Paper

Topics: Cost, Cost-benefit analysis, Costs Pages: 11 (1323 words) Published: April 20, 2014
COQ
Boman Moradian
(compiled by Ms. Shalini Sadhwani)
MMS student at JBIMS

Cost of quality =Price of nonconformance and price of conformance.

COQ =PONC + POC

PONC = All those costs incurred because things were not done right the first time.

POC = Those costs incurred to ensure that things are done right the first time.

THE COST OF QUALITY (COQ) SYSTEM

Origin

The system probably originated in the 1940’s in Western Electric and was used as an attempt to measure the efficiency of work processes in financial terms. The system has been around for some 40 odd years but has not been successfully implemented by many organisations.

In any company, the total operating costs can be broken down into: PONC
POC
Error-free costs

Error-free costs include all expenses incurred for operating processes as they were designed, assuming no planned waste; rework or non-conformance was part of the design. Expenses the word include those for materials, labour, equipment, plant, officer energy, etc.

The cost of quality typically runs at 10 to 30% of sales in manufacturing companies and 20 to 50% of operating costs in service companies.

The cost of quality is not an accounting system

The cost of quality is a communications tool and should not be viewed as a classical accounting system. An analogy may help to make this clear. You are walking down the street and, unprovoked; a maniac fires a shotgun at you. You fall to the ground, alive, but seriously wounded and bleeding from numerous perforations. The accountants and quality specialists would try to devise a system of counting precisely the number of red blood corpuscles that you are loosing. The cost of quality specialist (doctor) simply wishes to know roughly but with some accuracy and consistency, where the worst leaks are so that he can plug them fast. In the first instance the patient would die before the system was perfected (if it ever was). In the second, remedial action could be taken and the patient would survive and hopefully thrive.

Why do we need a cost of quality system ?

As discussed earlier, the only subject that sustains management’s attention for any l;ength of time is money. It is the yardstick by which company and executive performance is judged and is the basic language of business. The purpose of Cost of Quality is therefore to :

Gain Management’s attention – A Cost of Quality of 25% of sales gets management’s attention.

Sustain management’s attention – Seeing the Cost of Quality drop from 27% of sales to 19% in 18 months keeps them interested.

Direct Corrective Action – The system highlights where the company is hemorrhaging money and shows where corrective actions should be focused.

Justify Corrective Action - The ‘payback’ for both major and minor corrective actions can be assessed and the action (with any attendant expenditures) can be justified.

Measure improvement - Many quests for improvement, quality or excellence are frustrated because there is no way to measure improvement.

COST OF QUALITY

(A) LEGAL DEPARTMENT :

Price of conformance :
1. Seminars on prevention of product liability claims.
2. Label copy evaluation.
3. Advertisement copy review.
4. Safety programme audit.
5. Checking paperwork for errors.
6. Compliance audit on environmental laws.
7. Review of state submissions (new products, patents, etc.).

Price of non-conformance :
1. Product liability matters (travel, litigation, outside forms, time). 2. Warrantry reviews.
3. Penalties for late filing.
4. Product complaint reviews (internal and with regulatory agency). 5. Product recalls.
6. Defense of patent infringement suit.
7. Representing grievances.
8. Internal department rework (re-write, retype, etc.).
9. Seminars on defending product liability suits.
10. Settlements.

(B) MANUFACTURING :

Price of conformance :
1....
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