The Cost of Quality

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Six Sigma is perceived by many as an approach to quality improvement.  In fact, quality improvement is a means to two important ends.  One is improved customer satisfaction, and the other is saving money.

The marketplace determines to a great extent how much a company can charge for goods and services.   The company determines how much it costs to produce those products or services and therefore how much profit it can earn in the marketplace.  A great deal of money is wasted when the quality of a product or service is less than perfect.  Customers are also less satisfied when their requirements are not met.

The Cost of Quality is a way to stratify and quantify the financial impact of poor quality.  There are four main elements to the Cost of Quality.

  1.  Costs related to internal failures, i.e. failures that occur before the product is delivered to the customer.  These costs include scrap, rework, segregation of defective material, spoilage, reordering and remaking products, and more.
  2. Costs related to external failures, i.e. failures that occur after the product or service is delivered to the customer.  These costs include recalls, loss of reputation and good will, warranty, lawsuits, field servicing and more.
  3. Costs related to appraisal, i.e. looking for defects.  These costs include inspection and testing, the cost of purchasing and operating test equipment and more.
  4. Costs related to prevention.  This is the area where organizations could and should focus their efforts in order to prevent defects from happening.  Costs here include training, data gathering and analysis, quality engineering and supplier development.    

Here are some dramatic historical examples of how quality failures led to enormous cost and customer satisfaction issues.

Thalidomide

Thalidomide, an anti-nausea and sedative drug, was launched by the German company Grunenthal and was sold from 1957 until 1962. It was widely used to help negate the symptoms of pregnant women suffering from morning sickness.  It was withdrawn from the market after being identified as the cause of numerous birth defects.  In total, 10,000 children across 46 countries were born with deformities which included the malformation of limbs and internal organs.  Only 50% of these children survived birth.  More recent estimates put the number of victims worldwide closer to 20,000.

Criminal charges were brought against Grunenthal and the settlement of those charges cost the company 100 million DM.  The German government added an additional 320 million DM to a fund to compensate victims.  Grunenthal paid another 50 million Euros to the fund in 2008.  The withdrawal of thalidomide prompted concerted efforts to prevent abnormalities in physiological development caused by drugs as well as an appraisal of the clinical trials process.

Deepwater Horizon Oil Rig Explosion

The explosion of BP’s Deepwater Horizon rig on April 20th, 2010 ranks as the biggest manmade environmental disaster in US history. The explosion killed 11 on-board workers, and discharged 4 million barrels of oil into the Gulf of Mexico, before the leak was sealed on July 15th 2010. On top of widespread damage to Gulf marine wildlife and tourism industries, BP faced a number of lawsuits and paid over $4.5 billion in fines and payments.

The root cause was a quality management failure. Contractors did not test the cement around the oil well, which failed to contain hydrocarbons within the reservoir and allowed flammable gas and liquids to flow up the production casing. Technicians misinterpreted fluid pressure tests, and gas passed through the ventilation system into the engine room.  After the explosion, the oil rig’s blow-out preventer located on the sea-bed failed to activate and seal the well.  Three corporations were implicated: BP for the flawed well design, Transocean as the owners of the rig, and Halliburton as the contractor who provided the inferior cements.

Ford Pinto Automobile

In response to competition from Japanese imports, Ford released the Pinto automobile in 1971.  It was a car that looked to capture consumer hearts with its $2,000 price-tag.  In 1977 a number of lawsuits emerged based on allegations of a structural design fault. The fuel tank was installed in close proximity to the rear bumper and rear axle, meaning that rear-end collisions would elevate the risk of fires.  Just one of the many lawsuits (Grimshaw Vs. Ford Motor Company) resulted in compensatory damages of $2.5 million dollars and punitive damages of $3.5 million dollars.  The punitive damages were awarded because Ford was aware of the defect before production but did not make corrections.

Ford’s decision to recall 1.4 million units in 1978 saved no face, as investigative journalist Mark Dowie revealed that Ford had been aware of the design flaw during production.  He published an internal Ford cost-benefit analysis document in which Ford compared the cost of $11 per-vehicle to repair the problem with the cost of settlements for deaths and injuries.  The conclusion of the company was that it would be cost beneficial to pay for the expected number of settlements for injuries and deaths rather than fix the defect.  The Pinto was taken out of production in 1980; however Ford’s callous cost-benefit analysis left a legacy of an uncaring corporate culture even though subsequent studies showed that the Pinto was as safe as other cars of that era.

Your comments or questions about this article are welcome, as are suggestions for future articles.  Feel free to contact me by email at roger@keyperformance.com.

About the author:  Mr. Roger C. Ellis is an industrial engineer by training and profession.  He is a Six Sigma Master Black Belt with over 45 years of business experience in a wide range of fields.  Mr. Ellis develops and instructs Six Sigma professional certification courses for Key Performance LLC.   For a more detailed biography, please refer to www.keyperformance.com.

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On August 8th, 2014, posted in: Six Sigma by Tags: ,

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