When John Elkington coined the phrase the Triple Bottom Line in 1994 to measure company performance in corporate America, global business realized that the full cost of doing business cannot be measured by profit and economics alone butthat the cost of a company’s social and environmental impact should be considered as well.The same principle applies to the impact of quality in a company or the lack thereof. Philip Crosby presented the concept Quality is Free to business in his first book published in 1979 to change the way that organizations view quality. Traditionally, quality is considered an expense and a trade-off in business, but Crosby argues that it is not quality that is an expense, but the absence of quality which results in costly non-conformances, recalls, scrap and damaged reputation.
Despite this important work, the current business view of quality as an expense has not changed much. However, the change that has occurred is the global requirement by Clients and Original Equipment Manufacturers (OEMs) for their suppliers to implement some form of quality management system, and preferably be certified by recognized bodies of certification that subscribe to the International Standards Organization. Quality in operations, product and service is rapidly becoming a barrier-to-entry in international markets and across borders, and consequently, quality isnow viewed not only as a prescriptive exercise, but also as a necessary expense, particularly for small and medium enterprises (SME). If you were to ask any Director of an SME what his or her reasons are for implementing the ISO 9001:2015 Standard for Quality Management, the response is mostly likely becausetheirClientsdemand it. Very little consideration is given to the inherent value of a substantive quality philosophy and a management system implemented effectively, and how the measurement of the benefits of such a system can change a company’s strategy and competitive advantage.
If we were to measure quality in terms of its investment and benefits, rather than view it as an expense, how would such a change in perspective impact an organization, as well as the extended supply chain from supplier to manufacturer or service provider to Client and consumer? We foresee the impact would be significant and immense. Quality would change from a prescribed directive enforced on a company, to a voluntary and indispensable strategic imperative that adds value to all members of the organization and its stakeholders. The primary reason that business is unable to view and realize the financial benefit of quality is that current accounting systems are not designed and therefore not able to capture quality activity clearly, directly, and transparently. The measurement of quality from an investment perspective requires a combination of activity-based costing and process costing, depending on the industry in which the business operates. In essence, quality cost analysis needs to occur at an operational and transactional level which identifies the cost of discrete activities and offsets the costs against return-on-investment.
The secondary reason for ineffective cost measurement of quality value is that the relevant personnel who are responsible for doing so are not trained in the measurementof qualitynor experienced in the design and implementation of quality cost systems. To date these systems have been overly complicated and have demanded excessive input from an already stressed workforce, therefore not receiving the requisite attention and commitment to ensure effective implementation. Also, research with firms attempting the implementation of quality cost systems indicates that personnel do not understand the differentiation of the cost categories of prevention, appraisal, internal, external and opportunity costs; and therefore, only focus on internal costs, particularly the cost of non-conformance, which represents a small fraction of the total cost of quality, and a negative cost at that.
As a result, companies do not see the full picture of quality investment and reward because only a thinly sliced portion of quality management is identified and measured. In addition, we could argue that any environmental impact a company may experience is a result of non-conformance to a quality standard, process, or procedure. If a company were to measure the cost of such an impact, the value of quality investment would be undeniable and indisputable. Consider the exorbitant costs associated with the BP Deepwater Horizon Disaster which occurred on 20 April 2010 and is still recorded as the biggest oil spill in US history, killing 11 rig workers and severely injuring many of the 126 workers on board. The rig spewed four million barrels of oil into the Gulf of Mexico(www.offshore-technology.com).After significant investigation of the disaster, the root-causes of the incident were all directly linked to a lack of commitment to quality: poor quality cement was used for the seal in the borehole, critical valves failed, pressure test results were misinterpreted, the leak of oil and gas to the surface were not identified and the alarm system failed (www.newscientist.com): a series of complex events that could have been prevented if quality standards and processes were enforced. The costs associated with these lack of quality measures:BP spent USD$14bn on response and clean-up activities between 2010 and 2015 and committed another USD$1bn for early restoration of natural resources, apart from spending USD $1.3bn on the natural resource damage assessment process. BP also paid USD $6.67bn through the Gulf Coast Claims Facility, a trust fund established by BP to settle claims arising from the Deepwater Horizon oil spill. The total cost borne by BP for the Deepwater Horizon disaster is estimated to be more than USD$65bn.
Many such examples of the cost of poor quality exist, including in the automotive, construction, engineering, pharmaceutical and banking industries, to name a few.The third, and significant, reasons for the ineffective cost measurement of quality are resistance to change and a corporate culture that is not conducive to transparency. Discrete measurement of quality is most often considered intrusive to the responsible person conducting the activity; or to the manager of the work section; or to the executive of the division. Discrete measurement identifies and highlights non-conformity to quality and waste at an operational level and if the culture of the organization is not transparent, or ispunitive, the measurement will either not occur or be incorrect. A necessary requirement for the effective measurement of quality and its return on investment is therefore a leadership culture that promotes transparency and positive reward for the detection of non-conformance and waste.
As Philip Crosby illustrates, Quality may be free, but the cost associated with the lack of quality is immense and crippling. If companies were to design and implement a transactional quality cost measurement system that identifies discrete quality activityor the lack thereof and empower such a system with committed change management and transparent leadership, the true value of Total Quality Management and investment would be clearly identified. And such a strategy will have the potential to restore our manufacturing and businesses to deliver high quality, sustainable and long-lasting products and services.