Evolution Of H. J. Harrington's Poor-Quality Cost Model

In the 1950s, A. V. Feigenbaum, then VP at General Electric (GE), developed and implemented the "Cost of Quality" concept throughout GE. He divided Cost Of Quality into the following two categories and four sub categories:

• Costs of Control
• prevention costs
• appraisal costs
   
• Costs of Failure of Control
• internal defect costs
• external defect costs

Feigenbaum's concept was later adopted by several large American firms. In the 1960s, Dr. James Harrington was assigned to implement Dr. Feigenbaum's Cost Of Quality concept at IBM. He found the concept lacking because it did not focus on the support functions' cost of quality or the external customers' quality costs. As a result, IBM expanded the concept to fulfill its own needs. To distinguish it from Feigenbaum's concept, IBM used the name "Poor-Quality Cost." This name was selected because IBM felt that Cost Of Quality was an inappropriate title: Good quality does not cost any additional money. It is poor quality that generates the additional costs for the company. If we had perfect quality, we would not have a need for preventive cost or appraisal cost, and there would be no internal error cost or external error cost. Unfortunately, we do not live in a perfect world.

In January 1964, IBM published its first report that included poor-quality cost for internal component manufacturing, subassembly, final assembly, final machine test, system test, and the first 12 months at the customer location for the 1620 system. It was called the

Q-100 Report. During the following months, this report was expanded to cover many other IBM systems.

In the early 1980s, Philip Crosby left ITT where he had earlier also implemented Feigenbaum's Cost Of Quality concept and incorporated the concept into his own consulting practice. Crosby's approach closely followed Feigenbaum's teachings, although he changed the names of some of Feigenbaum's terms without altering their meaning.

In 1987, the American Society for Quality Control (ASQC) published Dr. Harrington's book entitled, Poor-Quality Cost, which documented IBM's approach to reporting the costs that result from poor quality. This book has since been translated into many languages, including Chinese, French, Spanish, Portuguese, and Russian.

In the early 1980s, while developing the Business Process Improvement methodology that focused on streamlining business processes, Dr. Harrington found that the costs that resulted from poorly-designed business processes were also poor-quality cost elements.  As a result, he included "no-real-value-added" elements to his Poor-Quality Cost model in 1990.

The importance of including some of these new PQC elements in Dr. Harrington's model has been verified in many organizations over the past year. When Saab's R&D organization looked at its Poor-Quality Costs, it was amazed to find that 78 percent of its R&D budget was classified as Poor-Quality Cost. Likewise, in a marketing and sales organization, the Poor-Quality Cost is often more than 100% of the marketing and sales budget when lost-opportunity costs are considered.

I am in the process of writing a new book for McGraw-Hill entitled "Measuring Poor-Quality Cost" (Table of Contents is attached.) I would like to acquire case studies, examples, and quotes that can be used in this book. If you have any data you would like to contribute, please forward it to me via e-mail to:  james.harrington@tqnet.com

TABLE OF CONTENTS

1 WHY POOR-QUALITY COST?

What Is Poor-Quality Cost?
Where Is PQC Used?
Why Use PQC?
PQC Limitations

2 UNDERSTANDING DIRECT POOR-QUALITY COST

Controllable PQC

• Prevention
• Appraisal
• No-value added

Resultant PQC

• Internal error cost
• External error cost

Equipment PQC

3 DIRECT POOR-QUALITY COST CURVES

Interaction Between Controllable and Resultant PQC
Best Interim Operating Point
Percentage of Value Added
Changes in PQC with Time

4 DIRECT POOR-QUALITY COST ANALYSIS

Why Spend Dollars on Prevention?
Interaction Between Prevention and Appraisal Activities
Defining and Calculating No-Value Added Cost
PQC Versus Time
Poor Quality Is Poor Business
How Should You Spend Your PQC Dollar?
Impact of Reducing PQC

5 STARTING A POOR-QUALITY COST SYSTEM

Step 1:  Forming the Implementation Team
Step 2:  Presenting the Concept to Top Management
Step 3:  Developing the Implementation Plan
Step 4:  Selecting a Trial Area
Step 5:  Starting the Program
Step 6:  Identifying and Classifying the Cost Elements
Step 7:  Staging Each PQC Element
Step 8:  Establishing Input to the System
Step 9:  Establishing Output Formats
Step 10: Defining Additional Data-Assistance Requirements
Step 11: Reviewing Status with Plant Management
Step 12: Starting with Trial Period
Step 13: Reviewing the Monthly Report
Step 14: Modifying the Program Based on Experience
Step 15: Expanding the Program

A Word of Caution

6 WHITE-COLLAR POOR-QUALITY COSTS

White-Collar Errors
Understanding White-Collar PQC
White-Collar No-Value Added Cost
Typical PQC by Function
Collection of White-Collar PQC Data
Service Industries' PQC

7 INDIRECT POOR-QUALITY COST

Poor-Quality Costs Your Customers
The Second Major Division
Why Use Indirect PQC?
Customer-Incurred PQC
Customer-Dissatisfaction PQC
Lost-Opportunity PQC
Loss-of-Reputation PQC
Using Indirect PQC

8 ADVANTAGES OF A POOR-QUALITY COST SYSTEM

Why Use a PQC System?
Increased Profits
Increased Market Share
Directions for Today and Tomorrow
Summary

APPENDIX:  TYPICAL POOR-QUALITY COSTS

Prevention Costs
Appraisal Costs
Internal Error Costs
External Error Costs
Flow Charting