Quality is much talked about, butironically is also one of the least understood subjects in the apparelindustry. Most manufacturers do not know the real cost they pay for ignoringquality, which could be as high as 25 per cent of the total manufacturing cost.Greater understanding of cost of quality can reduce these expenses and improveprofitability of operations, says Rajesh Bheda.
Muchhas been written about quality. However, it is one of the least understoodsubjects in the apparel industry. Most apparel manufacturers do not know thereal cost they pay for ignoring quality. As shown in the illustration fromManaging Productivity in the Apparel Industry, the money going down the draincould be as high as 20 per cent to 25 per cent of total manufacturing cost.This cost incurred due to poor quality is aptly called Cost of Quality (CoQ).Greater understanding of cost of quality can reduce these expenses and improveprofitability of operations.
Importance of Cost of Quality
ABusiness Week Special Report on the change in the attitude of American industryto quality quoted by Pradip Mehta in his book, An Introduction to QualityControl in Apparel Industry says, "What finally sank into US industry isthe tremendous cost of ignoring quality. In most traditional factories thatcost is probably the biggest item on their list of expenses, and it is alwaysbigger than gross profit. But because CoQ is rarely broken out in gory detail,management has no idea of its true dimensions." He points out that qualityaudits uncover hidden plants that find and fix defective products. "Thetypical factory invests a staggering 20 per cent to 25 per cent of itsoperating budget in finding and fixing mistakes." That translates into aquarter of the workforce only reworking mistakes. "Add in the expense ofrepairing or replacing the flawed products that slip out of the factory andinto the market, and the total burden of "un-quality" can mount topunishing 30 per cent or more of production costs."
Classification of Cost of Quality
Cost ofQuality is classified in four categories:
� Prevention Costs: Associatedwith personnel engaged in designing, implementing and maintaining qualitysystem. This also includes auditing.
� Appraisal Costs: Associatedwith measuring, evaluating or auditing products, components and purchasedmaterial to assure conformance with quality standards and performancerequirements.
� Internal Failure Costs: Associated with defective products, components and materials that fail to meet quality requirements and result in manufacturing losses.
� External Failure Costs: When defective products are shipped to customers.
In many cases, Prevention Costs and Appraisal Costs are clubbed together as Cost of Conformance. Internal failure and external failure costs are together called Cost of Non-Conformance or Price of Non-Conformance. The objective of any organisation should be to eliminate the Cost of Failure by investing in Cost of Prevention and rationalised Appraisal Cost.
Though quality and management gurus have written about Cost of Quality for decades, there has been very little research on this subject in the international apparel industry. This is mainly because data needed for Cost of Quality study is generally not maintained in the apparel industry or if the data is available, it is considered too confidential to share.
My study, Cost of Quality in Indian Apparel Industry, involved 61 Indian apparel manufacturers, contributing to over 5 per cent of total export. The results, provided in Table below, were an eye-opener for most participants.
The key results are:
Participating apparel factories lost on average 14.05 per cent of annual sales on account of Cost of Quality. It can safely be said that this is higher than the profitability rate of the industry.
� Only 0.26 per cent of sales was spent on Prevention Costs and 3.31 per cent was spent on appraisal. This meant almost 10 per cent of sales was cost of internal and external failure.
Cost of Quality varied from 3 per cent to 33 per cent of sales among participant factories. This means, many factories lost huge amounts while there were factories that managed Cost of Quality better and lost very little money. This gave them the competitive edge.
� The results also demonstrate that if CoQ of the average apparel manufacturer covered by the study goes down from average level to about 6 per cent of sales, the firm could improve its profitability by almost 50 per cent.
� This also meant an additional profit of $1.6 million for a firm that had sales turnover of $20 million in 2005.
My own consulting experience has demonstrated that management of cost of quality through strengthening quality systems and institutionalising problem-solving techniques provides substantial financial savings while improving organisation wide quality performance.
In the past five years, RBC has supported over 150 apparel manufacturers in Asia, mainly in India, Bangladesh and Central Asia, for strengthening quality systems. Average results from India and Bangladesh involving over 100 factories show that the factories achieved about 25 per cent reduction in rejection level and improved their Cut to Ship Ratio by over 1 per cent. Average reduction in defect rates on sewing floors has been 20-40 per cent.
Some key initiatives that have helped strengthening of the quality system and reducing cost of quality are:
� Zero Defect Operators
� Improved defect recording and daily management
� Quality Management Information System
� Problem solving skills through 5 Why Analysis
� Internal customer orientation
Improvements achieved by factories are not the end of the journey but just the start. Should factories continue their march towards manufacturing excellence, the journey will yield rewards like improved customer satisfaction, higher employee morale and financial returns.
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