Costs of Quality: Exploratory Analysis of Hidden Elements and Prioritization using Analytic Hierarchy Process

International Journal of Supply and Operations Management IJSOM February 2015, Volume 1, Issue 4, pp. 489-506 ISSN-Print: 2383-1359 ISSN-Online: 2383-2525 www.ijsom.com Costs of Quality: Exploratory Analysis of Hidden Elements and Prioritization using Analytic Hierarchy Process A Sailaja a*, P C Basakb and K G Viswanadhanc a School of Management Studies, Indira Gandhi National Open University, New Delhi, India b Indira Gandhi National Open University, New Delhi, India c Mechanical Engineering Department., N.S.S College of Engineering, Palakkad, Kerala, India Abstract Cost of Quality analysis is emerged as an effective tool for the industrial managers for pinpointing the deficiencies in the system as well as for identifying the improvement areas by highlighting the cost reduction opportunities. However, this analysis will be fully effective only if it is further extended to identify the cost incurred in ensuring quality in all areas of the supply chain including the hidden costs and costs of missed out opportunities. Most of the hidden elements of quality costs are difficult to track and not getting accounted by the traditional accounting tools. An exploratory analysis is made in this research to identify the hidden elements of quality costs in manufacturing industry. Further, the identified cost elements are classified into various groups for better analysis and, finally, prioritized to identify the vital few among them. Analytic Hierarchy Process (AHP) technique which is one of the most popular Multi Criteria Decision Method (MCDM) and Pareto analysis were used in this study for prioritizing the hidden quality cost elements based on their degree of impact on overall cost of quality. By this analysis, the key cost elements which are to be addressed to reduce the overall cost of quality are identified. Keywords: Cost of Quality; Hidden Quality Costs; Opportunity Costs; AHP; Pareto Analysis. * Corresponding author email address: 489 Sailaja, Basak and Viswanadhan 1. Introduction Quality has become the key strategy to survive in the highly competitive and customer-driven market which demands highest quality at lower price. Hence, industrial experts are keen on exploring the possibilities of quality management with cost reduction opportunities. The need to improve an organization’s financial position directly correlates with the process of making and measuring quality improvements (Zulnaidi, Y. ,2010). Cost of quality (COQ) analysis is identified as one of the effective tools for tracing the improvement opportunities (Mohandas,V.P. & Sankaranarayanan, S.R.,2008; Zimwara, D.et al ,2013) as it supports the top management to get the highlights of quality related activities in monitory terms, to track, estimate and demonstrate the cost of non-conformance and its causes and impacts, to identify improvement opportunities, to set action priorities and to monitor the performance over time (Gidey, E et al,2014). The cost of quality analysis triggers changes and provides proof why changes should be made (Cosmin, D et al, 2013). The costs of poor quality will tend to zero, if all the activities are performed without any deficiencies every time (Arvaiova, M et al, 2008). Over the last six decades, many studies were in place worldwide and the understanding of quality cost concept has developed many folds (Schiffauerova, A., & Thomson, V., 2006; Omar, M. K., & Murgan, S., 2014). Earlier models were having production oriented point of view, taking only costs of deviations from specification into account (Sorqvist, 1997). The area has become wider with the additional dimensions added to the term quality (Suthummanon, S., & Sirivongpaisal, N., 2011). Traditional quality cost models based on the Prevention-Appraisal-Failure cost categories (P-A-F) are widely accepted by the quality practitioners (Wang et al, 2010) even with their limitations that they are confined within the tangible and directly measurable costs and are failed to address many of the cost areas (L.H.Tye et al, 2011) such as lost sales, loss of customer good will, loss due to low morale of work force etc. (Snieska, V, 2013). Many of the cost elements were not identified, quantified or analyzed further in this approach (Jafari, A., & Rodchua, S., 2014) and do not adequately evaluate the invisible or hidden quality related activities. Hidden costs are hidden profits and will provide a tremendous opportunity for improvement (Krishnan, S. K et al, 2000) on proper tracking and analysis. Increasing complexity of organization, product, variety, and dynamic market situations forces industrial practitioners to enhance the concept of COQ with identification of more intangible and opportunity factors (Cheah, S. J. et al, 2011). Accounting and analyzing hidden quality costs is essential for a complete picture of losses due to poor performance and it would disappear entirely if every activity were performed without deficiency every time (Shanshan, S. ,2013). Improvement attempts with the incorporations of additional cost categories were made by several researchers like Akyol, D. E (2005), Teeravaraprug , J (2004), Yang, C.C (2008) and Sellés, M. E, et al (2008). In spite of the academic interest on this subject, not many industries are found practicing these theories for the organizational improvement. 1.1. Hidden elements of Cost of Quality The studies in this field are limited to a few dimensions of hidden quality costs in the manufacturing process. The elements identified by Sandovel- Chavez (1998) were effectively utilized by Cheah, S. J. et al (2011) for an action research in identifying the quality cost elements in continuous process manufacturing company with a highlight of resistance against implementation. Comprehensive researches with identification of all hidden elements of quality cost including opportunity losses are rare. In the current industrial scenario in which more and Int J Supply Oper Manage (IJSOM), Vol.1, No.4 490 Costs of Quality: Exploratory Analysis of Hidden Elements and Prioritization using Analytic Hierarchy Process more companies are aiming at TQM status with an objective of continuous improvement of the quality of goods and services, the lack of practical and comprehensive studies to identify and quantify the costs incurred in such quality improvement programs are noteworthy. Hence, in this research, an attempt is made to analyze cost of quality in a broader sense by tracking all the hidden elements of costs incurred in ensuring the quality of each and every function associated in the total supply chain – right from the customer requirement analysis to after sales customer support quality of a product in a manufacturing firm. 1.2. Significance of Prioritization of Hidden Cost Elements In an industrial situation which focuses on result oriented objectives, elaborative and time consuming analysis of non-significant cost elements is not practically advisable. Hence the most significant cos (...truncated)