11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece Level Of Quality Costs Modeling And Application In The Practice Maja Krsmanovic Faculty of Organizational Sciences Univesity of Belgrade, Serbia +381698893384 krsmanovic.maja@fon.bg.ac.rs Zoran Rakicevic Faculty of Organizational Sciences Univesity of Belgrade, Serbia rakicevic.zoran@fon.bg.ac.rs Jelena Ruso Faculty of Organizational Sciences Univesity of Belgrade, Serbia ruso.jelena@fon.bg.ac.rs ABSTRACT Quality has been important competition factor wherefore companies invest heavily in it and continuous improvement initiatives On the other hand, quality costs models are seen as a way to recognize the need for quality improvement Where the quality costs are high, the quality is poor so the improvement is necessary Notwithstanding many studies elaborate that an analysis of quality costs is an important aspect of implementing a total quality management culture, there are still significant number of firms that neglect this aspect, especially small and medium sized organizations This paper aims to examine the level of quality costs models application in the practice The analysis will be carried out on the basis of research on quality costing in the practice, pointed out in literature by different authors in this field Additionally, advantages of quality costing application as well as reasons for neglecting this aspect will be included This examination and reasons comparison can give a valuable insight into overall effectiveness of the quality costs models implementation Keywords Quality costs, application level, advantages and problems INTRODUCTION There has been a common belief in the past that quality could not be measured in terms of costs (Omurgonulsen, 2009) Notwithstanding allusions to cost of quality (CoQ) first appeared in the 1930s, there was no systematic 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece approach for quality costing until the 1950s since the costs were considered only as scrap and rework When managers has realized that all departments make errors (Harrington, 1987) many quality experts have written extensively about quality-cost systems, and the importance of quality-related costs has been increasingly recognized (Yang, 2008) It was Juran (1951) who formally first introduced the concept of CoQ in his Quality Control Handbook claiming that plenty of the costs are the result of poor quality and that they are avoidable (also famous as analogy of “Gold in mine”) Since then, quality costing is seen as more sophisticated management program This “modern” approach to quality cost, as it is seen still today, was further developed by Feigenbaum (1956), Masser (1957), Freeman (1960) They, unlike Juran (1951) who tended to measure production and outputs, concentrated on measurement to evaluate if good service or product met the desired level of customer satisfaction Afterwards, American Society for Quality (ASQ) formed a Quality Costs Committee in 1961 aiming to emphasize the magnitude of CoQ measurement and to promote its use in industry Nevertheless, Crosby (1979) provided probably the biggest boost to popularizing the concept of quality cost in with his book “Quality is free”, emphasizes that quality means conformance and that failure to things right first time costs money Over the decades, as the quality specialists extended their studies on costs of quality, some quality costs models emerged: - PAF model (widely accepted system for measuring CoQ), - Crosby’s model, - Opportunity or intangible cost model, - Process cost model, - ABC model, - And different variations of those models Today, there is huge number of published literature about costs of quality models and their application in the practice THE LEVEL OF QUALITY COSTING IMPLEMENTATION IN PRACTICE In 1963, the US Department of Defense issued the Military standard, MIL-Q9858A, Quality Program Requirements, which required many government contractors and subcontractors to take into account costs related to quality This document helped to focus attention on the importance of quality cost measurements but provided only a general approach to their implementation and use It did, however, elevate interest in the subject of quality costs Concurrently, the ASQ Quality Costs Committee, formed in 1961 primarily to emphasize the importance of product quality to the well-being of a manufacturing business through measurements of the cost of quality, became an authoritative promoter of the quality cost system application Probably partly as a result of that, quality costing has been primarily used in the manufacturing industry, but nowadays there is a growing interest from commerce, the public sector and service organizations (European Commission, 2012) 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece Notwithstanding past studies elaborate that an analysis of quality costs is an important aspect of implementing a total quality management (TQM) culture (as it is stated in Kumar & Brittain, 1995; Dahlgaard, Kristensen, & Kanji, 1998, 2002; Mandal & Shah, 2002), there are still significant number of firms that neglect this aspect (Tye et al., 2011) Only a small number of firms really measure the results of quality improvement programs (Schiffauerova and Thomson, 2006) Smaller firms most often not even have any quality budget and not attempt to monitor quality costs (Porter and Rayner, 1992; Plunkett and Dale, 1983) Large companies usually claim to assess quality costs (Schmahl et al., 1997; Allen and Oakland, 1988; Chen, 1992) Thus, it can be concluded that this tool is not widely practiced yet (Rodchua, 2006; Schiffauerova & Thomson, 2006b; Sower, 2007; Vaxivandes et al., 2009), especially for quality management and improvement purposes (Morse, 1991; Tatikonda & Tatikonda, 1996; Mandal & Shah, 2002) Actually, some organizations implemented cost of quality measurement systems but did not report quality costs systematically (Cheah et al, 2011) or did not use the reports properly as an improvement opportunity (Cheah et al., 2011; Chopra, 2011) Such situation is confirmed through numerous studies that have been undertaken by various authors in various countries and in variety of areas In an earlier empirical research, Mensforth (1971) reported disappointment at how few firms collect and analyse quality costs After that, surveys by Roche (1981), Duncalf and Dale (1985) showed that only about one-third of the companies they studied collect quality costs The Australian Organization for Quality Control (AOQC, 1980) and Sohal et al (1992) report that many Australian firms not collect quality cost data or are reluctant to disclose those data Similary, Porter & Rayner (1992) studied twenty quality-oriented manufacturing firms in the North of England and revealed that only seven (35%) of the sample made any attempt to monitor quality costs At the same time, a survey of American companies revealed that only 38% of respondents claimed to have an organized quality cost system (Chen, 1992) while in Australia, a survey conducted showed that only 42% of respondents measured quality cost (Sohal et al., 1992) A report by Berry and Parasuraman (1992) indicates that, while many companies understand the importance of quality, they still not implement quality cost evaluations After that, Ross (1993) found out a slight improvement – 48% of the companies adopted the CoQ reporting Gupta and Campbell (1995) advocate, from two surveys conducted, that only 33–40% of firms tracked quality costs In a like manner, a survey by Viger and Anandarajan (1996) found that only about half of the firms calculated quality costs In 1995 a similar research was performed by Kumar & Brittain (1995) in 250 companies of the manufacturing sector, having a minimum of 50 employees The situation concerning CoQ was improved in this case, where 78% of the companies provided information about the perceived total cost of quality, but only 59% them stated that they presented quality cost information at management review meetings However, it can not be said for all the companies After a while, Gryna and Krause (1996) estimate that 40% of all manufacturing companies are conducting CoQ analysis Kumar et al (1998) pointed out that only about one-third of the 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece companies collect quality costs Shah and FitzRoy (1998) present the surveys of quality costs conducted in various countries The authors conclude that the concept of reporting quality cost data is not widely accepted by firms in any part of the world They focus on the collection and measurement of CoQ experiences and also point out the shortage of quality cost surveys.Afterwards, in a research concerning Australian manufacturing firms carried out by Oliver & Qu (1999), it is indicated that of the 136 respondents, 35 firms (26%) currently measure the cost of quality in some form Among the remaining 101 firms which did not measure cost of quality, 37 firms (27%) indicated that they plan to implement a CoQ reporting system in the future, and a further 64 firms (47%) had no plans to implement CoQ reporting in the future In the United States also only 33% of companies actually calculate the cost of quality (Harry & Schroeder, 2000) The results are similar in northeast England where 33% of organizations make use of quality costing (Prickett & Rapley, 2001) Some studies have also been done in the cost of quality practices in India Nath, et al (2003) concluded that awareness level of quality costing is very low in Indian industries, but that COQ implementation is a recent and growing phenomenon there Similar conclusions are made by Rosnah (2004), within her research carried out in firms in Malaysia - the cost of quality showed only minimal implementation but that the use of cost of quality has to be increased When it comes to the more recent research, the improvement regarding CoQ improvement can be seen The research by Tye (et al., 2011) showed that from the 63 responses received 82.5% have implemented a cost of quality system However, there are very few research conducted in the recent years So, it can be seen that the results of numerous industry surveys or research studies confirm that CoQ is not a widely used concept, although, in theory, it is extremely valuable Quality cost calculations are not common even among the recipients of the Malcolm Baldridge National Quality Award (Vaxevanidis et al., 2006) On the other hand, most examples confirm that quality improvement and cost measurement processes bring about a huge reduction in a company’s CoQ (Vaxevanidis & Petropoulos, 2008) But, no matter how great the interest of the academic community in CoQ models is, and how much theoretical information and practical advice can be found, the situation in the real world is different (Schiffauerova and Thomson, 2006) This is akin to a captain remaining asleep in his quarters while the ship is slowly sinking (Yang, 2008) It is because many companies are unaware of the real harm they are causing (Sellés et al., 2008) Companies rarely have a realistic idea of how much profit they are losing through poor quality (Abdelsalam & Gad, 2009) On the other hand, many authors (including Crosby, 1979; Harrington, 1987; Campanella, 1999; Dale & Plunkett, 1999 etc.) indicate that quality costs can easily reach percentages that are higher than 20% of sales For most companies, these costs ran in the range of 10 to 30 percent of sales or 25 to 40 percent of operating expenses (Gryna in Jurans handbook , 1988) Though determination 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece of quality-related costs is a difficult area for managers, this activity should not be neglected (Plunkett & Dale, 1987) In some research, defferent levels of CoQ implementation are recognized depending on the some companies’ features, although the CoQ approach is universal, flexible and could be adapted to any business setting In this regard, the use of quality costing is shown to be statistically related to organization size and sophistication of quality culture and sophistication of quality management in terms of practices (Prickett & Rapley, 2001) Cost of quality usage and its relationship to quality system maturity Another finding of this research is in the area of the industry segments The results suggest that quality cost measurements are more frequently made in electronics and other hightech industries (Schiffauerova & Thomson, 2006b) Later, Tye (et al 2011) concluded similar - the majority of the firms that are involved actively in the implementation of the quality costs are from the electronics and electrical industry The business environment for an industry sector and product line dictates somewhat the amount of effort that is put into a continuous quality program So, it could be supposed that companies within the industries that require very high levels of quality would have quite elaborate quality and productivity improvement systems (Schiffauerova & Thomson, 2006b) ADVANTAGES OF QUALITY COSTING APPLICATION AND REASONS FOR NEGLECTING THIS ASPECT The most frequent pointed out adventages of quality costing application in the literature are: - To focus on areas of poor performance (high costs) which are in need of improvement, - To increase awareness of the organization of the potential affect of poor quality upon overall business results, - To prove quality initiatives/drive improvements and quality programmes or corrective actions, - To focus on significant not trivial problems/help set priorities, - To enable better understanding of true cost, - Strategic quality planning and budgeting, - To motivate employees to work towards quality goals - Quality costing can be used as a lever to gain top management commitment to initiate an improvement project - Etc On the other hand, the main reasons for neglecting quality costing, as it is stated in the related literature, are: - The time spent on quality costing, - Getting information about costs/how to calculate costs, - Individuals not accepting responsibility for costs, 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - Social Aspects, 28-31 July 2014, Athens, Greece Remain accurate within a time scale, Maintaining system in changing organizations, Lack of senior management support, Cost used out of context, Confidentiality of costs, Departments refusing to be involved, Lack of resource for collecting quality related costs, Too much pressure placed on employees and other managers, Manufacturing complexity, Etc CONCLUSIONS Althougt many studies point out that an application of quality costs models in the practice is an important aspect of implementing a total quality management with numerous adventages, this aspect is not yet widely used by the companies Taking into account barriers to the implementation of quality costs models, it can be concluded that they are still significant for many companies, esspecialy small-sized ones In the other hand, it can be noted from the listed adventages and reasons for neglecting quality costing, that the company could gain significant benefits if it manage to overcome the barriers It can also be concluded from the stated listed adventages and reasons for neglecting quality costing that the mayority of barriers could be overcome with an adequate selection of a sistematic quality costs model (barriers such as: cost used out of context, confidentiality of costs, manufacturing complexity, maintaining system in changing organizations, getting information about costs/how to calculate costs, etc) and with the good leading (barriers such as: lack of senior management support, departments refusing to be involved, individuals not accepting responsibility for costs, too much pressure placed on employees and other managers, the time spent on quality costing, etc.) REFERENCES Abdelsalam, H.M.E., and Gad, M.M (2009) Cost of quality in Dubai: An analytical case study of residential construction projects International Journal of Project Management, 27(5), 501–511 Allen, N and Oakland, J.S (1988) Quality assurance in the textile industry: part I International Journal of Quality and Reliability Management, Vol.5, No.5, p.25 Australian Organisation For Quality Control (AOQC) (1980) Survey of Quality Control in the Manufacturing Sector of Australian Industries (Canberra, Australian Government Publishing Services), pp 23- 24 Berry, Leonard L and A Parasuraman “Prescriptions for a Service Quality Revolution in America.” Organizational Dynamics Spring, 1992: 5-15 11th Annual International Conference on SΜΕs, Entrepreneurship and Innovation: Management – Marketing – Economic - 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Social Aspects, 28-31 July 2014, Athens, Greece Viger, C., and Anandarajan, A (1996) Cost management and pricing decisions in the presence of quality cost information: An experimental study with marketing managers Journal of Cost Management, 13(1), 21–28 Yang, C-C (2008) Improving the definition and quantification of quality costs Total Quality Management, 19(3), 175-191 ... about costs of quality models and their application in the practice THE LEVEL OF QUALITY COSTING IMPLEMENTATION IN PRACTICE In 1963, the US Department of Defense issued the Military standard,... Control Handbook claiming that plenty of the costs are the result of poor quality and that they are avoidable (also famous as analogy of “Gold in mine”) Since then, quality costing is seen as more... similar - the majority of the firms that are involved actively in the implementation of the quality costs are from the electronics and electrical industry The business environment for an industry