What are the major principles of economics of quality?

As in most of the decision-making processes in project management, when we consider the opportunity to improve our management functions we normally look first at what is called the cost-benefit analysis. In other words, when we are thinking about quality improvement for our product, our first concern is to see if this is cost-efficient for our product. Normally we try to work only with the level of quality that is optimal from the point of view of the quality benefit we gain for each new dollar invested.

Although it is generally considered that improving quality will result in increasing cost, this is not necessarily the case in modern quality management. In the past it was generally believed that high quality would come only with high cost. Today, with the concept of total quality management, we have learned that high quality actually reduces overall cost.

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Some of the statistics developed for the cost of quality for major companies show that the overall cost of quality makes up to 12 to 20 percent of sales, with the major part of expenses formed by internal costs and costs of appraisal. It has been proven that by spending a higher percentage of cost on quality prevention, up to 70 percent, we can decrease our overall cost for quality to 3 to 5 percent of sales. The 70 percent cost of prevention should not startle us because we are talking about 70 percent of a much smaller figure but still a larger figure than we are used to.

The reason for such a huge change is that there are three major components of quality cost: the cost of production, the cost of acceptance, and the cost of unsatisfactory products.

What is known as production costs will actually increase in the case of increased quality because it will consider using better and more expensive materials as well as improving tools and equipment and increasing labor cost.

Acceptance costs include cost for inspection as well as costs for quality management in each of its three parts—quality planning, quality control, and quality assurance. This part of the overall quality cost can actually go down with the introduction of new quality management concepts because it may allow a significant decrease in the number of formal inspections needed.

However, the largest class of expenses saved with the introduction of new quality practices has to do with unsatisfactory costs. This includes the cost of the replacement of defectives, repair of defects cost, customer goodwill, and even such an important cost line for the company as the cost of liabilities. It is easy to see that some of the aspects of these costs have huge influences on the company, especially those having to do with customer goodwill and follow-up on orders. In general, this way of looking at overall costs of quality improvement has a lot in common with the life cycle cost approach to project cost management as discussed in Chapter 3. It becomes especially important to recognize these large cost savings in the justification of various quality improvement projects.

The other very important issue that needs to be considered when making decisions concerning the cost of quality for your project has to do with any cases in which people's lives or health is at stake. In these cases, normal cost-benefit analysis becomes useless and even dangerous. A number of companies throughout the world, including some of the "giants" of production, have proved by their negative experience that the attempt to evaluate financially the cost of improving the quality of products can lead to some potentially serious injuries to people that result from poor quality characteristics and can ultimately bring the company some really serious financial losses.