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When the customer experiences a product or a service, he/she evaluates such experience. Most of the time, this evaluation does not formally reach the product maker or service provider for many reasons. However, this evaluation is often felt by the provider through returns, repeat business or new business through word of mouth.

When the customer is dissatisfied,  it is usually due to a problem. For minor problems, most people don’t complain about the service or return products. In some instances, it is just not worth their time to do that. But in most cases, they do something else if they can.

For the provider, it is a lost opportunity that is not measured immediately. A customer suddenly cancels subscription or does not plan on renewal the next time around. Or may be one mentions such a problem to friends who are considering the product or service. Some put their lack of satisfaction on social media outlets making ripple effects. In all cases, it is a customer issue that was not accounted for but will likely have  impact on the bottom line.

In summary, cost of poor quality may be extended to the lost opportunity and customer good will using the Taguchi loss function. This can be estimated by taking a sample of most recent complaints then determining the projected overall cost.  In general, as the issue (problem) with the product or service is experienced by more customers, the loss (to society) becomes more severe. Ideally, our target loss is zero which can only be achieved with perfection.

 Number of complaints

As discussed in previous posts, costs of quality are typically divided into two types:

• Costs of conformance: costs incurred to ensure that the product or service we deliver are good to go. Under this type, we have prevention as well as appraisal costs
• Costs of nonconformance: costs that result from doing something wrong. If what we make or deliver is experienced by the customer, it triggers all kinds of others costs (complaints, returns, warranty, liability, etc.)

The objective with regard to costs of quality is to invest wisely in the first type (particularly in the prevention side of activities) to minimize the non-conformance costs (particularly those generated from customers’ experience).

Do you notice a difference between activities of the first type and the second type? The first are planned (we know what they are going in) and the second are just results (unpleasant surprise!). The idea is to plan activities related to the first type (costs of conformance) so we minimize the unpleasant surprises. This applies to all types of organizations; profit and nonprofit; manufacturing and service; project-based as well as non-project-based.

Please click on the following link to see the relationship between types of errors to costs of quality: http://www.shraimqps.com/Resources/Types_of_Errors.pdf

The question is, how can all possible quality costs be accounted for in an organization? How can they be tracked? and most importantly, how can they be optimized?

In order to provide the best value to the customer, quality (of product and service) as experienced by the customer must be managed. By “managed”, I mean planned for, controlled, and improved. Many companies engaged in applying lean concepts focus on internal operations with little attention to quality. Or quality might be addressed one issue at a time, as needed. For example, if you’ve been applying lean concepts (e.g. value stream maps) but still get many customer complaints / high external failure costs, this might be an indication.

The fact of the matter is that applying lean concepts should not be in conflict with providing high quality that the customer wants. The objectives of a lean system are to improve quality, eliminate waste, reduce lead time, and reduce total costs. In his book “Lean Thinking”, leading expert Jim Womack outlines steps for applying lean starting with identifying value. Value is specified by the customer and created by you (the producer).

If the customer specifies value, why not study what they want? What types of complaints have we encountered in the past? Can we summarize such complaints on a Pareto chart? What complaints are repeated? Do we have survey results? Any informal data from sales or field service? Answering such questions upfront will help us determine value as perceived by the customer. Once that value is determined, it can then be identified and controlled on the value stream.

In previous posts, I discussed the different costs of quality (CoQ). To summarize, prevention and appraisal costs are those related to conformance of the product or service. On the other hand, internal and external failure costs result form experiencing non-conformance, where “external” means that this experience is told by the customer.  At the ASQ-Columbus Spring Conference held at Columbus State on April 14, someone asked me if the concept of “Quality Costs” applies to sectors outside manufacturing. To prove that it does, many people from different service industries such as healthcare, education, finance, government, and information technology, among others, shared their examples during the presentation. If you would like to view / download the presentation, please go to our website.

Another question was related to the reason that while analyzing quality in terms of costs seems to be an eye-opener, why isn’t the concept used more often? One of the most challenging implementation issues for a Quality Costs program is separating such costs from other costs of doing business. Traditional accounting systems are not designed with such concept in mind. Therefore, your options are to either:

• Change the cost structure of the accounting system (must get the accounting department on board!)
• Build a separate system for capturing CoQ

It may not be simple to do either but it is well-worth the efforts.

In the previous post, I related the Toyota issue of sticking accelerator to the type of costs incurred. When failure occurs after the product reaches the customer, the associated costs are regarded as External Failure costs. This goes much further upstream than just replacing the defective part or settling a liability issue. Many examples where given in the previous post as well.

Here, I would like to relate this to the type of error. In general, there are 4 scenarios:

1. Your product or service is GOOD and your QC program let it PASS
2. Your product or service is GOOD and your QC program REJECTED it
3. Your product or Service is NO GOOD and your QC program let it PASS
4. Your product or service is NO GOOD and your QC program REJECTED it

Now guess which scenario affected Toyota’s reputation and bottom line!

When QC lets a NO GOOD product go to the customer, that’s a serious type of error (Type II). This is often called “Consumer’s Risk” beacuase the customer is paying a price as well as Toyota (In this case, deaths resulted from failure). The impact of such error for Toyota, primarily because it deals with safety, is huge and most likely will last a long time.

The Toyota case of sticking accelerator is a good example of how External Failure costs can add up very quickly. As mentioned in the previous post, external failure costs (the worst type of quality costs) are those related to a failure after the product has reached the customer. In addition to the impact on Toyota’s near-perfect reputation, and the loss customer confidence in the brand name, other immediate costs are incurred by the company and include, but not limited to, the following:

• Recall costs
• Warranty (of unaffected cars)
• Replacement / repair of sold and unsold cars
• Training service staff on special repair
• Liability / lawsuits
• Downtime at factories
• Wages during downtime
• Scrap and disposition of questionable parts
• Troubleshooting / Corrective actions
• Trips made by executives / engineers / designers
• Public relations
• Working with suppliers
• Dealership support
• Overtime for suppliers (for making good replacement parts)
• Additional freight and premium freight for replacement parts
• Additional legal council (in many countries)
• Discounts for future sales

It is estimated that, with the lawsuits associated with the recall, this will cost Toyota over $2 Billion. The question is could this have been prevented? or at least taken seriously after the very first few complaints? was failure mode and effects analysis (FMEA) or equivalent done for the break subsystem?

As I proposed in the first post, company X is asking you for help to improve, but where do you start?

Let’s ask this question… In terms of improvement, what does company X need?
Could it be improving customer satisfaction - for example, quality, on-time delivery ?
May be it has something to do with cost reduction?
May be the customer wants lower prices?

Typical solutions might include:
Customer dissatisfaction: give more coupons / deals
Profit margins not there: lay-off employees
Competition / Customer wants lower prices: Use cheaper materials / less qualified workforce

This rush into taking action for a “quick fix” may backfire. Giving discount and coupons to quiet customers about quality may temporarily satisfy the customer but would likely reduce the profit margin. Cutting staff without studying long term effects would also affect quality and customer satisfaction.

The first step for any improvement initiatives should always be evaluating the status quo using meaningful measures. When we do this we should keep in mind the costs of nonconformance and modes of waste. Costs of nonconformance are related to costs incurred as a result of customer’s negative reaction (bad experience) with the company’s product or service. They can also be internally generated for various reasons but related to inadequate processes.

Can you think of examples?