Optimum Quality Costs and

Zero Defects: Are They

Contradictory Concepts?

Quality Progress/November 1986 C1

 A program of A S DEFECT LEVELS DROP, failure costs decline while
appraisal plus prevention costs increase. This
apparent tradeoff suggests that an optimum quality

continuous improvement
does not necessarily
level exists and that attempts to further improve quality
above this level will increase total cost and decrease
financial performance. Proponents of this view therefore
argue that striving for zero defects (ZD) through a program
A
of continuous improvement is not in a company's best
introduce increased costs economic interest.
J.M. Juran discusses the concept of optimum quality in
as the quality level his Quality Control Handbook.1, 2 Figure 1 depicts his
model for optimum quality costs. Juran also defines three
approaches 100% quality zones relative to the point of minimum total quality
costs. The zone of improvement projects lies below the
optimum quality level, while the zone of perfectionism
lies above it. Between them, and in the area of the
minimum, lies the zone of indifference. It is the zone of
perfectionism that most troubles proponents of zero defects,
for here Juran suggests relaxing prevention efforts and

1986 American Society for Quality Control allowing (even encouraging) increased defect rates.
Furthermore, he identifies the boundary of the zone of
perfectionism as lying, typically, at a quality level where
failure costs amount to 40% of the total quality cost.
Applying other rules of thumb, this translates into a defect
level only half that which exists in the zone of
improvement.

Quality Progress/November 1986 C1

 Coming from anyone other than Juran, this apparent
heresy might go unnoticed. Are the ZD movement and
the concept of continuous improvement wrong? Or can 1
these two apparently disparate views be reconciled? To
answer this question, consider the physics involved in Juran's model of
quality cost optimization. First, the mathematics of Optimum Quality Costs
optimization:

Let: f(q) = Total (internal + external)

~
failure costs

Cost Per Good Unit of Product

p(q) = Total (appraisal + prevention) Total
Failure Quality
prevention costs Costs Costs
A
T(q) = Total quality cost = f(q) +
c
P(q)
q = quality level (0 to 100% good Costs of Appraisal
To Plus Prevention
product)
Then, T(q) is minimized 3 when dT/dq =
Q.
0 or dp/dq = -df/dq. 0 100 %
(100 % defective) Quality Level (100 % good)
In other words, at the point of minimum total quality
costs, an additional dollar invested in prevention will
produce exactly one dollar's worth of reduced failure
costs. Below the optimum, this incremental dollar's From J.M. Jurans Quality Control Handbook,
Third Edition (New York: McGraw Hill, 1979) p. 5-12.
worth of prevention provides more than the proverbial
dollar's worth of cure. Above it, the opposite is true.
There are two other crucial lessons to be learned:
1. Optimum quality costs depend on incremental,
not total, elementary costs. At the optimum, nothing in
general can be said about the relative levels of
prevention and failure costs.
2. There is no mathematical requirement that the 2 Optimum Quality Level
optimum occurs at q < 100%. There may be no optimum
in the range of q = 0 to 100%. There might be a Equals Zero Defects
minimum rather than an optimum, and it could very well
be at q = 100%. Figure 2 shows an example.
Cost Per Good Unit of Product

The optimum (or more correctly, the minimum)

Total
quality cost could lie at zero defects (q =100% ) if the Failure Quality
incremental cost of approaching ZD is less than the Costs Costs
incremental return from the resulting improvement.
Juran asserts that prevention costs rise asymptotically,
becoming infinite at 100% conformance. 4 This implies
that the incremental cost is also infinite. Since the in-
cremental return is not, it follows from his assertion and Costs
the above mathematics that the optimum lies below of Appraisal
100%. The question now is, Does it really take infinite Plus Prevention
investment to reach zero defects?

Z 0
(100 % defective) Quality Level
100 %
(100 % good)

ERO DEFECTS ADVOCATES endorse continuous improvement.

This is the never-ending effort to totally eliminate all
forms of waste (the Japanese call it muda), including
reworks, yield losses, unproductive time, over-design,
inventory, idle facilities, safety accidents, and the less
tangible factors of unrealized individual and societal
potential. The methods used in this process are widely
misunderstood and in fact may lie

C2 Quality Progress/November 1986

3
Two Contrasting Improvement Processes

Kaizen vs. Innovation

FOCUS Design, Production Science and
and Marketing Technology

TARGETING Broad: Narrow:

Quality, Cost Feature
Safety, Efficiency Technique
Product Development

EXPERTISE Conventional Leading Edge,

Know-How Breakthrough

CAPITAL NEEDS Very Modest Major

Investment
PROGRESS Small Steps Big Jumps
RESULTS Continuous Spontaneous
VISIBILITY Not Dramatic Very Dramatic
INVOLVEMENT Everyone Selected Few
COOPERATION Group Activity Individual
Effort
RECOGNITION Effort, Process Results
Evolution Revolution

at the root of the issue. The Japanese word for return? A detailed cost analysis could probably capture all
continuous improvement is kaizen. Figure 3 of the costs and benefits, but the results can be guessed. The
compares this method to an alternative improvement incremental costs are essentially zero. Why? At a minimum,
process-innovation. 5 While innovation is one could argue, there are the labor costs associated with
characterized by costly major events, kaizen the time spent working on the improvements. But these
represents inexpensive and almost imperceptible were not incremental or increased costs. They were fixed
continuous improvement. costs based on a process that encourages everyone to spend
Kaizen is much like the tortoise in the fable of about 5 to 10% of their time working on improvements.
the tortoise and the hare. It often beats innovation What if less time were spent? Evidence suggests that this
in the race for competitive advantage. One striking would result in backsliding (Figure 5). 7 After 20 months of
example was the reduction of dip soldering failures continuous improvement (at an improvement rate of 50%
at Yokogowa Hewlett-Packard (YHP), shown in each 5.1 months) and a tenfold reduction in scrap, the
Figure 4.6 For a little more than two years, the problem was declared solved and all efforts toward further
continuous improvement process on average improvement abandoned. The result: the gains could not be
produced a 50% reduction in the failure rate every held, and the scrap rate increased until the continuous
3.6 months. Defects were reduced by a factor of improvement program was reinstated. Quality is not a
over 250. The process eventually slowed, probably stable property. Without constant effort from everyone, the
due to equipment limitations. Interestingly, that equipment organization naturally drifts toward poor performance:
had purportedly been discarded as obsolete by a sister plant higher cost and lower quality.
in the U.S. It would not be at all surprising to find that the If the incremental labor costs are indeed zero, what about
equipment had become obsolete because of an innovation capital costs required for these improvements? Again, they
that resulted in improvements of a factor of only two or are probably negligible. Kaizen-type improvement is
three. usually the result of better methods or small equipment
What was the incremental cost to YHP in going from a changes or additions.
defect rate of 3 ppm to 2 ppm? What was the incremental
Quality Progress/November 1986 C3
 The direct incremental benefits of continued improvement

4
are clearly small in going from 3 to 2 ppm. However, there
are some major cultural advantages: organizational pride,
reputation, spillover into other areas, and experience in
Example of
problem solving, to mention a few. Continuous Improvement
The correct way to view quality cost optimization is on the
basis of incremental economics. However, as ZD is 1 10,000
approached, it becomes harder to quantify any increased costs
or benefits as less tangible issues enter the equation. A
program of continuous improvement does not necessarily
introduce increased costs as the quality level approaches
100%. Any benefit at all could produce a minimum quality 1,000
cost at zero defects. The apparent contradiction therefore .1
50 % Improvement Each:
disappears once the underlying economics of both concepts
3.6 Months

Failure Rate %
are clear. Perhaps the best test of this view is the competitive
performance of firms that believe in continuous improvement
and zero defects. That group includes not only Toyota and

PPM
Sony, but also IBM, Hewlett-Packard and an ever-increasing .01 100
number of successful U.S. firms.

.001 10

.0001 1
0 12 24 36 48 60
Months

5
Failing to Hold the Gains
100

50 % Improvement Each:
5.1 Months
10
Scrap %

0.1
0 12 24 36
Months

C4 Quality Progress/November 1986