To sustain in a competitive environment, organizations worldwide puts emphasis on achieving quality, as it lowers the cost and at the same time offer value for money to the customers. Mission statements of almost every organization declare that achieving quality is the most important priority to grow in a globally competitive market.
It has been already mentioned that traditional focus on product quality has now been changed to quality of organization in the TQM era. Corporate houses, both for achieving internal efficiency and international acceptance, now get ISO Certification to establish their quality identity.
1. Cost of Quality:
To appreciate the importance of quality, first it is necessary for the organization to understand the meaning and the term ‘cost of quality’. Identification of cost of quality and appropriate steps to reduce the same can help an organization in both ways, i.e., cost minimization and increased profitability. To analyse the cost of quality, it is necessary to first classify the nature of cost under three sub-headings as under:
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2. Cost of Failure:
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Quality may fail either internally, i.e., within the organization or externally, i.e., within the customers’ premises. Therefore, failure cost can be grouped either as internal failure cost or external failure cost. The cost of rework, the cost for additional raw-materials, additional payments required to be made to workmen, etc., can be accounted under the internal failure cost.
In case of any external failure, the cost incurred for re-transportation, re-packaging, servicing and handling of customers’ complaints and cost for loss of goodwill are considered, in addition to the cost to be incurred for any internal failure. Experience shows that the cost of failure itself absorbs 70 per cent of the total cost of quality.
3. Cost of Appraisal:
For verification of quality, an organization has to incur additional expenses for maintaining an inspection team. Even for carrying out inspection, certain inspection gadgets and tools are required. All the expenses incurred on this account are considered as the cost of appraisal. Usually, an organization spends almost 28 to 29 per cent of the total quality cost.
4. Cost of Prevention:
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This type of quality cost is incurred when an organization tries to reduce the other two quality costs indicated above. Such expenses are carried out for research and development and human resource development. Expenses on this account normally vary between 1-2 per cent.
Although in Indian organizations, we are yet to make any serious study about computing the cost of quality, from the international perspective; it has been found that such cost, even though not accounted under any separate head, is as high as 40 per cent of the cost of production.
In Indian organizations, it is typically assumed that in the normal manufacturing process, there may be some natural rejection, which could be as high as 22 per cent (at least in some cases). This type of rejection rate is called Unavoidable Rejection Rate (UAR) in India. However, in other developed countries, more particularly in Japan, they subscribe to the philosophy of zero defects.
Experience shows that a if company spends mere 1-2 per cent more on the cost of prevention, it can substantially reduce the expenditure incurred on account of other two sub-heads of cost of quality. In fact, the rate of such incremental cost benefit is as high as 70-80 per cent for mere additional 1-2 per cent expenses on the cost of prevention.
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Thus, it is evident that cost of quality, even though not apparent from the Books of Account, is a significant wasteful cost factor, which can be reduced substantially to increase the profit of an organization. In fact, the ISO documentation process helps in prune the cost of quality in addition to the augmentation of the internal efficiency of an organization. It also helps to achieve total quality management in a phased manner.