Evaluating the Cost of Quality: It’s Simple Math

Evaluating the Cost of Quality: It’s Simple Math

Deborah Kacera, Regulatory & Industry Strategist, Pilgrim Quality Solutions

Every regulated organization understands the need to implement a quality system. In fact, it’s a “shall” clause for all Life Science companies to ensure they are in compliance with industry regulations.

The focus of any effective quality system is, and rightly so, all about ensuring Patient Safety. From there, as the organization matures, its people, processes and technology evolve from a compliance, to a correction, to a prevention mindset, eventually resulting in increased quality brand recognition and shareholder value.

Consider a scenario in which a manufacturer maximizes the capabilities of its quality system. If that company really “did it right the first time;” if every motion, thought, and investment — from the product development, through market approval, and through manufacturing at all production sites and along the value chain — was spent “right the first time” — the outcome would be “right.” Right for the consumer/patient and for the manufacturer.

In the real world, companies need to engage quality system processes, such as Corrective and Preventive Action (CAPA), as the lifeline to feed improvements through the Change Management processes into the product lifecycle, from design inputs to manufacturer and supplier outputs.

Defining the Cost of Quality

As we look at process and product improvements, quantifying the “quality” costs to the organization is defined as the Cost of Quality (COQ). Why quantify the quality data? The COQ categorizes these costs so the organization can see how moving from a quality assurance (control and correction) focus to a focus on prevention helps to reduce the cost of nonconformances.

The American Society of Quality (ASQ) uses the following formula to calculate the Cost of Quality (COQ):

Cost of Quality (COQ) = Cost of Poor Quality (COPQ) + Cost of Good Quality (COGQ)

The COPQ contains all the costs of nonconformances that are both internal and external to the organization; whereas, the COGQ contains the cost of quality conformance, including any costs associated with both appraisal and prevention.

Some cost of quality calculation examples would be:

  1. COPQ – Internal Costs (defects occurring and managed within the organization)
    • Scrap, Rework, Re-inspection
  2. COPQ – External Costs (defects that reach the consumer)
  3. COGQ – Appraisal Costs (controls put in place by the organization)
    • Inspection (purchased, manufactured), Testing (acceptance, field), Quality Audits, Calibration
  4. COGQ – Prevention Costs (activities to eliminate defects from ever occurring)

What’s the Cost to Your Organization?

In the Life Sciences industry, analysts have stated that less than 50 percent of companies really know what the COQ is for their organization. However, ASQ, quality guru Philip Crosby, and the FDA Case for Quality have shown that the COQ for an organization can range from 3 – 25% of a company’s revenue. LNS Research has shown that COPQ – Internal can have a range of 1 – 10%, and likewise, COPQ – External can also be 1 – 10% of revenue. McKinsey states in a 2013 whitepaper for the Medical Device industry that the day-to-day COQ can range between 10 – 14% of a company’s revenue.

The good news is that there are known strategies that can be put in place to drive down the COQ which will have a direct positive impact on the profitability of your organization, and it’s all within your control.

Strategies for Cost Improvements

Every company is at a different point in the evolution of its people, processes and technology implementations, and even its understanding of its key metrics/performance indicators or COQ. Management could consider leveraging the following strategies to reduce their company’s COPQ and positively impact quality and profitability performance.

  1. Improve supplier relationships for both product and process improvements
    • Collaborate during design process, engage suppliers in the corrective action process (from incoming, manufacturing or customer-reported problems), develop supplier scorecards, audit suppliers based on their product/process risk levels
  2. Focus product development on Prevention
    • Define Critical to Quality attributes, pull in lessons learned defect information from similar products’ risk files and quality system information
  3. Make quality and compliance information and metrics visible across the organization
    • Collect real time quality data from SPC, defects/dispositions, inspection results, and downtime, just to list a few, to trend problems and see systemic issues
    • Evaluate quality and compliance risk from audit results (internally and externally), complaints, reportable events
    • Use statistical analysis to monitor real-time quality data
  4. Leverage technology
    • Deploy a quality and compliance management platform to support operational efficiency which can increase accountability, productivity and reliability
    • Implement an enterprise quality management solution (EQMS) to deliver a single source of truth, common systems across divisions and sites, and harmonized processes

Each of the above initiatives have costs to implement, but also savings to achieve. The costs may increase COGQ (either through appraisal or prevention categories), and the cost savings can impact both the COPQ and the COGQ.

Improvement = EQMS

For example, leveraging an automated, enterprise-wide quality management system (EQMS) can impact the COGQ based on the investment, but it also will show efficiency savings that will continuously reduce the COGQ over time.

In a recent study, LNS Research showed that companies that implemented an automated, integrated, closed-loop EQMS solution improved quality performance and added value to impact the following COQ categories, compared to companies that had not:

COPQ – Internal cost was lower by 27%

COPQ – External cost was lower by 10%

COGQ – Appraisal cost was lower by 7%

COGQ – Prevention cost was lower by 1%

If your organization is on a path to quality maturity, you surely have considered the full range of positive implications of evaluating Cost of Quality. For the younger set, addressing your COQ is going to take you to that next level. Don’t let the task intimidate you. It’s really nothing more than simple math: COQ = COPQ + COGQ.

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