The complex global supplier network, dynamic customer demands, and the need for short and effective NPI cycles provide little room for error in the electronics industry, especially when it comes to managing the quality of processes and products. A slight hiccup somewhere along the value chain could have significant effects on the bottom line down the road. What electronics manufacturers need is a holistic business measurement to provide visibility into the effectiveness of quality management as it relates to both cost and operating margins. Many are realizing improvements in these areas by measuring the cost of quality metric.
So, what is the cost of quality?
Depending on whom you’re talking to or which company is measuring it, the cost of quality metric may be defined in many different ways. To simplify things, we’ll cover its main elements. At a high level, it can be defined as a function of the cost of good quality and the cost of poor quality.
Cost of Quality = Cost of Good Quality + Cost of Poor Quality
In this equation, the cost of good quality is a measurement of costs companies incur to ensure the production and delivery of quality products. On the other end, the cost of poor quality relates to costs incurred to evaluate and prevent quality issues. Variables that affect these two areas are below:
Cost of Good Quality
- Inspection costs
- Testing costs
- Calibration costs
- Quality planning costs
- Risk management costs
- CAPA costs
Cost of Poor Quality
- Scrap costs
- Rework costs
- Returned product costs
- Warranty costs
- Product recall costs
The formula above is only the tip of the iceberg when it comes to the cost of quality. There are many more factors to consider. Depending on how granular you want to get, the formula can provide incredible insight into your operation. By measuring each variable as a percentage of revenue, the metric can shed light on the areas that will have the most direct and impactful results on profitability.
To learn more about how electronics manufacturers can evaluate their cost of quality and improve profitability, click here to watch an on-demand webinar with LNS Research on this topic.