820209 Measuring the Cost of Product Quality .COPYRIGH1 SOCIETY OF AUTOMOTIVE ENGINEERS, INC.Jack W. Schmidt and Jerry F. Jackson Detroit Diesel Allison Division of General Motors Corp. ABSTRACT A number of steps have recently been taken to measure the cost of product qualit y at Detroit Diesel Allison. These steps and the concept of setting goals to effect improved product quality and productivity are discussed. The paper expands the basic "cost of unquality" model presented in the "DDA 14-Point Quality Improvement Program" to demonstrate the meth- odology established to quantify the cost sav- ings which result from quality improvement programs. IN ORDER TO BETTER ADDRESS the challenge of quality improvement at Detroit Diesel Allison, Division of General Motors Corporation, a "14-Point Quality Improvement Program" was developed early in 1981. That program was directed at improving product quality, which also yielded reductions in the cost of un- quality to produce tangible savings, as illus- trated in Fig. 1. The program focused on managing quality improvement in a systematic manner and reducing total costs to enhance return on investment. This paper describes the methods and techniques developed at DDA to: omeasure the cost of product quality in support of the "14-Point Quality Improvement Program," o use the measured cost of product quality as a tool for more effectively managing the business. But most importantly, the purpose of this paper is to present a management program for measur- ing the cost of quality. The supporting ele- ments for the suggested program are discussed in detail so that the program may be developed and applied to any business situation.COST OF QUALITY Cost of quality--is it a buzz word from the new school of managers? Is quality free as a recent book suggests? Is the cost of quality of concern only to the quality department? Is the cost of quality small? The answer to all of these questions is no. Cost of quality (COQ) is the cost of pro- ducing, finding, correcting, and preventing defects. An accurately measured COQ is a management tool which can be used in many ways to improve profit. Recent studies indicate that the typical COQ for U.S. companies is from 10 to 20 percent of total sales. It has been suggested by Philip Crosby and others that COQ should be about 2.5 percent of total sales (1F:. The Japanese automobile industry has given credibility to Crosby's COQ estimate by con- sistently showing COQ in the 2.5 to 4.0 percent range. It is appropriate to note that typical U.S. auto industry operating profit as a per cent of sales is only 10 percent (2). Fig. 2 shows the typical traditional pic- ture for cost of goods sold by U.S. companies. Note that labor, which has usually been the major target of American cost reduction pro- grams, is usually less than 50 percent of total sales. Direct labor is only a portion of total labor cost, and a common goal has always been to reduce direct labor costs by 3 to 6 percent per year. Given that COQ is 10 to 20 percent of total sales rather than 2.5 to 4.0 percent and that it is a cost of having done something wrong, U.S. industry's cost reduction/ profit improvement programs have certainly been suboptimal in the near term. The long-turm implications of this laxity have now manifested themselves as U.S. reputation for poor quality and relatively low product value, resulting in a reduced share of markets once totally dominated. The reason for this misdirection can be understood within the framework of traditional American management. The cost of direct labor was easy to identify, easy to measure and large. Therefore, labor cost reduction programs and goals were easy to establish and sell. Prog- ress toward those goals was easy to monitor, and reporting success in this area was very *Numbers in parentheses designate references at end of paper. 7Downloaded from SAE International by University of Leeds, Monday, September 24, 2018TANGMLE 9# SAVINGS i LPG (s) COST