Do you want to get upper management’s attention on a specific issue? Management is always interested in these three things: (1) money, (2) making money, and (3) not losing money. So when talking to management about Quality, it helps to express the issue in monetary terms.
Most organizations report on Quality in terms of an index, or a ratio or trend chart. Those things are helpful, but only when money enters the discussion will you really get management’s attention, have a means to prioritize corrective action and see how we have impacted the entire organization’s performance.
Phil Crosby used the term “the Cost of Quality” to describe the monetary impact of quality issues and activities. He formulated it this way:
Cost of Quality = Prevention Costs + Appraisal Costs + Nonconformance Costs
Eventually at the Quality College we focused on the last variable in the formula: we called it the Price of Nonconformance. We thought the word “price” conveyed the concept of a choice (“What price do you wish to pay? High or low?”) and our focus was on nonconformance because that’s where the largest sums of money could be found.
What is included in the Price of Nonconformance (PONC)? Among the possibilities are:
- Rework and reprocessing
- Returns
- Warranty costs
- Unplanned service
- Legal fees
- Forecasting errors
- Complaint handling
- Brand reputation damage
- Downtime
- Excess & Obsolete inventory
- Failed product launch
Every industry is unique and so the list of PONC items will change with each organization. But rest assured that anytime there is a failure to meet requirements and a failure to prevent a problem, there is an associated negative cost. That cost can be a substantial chunk of operating costs, and it can be calculated.
There are 5 methods for calculating the PONC:
Whole Account: specifically, an entire category of expenditure related to nonconformance. An example here might be “warranty costs” as claims are generally the result of a failure in design or performance requirements. This cost can be found in the chart of accounts and accounting records.
Whole Person: some organizations have personnel or departments simply devoted to dealing with nonconformance issues. A “customer complaint” function within the Sales Department might be an example. The cost is compiled by counting the salaries, burden and administrative cost associated with that particular group.
Labor Claiming: this involves a careful calculation of the amount of labor and resources expended on an individual activity. This can be done through a tracking mechanism such as a time sheet. In labor claiming, it is only part of an individual’s time that is related to PONC. So a software engineer who spends 2 days a week debugging coding errors would claim 2 days of time as PONC.
Unit Pricing: in some cases, the PONC can be calculated by counting nonconforming units or quantities and fixing the price for those units. For example, if we build compressors for the natural gas industry and a unit fails final testing and is scrapped, the PONC would be the total investment made in that unit. This method is useful when there are multiple occurrences of nonconformance.
Deviation from the Ideal: this method involves comparing what “is” to what it “theoretically should be”. For example, if a company did everything right it might be estimated that its market share should a certain level. Anything less than that level may be due to error, waste and inefficiency. That missing market share has a price associated with it.
It can be difficult to do some of these calculations, but others are straightforward. Use what you can, whenever you can. Actual expenditures are best but if too difficult to obtain, estimates and surveys can help. Involve finance whenever possible.
