External Failure Costs
External failure costs are incurred when poor-quality goods or services are passed on to the customer
and include costs of returns, replacement of services, warranty costs, and management time handling
customer complaints. Unfortunately, when poor-quality
parts are incorporated in assemblies, disassembly and reassembly costs may far outweigh the cost of
the original part itself. When a defective product gets into the hands of customers or their customers,
the possibility of consequential damages arises because a paper roll did not meet specifications, the
printer missed an important deadline, a magazine did not reach advertisers and subscribers on time, and
so on. There may be health or safety consequences from defective products. External failure costs for
services occur during or after the delivery of the service. Examples include the cost of correcting a bank
statement, reprocessing an application, or reteaching a seminar that failed to meet agreed-upon
outcomes. These costs are the most expensive because of the possible effects on individual customer
goodwill and lost sales and profits. The loss of customers, the inability to secure new customers, and the
penalties paid to keep existing customers are also part of external failure costs.
One cost seldom recognized in an accounting sense is the morale cost of producing (or having to use)
defective products or services. Aside from the obvious productivity impact, it may remove pride in one’s
work or the incentive to keep searching for continuing improvement. The motivation to work hard and
well may be replaced by a “don’t care” attitude.
An Overall Quality–Cost Perspective
It is so unpleasant to detail the costs of defective quality that the temptation is strong to ignore them.
And that is exactly what many organizations have done for many years. They also have built these costs
into internally accepted standards. As a consequence, the opportunity to improve quality is great in
Some organizations have attempted to quantify the total cost of quality, and the outcome of such
studies suggests that 30 to 40 percent of final product cost may be attributable to quality. There is a
huge incentive to tackle quality as a major organizational challenge. For example, Kodak’s Supplier
Quality Process expects suppliers to meet or exceed world-class standards of performance in quality and
the reliability, cost, and delivery of the products and services provided. One element is the cost of
quality model used to quantify, in dollars, quality performance of suppliers by looking at defects per part
per million (DPPM), delivery, lead times, administrative costs of corrective actions, and potential line
down situations. The model may also be used in benchmarking suppliers in e-auctions and on sourcing
QUALITY MANAGEMENT TOOLS AND TECHNIQUES
The question of how to assure quality is important for all three roles played by an organization:
customer, converter, or supplier of goods or services. This section addresses tools and techniques for
assuring quality, including lean thinking; total quality management (TQM); continuous improvement or
kaizen; quality function deployment (QFD); Six Sigma; statistical process control (SPC); sampling;
inspection and testing; and supplier certification.
Lean thinking is a management philosophy focused on maximizing customer value while minimizing
waste, typically in the form of overproduction, waiting, transportation, nonvalue-adding processes,
inventory, motion, and costs of quality (scrap, rework, and inspection). Lean was first used to describe
Toyota’s Production System in the late 1980s and has also been called just-in-time (JIT) manufacturing.
Today, lean principles and practices are applied in all industries and services, including health care and
The goal is to optimize the flow of products and services through value streams that flow internally
across technologies, assets, and departments to customers and externally with supply chain partners.
The product or service flows when pulled by the next downstream step. A value stream is a series of
steps executed in the right way and at the right time to create value for the customer. Each step in a
value stream must be valuable to the customer, capable, available, adequate, and flexible. A step is
capable if it gets the exact same result every time, available if it can be performed whenever it is
needed, adequate if there is capacity to perform it exactly when it is needed, and flexible if it can
respond rapidly to changing customer desires without creating inefficiencies.
Lean supply networks require advanced modeling tools that consider all costs and provide optimized
strategies across a network of distribution centers, plants, contract manufacturers, sourcing options,
and logistical lanes. Demand variability drives waste into the network. Therefore, lean enterprises use
tools such as IT solutions that solve complex optimization problems yet are easy to use and deploy,
capable of responding to real-time information, and integrate and align internal and external supply
chain partners globally.
Honda’s strategy is to move production as close to customers as possible to minimize lead times and
inventories and to move design close to production to maximize information flow while minimizing
response time. Honda’s lean enterprise includes designing and making high-volume products for each
world region entirely within the region and cross-trading niche products between regions to capture
Total Quality Management (TQM)
Total quality management (TQM) is a philosophy and system of management focused on long-term
success through customer satisfaction. It was developed in Japan after W. Edwards Deming taught
statistical quality control to the Union of Japanese Scientists and Engineers (JUSE) in 1950. Total quality
control (TQC) was reimported to the United States in the 1980s and contributed to the revitalization of
U.S. industries. It is known internationally as total quality management (TQM).
In a TQM effort, all members of an organization participate in improving processes, products, services,
and the culture in which they work. Top management develops the vision for total quality and provides
the commitment and support, including progress reviews, to realize this vision. The customer can be
internal or external and is anyone in the supply chain who receives materials from a previous step in the
chain. The methods for implementing this approach come from the teachings of such quality leaders as
Philip B. Crosby, W. Edwards Deming, Armand V. Feigenbaum, Kaoru Ishikawa, and Joseph M. Juran.
Deming’s 14 Points
A core concept in implementing TQM is Deming’s 14 points, a set of management practices to help
companies increase their quality and productivity. These are:2
1. Create constancy of purpose for improving products and services.
2. Adopt the new philosophy.
3. Cease dependence on inspection to achieve quality.
4. End the practice of awarding business on price alone; instead, minimize total cost by working with a
5. Improve constantly and forever every process for planning, production, and service.
6. Institute training on the job.
7. Adopt and institute leadership.
8. Drive out fear.
9. Break down barriers between staff areas.
10. Eliminate slogans, exhortations, and targets for the workforce.
11. Eliminate numerical quotas for the workforce and numerical goals for management.
12. Remove barriers that rob people of pride of workmanship, and eliminate the annual rating or merit
13. Institute a vigorous program of education and self-improvement for everyone.
14. Put everybody in the company to work accomplishing the transformation.
From this list, four important features of TQM emerge:
1. Quality must be integrated throughout the organization’s activities.
2. There must be employee commitment to continuous improvement.
3. The goal of customer satisfaction and the systematic and continuous research process related to
customer satisfaction drive TQM systems.
4. Suppliers are partners in the TQM process.
TQM stresses quality as the integrating force in the organization. For TQM to work, all stages in the
production process must conform to specifications that are driven by the needs and wants of the end
customer. All processes, those of the buyer and the suppliers, must be in control and possess minimal
variation to reduce time and expense of inspection. This in turn reduces scrap and rework, increases
productivity, and reduces total cost. TQM is more than a philosophy. It involves the use of several tools,
such as continuous improvement or kaizen, quality function deployment (QFD), and statistical process
control to achieve performance improvements.
The following sections describe how quality management techniques are used and how they apply to
the supply function.
Continuous improvement, sometimes called by its Japanese name, kaizen, refers to the relentless
pursuit of product and process improvement through a series of small, progressive steps. It is an integral
part of both just-in-time (JIT) and TQM. Continuous improvement
should follow a well-defined and structured approach and incorporate problem-solving tools such as
Pareto analysis, histograms, scatter diagrams, check sheets, fishbone diagrams, control charts, run
charts, and process flow diagrams.
The plan–do–check–act cycle, sometimes called the Deming Wheel, provides a good model for
conducting continuous improvement activities.
Plan: Collect data and set performance target.
Do: Implement countermeasures.
Check: Measure and evaluate the results of countermeasures.
Act: Standardize and apply improvement to other parts of the organization.
For example, at Thomas Jefferson University Hospitals in Philadelphia, operating room patient flow from
preadmissions testing to the post-anesthesia unit was marked by inefficiencies, including delays and
bottlenecks. By forming kaizen teams and executing events to identify and eliminate root causes, the
hospital realized significant efficiencies.3
At Honda, the purchasing policy is “Best possible quality, cost, delivery, development, and environment
(QCDDE): sensing worldwide, acting worldwide, creating worldwide.” The goal is to help achieve the
company’s 2020 Vision of providing “good products that maximize the joy of customers with speed,
affordability and low CO2 emissions.”4
Quality Function Deployment (QFD)
Quality function deployment (QFD) is an important aspect of TQM. It is a comprehensive quality system
aimed specifically at satisfying the customer throughout the development and business process—end to
end. It is a method for listening and effectively responding to the voice of the customer to develop
higher-quality new products at less cost and in less time. The QFD method can be used for both tangible
products and nontangible services across business sectors.5 It has been used successfully by companies,
including Accenture, Boeing, Continental Rehabilitation Hospital, Ford, and the U.S. Department of
Defense. Modern QFD addresses the four Ss of today’s lean business environment: speed, smart, slim
QFD is a comprehensive quality system that:
• Seeks both spoken and unspoken customer needs.
• Maximizes “positive” quality (such as ease of use, fun, luxury) that creates value.
• Translates these into actions and designs by using transparent analytic and prioritization methods.
• Empowers organizations to exceed normal expectations.
• Provides a level of unanticipated excitement that generates value.
QFD is based on teamwork and customer involvement. It integrates marketing, design, engineering
development, manufacturing, production, and supply in new product development from the conception
stage through final delivery. Through coordination and integration, rather than the traditional sequential
development approach, QFD allows the end customer’s needs and wants to be communicated at the
product development stage and then drive the
design and production stages. More time is spent up front in product development, but by accurately
defining customer needs and wants, the total time spent on the design cycle is reduced because fewer
design changes are made in later stages of the process.
The four integrated stages of the QFD process are:
1. Product or service planning, to determine design requirements.
2. Parts deployment, to determine parts characteristics for manufactured goods.
3. Process planning, to determine manufacturing requirements or service process elements.
4. Production or action planning, to determine production requirements or service action plans.
Buyer and supplier integration into the process can benefit the organization by:
1. Reducing or eliminating engineering or service design changes during product or service
2. Reducing product or process development cycle time.
3. Reducing start-up cycle time.
4. Minimizing product or service failures and repair or service replacement costs over the product or
5. Creating product or service uniformity and reliability during production or service delivery.
From the perspective of supply management, well-functioning buyer–supplier relationships are a key
contribution that purchasers and supply managers can make to the organizations’ TQM and QFD efforts.
Supply-base rationalization (determining the optimum number of suppliers to meet business needs) and
closer relationships with key suppliers through partnering arrangements or strategic alliances go hand in
hand with quality initiatives (see Chapter 13). The importance of matching supply performance
measures to the strategic initiatives of the organization is also important if TQM and QFD are to be
successful. For example, if supply’s performance is measured by a reduction in the prices of materials
and improved operating efficiency rather than the quality of supplier relationships, then purchasers may
buy on the basis of price alone. This will undermine the quality initiatives of the firm. Integration of
functions and processes throughout the firm, and with key suppliers, is a critical component of global
A Six Sigma (6s) approach to quality focuses on preventing defects by using data to reduce variation and
waste. This quality initiative was developed by GE and Motorola and has been adopted by many
organizations. Six Sigma quality means there are no more than 3.4 defects per million opportunities.
Technically, 6s or six standard deviations are very close to zero defects and correspond to a Cpk value
(discussed later in this chapter) of 2.0. Six Sigma initiatives have measurable goals such as cost reduction
or profit increase through improvements in cycle time, delivery, safety, and so on.
Six Sigma methods may also be adapted to service processes. First, categorize service processes as
highly customized, mass customized, or standard. While opportunities may exist in any category, the
greatest occur in standardized services such as credit card
account services, fast-food, benefits processing, and payroll or accounts payable. The next step is
defining a service defect. A service defect is a flaw in a process that results in a lower level of customer
satisfaction or a lost customer. Easily quantified measures are lost customers, customer satisfaction
ratings, and service turnaround times. After identifying a service defect, conduct root cause analysis,
then develop and implement improvement action plans.
According to Kubiak and Benbow, writing for the ASQ, Six Sigma is defined in several ways:
1. It is a philosophy based on the view that all work is processes that can be defined, measured,
analyzed, improved, and controlled. Processes require inputs (x) and produce outputs (y). If you control
the inputs, you will control the outputs.
2. It is a set of tools, including statistical process control (SPC), control charts, failure mode and effects
analysis, and flowcharting. These are qualitative and quantitative techniques to drive process
3. It is a methodology with five steps: define, measure, analyze, improve, and control (DMAIC). This is
the most widely adopted and recognized Six Sigma methodology.6
The common elements of Six Sigma initiatives are:
• A management environment that supports the initiatives as business strategy. Organizational support
is provided by designated executives and champions who set the direction for project selection and
• Well-defined projects with bottom-line impact.
• Teams whose members have statistical training. Levels include black belt, master black, green, yellow,
and white belts. Each level has specific roles and project responsibilities.
• Emphasis on the DMAIC approach.
Statistical Process Control (SPC)
Dr. W. Edwards Deming, the well-known American quality control specialist, assisted Japanese
manufacturers in instituting statistical quality control (SQC) beginning in the 1950s. Dr. Deming showed
that most processes tend to behave in a statistical manner and that understanding how the process
behaves without operator interference is necessary before controls can be instituted. Managing quality
using SQC techniques involves sampling processes and using the data and statistical analysis to establish
performance criteria and monitor processes. Statistical process control (SPC) is a technique that involves
testing a random sample of output from a process in order to detect if nonrandom, assignable changes
in the process are occurring. Because almost all output results from a manufacturing or transformation
process of some sort, process control is the preferred approach to controlling product quality.
The first step in quality assurance is making sure that the supplier’s process capability and the buyer’s
acceptable quality range mesh. If the natural range of the supplier’s process is wider than the range of
the buyer’s quality requirements, then the buyer
must negotiate with the supplier to have the supplier narrow the natural range through process
improvements such as operator training or machine improvements. If it is not economically feasible or
the supplier is unable or unwilling to make improvements for some reason, then the buyer may seek
another supplier rather than incur the extra cost of inspection, rework, and scrap.
From the buyer’s perspective, the basic steps in assuring quality through statistical process control are:
1. Buyer establishes required quality specifications.
2. Supplier determines process capability.
a. Identify common or chance causes of variation.
b. Identify special or assignable causes of variation.
c. Eliminate special causes.
3. Compare buyer’s quality requirements to supplier’s process capability.
4. Make adjustments, if necessary.
a. Negotiate with supplier for process improvements.
b. Seek an alternate supplier.
Causes of Variation
Since no process can produce the same exact results each time the activity is performed, it is important
to establish what kind of variation is occurring and eliminate as much as possible. A process capability
study identifies two types of variation: (1) common causes or random variation and (2) special or
assignable causes of variation.
Common or chance causes of variation. These causes are intrinsic to the process and will always be
there unless the process is changed. They may be related to machine, people, material, method,
environment, or measurement. For instance, machine lubrication, tool wear, or operator technique
would be common causes that result in inconsistent output. If too many defects occur because of
common causes, then the p ...
Purchase answer to see full attachment