Back to Basics: Using Cost of Quality to Manage and Improve
Supply Chain Performance Lynn A. Fish, Ph.D, Girish Shambu, Ph.D
In this diffi cult recessionary time, supply chain management needs valid and useful performance measures. Cost of Quality (COQ) is a quality model that has been used for decades to improve organizational performance. We extend this model to supply chain business processes. Our model views the supply chain as a system with the raw material providers through retailers as internal and the fi nal customer as external to the supply chain. The model further divides potential improvement areas by product, fi nancial, logistics, and information fl ows. The key business processes that are mapped include product development, merchandise, promotion, and replenishment. Improvements in both cost and quality can be attained through the model.
INTRODUCTION
Today, organizations compete as supply chains focused on delivering value-added, quality products in a cost-effective and timely manner. Managers need global performance measures to monitor and improve business processes in order to compete, and as expected, supply chain costs are the most critical element in overall control. Cost of Quality (COQ) measurement as a method to improve businesses processes and reduce costs while improving customer service is not a new concept; however, its extension to supply chains has been limited. A recent Aberdeen Group survey found that only 50% of senior executives are planning to address COQ in their purchasing and manufacturing operations, and across their
Lynn A. Fish, Ph.D, Girish Shambu, Ph.D, Department of Management/Marketing, Canisius College, Buffalo, NY 14208, (716) 888-2642, (716) 888-2796, fi [email protected], shambu@ canisius.edu, May 27, 2011
88 THE BRC ACADEMY JOURNAL OF BUSINESS
supply chains [Stundza, 2009]. We propose a potential performance measurement system—quality costs tracked through supply chain processes—as a framework to manage and improve the supply chain.
Although many supply chains are signifi cantly more complex, we adopt a simple supply chain involving raw material providers, a single manufacturer, distribution centers, retailers, and fi nal customers as shown in Figure 1. This model falls under the ‘kingdom’ network struc-ture where the manufacturer is the core member, gathers information, and makes decisions for the supply chain [Cooper and Slagmulder, 1999]. Other more complex network forms will not be considered.
Quality is the ability of a product or service to consistently meet customer expectations and implies a defect-free product or service [ American Society for Quality, 2001]. As seen in Table 1, the four major COQ categories are prevention, appraisal, internal failure, and external failure [British Standards Institute, 1990]. Appraisal costs are associ-ated with efforts to ensure conformance to requirements. Prevention costs are investments made to keep defects from occurring in the fi rst place. Internal failure costs occur when a non-conforming product is found prior to shipment to the customer. External failure costs, which include reputation and contractual cost from selling a defective product,
Raw Materials Distribution Retailer Provider Center
Raw Materials Manufacturer Retailer Provider
Raw Materials Distribution Retailer Provider Center
Supply Chain
FIGURE 1. Simple Supply Chain Model.
89Back to Basics: Using Cost of Quality to Manage
Failu
re C
osts
In
tern
alEx
tern
alA
ppra
isal
Cos
tsPr
even
tion
Cos
ts
Scra
p, re
wor
k an
d re
- in
spec
tion
to p
rope
rly
scra
p or
repa
ir th
e un
it in
clud
ing
labo
r and
equ
ip-
men
t to
perfo
rm th
ese
activ
ities
.C
orre
ctiv
e ac
tions
incl
udin
g th
e la
bor a
nd e
quip
men
t co
sts
to p
rope
rly tr
ack
the
caus
e of
failu
re a
nd c
or-
rect
the
prob
lem
.D
owng
radi
ng in
clud
ing
the
lost
reve
nue
in s
ellin
g a
non-
conf
orm
ing
prod
uct
at a
low
er p
rice.
Proc
ess
failu
res
are
the
unpl
anne
d do
wnt
ime
and
unpl
anne
d eq
uipm
ent
repa
ir du
e to
failu
res
in
the
proc
ess.
Trou
ble-
shoo
ting,
re
- insp
ectio
n an
d re
pair.
Cus
tom
er c
ompl
aint
s an
d re
turn
s in
clud
ing
the
labo
r and
equ
ipm
ent t
o re
wor
k re
turn
ed it
ems,
ca
ncel
ord
ers,
reca
ll an
d fre
ight
pre
miu
ms.
Prod
uct r
ecal
l and
war
-ra
nty
clai
ms
incl
udin
g th
e di
rect
and
indi
rect
la
bor f
or re
pairs
or
repl
acem
ents
.Pr
oduc
t lia
bilit
y in
clud
ing
the
lega
l cos
ts in
curre
d du
e to
any
lega
l ac
tions
or s
ettle
men
ts.
Lost
reve
nue
from
cu
stom
er “b
ad w
ill”
(opp
ortu
nity
cos
t).
Exte
rnal
repu
tatio
n.
Test
and
insp
ectio
n in
clud
ing
the
equi
pmen
t and
labo
r ass
ocia
ted
with
pr
oper
ly te
stin
g in
com
ing
mat
eria
ls,
wor
k-in
-pro
cess
, and
fi ni
shed
goo
ds.
Inst
rum
ent m
aint
enan
ce in
clud
ing
pers
onne
l and
equ
ipm
ent c
osts
.Pr
oces
s m
easu
rem
ent a
nd c
ontro
l cos
ts
are
incu
rred
to g
athe
r and
ana
lyze
qu
ality
dat
a du
ring
prod
uct m
anuf
actu
re.
They
incl
ude
the
labo
r to
perfo
rm
thes
e m
easu
rem
ents
incl
udin
g qu
ality
en
gine
erin
g an
d pl
anni
ng.
Des
ign
and
deve
lopm
ent o
f qua
lity
equi
pmen
t and
pro
duct
eva
luat
ion.
C
ost a
ccou
ntin
g fo
r pro
duct
ion
varia
nces
.An
alys
is a
nd re
porti
ng o
f tes
t res
ults
. Ap
prov
als
and
endo
rsem
ents
.Fi
eld
perfo
rman
ce te
stin
g an
d ev
alua
tion
of
fi eld
sto
ck.
Qua
lity
plan
ning
cos
ts
incl
udin
g th
e pe
rson
nel
to p
lan,
pro
blem
-sol
ve,
deve
lop
new
pro
ce-
dure
s an
d ne
w e
quip
-m
ent,
qual
ity a
udits
, an
d re
liabi
lity
stud
ies.
Proc
ess
cont
rol c
osts
in
clud
ing
prod
uctio
n pr
oces
s an
alys
is a
nd
impl
emen
ting
proc
ess
cont
rol p
lans
.In
form
atio
n sy
stem
cos
ts
incl
udin
g da
ta d
evel
op-
men
t req
uire
men
ts a
nd
mea
sure
men
ts.
Trai
ning
and
gen
eral
m
anag
emen
t inc
ludi
ng
train
ing
cost
s, c
leric
al
staf
f exp
ense
s an
d m
isce
llane
ous
supp
lies.
TAB
LE 1
. Cate
goriz
ation
of C
ost o
f Qua
lity [B
ritish
Stan
dard
s Ins
titute,
1990
].
90 THE BRC ACADEMY JOURNAL OF BUSINESS
are the most diffi cult to precisely measure. Not all COQ neatly fi t into these categories; however, as long as a company uses a consistent set of costs to monitor quality, COQ trends over time can provide powerful insight into cost management and reduction. A quality expert, Joseph Juran (1992) believes that COQ ‘speaks the language of money’ that upper managers can understand, calls management attention to prob-lems, selects opportunities for corrective action, guides long-term com-pany activities, and tracks quality improvements. Current organizational methods for collecting and establishing an organizational COQ system exist and include, but are not limited to, the British Standards Institute Prevention-Appraisal-Failure checklist method (BS6143: Part 2) [Brit-ish Standards Institute, 1990], and the British Standards Institute Process Cost Modeling Approach (BS6143: Part 1) [British Standards Institute, 1992]. We extend these models to supply chain management.
Supply chain competition needs better performance measurement systems that take a holistic approach as activities align across the supply chain. Criteria must shift away from effi ciency measures and purchase-price variances toward effectiveness measures that consider not just cost, but also delivery, quality, fl exibility, and service. Supply chain manage-ment needs globally-defi ned performance measures for supply chain throughput, total inventory, on-time delivery, customer-to-customer cycle time, and total supply chain costs. Various supply chain specifi c performance measurement systems exist including the Grocery Indus-try Key Performance Indicators-Effi cient Consumer Response model, Council of Logistics Management Survey Key Performance Indicators, and Transportation and Logistics Key Performance Indicators.
Another popular performance measurement model, SCOR is a hier-archical model that analyzes the supply chain in terms of plan, source, make, deliver, and return. SCOR focuses on overall delivery perfor-mance, reliability, fl exibility and responsiveness, costs and assets. SCOR defi nes total supply chain cost as the fi xed and operational costs associ-ated with each of the supply chain processes within the supply chain. Cost metrics attempt to segment the cost centers into process-based activity tied to benchmarked measurements. Our framework offers a potential
91Back to Basics: Using Cost of Quality to Manage
measurement system that can be used for all products, product lines and across companies, and ties the system into a common monetary basis with a focus on the fi nal customer.
Purchasing and logistics managers are also interested in improving their performance measurement systems. In a Purchasing Magazine survey, purchasing executives indicate dissatisfaction with current per-formance measures and that current metrics fail to measure and iden-tify actions to improve performance [Morgan, 2000]. Similarly, in a Council of Logistics Management survey, information availability and quality are secondary when compared to cost information [Fawcett and Cooper, 1998]. Purchasing and logistics managers expressed the need for internally and externally-based assessments focused on value-added operations. A system that is primarily numbers-based, has one common measurement unit, is standardized, and incorporates multiple supplier performance to specify quality, on-time performance, and cost competi-tiveness is desired.
Traditional cost accounting systems provide COQ data for direct labor, overhead, scrap, warranty expenses, product liability costs, maintenance, repair, and calibration of test equipment. However, COQ information, such as service effort, product design, rework, engineer-ing change losses, customer dissatisfaction, and future lost revenues, go un-reported [Evans and Lindsay, 1999]. Management needs a business planning approach designed to meet cost and quality targets simultane-ously while being tied to all cost control activities [Carr and Ng, 1995].
Several cost management systems, such as value-chain analysis (VCA), total cost of ownership (TCO), inter-organizational costing, and total supply chain costs, manage internal supply chain costs. These sys-tems are based upon Activity-Based Costing (ABC) analysis and Process Value Analysis, which both seek to identify value-added and non-value-added activities, resource consumption within a process, and underlying cost drivers. VCA, a widely used analytical tool for strategic manage-ment accounting, assists in coordinating supply chain inter-dependence and managing cooperative inter-fi rm relationships within a supply chain. The TCO approach, focused on value-based supply chain processes,
92 THE BRC ACADEMY JOURNAL OF BUSINESS
includes costs for supplier selection, qualifi cation and certifi cation, order placement and follow-up, payment terms, inventory holding costs, and delivery expedition. In a global supply chain, TCO is comprised of two major elements: ownership cost, which includes purchase, hold-ing, and quality, and landed costs, which include transportation costs, tariffs, insurance, and import fees. TCO may actually increase due to poor quality. TCO and inter-organizational cost management need to be expanded to include all supply chain cost in a global environment. Total supply chain cost is equal to the sum of the purchase price, supplier performance cost, acquisition costs, out-of-synchronization planning, speculation costs, upside fl exibility costs, manufacturing costs, sales, general and administrative expenses, and distribution costs [Handfi eld and Nichols, 1999].
Inter-organizational cost management, target costing and target-chained costing during product design, kaizen costing during manu-facture, and improving the buyer-suppler interface, are very effective techniques in Japan [Cooper and Slagmulder, 1999]. Target costing and target-chained costing determine the product proposed production costs that will generate the desired profi tability at its anticipated sell-ing price. Kaizen costing applies continuous improvement techniques to reduce existing costs by a pre-specifi ed amount through increasing pro-duction process effi ciency. Reducing transaction costs and uncertainty costs associated with uncertainty in demand and time, results in reduced buyer-supplier interface costs.
Since the focus of the supply chain should be the fi nal customer satis-faction, our model is predicated upon the business processes outlined in the Effi cient Consumer Response (ECR) model as it monitors the critical interaction between the entire supply chain and the fi nal customer with a focus on satisfying the fi nal customer. In the ECR model, the grocery industry evaluates four critical business processes: product introduction, merchandising products, product promotion, and product replenishment [Lummus, Vokurka and Alber, 1998]. Product introduction includes basic research and new product development. Managing product categories, managing store operations, and serving consumers are critical processes
93Back to Basics: Using Cost of Quality to Manage
within merchandising products. Product promotion involves consumer advertising, store advertising, consumer promotions, in-store promotions, and customer deals. The sub-processes for replenishment include manag-ing store and customer orders, procuring and producing materials, prod-uct storage, staging, and delivery, and managing invoices.
Supply chain cost management strategies should be based upon busi-ness process improvements. Relevant to our model, product development and procurement cost strategies are typically documented; however, sup-ply chain merchandising and promotional costs are rarely considered. Traditional COQ systems do not consider COQ during product devel-opment stages and focus instead on manufacturing conformance activi-ties; however, once designed, 80% of the product costs are determined [Cooper and Slagmulder, 1999]. Therefore, management should redirect attention to design, R&D, and product planning. Due to signifi cant trans-portation costs, supplier-buyer relationships may have a greater effect on total cost than the manufacturing process. Purchasing agents need to look at more than just transaction costs to assess the different internal and external cost structures and infrastructure required.
MAPPING COQ AND BUSINESS PROCESS
As the need to integrate business processes increases, a model based upon COQ and critical supply chain business processes offers a potential methodology to monitor supply chain performance. Supply chain qual-ity can be defi ned as the ability of a supply chain to consistently meet or exceed fi nal customer expectations for products and service support in a timely manner. COQ offers a potential method to link quality, delivery, cost and service into a common performance measure, provides a basis for supply chain quality improvements, and provides a cost measure for a “perfect order” delivery to the fi nal customer. Every supply chain activity should add value from the perspective of the fi nal customer.
In developing the model, we envisioned the COQ associated with crit-ical supply chain business processes. As shown in Figure 1, we defi ned the internal supply chain as the processes just prior to fi nal distribution
94 THE BRC ACADEMY JOURNAL OF BUSINESS
and the external chain as the interaction between the fi nal distribution point and the fi nal customer. We defi ne internal failure costs as quality costs up to fi nal customer delivery, and external failure costs as quality costs incurred in the interaction with the fi nal customer. Prevention and appraisal costs occur within the supply chain. The key supply chain pro-cesses are similar to the ECR model—introduction, merchandise, pro-motion, and replenishment. We propose using this model in a “kingdom” supply chain, where the manufacturing fi rm gathers COQ information and makes informed decisions for the benefi t of the entire supply chain. Since it is not only the inventory fl ow that is relevant to quality and costs, we further sub-divided the model into product, logistics, informa-tion, and fi nance categories.
Our model, shown in Table 2, outlines a COQ framework for supply chain processes. Table 2 represents cost examples to consider and not a comprehensive, complete measurement of each cost category. In our model, product introduction COQ focuses on prototype development and information transfer between supply chain members. Test results on prototypes, marketing information accuracy, and design and develop-ment procedures are part of this process. For example, prevention costs to design the product correctly the fi rst time would be incurred to design and develop the product across company lines. Merchandising focuses on timely delivery of a quality product on demand and incurs costs between the fi nal supply chain member and the fi nal customer. Through our model, service quality efforts can be quantifi ed, including additional quality training costs for sales personnel or planning customer service procedures. As an example, merchandising appraisal costs includes inaccurate information being gathered and transmitted to other supply chain members. Promotions, which can upset demand-capacity bal-ance, are necessary to meet forecasted demand levels; but if inaccurate, promotion can lead to the bullwhip effect and upset this balance. Addi-tional manufacturing, markdown, scrapping, obsolescence, storage, and transportation costs for unwanted units may result. Promotional COQ are generated due to the inaccuracies in forecasting, product marketing, and promotion information transfer process. Additional logistics costs to
95Back to Basics: Using Cost of Quality to ManageIN
TRO
DU
CE
PRO
DU
CTS
(Pro
duce
Dev
elop
men
t; C
ondu
ct b
asic
rese
arch
and
dev
elop
new
pro
duct
s)
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Pro
duct
• A
dditi
onal
han
dlin
g,
setu
p, o
verti
me,
etc
. du
e to
eng
inee
ring
chan
ges
with
in s
uppl
y ch
ain.
• A
dditi
onal
han
dlin
g,
setu
p, o
verti
me,
etc
. du
e to
ext
erna
l eng
i-ne
erin
g ch
ange
s.•
Pro
duct
reca
lls d
ue to
im
prop
er d
esig
n.•
Pro
duct
liab
ility
co
sts
due
to d
esig
n im
perfe
ctio
ns.
• W
arra
nty
adju
stm
ents
du
e to
pro
duct
des
ign.
• Te
stin
g an
d in
spec
-tio
n of
pro
toty
pes
and
equi
pmen
t. •
App
rais
al o
f des
ign
and
deve
lopm
ent
proc
edur
es.
• Va
lidat
ing
outp
uts
agai
nst d
esig
n in
puts
.
• R
&D
cos
ts fo
r qua
lity
equi
pmen
t and
pr
oduc
ts.
• R
&D
pro
cedu
res
at
orga
niza
tiona
l and
te
chni
cal i
nter
face
s.•
Dev
elop
des
ign
verifi
-ca
tion,
val
idat
ion
and
revi
ew p
roce
dure
s.•
Qua
lity
train
ing
of R
&D
pe
rson
nel.
Info
rmat
ion
• In
accu
rate
mar
ketin
g da
ta.
• In
accu
rate
eng
inee
ring
info
rmat
ion.
• R
&D
failu
re to
inte
r-pr
et c
usto
mer
nee
ds
corr
ectly
.
Dat
a va
lidity
and
acc
urac
y of
test
s.D
evel
op R
&D
pro
cedu
res.
Logi
stic
s•
Pro
toty
pe d
eliv
ery
inac
cura
te.
• In
abili
ty to
pro
vide
pr
oper
pac
kagi
ng
mat
eria
ls fo
r pro
toty
pes.
Failu
re to
ent
er m
arke
t on
sche
dule
due
to lo
gis-
tics
erro
rs in
del
iver
y.
Inac
cura
te m
ovem
ent
of p
roto
type
bet
wee
n su
pply
cha
in m
embe
rs
lead
ing
to p
rodu
ct
defe
cts.
Dev
elop
new
logi
stic
s pr
oced
ures
.
Fina
ncia
lIn
accu
rate
fi na
ncia
l tra
ns-
actio
ns o
n pr
otot
ype
and
cost
ing.
TAB
LE 2
. Cos
t of Q
uality
Mea
sure
s for
Key
Sup
ply C
hain
Proc
esse
s.
(conti
nued
on ne
xt pa
ge)
96 THE BRC ACADEMY JOURNAL OF BUSINESSM
ERC
HA
ND
ISE
(Man
age
prod
uct c
ateg
orie
s, s
tore
ope
ratio
ns, a
nd s
erve
cus
tom
ers)
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Pro
duct
• In
tern
al c
ompl
aint
s.•
Pro
duct
retu
rns
with
in
chai
n.•
Dis
posa
l of e
xces
s in
vent
ory.
• C
usto
mer
com
plai
nts.
• P
rodu
ct re
turn
s.•
Sto
re a
nd g
athe
r inf
or-
mat
ion
on re
turn
ed
good
s.
Aud
it st
ore
oper
atio
ns
for c
usto
mer
ser
vice
in
clud
ing
labo
r and
eq
uipm
ent.
• Tr
aini
ng fo
r in-
stor
e pe
rson
nel.
• D
evel
op q
ualit
y pr
oced
ures
with
focu
s on
fi na
l cus
tom
er.
Info
rmat
ion
Dat
a in
accu
raci
es w
ithin
ch
ain
rega
rdin
g qu
ality
an
d qu
antit
y of
goo
ds
dist
ribut
ed to
and
re
turn
ed fr
om s
tore
s.
Dat
a in
accu
raci
es to
and
at
sto
re le
vel.
Inac
cura
te in
form
atio
n ga
ther
ed a
nd tr
ansm
it-te
d on
inte
rnal
aud
it.
Dev
elop
sys
tem
to a
ccu-
rate
ly tr
ack
cust
omer
ne
eds
and
retu
rns.
Logi
stic
sIn
abili
ty to
ser
vice
dem
and
and
retu
rns
chai
n in
a
timel
y m
anne
r.
Inab
ility
to s
ervi
ce s
tore
sh
elve
s in
tim
ely
man
ner.
Aud
it de
liver
y sy
stem
at
stor
e.D
evel
op p
roce
dure
s fo
r tim
ely
deliv
ery.
Fina
ncia
lIn
accu
rate
pric
ing
on
prod
uct i
nter
chan
ge
with
in th
e sy
stem
.
Inac
cura
te s
tore
pric
ing
at
fi nal
cus
tom
er in
terfa
ce.
PRO
MO
TE (M
anag
e co
nsum
er a
dver
tisin
g, s
tore
adv
ertis
ing,
in-s
tore
pro
mot
ions
and
cus
tom
er d
eals
)
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Pro
duct
• D
isru
ptio
ns in
op
erat
iona
l sch
edul
es
such
as
incr
ease
d ov
ertim
e, in
vent
ory,
nu
mbe
r of
• Lo
ss o
f goo
dwill
due
to
ove
r-pr
omot
ion
of
prod
uct a
nd in
abili
ty
to m
eet d
eman
d.
• A
dditi
onal
uni
t tes
ting
and
insp
ectio
n in
clud
ing
labo
r and
equ
ipm
ent.
• Q
ualit
y pl
anni
ng a
nd
proc
ess
cont
rols
to
hand
le a
dditi
onal
p r
omot
iona
l uni
ts.
TAB
LE 2
. (co
ntinu
ed )
97Back to Basics: Using Cost of Quality to Manage
setu
ps, a
nd a
dditi
onal
m
ater
ial h
andl
ing
for
prom
otio
nal u
nits
.•
Obs
oles
cenc
e, s
crap
, an
d m
ark-
dow
ns o
f ov
erag
e.
• In
crea
sed
cust
omer
se
rvic
e an
d la
bor f
or
prod
uct r
ecal
l.•
Prod
uct l
iabi
lity
due
to
impr
oper
adv
ertis
ing.
• Ad
ditio
nal u
nit p
roce
ss
mea
sure
men
t and
co
ntro
l cos
ts.
Info
rmat
ion
• In
cons
iste
ncie
s in
fo
reca
sted
dat
a w
ithin
th
e su
pply
cha
in.
• Ad
ditio
nal l
abor
and
eq
uipm
ent t
o tra
ck
prom
otio
nal u
nits
with
in
syst
em.
• In
accu
rate
dat
a tra
nsac
-tio
ns w
ithin
sup
ply
chai
n of
pro
mot
iona
l mat
eria
ls.
• Fo
reca
st in
accu
raci
es
of fo
reca
st to
pre
dict
fi n
al c
usto
mer
dem
and.
• Ad
ditio
nal l
abor
and
eq
uipm
ent t
o tra
ck
prom
otio
nal a
nd
retu
rned
uni
ts.
• In
accu
rate
pro
mot
iona
l m
ater
ials
.
Ensu
re d
ata
accu
racy
of
prom
otio
nal m
ater
ials
.•
Proc
edur
es to
ad
equa
tely
fore
cast
an
d de
velo
p pr
oduc
tion
plan
s fo
r pro
mot
iona
l ac
tiviti
es.
• Q
ualit
y pl
anni
ng a
nd
info
rmat
ion
proc
ess
cont
rols
.
Logi
stic
s•
Addi
tiona
l pro
mot
iona
l un
its w
ithin
sup
ply
chai
n in
clud
ing
addi
tiona
l pa
ckag
ing,
exp
editi
ng,
prem
ium
frei
ght,
war
ehou
sing
, con
-ta
iner
izat
ion,
labe
ling,
an
d ho
ldin
g.•
Pre
miu
ms
due
to s
hort-
age
with
in s
yste
m a
s at
tem
pts
are
mad
e to
di
strib
ute
units
with
in
syst
em.
• Ad
ditio
nal p
rom
otio
nal
units
to fi
nal c
usto
mer
.•
Shor
tage
cos
t at fi
nal
cu
stom
er—
prem
ium
s of
fere
d, a
nd/o
r red
uc-
tions
offe
red.
Audi
t pro
per m
ovem
ent o
f m
ater
ials
with
in s
uppl
y ch
ain.
Qua
lity
plan
ning
and
fi na
n-ci
al p
roce
ss c
ontro
ls to
ha
ndle
add
ition
al m
ove-
men
t of p
rom
otio
nal
units
. (conti
nued
on ne
xt pa
ge)
98 THE BRC ACADEMY JOURNAL OF BUSINESSPR
OM
OTE
(Man
age
cons
umer
adv
ertis
ing,
sto
re a
dver
tisin
g, in
-sto
re p
rom
otio
ns a
nd c
usto
mer
dea
ls)
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Fina
ncia
l•
Cha
nges
in o
pera
tions
du
e to
pre
miu
m c
harg
es
to m
eet a
dditi
onal
de
man
ds.
• D
istri
bute
pro
mot
iona
l m
ater
ials
with
in s
uppl
y ch
ain.
Scr
ap o
r sho
rtage
, and
pr
ofi t
loss
of o
vera
ge
due
to fo
reca
stin
g in
accu
raci
es.
Ens
ure fi n
anci
al d
ata
accu
racy
of p
rom
otio
nal
mat
eria
ls.
Qua
lity
plan
ning
and
fi n
anci
al p
roce
ss
cont
rols
to h
andl
e ad
ditio
nal t
rans
ac-
tions
due
to a
dditi
onal
pr
omot
iona
l uni
ts.
REP
LEN
ISH
(Man
age
stor
e &
cus
tom
er o
rder
s)In
tern
al F
ailu
reEx
tern
al F
ailu
reA
ppra
isal
Prev
entio
nP
rodu
ctC
usto
mer
ser
vice
bet
wee
n bu
yers
and
sup
plie
rs
with
in th
e su
pply
cha
in.
• S
crap
and
rew
ork
due
to im
prop
er o
rder
ing.
• Lo
ss o
f cus
tom
er g
ood
will
due
to p
rodu
ct
shor
tage
.
• R
ecei
ving
insp
ectio
n at
st
ore.
• Q
ualit
y au
dit a
t sto
re.
• P
roce
ss m
easu
rem
ent
and
cont
rols
at s
tore
.
Focu
s on
pre
vent
ion
of
impr
oper
ord
erin
g of
pr
oduc
t qua
ntity
, inf
or-
mat
ion
accu
racy
, and
tim
ely
deliv
ery
to fi
nal
mem
ber i
n su
pply
cha
in
thro
ugh:
Qua
lity
plan
ning
;Q
ualit
y im
prov
emen
t pr
ojec
ts;
Qua
lity
data
gat
herin
g,
anal
ysis
, and
repo
rting
;S
tatis
tical
pro
cess
co
ntro
l;P
roce
ss c
ontro
l act
iviti
es.
TAB
LE 2
. (co
ntinu
ed )
99Back to Basics: Using Cost of Quality to ManageIn
form
atio
nP
oor d
ata
with
in s
yste
m.
• In
accu
raci
es in
sto
re
orde
rs d
ue to
inac
cura
te
data
on
retu
rns.
• In
accu
rate
ly p
redi
ctin
g or
sto
ckin
g or
ders
.
Qua
lity
audi
t for
dat
a ac
cura
cy.
Logi
stic
sIn
corr
ectly
fulfi
lling
ord
ers
with
in s
uppl
y ch
ain.
Del
iver
y er
rors
to s
tore
sh
elve
s.Q
ualit
y au
dit o
f del
iver
y sy
stem
.
Fina
ncia
lLo
st re
venu
e fro
m lo
ss o
f cu
stom
er g
oodw
ill.
Proc
ure
Mat
eria
ls
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Pro
duct
• S
crap
, rew
ork,
re-
insp
ectio
n, b
oth
forw
ard
and
reve
rse
mov
emen
t.•
Cor
rect
ive
actio
ns to
de
term
ine
caus
e of
raw
m
ater
ial f
ailu
re.
• D
ownt
ime
to re
pair
or s
end
units
bac
k to
su
pplie
r.•
Failu
re to
pur
chas
e re
quire
d qu
antit
ies
or
qual
ity o
f mat
eria
ls.
• P
roce
ss fa
ilure
s.•
Ret
urns
and
war
rant
y cl
aim
s.
• Lo
ss o
f goo
dwill
due
to
defe
ctiv
e m
ater
ials
at
fi nal
cus
tom
er.
• P
rodu
ct li
abili
ty, c
om-
plai
nts,
war
rant
y co
sts
at fi
nal c
usto
mer
site
, bu
t dire
cted
at p
artic
ular
ra
w m
ater
ial.
Sup
plie
r Cer
tifi c
atio
n P
rogr
ams.
Sup
plie
r sel
ectio
n w
ithin
th
e su
pply
cha
in.
• M
aint
enan
ce o
f tes
ting
equi
pmen
t.•
Qua
lity
audi
ts.
• C
alib
ratio
n of
qua
lity
equi
pmen
t.•
In-p
roce
ss in
spec
tion
of
inco
min
g m
ater
ials
.•
Lab
test
ing
(inte
rnal
and
ex
tern
al).
• Q
ualit
y pl
anni
ng a
nd
cont
rols
to e
nsur
e in
tern
al p
rodu
ct q
ualit
y.•
Sta
tistic
al p
roce
ss
cont
rols
.•
Qua
lity
impr
ovem
ent
proc
esse
s.
(conti
nued
on ne
xt pa
ge)
100 THE BRC ACADEMY JOURNAL OF BUSINESSPr
ocur
e M
ater
ials
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
• W
areh
ouse
/inve
ntor
y re
duct
ion
cost
s du
e to
re
turn
s.•
Pro
duct
liab
ility
, com
-pl
aint
s, w
arra
nty
cost
s w
ithin
the
chai
n.In
form
atio
n•
Inve
ntor
y tra
ckin
g sy
stem
failu
res
and
inac
cura
cies
.•
Per
sonn
el a
nd e
quip
-m
ent c
osts
incu
rred
due
to
inco
rrec
t cha
rges
.
• In
accu
raci
es o
f raw
m
ater
ial d
ata.
Rel
iabi
lity
test
ing.
Qua
lity
data
gat
herin
g,
anal
ysis
, and
repo
rting
.
Logi
stic
s•
Del
iver
y fa
ilure
cos
ts
with
in s
uppl
y ch
ain:
ex
pedi
ting,
pre
miu
m
trans
porta
tion,
dow
n-tim
e, h
oldi
ng a
nd
adm
inis
tratio
n du
e to
ea
rly o
r lat
e de
liver
ies.
• In
tern
al c
osts
for
repa
ir, a
nd o
pera
tiona
l e-
proc
urem
ent o
f raw
m
ater
ials
.•
Logi
stic
s er
rors
incl
ud-
ing
late
del
iver
ies,
pr
emiu
m fr
eigh
t, an
d da
mag
e in
tran
sit.
• A
dditi
onal
cos
ts
incu
rred
if p
artn
er lo
gis-
tics
supp
lier m
ust s
eek
addi
tiona
l sup
port
to
deliv
er c
ompo
nent
s.•
Com
pone
nt d
amag
e th
at o
ccur
s in
tran
sit t
o fi n
al c
usto
mer
or r
etur
n to
cha
in.
• In
tern
al c
osts
for
e-pr
ocur
emen
t of r
aw
mat
eria
ls.
• A
udit
deliv
ery
syst
em.
Qua
lity
plan
ning
and
pro
-ce
ss c
ontro
ls to
ens
ure
prop
er d
eliv
ery.
TAB
LE 2
. (co
ntinu
ed )
101Back to Basics: Using Cost of Quality to Manage•
Impr
oper
ly la
belin
g or
pa
ckag
ing
mat
eria
ls
with
in th
e su
pply
cha
in.
• A
dditi
onal
repa
ckag
-in
g du
e to
def
ectiv
e m
ater
ials
.
Fina
ncia
lTr
ansa
ctio
n in
accu
raci
es
and
lack
of t
imel
ines
s.P
rofi t
loss
due
to
defe
ctiv
es.
Aud
it pr
oced
ures
to
ensu
re d
ata
inte
grity
fo
r com
pone
nt c
ostin
g.
Qua
lity
plan
ning
and
pr
oces
s co
ntro
ls
to e
nsur
e ac
cura
te
fi nan
cial
tran
sact
ions
.
Prod
uce
Mat
eria
ls
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Pro
duct
Cor
rect
ive
actio
ns o
n pr
oduc
t def
ects
with
in
supp
ly c
hain
.•
Scr
ap, r
ewor
k,
re- in
spec
tion
of re
wor
k w
ithin
the
supp
ly c
hain
bo
th fo
rwar
d an
d re
vers
e m
ovem
ent.
• D
ownt
ime
with
in
supp
ly c
hain
, ad
ditio
nal p
roce
ssin
g tim
e.•
Ove
rtim
e an
d ad
ditio
nal
proc
essi
ng.
• R
etur
ned
and
repa
ired
good
s.•
Pro
duct
liab
ility
.•
War
rant
y.•
Dis
asse
mbl
y,
scra
p, re
wor
k an
d re
-insp
ectio
n.•
Re-
rece
ivin
g an
d re
- pac
kagi
ng o
f de
fect
ive
unit.
• Te
stin
g an
d in
spec
tion
at fi
nal p
rodu
ctio
n si
te.
• In
stru
men
t m
aint
enan
ce.
• Q
ualit
y en
gine
erin
g an
d pl
anni
ng fo
r pro
cess
m
easu
rem
ent a
nd
cont
rol.
• Q
ualit
y pl
anni
ng a
nd
cont
rols
to e
nsur
e pr
od-
uct q
ualit
y at
pro
duct
ion
site
.•
Sta
tistic
al p
roce
ss c
on-
trols
on
com
plet
ed u
nit.
• Q
ualit
y im
prov
emen
t pr
oces
ses.
( conti
nued
on ne
xt pa
ge)
102 THE BRC ACADEMY JOURNAL OF BUSINESSPr
oduc
e M
ater
ials
In
tern
al F
ailu
reEx
tern
al F
ailu
reA
ppra
isal
Prev
entio
nIn
form
atio
n•
Inve
ntor
y tra
ckin
g sy
stem
s fa
ilure
s:
data
tran
sact
ions
in
accu
raci
es.
• E
-pro
cure
men
t—m
ain-
tena
nce,
repa
ir, a
nd
oper
atio
n ite
ms.
Inac
cura
te in
form
atio
n fo
rwar
ded
from
cus
-to
mer
to p
rodu
ctio
n re
sulti
ng in
too
man
y or
too
few
uni
ts.
• Te
sts
and
insp
ectio
n to
en
sure
dat
a re
liabi
lity.
• R
epai
r of t
est e
quip
-m
ent f
or d
ata
appr
aisa
l.•
Gat
herin
g da
ta re
liabi
lity
info
rmat
ion.
Qua
lity
data
gat
herin
g,
anal
ysis
, and
repo
rting
at
fi na
l pro
duct
ion
site
.
Logi
stic
s•
Del
ivery
of t
he p
rodu
ct b
ack
to o
rigin
ator
of d
efec
t.•
Re-
rece
ivin
g,
repa
ckag
ing
and
re-c
onta
iner
izat
ion.
• Lo
gist
ics
erro
rs re
sulti
ng
in la
te d
eliv
erie
s, p
re-
miu
m fr
eigh
t, an
d da
m-
age
in tr
ansi
t.
• A
dditi
onal
pre
miu
ms
to s
atis
fy in
accu
rate
ly
plan
ned
dem
and.
Logi
stic
s au
dits
.Q
ualit
y pl
anni
ng a
nd
proc
ess
cont
rols
.
Fina
ncia
lFi
nanc
ial t
rans
actio
ns
inac
cura
cies
.A
dditi
onal
uni
t pro
-ce
ssin
g du
e to
dat
a in
accu
raci
es.
Aud
it pr
oced
ures
to
ensu
re d
ata
inte
grity
for
prod
uctio
n.
Qua
lity
plan
ning
and
pro
-ce
ss c
ontro
ls to
ens
ure
fi nan
cial
tran
sact
ions
at
fi nal
pro
duct
ion
site
are
ac
cura
te a
nd re
liabl
e.St
ore
and
stag
e pr
oduc
tsIn
tern
al F
ailu
reEx
tern
al F
ailu
reA
ppra
isal
Prev
entio
nP
rodu
ct•
Obs
oles
cenc
e.•
Dam
age
due
to
impr
oper
han
dlin
g an
d st
ore
with
in w
areh
ouse
.
• D
isas
sem
bly
and
re-
asse
mbl
y of
def
ectiv
e un
it at
sta
ging
site
.
• Te
stin
g th
at o
ccur
s du
r-in
g st
agin
g.•
Aud
it pr
oced
ures
for
stag
ing.
Qua
lity
plan
ning
, pro
cess
co
ntro
l and
trai
ning
co
sts
for i
nter
nal s
tagi
ng
and
stor
age
oper
atio
ns.
TAB
LE 2
. (co
ntinu
ed )
103Back to Basics: Using Cost of Quality to Manage•
Re-
pack
agin
g of
uni
ts
at w
areh
ouse
due
to
inac
cura
te fo
reca
sts.
• W
areh
ouse
/inve
ntor
y re
duct
ion
cost
s du
e to
def
ectiv
e m
ater
ial
retu
rn.
• In
abilit
y to
pro
perly
as
sem
ble
unit
at s
tagi
ng
oper
atio
n w
ithin
war
e-ho
use
due
to im
prop
er
train
ing,
def
ectiv
e co
mpo
nent
s, o
r mis
sing
pa
rts, d
ocum
enta
tion
or
pack
agin
g.•
Add
ition
al s
tora
ge d
ue
to in
accu
raci
es in
fi na
l cu
stom
er o
rder
.
• A
udit
stor
age
proc
edur
es•
Test
ing
equi
pmen
t and
la
bor.
Info
rmat
ion
• In
vent
ory
forw
ard
and
reve
rse
track
ing
sys-
tem
s fa
ilure
s w
ithin
w
areh
ousi
ng
syst
ems.
• Im
prop
er d
ocum
en-
tatio
n fo
r sta
ging
, pa
ckag
ing
and
con-
tain
eriz
atio
n w
ithin
w
areh
ouse
.
Inac
cura
te d
ata
trans
mit-
ted
from
fi na
l cus
tom
er
to s
tagi
ng o
r war
ehou
se
site
.
• Au
dit d
ata
proc
edur
es to
en
sure
dat
a in
tegr
ity.
• Te
stin
g eq
uipm
ent a
nd
labo
r.
Qua
lity
plan
ning
and
pr
oces
s co
ntro
ls
deve
lope
d to
eva
luat
e da
ta in
tegr
ity.
(conti
nued
on ne
xt pa
ge)
104 THE BRC ACADEMY JOURNAL OF BUSINESSSt
ore
and
stag
e pr
oduc
tsIn
tern
al F
ailu
reEx
tern
al F
ailu
reA
ppra
isal
Prev
entio
nLo
gist
ics
Del
iver
y fa
ilure
cos
ts
from
/to s
tagi
ng a
nd
war
ehou
sing
pro
cess
es
with
in s
uppl
y ch
ain
incl
udin
g ex
pedi
ting,
pr
emiu
m tr
ansp
orta
tion,
do
wnt
ime
with
in s
tagi
ng
oper
atio
ns, h
oldi
ng a
nd
adm
inis
tratio
n du
e to
ea
rly a
nd la
te d
eliv
erie
s.
Del
iver
y fa
ilure
cos
ts
from
/to s
tagi
ng a
nd
war
ehou
sing
pro
cess
es
from
cus
tom
er b
ack
to
war
ehou
se in
clud
ing
expe
ditin
g, p
rem
ium
tra
nspo
rtatio
n, d
own-
time
with
in s
tagi
ng
oper
atio
ns, h
oldi
ng a
nd
adm
inis
tratio
n du
e to
ea
rly a
nd la
te d
eliv
erie
s.
• A
udit
logi
stic
s sy
stem
.•
Test
ing
equi
pmen
t and
la
bor.
Qua
lity
plan
ning
and
pro
-ce
ss c
ontro
ls d
evel
oped
to
acc
urat
ely
stag
e an
d w
areh
ouse
pro
duct
.
Fina
ncia
lQ
ualit
y pl
anni
ng a
nd p
ro-
cess
con
trols
dev
elop
ed
to a
ccur
atel
y re
cord
an
d tra
nsm
it up
-to-d
ate
fi nan
cial
info
rmat
ion.
Del
iver
pro
duct
sIn
tern
al F
ailu
reEx
tern
al F
ailu
reA
ppra
isal
Prev
entio
nIn
form
atio
nP
rodu
ct d
eliv
ery
sche
d-ul
es o
r qua
ntiti
es
inac
cura
cies
.
• In
accu
raci
es in
pro
d-uc
t del
iver
y sc
hedu
les
or q
uant
ities
to fi
nal
dest
inat
ion.
• A
udit
proc
edur
es to
en
sure
dat
a in
tegr
ity
with
logi
stic
s pr
ovid
ers
with
in c
hain
and
to fi
nal
dest
inat
ion.
• Te
stin
g.
Qua
lity
train
ing
for p
er-
sonn
el to
ens
ure
data
in
tegr
atio
n w
ith lo
gist
ics
info
rmat
ion.
Qua
lity
plan
ning
and
pro
-ce
ss c
ontro
ls to
ens
ure
data
inte
grat
ion.
TAB
LE 2
. (co
ntinu
ed )
105Back to Basics: Using Cost of Quality to ManageLo
gist
ics
• R
e-de
liver
y of
def
ec-
tive
mat
eria
ls to
orig
inal
ow
ner i
n su
pply
cha
in.
• P
rodu
ct lo
ss in
tran
sit
with
in s
uppl
y ch
ain.
Re-
deliv
ery
of d
efec
tive
mat
eria
ls fr
om c
usto
mer
ba
ck to
sup
ply
chai
n.P
rodu
ct lo
ss in
tran
sit f
rom
su
pply
cha
in to
fi na
l de
stin
atio
n.
Aud
it pr
oced
ures
.Q
ualit
y pl
anni
ng a
nd p
ro-
cess
con
trols
to e
nsur
e de
liver
y.
Man
age
invo
ices
Inte
rnal
Fai
lure
Exte
rnal
Fai
lure
App
rais
alPr
even
tion
Info
rmat
ion
• In
accu
raci
es in
dat
a.•
Per
sonn
el a
nd e
quip
-m
ent i
ncur
red
due
to
inco
rrec
tly c
harg
ing
for
non-
issu
ed u
nit,
too
man
y, o
r too
few
with
in
the
supp
ly c
hain
.
• Fa
ilure
to re
port
need
fo
r pro
duct
by
cust
omer
or
inac
cura
te re
port
from
cus
tom
er.
• Q
ualit
y au
dit o
f pro
ce-
dure
s to
ens
ure
trans
ac-
tions
bet
wee
n fi n
anci
al
info
rmat
ion
and
data
are
lin
ked
prop
erly.
• Te
stin
g.
Qua
lity
train
ing
for a
ll ac
coun
ting
and fi n
anci
al
pers
onne
l.•
Qua
lity
plan
ning
and
pr
oces
s co
ntro
ls to
en
sure
dat
a an
d fi n
an-
cial
inte
ract
ions
are
ac
cura
te a
nd re
liabl
e.
Fina
ncia
lFi
nanc
ial i
nfor
mat
ion
inac
cura
cies
.•
Pot
entia
l los
s of
goo
d w
ill d
ue to
inco
rrec
tly
char
ging
or o
verc
harg
-in
g a
cust
omer
.P
oten
tial l
oss
of re
venu
e du
e to
impr
oper
bill
ing
and
loss
of r
ecor
d.
• Q
ualit
y au
dit o
f pr
oced
ures
.Te
stin
g.
• Q
ualit
y pl
anni
ng a
nd
proc
ess
cont
rols
to
ensu
re fi
nanc
ial t
rans
-ac
tions
are
acc
urat
e an
d re
liabl
e.
106 THE BRC ACADEMY JOURNAL OF BUSINESS
move a good product to the fi nal customer to replace the defective one may be categorized as a promotional external failure cost. Replenishment includes product, data, and information fulfi llment in both the forward and reverse directions for normal forecasted fl ow, that is, non-promo-tional activities. For example, additional replenishment COQ includes the costs to scrap an incorrect product due to improper ordering.
With reference to Table 2, manage store orders, customer orders, and invoices are information processing responsibilities as they coordi-nate the fi nancial and product transactions. Material procurement and production, which are operational procedures, need to be coordinated with data and fi nancial transactions. Procure materials, the process to attain the various raw materials for the supply chain, are mainly inter-nal to the chain. For example, poor quality procurement within a supply chain includes the fl oor mat recall on Toyota vehicles. Product produc-tion produces the fi nished good within the supply chain, with a focus on assembly and disassembly procedures. Storage, staging, and deliv-ery are mainly logistics functions and need to be coordinated with data management.
DISCUSSION
COQ evolved as a critical organizational measure during the quality revolution of the 1980’s. Here, we propose a framework for potential quality cost mapping by supply chain business processes. The model differs from other current performance measurement models as it incor-porates a COQ business process perspective into the supply chain and includes logistics and marketing processes. Although efforts to imple-ment a COQ supply chain system will require time and fi nancial invest-ment, personnel are familiar with COQ, making it simpler and less expensive to employ such measures. Current company COQ systems can be extended to the supply chain. The entire supply chain can focus on process and continuous improvement through concentrating on remov-ing non-value added activities in the system.
107Back to Basics: Using Cost of Quality to Manage
There are several advantages to managers developing this model for their supply chains. To begin, the model standardizes the supply chain measurement system while simultaneously, and equally emphasizing, quality, delivery and cost measurement. A common unit of measure—money—is used to track and focus quality, delivery, and cost improve-ment efforts. Supply chain business strategies can be integrated through evaluating their business processes on a common, integrated measure instead of a wide variety of measures. Furthermore, instead of various Key Performance Indicators, COQ can be tracked through accounting systems. Product, logistics, information, and fi nancial quality are inte-grated into a single quality measure. The proposed mapping links quality and timeliness with the more commonly used cost measurements. COQ can be utilized as a benchmarking and improvement technique. Since it focuses on a common metric—money, it offers the additional benefi t of industry and product comparisons. A score card based on COQ can be used to evaluate supply chain quality effectiveness.
One of the biggest advantages in using this model is that it focuses the entire supply chain attention on the fi nal customer—not the internal ones. Marketing, operations, and fi nancial efforts are integrated. Often forgotten areas for quality and cost improvement, such as promotion, logistics, purchasing, and merchandising, are included. Similar to the TCO model and total supply chain costs model, total COQ is the focal point for performance and improvement efforts through reducing non-value added activities within business processes. Managers can utilize the COQ business process mapping to evaluate continuous improvement efforts and work toward total COQ reduction. A long-term measure, COQ should not be utilized to guide short-term managerial decision-making. However, tracking COQ trends can provide powerful insight into cost reduction, quality improvements, and improved service times. Over time, like an organization, a supply chain that focuses on COQ will learn to accurately categorize costs and reduce total COQ. Instead of redis-tributing COQ within the supply chain, the model mapping increases managerial understanding and focus efforts on total COQ reduction.
108 THE BRC ACADEMY JOURNAL OF BUSINESS
Managerial attention shifts from less effective external quality measures to total supply chain COQ.
Why should a manager focus on the processes of introduction, replen-ishment, merchandising and promotion? With respect to ‘introduction’ processes, roughly 80% of a product’s costs can be attributed to decisions made during design [Cooper and Slagmulder, 1999]. Evaluation of the ‘replenishment’ process assists managers to take a long-term perspective for accurately evaluating purchasing and logistics costs. ‘Merchandis-ing’ COQ specifi cally focuses on the critical juncture between the entire supply chain and fi nal customer. Merchandising, which includes scrap-ping or reworking defective purchased materials potentially caused by non-conforming suppliers, potentially adds 50% to the product’s non-conformance cost [Crosby, 1979]. The ‘promotion’ process addresses supply chain uncertainty. Through tracking these costs, managers can focus on reducing non-value added costs that are incurred throughout the entire supply chain.
The framework is an extension of organizational accounting pro-cedures, such as ABC, that evolved to capture value-added operations and reduce COQ. Several accounting systems effective in Japan are not easily transferred to the West [Cooper and Slagmulder, 1999]; however adaptation of this framework may assist in implementation of these sys-tems. Inter-organizational cost management, target costing, and chained target costing can be incorporated into the model in the product life cycle ‘introduction’ stage. Also, kaizen can be used in the model for ‘replen-ishment’. Hence, the accounting systems we discussed can be utilized in the model, but allow for one single supply chain performance measure-ment and fi t into current Western practices. Through information sys-tems, the COQ business process model can be implemented and create a viable, accurate, global performance management system.
As mentioned previously, not all supply chain COQ will fi t neatly into the proposed categories. However, as long as the supply chain uses a consistent set of costs to monitor quality, COQ trends over time can pro-vide powerful insight into cost management. Even if some supply chain costs are inaccurately mapped to a category, as long as the model is
109Back to Basics: Using Cost of Quality to Manage
consistent, it will be effective since it is the total COQ that is important. Preventing defective products from reaching the fi nal customer will result in signifi cant cost reductions for all supply chain members. Therefore, managers’ efforts should focus on eliminating or reducing the potential for a defective unit to reach the fi nal customer.
How does the model compare to other models, such as SCOR? SCOR, a successful, well-accepted supply chain management model, includes COQ as part of its measurement system. The critical difference is the model’s focus on the internal supply chain as essentially “one entity”. SCOR evaluates the linkages between each supply chain member in sim-ilar business processes. SCOR processes are similar to the model as plan, source, make and delivery focus on internal activities similar to intro-duction and replenishment, while return focuses on defective product.
What about other network structures? The “kingdom” network struc-ture provides a centralized location for COQ data gathering and decision-making, and provides a forum for COQ business process implementation. A genuine concern with the kingdom structure is that in spite of a cen-tralized data and decision-making location, fi rms are still autonomous entities keenly sensitive to their own self-interests. Information sharing is detrimental to this self-interest, thus inhibiting cooperation; however, this can be overcome. For example, VCA use by retailer J. Sainsbury provided a structured methodology for facilitating division of costs, ben-efi ts and investments from supply chain improvements and improving inter-fi rm relationships [Dekker, 2003]. However, before VCA can be implemented, it is necessary for fi rms to build a mutual level of trust so that exchange of information can easily take place. Formal control creation, including contractual and confi dentiality agreements, can help build goodwill and strengthen inter-fi rm relationships.
Although we cited a signifi cant number of advantages to our model, the model has a few disadvantages, including transcending different accounting systems, implementation, using the model in other network and global formats, alternative models, and a lack of a demonstrated case. The different accounting systems and monetary valuations across supply chains are major problems with implementing this model.
110 THE BRC ACADEMY JOURNAL OF BUSINESS
The model does not take different currencies and exchange rates in a global supply chain into account. Business process COQ mapping is diffi cult to implement for other network forms where a centralized information sharing location does not exist for data gathering and decision-making [Cooper and Slagmulder, 1999]. The model offers a proposed framework for business process COQ; however, exact catego-rization needs to be developed by the supply chain. Alternative, popular and accepted measurement systems, such as SCOR, would be diffi cult to circumvent with a different performance measurement system. Due to proprietary requirements, a major drawback of this model is the lack of a demonstrated real-world application. Recently, a nonlinear program-ming formulation incorporating COQ into supply chain design decisions [Ramudhin, Alzaman and Bulgak, 2008] highlighted the importance of including quality suppliers in the supply chain system. The COQ busi-ness process mapping is based upon theoretical and intuitive information. Actual test cases are lacking, potentially due to confi dentiality issues. However, this framework should encourage supply chain management discussions on COQ business processes mapping as a supply chain qual-ity improvement and cost reduction technique.
111Back to Basics: Using Cost of Quality to Manage
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