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In 1997 CRC Industries first started tracking cost of quality. Since then we have come to consider it a
key measure for improving business results and the foundation of our continuous improvement efforts.
As Figure 1 shows, we have reduced failure dollars—the money we spend because of products and
services that do not meet our customers’ requirements—from 0.70% of sales to 0.21% of sales, saving
hundreds of thousands of dollars.
Figure 1 Failure dollars as a % of sales
0.80
0.70
0.70
0.62
0.60 0.56
0.50
0.40 0.38
0.33 0.33
0.30
0.22 0.21
0.19
0.20
At a Glance...
0.10
The cost of quality metric therefore seemed like a natural fit for our existing quality policy, but we could
not have predicted the full extent of the impact it would have.
Often misinterpreted to mean the cost of using quality methods, The system developed in 1997 has remained the basis of our
cost of quality actually refers to the expense of failing to provide cost of quality measure, ensuring the validity of year-to-year
a quality product or service. At CRC, we use the term “failure comparisons.
dollars” to describe the different kinds of expenses—from the
cost of materials and labor for rework, to the cost of correct We collected data in four categories of failure dollars:
shipping and customer service errors, to the cost of product
replacement and waste—that make up the total cost • Internal Quality Incidents, defined as the costs related to
of quality. correcting any product defect caught prior to shipping the
product, includes all labor and materials involved in
In centering our improvement efforts on cost of quality, we reworking the product and any materials wasted.
are not simply focusing on CRC’s balance sheet. We are also • Scrap/Waste includes chemical waste costs and materials
confronting the issues that keep us from providing the best scrapped due to defects.
products and services possible. While reduced costs and • Customer Complaints/Recalls are all costs involved in
increased savings remain the primary benefits we track, we resolving a customer complaint or recall, including
understand that improvements in other quality metrics, such as product replacement costs, claims, shipping costs, and
accuracy, productivity, and customer satisfaction, are tied to labor costs.
cost of quality results. • Product Destroyed in Field/Warranty is the cost of the
deductions our distributors take for product returned by
CRC Industries’ Cost of Quality Journey their customers.
Recognizing the importance of the cost of quality metric to 3. Analyze the data
our overall mission, we set about systematizing our use of the
metric as a driver of improvement through the following steps: We reviewed data in several stages, making monthly, quarterly,
yearly, and year-to-year comparisons. By examining first each of
1. Establish the measurement system these four categories and then the types of problems within each
category, we conducted Pareto analyses (see Figure 2 next page)
Establishing a consistent measuring system required the to reveal where we were making the most progress and where
involvement of various departments within CRC, most we should focus ongoing efforts.
important our finance department. Specifically, our task
was to determine how the data would be collected and 4. Improve the results
what categories would be tracked.
As Figure 2 shows (page 3), total failure dollars decreased from
This may seem like an easy step at first, but measurement 0.70% of sales to 0.21% of sales. This amounted to a savings of
definitions are not always obvious. Questions we had to hundreds of thousands of dollars for CRC Industries.
address included:
Merely tracking cost of quality could not in itself bring the
• How do we count costs for returns due to customer errors results we were seeking. With cost of quality as a driver, several
or customer requests, separating them from returns due to key initiatives contributed to our improved results:
product defects?
• How much does a customer service entry error or shipping • ISO 9001:2000 certification, achieved in 1996, laid the
error cost? foundation for our quality system. When we make changes
to process, we update documentation—including
Before we could begin to collect accurate data, we had to procedures, checklists, and instructions—to assure
negotiate answers to these questions and many more, and we consistency and compliance.
had to standardize our approach.
As part of meeting ISO 9001:2000 requirements, we
established quarterly management reviews, which include a
2. Collect the data review of quality incidents and customer complaints and
the related cost of quality data. These reviews give upper
To establish a baseline for future improvements, we spent management a better understanding of the issues so they
the first year collecting the initial data. During this step, can authorize appropriate improvement initiatives.
we finalized most of the measure criteria and refined the
measurement system.
0.80
Total Failure Dollars as % of Sales
Customer Complaints & Recalls
0.70 Internal Quality Incidents
Scrap/Waste
Destroyed in Field/Warranty
0.60
0.50
0.40
0.30
0.20
0.10
0.0
1997 1998 1999 2000 2001 2002 2003 2004 2005
• Root Cause Analysis sessions have been key in reducing Sometimes forming an improvement team to work over
failure costs related to internal incidents and customer several weeks or months on improving a process is
complaints. Every employee has received basic training in necessary. Action items and improvement teams’ progress
the relevant techniques needed for these sessions. are tracked and reviewed at the quarterly management
reviews.
The director of Quality Systems facilitates problem-solving
meetings to develop corrective and preventive actions for all • We use our Quality Incident Database to track quality
significant quality incidents. These meetings involve incidents that we catch and correct prior to shipping
production operators, supervisors, mixers, shippers, buyers, product. The causes are categorized based on the 4 “M’s”:
suppliers, and managers as needed to resolve the problem. specification errors (methods), operator/mixer errors
(manpower), equipment problems (machinery), and
As appropriate, we use techniques like “ask why 5 times,” problems with supplier-provided materials (materials).
fishbone analysis, and process mapping to uncover the root Costs are also tracked in the database and the
cause of the problem. Immediately following the session, information is used in the cost of quality metric.
we put a series of action items in place. In cases of longer-
term projects involving capital approval or training, we add
the action items to a pending list.
Directly related:
Order Entry Accuracy 0.6%
Order Shipment Accuracy 1.0%
Hazardous Waste Reduction 50%
Indirectly related:
Orders Shipped Complete & On Time 20%
Productivity 65%