Analyzing Cost-of-Quality (COQ) Reports Bergen Inc. produces telephone equipment at its Georgia plant. In recent years, the company’s market share has been eroded by stiff competition from Asian and European competitors. Price and product quality are the two key areas in which companies compete in this market.
Jerry Holman, Bergen’s president, decided to devote more resources to the improvement of product quality after learning that, in a 2008 survey of telephone equipment users, his company’s products had been ranked fourth in product quality. He believed that Bergen could no longer afford to ignore the importance of product quality. Jerry set up a task force (that he headed) to implement a formal quality-improvement program. Included on the task force were representatives from engineering, sales, customer service, production, and accounting because Jerry believed that this is a companywide program and that all employees should share the responsibility for its success.
After the first task-force meeting, Sheila Haynes, manager of sales, asked Tony Reese, production manager, what he thought of the proposed program. Tony replied, “I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I don’t like my annual bonus to be based on a decrease in quality costs; there are too many variables that we have no control over!”
Bergen’s quality-improvement program has been in operation for 18 months, and the following cost report was recently issued.
As they were reviewing the report, Sheila asked Tony what he thought of the quality program now. “The work is really moving through the production department,” replied Reese. “We used to spend time helping the customer service department solve its problems, but they are leaving us alone these days. I have no complaints so far. I’ll be anxious to see how much the program increases our bonuses.”
Cost-of-Quality (COQ) Report by Quarter (in thousands) | ||||||||||||
| June 30, 2010 | September 30, 2010 | December 31, 2010 | March 31, 2011 | June 30, 2011 | September 30, 2011 | ||||||
Prevention costs: |
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Machine maintenance | $ | 215 | $ | 215 | $ | 202 | $ | 190 | $ | 170 | $ | 160 |
Training suppliers |
| 5 |
| 45 |
| 25 |
| 20 |
| 20 |
| 15 |
Design reviews |
| 20 |
| 102 |
| 111 |
| 100 |
| 104 |
| 95 |
| $ | 240 | $ | 362 | $ | 338 | $ | 310 | $ | 294 | $ | 270 |
Appraisal costs: |
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Incoming inspection | $ | 45 | $ | 53 | $ | 57 | $ | 36 | $ | 34 | $ | 22 |
Final testing |
| 160 |
| 160 |
| 154 |
| 140 |
| 115 |
| 94 |
| $ | 205 | $ | 213 | $ | 211 | $ | 176 | $ | 149 | $ | 116 |
Internal failure costs: |
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Rework | $ | 120 | $ | 106 | $ | 114 | $ | 88 | $ | 78 | $ | 62 |
Scrap (net) |
| 68 |
| 64 |
| 53 |
| 42 |
| 40 |
| 40 |
| $ | 188 | $ | 170 | $ | 167 | $ | 130 | $ | 118 | $ | 102 |
External failure costs: |
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Warranty repairs | $ | 69 |
| $31 | $ | 24 | $ | 25 | $ | 23 | $ | 23 |
Customer returns |
| 262 |
| 251 |
| 122 |
| 116 |
| 87 |
| 80 |
| $ | 331 | $ | 282 | $ | 146 | $ | 141 | $ | 110 | $ | 103 |
Total COQ | $ | 4 6 9 | $ | 1,027 | $ | 862 | $ | 757 | $ | 671 | $ | 591 |
Total production cost | $ | 4,120 | $ | 4,540 | $ | 4,380 | $ | 4,650 | $ | 4,580 | $ | 4,510 |
Required
1. Identify at least three factors that should be present for an organization to successfully implement a quality-improvement program.
2. By analyzing the cost-of-quality (COQ) report presented, determine whether Bergen’s quality-improvement program has been successful. (Hint: You might want to focus on the oldest quarter and on the most recent quarter.) List specific evidence to support your answer.
3. Discuss why Tony Reese’s current reaction to the quality-improvement program is more favorable than his initial reaction.
4. Jerry Holman believed that the quality-improvement program was essential and that Bergen could no longer afford to ignore the importance of product quality. Discuss how Bergen could measure the opportunity cost of not implementing the quality-improvement program.
5. Comment on the following statement: “COQ reports allow an organization to focus on the reduction or elimination of non-value-added costs of quality.”
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