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The Cost of Quality: Increasing Profits in the Precast Industry

Sam Lines
Sam Lines
ConSeal Engineering Manager slines@conseal.com

Can you afford to adopt a documented quality management system? The better question to ask is this:
Can you afford not to have a quality management system? This question is often the center of debate between many small- and medium-sized precast concrete producers. The larger plants can afford the resources necessary to develop the documentation, procedures, forms, and tests that are required as part of a formal quality system.

One of the popular quality systems for the precast concrete industry is the National Precast Concrete Association’s (NPCA) Plant Certification program. This program has a foundation of industry-specific standards that have been established as the necessary requirements for a precast plant to implement in order to produce the best quality concrete products. Each plant develops its own procedures and work instructions that meet or exceed the NPCA requirements. Plants are audited annually through unannounced inspections by an independent auditing firm. The precast plant must meet a minimum score to maintain its certification.

Maintaining a quality system requires a disciplined effort on the part of the precast producer. Depending on the size of the operation, daily inspections and concrete testing is required. In some cases, multiple tests are required each day. The additional indirect labor required for quality is one of the major factors in plants choosing to become certified. It is perceived as an additional cost to the operation and is often viewed as something that will shrink profitability. The purpose of this article is to explain quality costs, and how they are related to daily operations. Hopefully this will answer some of
the questions concerning the costs associated with the implementation of a quality system.

 

Quality cost categories

Quality costs can be divided into three distinct categories: prevention, appraisal, and failure. The failure costs are further divided into internal and external. In a perfect world, there would be no failure costs, but we don’t live in perfect; we live in the real world. Experts agree that a typical manufacturing organization’s total quality costs range from 20% to 30% of sales. This is the sum total of all of these categories. Implementation of a documented quality system will have a tremendous impact on reducing these costs, primarily in the failure category. The three cost categories can be further explained.

Prevention costs are all of the activities performed to prevent poor quality. The cost in developing documented procedures, forms, and work instructions are in this category. The salary of a quality manager may also be in this category. This is often referred to as quality assurance. Appraisal costs include inspection and testing activities. Activities prior to manufacturing, such as design and purchasing, also have inspection activities. This is often referred to as quality control.

Prevention and appraisal activities are in place to reduce or eliminate failure costs. A lack of either of these activities will
not prevent defective product from being produced and shipped. Every manufacturer should have some form of prevention, appraisal, or both.

Failure costs are not desirable. If you did not make the product right the first time, then making it right the second time adds cost without adding value. Manufacturers with high failure costs will struggle to stay in business. To offset the high cost of repair and rework, wages for direct labor will be lower than comparable companies. These companies will typically hire the worst employees and may actually need to employ more laborers due to the additional time invested in repair and rework. In addition, not all products can be repaired, some are set aside and sold as seconds, or they are scrapped all together. As
the product gets further along in the manufacturing cycle, the cost for detection and repair is multiplied.

Here is an example: a mistake in the drawing that could be easily fixed for $1 of labor in design can cost $10 to repair if not caught until the pre-pour inspection. Further, a mistake that would cost $25 to repair prior to shipment can easily cost ten to one hundred times more if the defect is found at the jobsite.

It is easy to see how the cost of quality can easily be 20% of sales. Also, quality costs are often like an iceberg; the hidden cost is many times more than the visible costs. Prevention and appraisal costs can be planned and budgeted into product costing, whereas failure costs usually cannot. In addition, prevention and appraisal costs will vary with the size of an organization and are a blend of fixed and variable costs. Based upon the author’s experience as a quality manager in a large precast plant, where the quality department was staffed with five full time employees, the appraisal and prevention costs range from 1.5% to 2% of sales. If the cost of poor quality is equivalent to 20% of sales, and the investment to prevent this is 2% of sales, then the return on investment is 900%.

A popular book in the field of quality management is Quality is Free, by Philip Crosby. In his book Crosby lays out the case by explaining that a quality system is not an added expense, but rather a tool that is used to slash undesirable costs. Crosby states that “quality is free, it is not a gift but it is free. What costs money are the unquality things — all the actions that involve not doing it right the first time.” This is a shift in thinking for some people. It’s as simple as the rule my dad always taught me: “measure twice, cut once.”

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