Using cost of poor quality to identify areas for quality improvements

This thesis is concerned with the use of the cost of poor quality to identify areas for quality improvement, and to measure the results of the improvements. These improvements will show off in increased profit and increased customer satisfaction. A practically implementable method is developed for estimating and minimising quality costs in the manufacturing sector, and is demonstrated by 2 case studies. This method is based on the traditional Prevention-Appraisal- Failure (PAF) model. Three major modifications are made. The author argues that Prevention cost should not be included, due to the time lag before an increase in this cost pays off, and also because the collection of Prevention cost does not add any new knowledge. The External Failure cost is redefined to exclude warranty and liability cost. An attempt to include Invisible cost is made. In this way the customers view are incorporated into the model. The important thing about the model is not so much the absolute size of the quality problems in itself, but that the quality problems are identified and that the size of the problems is evaluated in monetary terms. Ranking the problems in monetary order is a good starting point for setting goals for quality improvements. The cost justification for attacking a specific quality problem can then be shown using Return On Investment (ROI), Residual Value and Net Present Value (NPV). The author argues that in general, NPV should be used to prioritise quality improvement projects. However, benefits that cannot be quantified, should at least be qualified and taken into account.