The purpose of the article is to explain the two different methods of costing variability to achieve quality by giving definitions, examples, and applications of each. 

Two Types of Product Variability Costing

Roth and Albright present two philosophies used by U.S. companies to attain quality in the products they produce: 1) zero defects and 2) robust quality. The way to measure quality for both philosophies is by attaining the cost of product variability. The factors used to determine this cost provides the difference between the two methods. 

Zero Defects

The philosophy of zero defects states that the product has sufficient quality if it falls within the range of specifications set forth.  Any variation within the specification limits is deemed acceptable and no variability costs are incurred. This philosophy follows the “conformance to specifications” definition of quality. 

Obviously, products will sometimes fall outside of the set specifications. When this happens, variability costs will be assigned according to the end result. The costs depend on three factors: 1) whether the product can be reworked or repaired, 2) production constraints, and 3) where specifications limits are set.  If the company can rework or repair the product and sell it for the original retail price, the only variability costs will be those incurred for the rework.  If rework results in a lower quality product that must be sold for cheaper than retail price, then the cost would include rework and the margin between the original retail price and the price finally charged.  Finally, if the product must be scrapped, then the cost would be the opportunity cost (i.e. retail price if it had been sold) plus any costs of disposal.  By using a normal distribution curve, one can see that a large majority of products will fall within specifications. Only a few (e.g. 1,240 out of 100,000) will be outside of specifications, but the costs associated with the variability can be substantial depending on what needs to be done to those products. Some argue that because variability within the limits is allowed, costs incurred by consumers due to the variation are ignored. Therefore, the zero defects philosophy understates the total cost of product variability.

Robust Quality

The philosophy of robust quality states that any variation from the target value leads to variability costs that will be incurred by the manufacturer, consumer, or society. This philosophy follows the “fitness for use” definition of quality.  Due to the stringent focus on achieving the target, substantially more costs will be incurred under this approach due to variability.

To find the variability cost, the quality loss function can be used. This function is based on the Taguchi quality philosophy that any variability causes a loss to society.  Even within the specification limits, costs are incurred if the target isn’t met.  The following formula is used to determine the quality loss for an individual unit:

L = k (Y – T)

Where L = unit loss, Y = actual value of characteristic, T = target value of characteristic, and k = proportionality constant.  The proportionality constant is the loss associated with a unit produced at the specified limit divided by the distance from the target value to the specification limit.  To compare this method against the zero defect approach, for the example provided in the article, the zero defect approach resulted in a loss between $14,880 and $68,200 (depending on result of rework) and the robust quality approach resulted in a quality loss of $192,000. 

Because customers perceive poor quality as inconsistency, keeping products within specifications or on target is extremely vital to the success of a company. Managers can use the information for improving processes, reducing product complexity, etc. To stay competitive, managers must employ this information to keep ahead.

See the summary of Deming's New Economics Chapter 10.

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