Cost of Quality may vary from company to company.It may in the region of 20% of sales for a manufacturing company and 30% of operating expenses for a service company.
HIDDEN COST OF FAILURE:
Materials 40%
Employees Cost 20%
Selling Expenses 20%
Administration 04%
Excise and Taxes 12%
Dividend to shareholders 02%
Retained profit to reserves 02%
TOTAL 100%
Each of these heads can have all the three components,natural cost of operating business(COB),Cost of prevention or cost of control(COC),and cost of internal and external failures(COF).
The cost of materials,estimated at 40%,includes not only the material essential to produce a product(COB) but extra material put in to be sure that the customer is satisfied all the time(COC) and cost of material wasted in the plant.The cost of employees essential to run the business(COB) but also the cost of employees required to ensure that the business is run properly(COC) and the employees who take care of the consequences of errors and mistakes.Let us take case of inventory carrying costs.The cost of inventory that the company considers optimum for running the business is COB.The cost of extra inventory held specifically with a view to avoid line stoppages when the storage of a particular material is anticipated or the cost of carrying safety stocks is COC and carrying less inventory because of failure to meet some forecast is COF.
Planning to reduce cost of Failures:
The first important step to reduce cost of Failures is commitment of management to concept of quality management.The philosophy of QUALITY FIRST must be communicated to all employees,just not in words but in deeds also.Once quality is put a head of cost, the management of quality has also got to be put on the same if not higher footing than management of Finance.Hence Quality Planning-equivalent to budgeting in finance,Quality Control-equivalent to controls in finance to keep expenses within budget.Quality Improvement--equivalent to projects for profit improvement to make the financial results of thee company better than those forecasted in the budget.
For reducing cost of failure,employees should learn to do things right the first time every time.For this there is need for training and education on large scale.Various support systems should be in place for its implementation.Higher management should take keen interest in it's implementation. To make this system successful,employees should be motivated to publish success stories of the results coming out of this system.People should be rewarded if substantial cost benefit is noticed by implementation of this system.
HIDDEN COST OF FAILURE:
Materials 40%
Employees Cost 20%
Selling Expenses 20%
Administration 04%
Excise and Taxes 12%
Dividend to shareholders 02%
Retained profit to reserves 02%
TOTAL 100%
Each of these heads can have all the three components,natural cost of operating business(COB),Cost of prevention or cost of control(COC),and cost of internal and external failures(COF).
The cost of materials,estimated at 40%,includes not only the material essential to produce a product(COB) but extra material put in to be sure that the customer is satisfied all the time(COC) and cost of material wasted in the plant.The cost of employees essential to run the business(COB) but also the cost of employees required to ensure that the business is run properly(COC) and the employees who take care of the consequences of errors and mistakes.Let us take case of inventory carrying costs.The cost of inventory that the company considers optimum for running the business is COB.The cost of extra inventory held specifically with a view to avoid line stoppages when the storage of a particular material is anticipated or the cost of carrying safety stocks is COC and carrying less inventory because of failure to meet some forecast is COF.
Planning to reduce cost of Failures:
The first important step to reduce cost of Failures is commitment of management to concept of quality management.The philosophy of QUALITY FIRST must be communicated to all employees,just not in words but in deeds also.Once quality is put a head of cost, the management of quality has also got to be put on the same if not higher footing than management of Finance.Hence Quality Planning-equivalent to budgeting in finance,Quality Control-equivalent to controls in finance to keep expenses within budget.Quality Improvement--equivalent to projects for profit improvement to make the financial results of thee company better than those forecasted in the budget.
For reducing cost of failure,employees should learn to do things right the first time every time.For this there is need for training and education on large scale.Various support systems should be in place for its implementation.Higher management should take keen interest in it's implementation. To make this system successful,employees should be motivated to publish success stories of the results coming out of this system.People should be rewarded if substantial cost benefit is noticed by implementation of this system.
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