El derecho general a gozar del medio ambiente en los Estatutos

14.1 THE CONCEPT OF TQM AND QUALITY COSTS

In Chapter 4 we defined TQM as being the culmination of a hierarchy of the following quality definitions:

Quality is to continuously satisfy customers’ expectations; Total Quality is to achieve quality at low cost;

Total Quality Management is to achieve Total Quality through everybody’s participation.

The concept quality costs, i.e. the sum of failure costs, inspection/ appraisal costs and prevention costs is very important to understand when you try to implement Total Quality Management and in this respect try to establish and fulfil strategic goals. But it is not so easy to get a profound understanding of the concept. The problem is that because the majority of these costs are invisible there is a risk that the following deadly disease may break out: ‘Management by use only of visible figures, with little or no consideration of figures that are unknown or unknowable’. As Deming told us (1986): The figures which management needs most are actually unknown and/or unknowable. In spite of this, successful managements have to take account of these invisible figures.’

In relation to TQM we know that the level of quality will be improved by investing in the so-called quality management costs. These consist of:

1. Preventive quality costs. These are costs of activities whose aim is to prevent quality defects and problems cropping up. The aim of preventive activities is to find and control the causes of quality defects and problems.

2. Inspection/appraisal costs. The object of these costs is to find defects which have already occurred, or make sure that a given level of quality is being met.

‘Investment’ in so-called quality management costs will improve quality and result in the reduction of so-called failure costs.

Failure costs are normally divided into the following two groups:

1. Internal failure costs. These are costs which accrue when defects and problems are discovered inside the company. These costs are typically costs of repairing defects. 2. External failure costs. These are costs which accrue when the defect is first discovered

and experienced outside the firm. The customer discovers the defect and this leads to costs of claims and as a rule, also a loss of goodwill corresponding to the lost future profits of lost customers.

We know now that a large part of failure costs, both internal and external, are invisible, i.e. they are either impossible to record, or not worth recording. We know too that, for the same reasons, a large part of preventive costs are also invisible. This leaves inspection costs which are actually the most insignificant part of total quality costs, inasmuch as these costs gradually become superfluous as the firm begins to improve quality by investing in preventive costs.

Investing in preventive costs has the following effects: 1. Defects and failure costs go down.

2. Customer satisfaction goes up.

3. The need for inspection and inspection costs goes down. 4. Productivity goes up.

5. Competitiveness and market share increases. 6. Profits go up.

This is why we can say that Quality is free

or more precisely

The cost of poor quality is extremely high.

It cannot be emphasized too strongly that, in connection with TQM, the concept of failure should be understood in the broadest possible sense. In principle, it is a failure if the firm is unable to maintain a given level of quality, i.e. maintain a given level for total customer satisfaction. Some examples of this are given below.

Example 1: A firm’s products and services do not live up to the quality necessary to maintain or improve customer satisfaction. The result is:

1. Market share goes down.

2. Profits decline, because the invisible failure costs rise. These do not show up in the firm’s balance sheet, though their effect can possibly be read on the ‘bottom line’, i.e. by looking at the change in profits—provided that management does not ‘cheat’ both auditor and readers of the financial statement by ‘creative bookkeeping’.

Example 2: The production department is not always able to live up to product specifications. The result is:

1. More scrap and more rework.

2. Chaos in production. Productivity declines. 3. More inspection.

4. More complaints. 5. More loss of goodwill.

6. Profits go down. Some failure costs are visible and do show up in the balance sheet. Some are invisible and therefore do not show up directly in the accounts. The ‘bottom line’ of the financial statement shows the effect of both visible and invisible failure costs.

Example 3: The firm’s marketing promises the customer more than the product can deliver. The result is:

1. The customer’s expectations are not fulfilled. 2. More complaints.

3. More loss of goodwill.

4. Profits go down. Some failure costs are visible (costs of claims) and show up on the firm’s balance sheet. Others are invisible (loss of goodwill) and can perhaps be read indirectly by looking at the trend in the company’s profits.

It will be clear from the examples we have discussed that the traditional classification of quality costs into:

1. preventive costs,

2. inspection/appraisal costs, 3. internal failure costs and 4. external failure costs

does not directly include these crucial ‘invisible figures’. This oversight could be one of the reasons why, according to Deming (1986), this deadly disease afflicts most Western companies. In proposing a new classification of quality costs, we hope to make good this deficiency.

By comparing these examples it is also clear that much has happened since 1951 when Dr J.M. Juran published his first Quality Control Handbook in which Chapter 1 (‘The Economics of Quality’) contained the famous analogy of ‘gold in the mine’ and also the first definition of quality costs:

The costs which would disappear if no defects were produced.

This definition uses a very narrow failure concept as a failure happens when a defect is produced. The failure concept used in these days was a product oriented failure concept. For many years the product oriented failure concept was dominant and the total quality costs were often calculated as the costs of running the quality department (including inspection) plus the cost of failures measured as the sum of the following costs:

1. cost of complaints (discounts, allowances etc.); 2. cost of reworks;

3. scrap/cost of rejections.

It is interesting to compare Juran’s definition of quality costs from 1951 with his definition from his Executive Handbook which was published 38 years later (1989, p. 50):

Cost of poor Quality (COPQ) is the sum of all costs that would disappear if there were no quality problems.

This definition uses the broad failure concept which we advocate in this book and it is also very near to ‘the TQM definition of Total Quality Costs’ presented by Campanella (1990, p. 8):

The sum of the above costs [prevention costs, appraisal costs and failure costs]. It represents the difference between the actual cost of a product or service, and what the reduced cost would be if there was no possibility of substandard service, failure of products, or defects in their manufacture.

This definition is a kind of benchmarking definition because you compare your cost of product or service with a perfect company—a company where there is no possibility of failures. We have never met such a company in this world but the vision of TQM is gradually to approach the characteristics of such a company. In practice we need other kinds of benchmarks as the perfect company. We will propose a method to estimate a lower limit of the total quality costs in section 14.2 which use a best in class but imperfect company as a benchmark.

The gold in the mine analogy signals first of all that the costs of poor quality are not to be ignored. These costs are substantial. Secondly the analogy signals that you cannot find these ‘valuables’ if you do not work as hard as a gold digger. The ‘gold digging process’ in relation to quality costs will be dealt with in section 14.4.

Because of the problem with the invisible costs, we have found it necessary to introduce a new classification of the firm’s total quality costs—one which takes account of ‘the invisible figures’. This new classification is shown in Table 14.1.

As Table 14.1 shows, total quality costs can be classified in a table, with internal and external quality costs on the one side and visible and invisible quality costs on the other. In the table, we have classified total quality costs into six main groups (1a, 1b, 2, 3a, 3b and 4). Apart from the visible costs (1a+1b+2), the size of the individual cost totals is usually unknown.

Table 14.1 A new classification of the firm’s quality costs

Internal costs External costs Total

Visible costs

1a. Scrap/repair costs 1 b. Preventive costs 2. Guarantee costs/costs of complaints

1+2 Invisible

costs

3a. Loss of efficiency owing to poor quality/bad management 3b. Preventive/appraisal costs

4. Loss of goodwill owing to poor quality/bad management

3+4

Total 1+3 2+4 1+2+3+4

It is often claimed in quality literature that total quality costs are very considerable, typically between 10–40% of turnover. This is why these costs are also known as ‘the hidden factory’, or ‘the gold mine’. We believe that these costs can be much higher, especially if the invisible costs of ‘loss of goodwill’ are taken into account.

14.2 A NEW METHOD TO ESTIMATE THE TOTAL QUALITY COSTS

Since quality costs are considerable in most firms, it is hardly surprising that management is interested in them. The question is, how can they be estimated?

The traditional method is to record costs as they arise (e.g. wage costs, material etc.) or are thought to arise (e.g. depreciations). However, this method is only applicable in calculating visible costs. We will therefore propose a new method for the indirect measurement of total quality costs—a method which we believe may be invaluable in connection with the strategic quality management process.

The method builds on the basic principle of benchmarking (Chapter 15) where differences in quality and productivity may be revealed by comparing firms competing in the same market. The method was first proposed by the authors of this book in 1991 and has later been proposed by Karlöff (1994) when identifying a benchmarking partner.

The method is as follows.

Let Pjt stand for the ordinary financial result of company j at time t, and let Pjt/Nj stand

for the ordinary financial result per employee. Nj denotes the number of employees,

converted to full-time employees, in company j. Assume also that there are m comparable firms competing in the same industry/market.

Now let the m competing firms be ranked as follows:

P1t/N1<P2t/N2<…<Pmt/Nm (14.1)

Based on this ranking, the lower limit of company j’s total quality costs at time t can now be calculated:

Cjt=(Pmt/Nm–Pjt/Nj)×Nj=(Nj /Nm)×Pmt–Pjt (14.2)

The limit in (14.2) is a lower limit in the short term.

It can be seen from (14.2) that this lower limit is calculated as the difference between the ordinary financial result per employee of the most profitable firm (per employee) and company j, multiplied by the number of employees in company j.

We call this limit a lower limit because the method builds on a comparison with the best company, i.e. the company which has achieved the highest profits per employee. This company is used as a benchmark for the other firms being compared, a consequence of this approach being that its lower limit of quality costs is zero. It does not have zero quality costs, of course, which is why, with the help of equation (14.2), we call it a lower limit.

In conclusion, we present an example of the use of the method in the Danish printing industry.

The example is based on an analysis of the financial statements of printing firms with at least 20 employees. Initially, there were 80 such firms who were thought to be comparable with company j, a printing firm with 64 employees.

The most profitable firm had a profit of 199 966 kroner per employee, while the most unprofitable firm had a loss of 254142 kroner per employee. 30%, i.e. 24 of the 80 firms had losses. The lower limit for total quality costs thus varies considerably between the 80 firms.

This variation is shown in Figure 14.1. It can be seen that the correla-tion between the lower limit of the total quality costs and company size, measured in number of employees, can be shown by a straight line with a positive slope. It can also be seen that