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schottmiller (504-506) 4/1/99 4:48 PM Page 504


John C. Schottmiller
RM Consulting Inc.
Mendon, NY 14506

This paper is a discussion on how quality costs are handled in the ISO 9000 standards and how their evolution in
succeeding versions of the standards of 1987, 1994, 1997 and 2000 reflect the impact of total quality management

cost of quality, economics, Q90 series

One of the most striking and universal trends in quality management during the past ten years has been the drive
by businesses of all types to become certified to ISO 9000, or industry-specific standards based on ISO 9000, such
as QS-9000. This trend is occurring simultaneously with another trend that has characterized, and indeed defined,
the quality movement for the past fifteen or so years, namely, the adoption by organizations of all types of the principles and practices of continuous improvement and TQM. Where does the use of quality costs, which actually predates by decades either of these two trends, fit into the picture? Observing how the committees and working groups
responsible for writing ISO and related standards continue to struggle with this question tells us a lot about both the
confluence and contradictions of these two cornerstones of modern quality management. The objective of this presentation is to provide quality managers and those charged with implementing ISO 9000 quality standards guidelines
on integrating financial measures into their quality systems.


The ISO 9001, 9002, 9003 series standards define and specify the elements of a quality system that must be in
place to ensure the quality of the output, i.e., that products and services meet customer requirements. Quality costs
are not mentioned in these standards. ISO 9004, on the other hand, offers guidelines to help measure the effectiveness of the quality system. The measures of most general interest are financial. Money is the universal language of
business and is at least a consideration in most other enterprises. For this reason the ISO 9004 standard recommends
a financial measurement of quality and specifies quality costs as one of these financial measures (ISO 9004-6
(Revision)Financial Considerations of Quality Systemsidentical to ANSI/ASQ Q9004-1-1994). The 1994 revision is at present the operative working ISO document concerned with quality costs and the economics of quality.
The original 1987 guideline standard on which the 1994 revision was based followed the earlier MIL-Q-9858A
and MIL-STD-1520C Department of Defense standards and called for tracking of costs associated with achieving
quality and resultant losses from inadequate quality, including the categories of prevention, appraisal, internal failure,
and external failure. The 1994 revision, however, no longer recommended such a specific approach for collecting and


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reporting financial data but offered three models. The approach selected by given organizations will depend, as stated,
on individual structures, their activities, and the maturity of their quality systems. Other approaches or adaptations
and combinations of the three mentioned are not to be excluded.
The three basic models offered in ISO 9004-1-1994 are: (1) the prevention, appraisal, failure approach that has
been used widely and effectively for four decades to measure quality conformance and nonconformance costs; (2)
the process-cost approach that captures under conformance costs a much broader range of activities relating to the
efficiency as well as the effectiveness (quality) of a process; and (3) the quality-loss approach that allows estimates
of intangible as well as tangible losses due to quality.
Of particular interest is the process-cost approach because it is new. Whereas the conventional approach has been
to distinguish cost of quality from cost of production, the process-cost approach lumps together all costs incurred
when a process is running without failure and calls them cost of conformance. Included are not only costs of assuring quality, such as costs of prevention, e.g., process control, but also cost of raw material, cost of labor, cost of
energy etc. Cost of nonconformance is the traditional cost incurred due to failure of the existing process, e.g., scrap,
rework etc. Defined in this way greater cost saving opportunities may be available in reducing cost of conformance
than in reducing cost of nonconformance. This is in contrast to the conventional quality costing approach where the
major savings are realized in reducing cost of nonconformance usually at the expense of some additional cost of prevention (conformance).The process-cost approach thus allows the tracking and reduction of costs normally associated with efficiency in addition to those traditionally associated with quality (effectiveness).
This broadening of the concepts of quality costs shows the influence of TQM. Since TQM looks not only at the
conformance of a product or service to specifications but at the overall effectiveness of the organization in meeting
customer requirements, including such things as delivery time and added value, the concept of quality cost is
expanded to a concept of economics of quality. At the same time that the concept of quality moved from quality control to TQM, quality costs moved from a specific measure of what it costs to incur failure, assess it and avoid it to a
more general measure of the effectiveness and efficiency of all the processes of the organization. Since continuous
improvement is a key tenet of TQM, the use of these financial measures to identify opportunities to improve
processes and to track these improvements over time has become the primary application of quality costs.
An attempt to broaden further the economics of quality was made by the ISO/TC 176 group preparing the new
10000 guideline series of ISO standards. Although their output (ISO 10014Guidelines for Managing the Economics
of Quality) for various reasons never advanced beyond the Draft International Standard (DIS) stage, it is likely that
it will issue it as an ISO Technical Report intended as an informative guidance document to organizations using
related conformance and guidance standards. The domain of economics of quality in this document was extended one
step further to take into account the cost/benefits of increasing revenue by customer satisfaction as well as reducing
costs. Broader economic benefits are thereby anticipated. Again we see the impact of TQM.
A complete revision or rewriting of all ISO 9000 standards is slated for the year 2000. There will be an obligatory standard (ISO 9001) and an extensive set of guideline standards (ISO 9004) in the format of a consistent pair
under a revised set of categories. The ISO 9004 standards are intended to provide a transition from quality assurance
to TQM. Based on a review of early drafts (ISO 9004: 2000. Quality Management Systems-Guidelines), quality costs
are not expected to be called out specifically as a financial measure of the effectiveness and efficiency of the quality
system as they were in ISO 9004-1:1994. While financial reporting of the activities related to the performance of the
quality management system will be required by the guideline standard, the specific approach will apparently be left
to the discretion of the organization doing the reporting. The standard is becoming less specific and more general.
Experienced quality professionals can be expected, however, to select quality costs in most instances as the tool to
do the job.

Although not required by mandatory standards, the routine measurement of financial consequences is recommended by ISO guidelines as a means of measuring the effectiveness of a quality system. Several measurement
approaches are available. The quality costing (prevention-appraisal-failure) approach is a proven means of tracking,
guiding and motivating quality improvement. The other approaches are based on less experience but have their own
advantages particularly in situations where it is desirable to include other TQM concerns such as efficiency and
customer satisfaction. At the same time that quality costs have moved from an organizational focus to identify
priorities for corrective action to a process focus to identify cross-functional opportunities for continuous improvement in the context of TQM, the ISO 9000 guidelines have become less and less specific and, in the opinion of

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some, less helpful on how financial measurements of the effectiveness of quality systems should be implemented.
However, knowledge of what the ISO 9000 standards say and do not say about quality costs and other financial measures of quality should enable the quality professional and responsible managers to make judicious choices.

ANSI/ASQ Q9004-1-1994. Quality Management and Quality System ElementsGuidelines, Milwaukee: ASQ: 78.
ISO 10014. Guidelines for Managing the Economics of QualityDraft International Standard (ISO/TC176/SC3).
ISO 9004: 2000. Quality Management SystemsGuidelines Committee Draft July 1998 (ISO/TC176/SC2/N415).