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Calculating and Reporting Benefits of QMS. Iowa State University of Science and Technology Agriculture and Biosystems Engineering Agriculture and Industrial Technology 7/15/05. Objectives.

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Calculating and reporting benefits of qms

Calculating and Reporting Benefits of QMS

Iowa State University

of Science and Technology

Agriculture and Biosystems Engineering

Agriculture and Industrial Technology



  • Identify potential benchmark measures of cost/benefit of quality management system adoption by agriculture.

  • Set scope of the project

  • Select summarizing fiscal indicator of costs and benefits measures

Dual roles for iso 9000 9004
Dual Roles for ISO 9000/9004

  • QMS for fulfilling customer, regulatory, etc., requirements (ISO 9000)

  • “Management should consider development of innovative financial methods to support and encourage improvement of the organizational performance” (ISO 9004 – Guidelines for performance improvements)

Allocation of costs process approach
Allocation of Costs: Process Approach

  • Early methods of tracking quality costs was too limited “focus on cost of non-conformance i.e. external and internal failure costs”. (Juran)

  • Process-cost broadens economics of quality by classifying cost of non-conformance and cost of conformance I.e. “costs incurred when a process is running without failure” (Schottmiller)

Process approach added benefits
Process Approach: Added Benefits

  • Utilize cost of non-conformance (often called Cost of Poor Quality) and cost of conformance = greater cost saving opportunities may be available in reducing cost of conformance (Schottmiller)

Process costing
Process Costing

  • Allows the tracking and reduction of costs normally associated with efficiency in addition to effectiveness (quality)” (Schottmiller)

  • Process simplification in addition to reduction of errors become objectives (Schottmiller)

  • Relate the economics of quality to the amount of activity performed (ISO/TR 10014: Economics of Quality)

Process costs i e costs of inefficient processes examples
Process Costs i.e. Costs of Inefficient Processes Examples

  • Variation of product characteristics from optimum

  • Unplanned downtime and/or loss of processing/storage capacity

  • Inventory shrinkage

  • Variation of process characteristics from ‘best practices’ (cycle times from to start to finish of activities)

  • Other non-value added activities

  • NOTE: Improvement is also an objective

Don t ignore quality failures

Cost of Poor Quality

Cost of non-conformity:

Internal failure costs

External failure costs

Cost of conformity: process approach

Cost of lost opportunities for sales revenue

Don’t Ignore Quality Failures


Internal failure costs examples
Internal Failure Costs Examples

  • Labor and material overhead spent on defective product – spoilage, defectives, scrap etc.

  • Correcting defectives in physical or service products i.e. reworking product

  • Sorting bad/good product

  • Reinspection, retest of product

  • Changing processes to correct deficiencies (CAR’s)

  • Downgrading product (Juran)

External failure cost examples
External Failure Cost Examples

  • Costs involved in replacing/making repair for warranty product

  • Investigation and adjustment costs to justified complaints of quality defective product

  • Returned material

  • Concession costs due to substandard product accepted by customer

  • Correcting errors on external supporting processes

  • Revenue losses in support operations


Allocation of costs
Allocation of Costs

  • The company must decide what to measure depending upon circumstances, objectives, etc.


  • The overall idea is to “allocate costs and not to absorb such costs into overhead” (ISO/TR 10014)

Deriving benefits
Deriving Benefits

  • Reduction of failures due to QMS

  • Improvement of process efficiencies due to QMS

    • Pre and post measures of implementation

  • However, improvements should be done as identified

    • Using quality tools such as flowcharting, value add analysis, cycle time reduction, process simplification, root cause investigation, etc.

Quality improvement examples
Quality Improvement Examples

  • Flow charting w/ value, non-value add analysis

    • Green – customer value added activity

    • Yellow – ‘necessary evil’

    • Red – non customer value added

Cycle time reduction

Stop watch time study common

Also work sampling

Better way to get data w/o estimating?

Cycle Time Reduction

Value add analysis
Value Add Analysis

  • Definitions

    • Value added activity:

      • only if the customer recognizes its value,

      • it’s done right the first time,

      • It changes the product toward something the customer expects

    • ‘Necessary Evil’ (operational value added activity):

      • not customer value added but required through law, regulation, or contract

      • required to support value added activities

      • technological barrier exists from eliminating activity

    • Non value added activity:

      • not valued by customer,

      • doesn’t change product towards customer value

      • not required by law, contract

Root cause analysis

Why-because diagram: ask ‘why’ at least 5 times to reach root cause

Root Cause Analysis



Improvements summary
Improvements Summary root cause

  • Point is to have active system of improvement per ISO guidelines and would bring more value to project and study as a whole

  • Question is: will it confound the measuring of the ISO impact study?

Potential benchmark measures
Potential Benchmark Measures root cause

“The organization can use a variety of financial decision methods (e.g. net present value, payback time, internal rate of return) to decide whether to proceed or not with a cost benefit analysis”

(ISO/TR 10014:1998(E): Guidelines for Managing the Economics of Quality)

Overall fiscal impact
Overall Fiscal Impact root cause

  • Roll up measures into a financial indicator such as:

    • Benefits/cost ratio:

      present worth of total benefits

      present worth of total costs

      If ratio is greater than 1, project deemed worthwhile and vise versa


Overall fiscal impact con t
Overall Fiscal Impact con’t. root cause


  • Net present worth:

    NPW=present worth of total benefits –

    total worth of total costs

  • Simple number; positive worth indicates program is viable

  • Both ignore time value of money; relative to project not company as a whole

Data collection and analysis
Data Collection and Analysis root cause

  • Statistical analysis of QMS impact, design study based on answering some questions:

  • Important to answer implementing QMS vs. not implementing?

    • Larger scope, need control group, different indicators

  • Does QMS implementation pay for itself? **

  • How do AIB vs. ISO systems compare?

  • What is QMS impact over time?

    • Repeated measures

      Regardless of above,

  • How to control location variation i.e. how were present locations picked for QMS implementation?

Timeline root cause

Timeline questions
Timeline Questions root cause

  • What is finish date?

  • How long does data collection last?

  • What are the resources at hand?

Conclusion root cause

  • Answer questions of scope, design, particular measures, summarizing fiscal indicator(s), timeline

  • Review relevant FC documents as necessary