24-A Research of Trade of Relation With in Quality Cost
24-A Research of Trade of Relation With in Quality Cost
24-A Research of Trade of Relation With in Quality Cost
To cite this article: Qiang Su , Jing-Hua Shi & Sheng-Jie Lai (2009) Research on the trade-off
relationship within quality costs: A case study, Total Quality Management & Business Excellence,
20:12, 1395-1405, DOI: 10.1080/14783360903248922
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Total Quality Management
Vol. 20, No. 12, December 2009, 1395–1405
In today’s global competition, the significant cost saving potential on the quality costs
is attracting more and more firms. The quality costs can be classified into control costs
(prevention and appraisal costs) and failure costs (internal and external failure costs).
As a universally accepted principle, the increase of the control costs will result in the
decrease of the failure costs and vice versa. This relationship is called the trade-off
relationship within quality costs. Thereof, the proportions of quality costs are vital
for balancing the quality cost and there is a balanced point (a set of proportions) that
can make a firm obtain the lowest level of the sum of quality costs. Based on a real
case study, this paper concentrates on the statistic analysis of the trade-off
relationship between quality costs and the quantitative calculation of the balanced
point. The statistic analysis reveals that the trade-off relationships within quality
costs will not show up except when time delays are taken into account. With these
time delays, the related total quality cost (RTQC) can be derived and utilised to
compute the balanced point of the quality costs. The case study demonstrates that
the findings and approach can provide a useful assistance in the quality cost saving
and management improvement.
Keywords: quality cost; balanced point; trade-off relationship; cost saving
1. Introduction
Nowadays, more and more practitioners and scholars are acknowledging the imperative-
ness of the quality costing management and improvement. This tendency is coming from
an unprecedented cost down pressure in order to cope with the fierce global competition.
According to Moyers and Gilmore (1979) and Wheelright and Hayes (1985), quality-
related costs represent a considerable proportion up to 40% of a company’s sales. Bell
et al. (1994) estimate that quality cost in the manufacturing industry is between 5 and
25% of sales. Service industries, however, expend an estimated 30– 40% of operating
costs in their quality cost. These figures tell us that the quality costs represent an
amount of money too tremendous to be ignored.
Companies have been interested in cost saving for a long period of time. However, in
recent years, the cost down strategies and activities are almost all focused on saving costs
on materials handling, manufacturing processes and facilities improving, and the organis-
ation downsizing or labour cutting and so on. These measures result in magnificent savings
and their aftermath brings in profits to companies. Nevertheless, few organisations have
explored systematically the quality cost saving. Along with the coming of the twenty-
first century, the century of quality, more and more organisations are realising the huge
Corresponding author. Email: [email protected]
potential in the quality cost saving, the most promising source of profit in the contempor-
ary competition environment.
Juran (1974) defined the cost of quality as ‘the sum of all costs that would disappear if
there were no quality problems’ pp. 5.1– 5.25. This implies that the cost of quality rep-
resents the difference between the actual cost of a product or service and what the cost
would have been if everyone performed 100% satisfying the requirement (Hagan,
1968). According to this viewpoint, the quality costs could be regarded as the loss of
profit. Taking a Chinese auto part vendor as an example, while the profit of the
company was approximately 5 million RMB last year, its quality related cost is around
10 million RMB in the same period of time. If the amount of the quality costs can be
reduced by 50%, the profit could be increased by 100%. That is why the cost of quality
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do not know what proportions are suitable for them and which point is the balanced point.
In reality, many firms just simply concentrate on reduction of the internal failure cost since
its value is usually much larger than other types of quality cost. However, this approach
can hardly achieve the expected results because of the ignoring of the interrelationship
between the quality costs.
In this circumstance, how to find out the quantitative trade-off relationship within
quality costs and how to compute out the balanced point are becoming the most concern-
ing problems in operations management. To this end, this study is conducted based on a
case firm’s real data. The trade-off relationships are explored systematically and the
balanced point is calculated out accordingly.
The remaining of the paper is structured as follows. Section two is the literature review
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on quality cost management. Then, in section three, the trade-off relationships within
quality costs are statistically studied using the case firm data and the balanced point is
derived accordingly in section four. The discussions are given in section five and
section six concludes the paper.
may be needed for specific projects when diagnosing the cause of a specific problem or
identifying specific savings. Fink (1993) suggested that the Taguchi quality loss function
could be utilised in the external quality cost measurement and some detailed procedures
were proposed and elaborated. Tareghian and Taheri (2007) proposed a meta-heuristic sol-
ution procedure for the discrete time, cost and quality trade-off problem in project man-
agement. Yang et al. (2006) explored the same problem using fuzzy multi-attribute
group decision utility function theory.
Although quality cost is becoming a hot academic topic and attracting more and more
attention, little of the literature is dedicated to the trade-off relationship between quality
costs. Researchers have just suggested some so-called proper proportions through inves-
tigations or surveys. For example, Juran and Gryna (1970) proposed that the optimal pro-
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portions should be 0.5– 5% for prevention cost, 10– 50% for appraisal cost and 25 –40%
for internal failure cost and 20– 40% for external failure cost. However, Feigenbaum
(1983) took the optimal proportions as 5 – 10% for prevention cost, 20– 25% for appraisal
cost, 65 –70% for internal and external failure cost. One can find that even these given
ratios are not consistent with each other. Which one is correct and suitable for a specific
company? This question is bothering most of the managers who are engaged in the quality
cost reduction.
In this situation, our research focus on the trade-off relationship exploring and the
balanced point calculating. We hope it can provide general practical guidance for a
company in finding out its own trade-off relationship and calculating out the balanced
point so as to facilitate the company’s quality cost saving and management improvement.
Table 2. Relationship between prevention cost and internal failure cost with time delays.
Figure 1. Inverse curve between the prevention cost and the internal failure cost with two seasons
time delay.
the prevention cost will take effect on the internal failure cost in six months. Figure 1 illus-
trates the inverse curve of the prevention cost and the internal failure cost with time delay
of two seasons.
Similarly, we can derive the time delay and relationship between other costs. As shown
in Table 3, with confidence level more than 95%, an inverse relationship exists between
the internal failure cost and the appraisal cost with a time delay of zero season.
In the same way, the regression analysis shows that there is an inverse relationship
between the appraisal cost and external failure cost with a confidence level more than
Table 3. Relationship between the appraisal cost and the internal failure cost with different time
delays.
80%. And the corresponding time delay is 0 season. However, the relationship between
prevention cost and external failure cost cannot be concluded. In summary, all the statistic
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As shown in Table 5, three records are removed and 25 records remain for further
analysis. Among these remaining records, a group of records with the smallest RTQC(t)
and a group of records with the largest RTQC(t) are selected and compared statistically.
Here, seven records, about 30% of the total record number of 25, are selected for each
group.
As shown in Table 6, t-test verifies that all the four types of quality cost are signifi-
cantly different in the two groups. It implies that the group with the smallest RTQC(t)
is totally different from the group with the largest RTQC(t). Therefore, the records in
the smallest group can be utilised as the benchmarking records. These records represent
the best performance of the case firm in the quality cost control. So, the averages of the
four quality costs and their proportions in the smallest group could be employed as the
benchmarking balanced point for the case firm.
Referring to the properties of the smallest group in Table 6, one can find that the
balanced point for the case firm should be 8.4% for prevention cost, 48.2% for appraisal
cost, 29.1% for internal failure cost and 14.2% for external failure cost. This proportion
should be regarded as the balanced point for the case firm.
5. Discussion
In this work, the findings of time delay and the concept of total related quality cost are
introduced in the relationship analysis between quality costs. And an approach is
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defined by which the balanced point can be derived based on firm’s historical records.
The approach can provide significant assistance on the quality costs saving and manage-
ment improvement.
For instance, Table 7 gives the comparison of the suggested percentages/costs and the
case firm’s real percentages/costs. The suggested figures are determined referring to the
balanced point derived in Table 6, whereas, the real values are derived based on the
records listed in Table 5.
Table 7 shows that, for the case firm, the percentage of the prevention cost should
increase from 4.8% to 8.4% and the percentage of the appraisal cost should increase
from 26.5% to 48.2%. Consequently, the percentage of the internal failure cost will be
decreased from 44.4% to 29.1% and the percentage of the external cost will be reduced
from 24.3% to 14.2%.
If evaluating in absolute value, Table 7 shows that if the prevention cost and the
appraisal cost are increased by 8.37% and 12.57% respectively, the internal failure cost
and the external failure cost will be decreased by 59.43% and 52.41% respectively.
Consequently, the total quality cost can be reduced by 35.42%. This leverage effect is
illustrated in Figure 2.
Figure 2 demonstrates the trade-off relationship between the control costs (prevention
cost and appraisal cost) and failure costs (internal failure cost and external failure cost).
More importantly, with a quantitative relationship, it provides useful assistance for the
management decision on the quality costs control.
Meanwhile, one can find that the suggested proportions are reasonable because they
are derived based on the firm’s historical records. And the suggested optimal values are
in the range of real practices which avoids the radical change. More essentially, this
approach is able to handle the dynamic changing environment in the real world. Whenever
necessary, the proposed approach can be utilised again to take the new situations into
consideration. This property can help the firm to respond to the changing environment and
make timely adjustments to its quality cost control strategies.
The research team also tried to use this approach to explore the trade-off relationships
in other firms. The results imply that this approach works better for firms with higher
quality cost management levels in which more complete quality cost accounting catalo-
gues are included and the data are collected carefully and precisely. As an attractive
advantage, this approach does not require data to fit the regressive curve perfectly.
However, it needs to be emphasised that high quality data are still necessary and critical
for the application effectiveness. Therefore, to some degree, this approach may be useful
to evaluate the quality cost management level of firms.
6. Conclusions
Concentrating on the trade-off relationships within quality costs, a systematical study
was conducted with a case study. In this work, the time delay is induced in the regression
analysis within quality costs. Meanwhile, the concept of related total quality cost (RTQC)
is proposed and used in the balanced point calculation.
As we known, for a specific firm, its products, processes, manufacturing systems and
employees are all unique. So, we should try to find its unique balanced point from its own
historical records instead of simply referring to some given proportions.
Meanwhile, the trade-off relationship and the balanced point should be re-calculated
from time to time according to the firm’s dynamic change. The findings and approach
elaborated above broaden our knowledge on quality costs control.
Acknowledgements
The paper is sponsored by the National Natural Science Foundation of China (70672077),
‘985’ Project at Xi’an Jiaotong University (07200701) and the Educational Foundation of
the Shanghai Automobile Industrial Corporation (SAIC). The authors would like to
express their gratitude to the Department of the Quality and Economics Operations of
SAIC for its great assistance in the case study.
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