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Back to Basics: Using Cost of Quality to Manage and Improve

Supply Chain Performance Lynn A. Fish, Ph.D, Girish Shambu, Ph.D

In this diffi cult recessionary time, supply chain management needs valid and useful performance measures. Cost of Quality (COQ) is a quality model that has been used for decades to improve organizational performance. We extend this model to supply chain business processes. Our model views the supply chain as a system with the raw material providers through retailers as internal and the fi nal customer as external to the supply chain. The model further divides potential improvement areas by product, fi nancial, logistics, and information fl ows. The key business processes that are mapped include product development, merchandise, promotion, and replenishment. Improvements in both cost and quality can be attained through the model.

INTRODUCTION

Today, organizations compete as supply chains focused on delivering value-added, quality products in a cost-effective and timely manner. Managers need global performance measures to monitor and improve business processes in order to compete, and as expected, supply chain costs are the most critical element in overall control. Cost of Quality (COQ) measurement as a method to improve businesses processes and reduce costs while improving customer service is not a new concept; however, its extension to supply chains has been limited. A recent Aberdeen Group survey found that only 50% of senior executives are planning to address COQ in their purchasing and manufacturing operations, and across their

Lynn A. Fish, Ph.D, Girish Shambu, Ph.D, Department of Management/Marketing, Canisius College, Buffalo, NY 14208, (716) 888-2642, (716) 888-2796, fi [email protected], shambu@ canisius.edu, May 27, 2011

88 THE BRC ACADEMY JOURNAL OF BUSINESS

supply chains [Stundza, 2009]. We propose a potential performance measurement system—quality costs tracked through supply chain processes—as a framework to manage and improve the supply chain.

Although many supply chains are signifi cantly more complex, we adopt a simple supply chain involving raw material providers, a single manufacturer, distribution centers, retailers, and fi nal customers as shown in Figure 1. This model falls under the ‘kingdom’ network struc-ture where the manufacturer is the core member, gathers information, and makes decisions for the supply chain [Cooper and Slagmulder, 1999]. Other more complex network forms will not be considered.

Quality is the ability of a product or service to consistently meet customer expectations and implies a defect-free product or service [ American Society for Quality, 2001]. As seen in Table 1, the four major COQ categories are prevention, appraisal, internal failure, and external failure [British Standards Institute, 1990]. Appraisal costs are associ-ated with efforts to ensure conformance to requirements. Prevention costs are investments made to keep defects from occurring in the fi rst place. Internal failure costs occur when a non-conforming product is found prior to shipment to the customer. External failure costs, which include reputation and contractual cost from selling a defective product,

Raw Materials Distribution Retailer Provider Center

Raw Materials Manufacturer Retailer Provider

Raw Materials Distribution Retailer Provider Center

Supply Chain

FIGURE 1. Simple Supply Chain Model.

89Back to Basics: Using Cost of Quality to Manage

Failu

re C

osts

In

tern

alEx

tern

alA

ppra

isal

Cos

tsPr

even

tion

Cos

ts

Scra

p, re

wor

k an

d re

- in

spec

tion

to p

rope

rly

scra

p or

repa

ir th

e un

it in

clud

ing

labo

r and

equ

ip-

men

t to

perfo

rm th

ese

activ

ities

.C

orre

ctiv

e ac

tions

incl

udin

g th

e la

bor a

nd e

quip

men

t co

sts

to p

rope

rly tr

ack

the

caus

e of

failu

re a

nd c

or-

rect

the

prob

lem

.D

owng

radi

ng in

clud

ing

the

lost

reve

nue

in s

ellin

g a

non-

conf

orm

ing

prod

uct

at a

low

er p

rice.

Proc

ess

failu

res

are

the

unpl

anne

d do

wnt

ime

and

unpl

anne

d eq

uipm

ent

repa

ir du

e to

failu

res

in

the

proc

ess.

Trou

ble-

shoo

ting,

re

- insp

ectio

n an

d re

pair.

Cus

tom

er c

ompl

aint

s an

d re

turn

s in

clud

ing

the

labo

r and

equ

ipm

ent t

o re

wor

k re

turn

ed it

ems,

ca

ncel

ord

ers,

reca

ll an

d fre

ight

pre

miu

ms.

Prod

uct r

ecal

l and

war

-ra

nty

clai

ms

incl

udin

g th

e di

rect

and

indi

rect

la

bor f

or re

pairs

or

repl

acem

ents

.Pr

oduc

t lia

bilit

y in

clud

ing

the

lega

l cos

ts in

curre

d du

e to

any

lega

l ac

tions

or s

ettle

men

ts.

Lost

reve

nue

from

cu

stom

er “b

ad w

ill”

(opp

ortu

nity

cos

t).

Exte

rnal

repu

tatio

n.

Test

and

insp

ectio

n in

clud

ing

the

equi

pmen

t and

labo

r ass

ocia

ted

with

pr

oper

ly te

stin

g in

com

ing

mat

eria

ls,

wor

k-in

-pro

cess

, and

fi ni

shed

goo

ds.

Inst

rum

ent m

aint

enan

ce in

clud

ing

pers

onne

l and

equ

ipm

ent c

osts

.Pr

oces

s m

easu

rem

ent a

nd c

ontro

l cos

ts

are

incu

rred

to g

athe

r and

ana

lyze

qu

ality

dat

a du

ring

prod

uct m

anuf

actu

re.

They

incl

ude

the

labo

r to

perfo

rm

thes

e m

easu

rem

ents

incl

udin

g qu

ality

en

gine

erin

g an

d pl

anni

ng.

Des

ign

and

deve

lopm

ent o

f qua

lity

equi

pmen

t and

pro

duct

eva

luat

ion.

C

ost a

ccou

ntin

g fo

r pro

duct

ion

varia

nces

.An

alys

is a

nd re

porti

ng o

f tes

t res

ults

. Ap

prov

als

and

endo

rsem

ents

.Fi

eld

perfo

rman

ce te

stin

g an

d ev

alua

tion

of

fi eld

sto

ck.

Qua

lity

plan

ning

cos

ts

incl

udin

g th

e pe

rson

nel

to p

lan,

pro

blem

-sol

ve,

deve

lop

new

pro

ce-

dure

s an

d ne

w e

quip

-m

ent,

qual

ity a

udits

, an

d re

liabi

lity

stud

ies.

Proc

ess

cont

rol c

osts

in

clud

ing

prod

uctio

n pr

oces

s an

alys

is a

nd

impl

emen

ting

proc

ess

cont

rol p

lans

.In

form

atio

n sy

stem

cos

ts

incl

udin

g da

ta d

evel

op-

men

t req

uire

men

ts a

nd

mea

sure

men

ts.

Trai

ning

and

gen

eral

m

anag

emen

t inc

ludi

ng

train

ing

cost

s, c

leric

al

staf

f exp

ense

s an

d m

isce

llane

ous

supp

lies.

TAB

LE 1

. Cate

goriz

ation

of C

ost o

f Qua

lity [B

ritish

Stan

dard

s Ins

titute,

1990

].


are the most diffi cult to precisely measure. Not all COQ neatly fi t into these categories; however, as long as a company uses a consistent set of costs to monitor quality, COQ trends over time can provide powerful insight into cost management and reduction. A quality expert, Joseph Juran (1992) believes that COQ ‘speaks the language of money’ that upper managers can understand, calls management attention to prob-lems, selects opportunities for corrective action, guides long-term com-pany activities, and tracks quality improvements. Current organizational methods for collecting and establishing an organizational COQ system exist and include, but are not limited to, the British Standards Institute Prevention-Appraisal-Failure checklist method (BS6143: Part 2) [Brit-ish Standards Institute, 1990], and the British Standards Institute Process Cost Modeling Approach (BS6143: Part 1) [British Standards Institute, 1992]. We extend these models to supply chain management.

Supply chain competition needs better performance measurement systems that take a holistic approach as activities align across the supply chain. Criteria must shift away from effi ciency measures and purchase-price variances toward effectiveness measures that consider not just cost, but also delivery, quality, fl exibility, and service. Supply chain manage-ment needs globally-defi ned performance measures for supply chain throughput, total inventory, on-time delivery, customer-to-customer cycle time, and total supply chain costs. Various supply chain specifi c performance measurement systems exist including the Grocery Indus-try Key Performance Indicators-Effi cient Consumer Response model, Council of Logistics Management Survey Key Performance Indicators, and Transportation and Logistics Key Performance Indicators.

Another popular performance measurement model, SCOR is a hier-archical model that analyzes the supply chain in terms of plan, source, make, deliver, and return. SCOR focuses on overall delivery perfor-mance, reliability, fl exibility and responsiveness, costs and assets. SCOR defi nes total supply chain cost as the fi xed and operational costs associ-ated with each of the supply chain processes within the supply chain. Cost metrics attempt to segment the cost centers into process-based activity tied to benchmarked measurements. Our framework offers a potential


measurement system that can be used for all products, product lines and across companies, and ties the system into a common monetary basis with a focus on the fi nal customer.

Purchasing and logistics managers are also interested in improving their performance measurement systems. In a Purchasing Magazine survey, purchasing executives indicate dissatisfaction with current per-formance measures and that current metrics fail to measure and iden-tify actions to improve performance [Morgan, 2000]. Similarly, in a Council of Logistics Management survey, information availability and quality are secondary when compared to cost information [Fawcett and Cooper, 1998]. Purchasing and logistics managers expressed the need for internally and externally-based assessments focused on value-added operations. A system that is primarily numbers-based, has one common measurement unit, is standardized, and incorporates multiple supplier performance to specify quality, on-time performance, and cost competi-tiveness is desired.

Traditional cost accounting systems provide COQ data for direct labor, overhead, scrap, warranty expenses, product liability costs, maintenance, repair, and calibration of test equipment. However, COQ information, such as service effort, product design, rework, engineer-ing change losses, customer dissatisfaction, and future lost revenues, go un-reported [Evans and Lindsay, 1999]. Management needs a business planning approach designed to meet cost and quality targets simultane-ously while being tied to all cost control activities [Carr and Ng, 1995].

Several cost management systems, such as value-chain analysis (VCA), total cost of ownership (TCO), inter-organizational costing, and total supply chain costs, manage internal supply chain costs. These sys-tems are based upon Activity-Based Costing (ABC) analysis and Process Value Analysis, which both seek to identify value-added and non-value-added activities, resource consumption within a process, and underlying cost drivers. VCA, a widely used analytical tool for strategic manage-ment accounting, assists in coordinating supply chain inter-dependence and managing cooperative inter-fi rm relationships within a supply chain. The TCO approach, focused on value-based supply chain processes,


includes costs for supplier selection, qualifi cation and certifi cation, order placement and follow-up, payment terms, inventory holding costs, and delivery expedition. In a global supply chain, TCO is comprised of two major elements: ownership cost, which includes purchase, hold-ing, and quality, and landed costs, which include transportation costs, tariffs, insurance, and import fees. TCO may actually increase due to poor quality. TCO and inter-organizational cost management need to be expanded to include all supply chain cost in a global environment. Total supply chain cost is equal to the sum of the purchase price, supplier performance cost, acquisition costs, out-of-synchronization planning, speculation costs, upside fl exibility costs, manufacturing costs, sales, general and administrative expenses, and distribution costs [Handfi eld and Nichols, 1999].

Inter-organizational cost management, target costing and target-chained costing during product design, kaizen costing during manu-facture, and improving the buyer-suppler interface, are very effective techniques in Japan [Cooper and Slagmulder, 1999]. Target costing and target-chained costing determine the product proposed production costs that will generate the desired profi tability at its anticipated sell-ing price. Kaizen costing applies continuous improvement techniques to reduce existing costs by a pre-specifi ed amount through increasing pro-duction process effi ciency. Reducing transaction costs and uncertainty costs associated with uncertainty in demand and time, results in reduced buyer-supplier interface costs.

Since the focus of the supply chain should be the fi nal customer satis-faction, our model is predicated upon the business processes outlined in the Effi cient Consumer Response (ECR) model as it monitors the critical interaction between the entire supply chain and the fi nal customer with a focus on satisfying the fi nal customer. In the ECR model, the grocery industry evaluates four critical business processes: product introduction, merchandising products, product promotion, and product replenishment [Lummus, Vokurka and Alber, 1998]. Product introduction includes basic research and new product development. Managing product categories, managing store operations, and serving consumers are critical processes


within merchandising products. Product promotion involves consumer advertising, store advertising, consumer promotions, in-store promotions, and customer deals. The sub-processes for replenishment include manag-ing store and customer orders, procuring and producing materials, prod-uct storage, staging, and delivery, and managing invoices.

Supply chain cost management strategies should be based upon busi-ness process improvements. Relevant to our model, product development and procurement cost strategies are typically documented; however, sup-ply chain merchandising and promotional costs are rarely considered. Traditional COQ systems do not consider COQ during product devel-opment stages and focus instead on manufacturing conformance activi-ties; however, once designed, 80% of the product costs are determined [Cooper and Slagmulder, 1999]. Therefore, management should redirect attention to design, R&D, and product planning. Due to signifi cant trans-portation costs, supplier-buyer relationships may have a greater effect on total cost than the manufacturing process. Purchasing agents need to look at more than just transaction costs to assess the different internal and external cost structures and infrastructure required.

MAPPING COQ AND BUSINESS PROCESS

As the need to integrate business processes increases, a model based upon COQ and critical supply chain business processes offers a potential methodology to monitor supply chain performance. Supply chain qual-ity can be defi ned as the ability of a supply chain to consistently meet or exceed fi nal customer expectations for products and service support in a timely manner. COQ offers a potential method to link quality, delivery, cost and service into a common performance measure, provides a basis for supply chain quality improvements, and provides a cost measure for a “perfect order” delivery to the fi nal customer. Every supply chain activity should add value from the perspective of the fi nal customer.

In developing the model, we envisioned the COQ associated with crit-ical supply chain business processes. As shown in Figure 1, we defi ned the internal supply chain as the processes just prior to fi nal distribution


and the external chain as the interaction between the fi nal distribution point and the fi nal customer. We defi ne internal failure costs as quality costs up to fi nal customer delivery, and external failure costs as quality costs incurred in the interaction with the fi nal customer. Prevention and appraisal costs occur within the supply chain. The key supply chain pro-cesses are similar to the ECR model—introduction, merchandise, pro-motion, and replenishment. We propose using this model in a “kingdom” supply chain, where the manufacturing fi rm gathers COQ information and makes informed decisions for the benefi t of the entire supply chain. Since it is not only the inventory fl ow that is relevant to quality and costs, we further sub-divided the model into product, logistics, informa-tion, and fi nance categories.

Our model, shown in Table 2, outlines a COQ framework for supply chain processes. Table 2 represents cost examples to consider and not a comprehensive, complete measurement of each cost category. In our model, product introduction COQ focuses on prototype development and information transfer between supply chain members. Test results on prototypes, marketing information accuracy, and design and develop-ment procedures are part of this process. For example, prevention costs to design the product correctly the fi rst time would be incurred to design and develop the product across company lines. Merchandising focuses on timely delivery of a quality product on demand and incurs costs between the fi nal supply chain member and the fi nal customer. Through our model, service quality efforts can be quantifi ed, including additional quality training costs for sales personnel or planning customer service procedures. As an example, merchandising appraisal costs includes inaccurate information being gathered and transmitted to other supply chain members. Promotions, which can upset demand-capacity bal-ance, are necessary to meet forecasted demand levels; but if inaccurate, promotion can lead to the bullwhip effect and upset this balance. Addi-tional manufacturing, markdown, scrapping, obsolescence, storage, and transportation costs for unwanted units may result. Promotional COQ are generated due to the inaccuracies in forecasting, product marketing, and promotion information transfer process. Additional logistics costs to

95Back to Basics: Using Cost of Quality to ManageIN

TRO

DU

CE

PRO

DU

CTS

(Pro

duce

Dev

elop

men

t; C

ondu

ct b

asic

rese

arch

and

dev

elop

new

pro

duct

s)

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Pro

duct

• A

dditi

onal

han

dlin

g,

setu

p, o

verti

me,

etc

. du

e to

eng

inee

ring

chan

ges

with

in s

uppl

y ch

ain.

• A

dditi

onal

han

dlin

g,

setu

p, o

verti

me,

etc

. du

e to

ext

erna

l eng

i-ne

erin

g ch

ange

s.•

Pro

duct

reca

lls d

ue to

im

prop

er d

esig

n.•

Pro

duct

liab

ility

co

sts

due

to d

esig

n im

perfe

ctio

ns.

• W

arra

nty

adju

stm

ents

du

e to

pro

duct

des

ign.

• Te

stin

g an

d in

spec

-tio

n of

pro

toty

pes

and

equi

pmen

t. •

App

rais

al o

f des

ign

and

deve

lopm

ent

proc

edur

es.

• Va

lidat

ing

outp

uts

agai

nst d

esig

n in

puts

.

• R

&D

cos

ts fo

r qua

lity

equi

pmen

t and

pr

oduc

ts.

• R

&D

pro

cedu

res

at

orga

niza

tiona

l and

te

chni

cal i

nter

face

s.•

Dev

elop

des

ign

verifi

-ca

tion,

val

idat

ion

and

revi

ew p

roce

dure

s.•

Qua

lity

train

ing

of R

&D

pe

rson

nel.

Info

rmat

ion

• In

accu

rate

mar

ketin

g da

ta.

• In

accu

rate

eng

inee

ring

info

rmat

ion.

• R

&D

failu

re to

inte

r-pr

et c

usto

mer

nee

ds

corr

ectly

.

Dat

a va

lidity

and

acc

urac

y of

test

s.D

evel

op R

&D

pro

cedu

res.

Logi

stic

s•

Pro

toty

pe d

eliv

ery

inac

cura

te.

• In

abili

ty to

pro

vide

pr

oper

pac

kagi

ng

mat

eria

ls fo

r pro

toty

pes.

Failu

re to

ent

er m

arke

t on

sche

dule

due

to lo

gis-

tics

erro

rs in

del

iver

y.

Inac

cura

te m

ovem

ent

of p

roto

type

bet

wee

n su

pply

cha

in m

embe

rs

lead

ing

to p

rodu

ct

defe

cts.

Dev

elop

new

logi

stic

s pr

oced

ures

.

Fina

ncia

lIn

accu

rate

fi na

ncia

l tra

ns-

actio

ns o

n pr

otot

ype

and

cost

ing.

TAB

LE 2

. Cos

t of Q

uality

Mea

sure

s for

Key

Sup

ply C

hain

Proc

esse

s.

(conti

nued

on ne

xt pa

ge)

96 THE BRC ACADEMY JOURNAL OF BUSINESSM

ERC

HA

ND

ISE

(Man

age

prod

uct c

ateg

orie

s, s

tore

ope

ratio

ns, a

nd s

erve

cus

tom

ers)

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Pro

duct

• In

tern

al c

ompl

aint

s.•

Pro

duct

retu

rns

with

in

chai

n.•

Dis

posa

l of e

xces

s in

vent

ory.

• C

usto

mer

com

plai

nts.

• P

rodu

ct re

turn

s.•

Sto

re a

nd g

athe

r inf

or-

mat

ion

on re

turn

ed

good

s.

Aud

it st

ore

oper

atio

ns

for c

usto

mer

ser

vice

in

clud

ing

labo

r and

eq

uipm

ent.

• Tr

aini

ng fo

r in-

stor

e pe

rson

nel.

• D

evel

op q

ualit

y pr

oced

ures

with

focu

s on

fi na

l cus

tom

er.

Info

rmat

ion

Dat

a in

accu

raci

es w

ithin

ch

ain

rega

rdin

g qu

ality

an

d qu

antit

y of

goo

ds

dist

ribut

ed to

and

re

turn

ed fr

om s

tore

s.

Dat

a in

accu

raci

es to

and

at

sto

re le

vel.

Inac

cura

te in

form

atio

n ga

ther

ed a

nd tr

ansm

it-te

d on

inte

rnal

aud

it.

Dev

elop

sys

tem

to a

ccu-

rate

ly tr

ack

cust

omer

ne

eds

and

retu

rns.

Logi

stic

sIn

abili

ty to

ser

vice

dem

and

and

retu

rns

chai

n in

a

timel

y m

anne

r.

Inab

ility

to s

ervi

ce s

tore

sh

elve

s in

tim

ely

man

ner.

Aud

it de

liver

y sy

stem

at

stor

e.D

evel

op p

roce

dure

s fo

r tim

ely

deliv

ery.

Fina

ncia

lIn

accu

rate

pric

ing

on

prod

uct i

nter

chan

ge

with

in th

e sy

stem

.

Inac

cura

te s

tore

pric

ing

at

fi nal

cus

tom

er in

terfa

ce.

PRO

MO

TE (M

anag

e co

nsum

er a

dver

tisin

g, s

tore

adv

ertis

ing,

in-s

tore

pro

mot

ions

and

cus

tom

er d

eals

)

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Pro

duct

• D

isru

ptio

ns in

op

erat

iona

l sch

edul

es

such

as

incr

ease

d ov

ertim

e, in

vent

ory,

nu

mbe

r of

• Lo

ss o

f goo

dwill

due

to

ove

r-pr

omot

ion

of

prod

uct a

nd in

abili

ty

to m

eet d

eman

d.

• A

dditi

onal

uni

t tes

ting

and

insp

ectio

n in

clud

ing

labo

r and

equ

ipm

ent.

• Q

ualit

y pl

anni

ng a

nd

proc

ess

cont

rols

to

hand

le a

dditi

onal

p r

omot

iona

l uni

ts.

TAB

LE 2

. (co

ntinu

ed )


setu

ps, a

nd a

dditi

onal

m

ater

ial h

andl

ing

for

prom

otio

nal u

nits

.•

Obs

oles

cenc

e, s

crap

, an

d m

ark-

dow

ns o

f ov

erag

e.

• In

crea

sed

cust

omer

se

rvic

e an

d la

bor f

or

prod

uct r

ecal

l.•

Prod

uct l

iabi

lity

due

to

impr

oper

adv

ertis

ing.

• Ad

ditio

nal u

nit p

roce

ss

mea

sure

men

t and

co

ntro

l cos

ts.

Info

rmat

ion

• In

cons

iste

ncie

s in

fo

reca

sted

dat

a w

ithin

th

e su

pply

cha

in.

• Ad

ditio

nal l

abor

and

eq

uipm

ent t

o tra

ck

prom

otio

nal u

nits

with

in

syst

em.

• In

accu

rate

dat

a tra

nsac

-tio

ns w

ithin

sup

ply

chai

n of

pro

mot

iona

l mat

eria

ls.

• Fo

reca

st in

accu

raci

es

of fo

reca

st to

pre

dict

fi n

al c

usto

mer

dem

and.

• Ad

ditio

nal l

abor

and

eq

uipm

ent t

o tra

ck

prom

otio

nal a

nd

retu

rned

uni

ts.

• In

accu

rate

pro

mot

iona

l m

ater

ials

.

Ensu

re d

ata

accu

racy

of

prom

otio

nal m

ater

ials

.•

Proc

edur

es to

ad

equa

tely

fore

cast

an

d de

velo

p pr

oduc

tion

plan

s fo

r pro

mot

iona

l ac

tiviti

es.

• Q

ualit

y pl

anni

ng a

nd

info

rmat

ion

proc

ess

cont

rols

.

Logi

stic

s•

Addi

tiona

l pro

mot

iona

l un

its w

ithin

sup

ply

chai

n in

clud

ing

addi

tiona

l pa

ckag

ing,

exp

editi

ng,

prem

ium

frei

ght,

war

ehou

sing

, con

-ta

iner

izat

ion,

labe

ling,

an

d ho

ldin

g.•

Pre

miu

ms

due

to s

hort-

age

with

in s

yste

m a

s at

tem

pts

are

mad

e to

di

strib

ute

units

with

in

syst

em.

• Ad

ditio

nal p

rom

otio

nal

units

to fi

nal c

usto

mer

.•

Shor

tage

cos

t at fi

nal

cu

stom

er—

prem

ium

s of

fere

d, a

nd/o

r red

uc-

tions

offe

red.

Audi

t pro

per m

ovem

ent o

f m

ater

ials

with

in s

uppl

y ch

ain.

Qua

lity

plan

ning

and

fi na

n-ci

al p

roce

ss c

ontro

ls to

ha

ndle

add

ition

al m

ove-

men

t of p

rom

otio

nal

units

. (conti

nued

on ne

xt pa

ge)

98 THE BRC ACADEMY JOURNAL OF BUSINESSPR

OM

OTE

(Man

age

cons

umer

adv

ertis

ing,

sto

re a

dver

tisin

g, in

-sto

re p

rom

otio

ns a

nd c

usto

mer

dea

ls)

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Fina

ncia

l•

Cha

nges

in o

pera

tions

du

e to

pre

miu

m c

harg

es

to m

eet a

dditi

onal

de

man

ds.

• D

istri

bute

pro

mot

iona

l m

ater

ials

with

in s

uppl

y ch

ain.

Scr

ap o

r sho

rtage

, and

pr

ofi t

loss

of o

vera

ge

due

to fo

reca

stin

g in

accu

raci

es.

Ens

ure fi n

anci

al d

ata

accu

racy

of p

rom

otio

nal

mat

eria

ls.

Qua

lity

plan

ning

and

fi n

anci

al p

roce

ss

cont

rols

to h

andl

e ad

ditio

nal t

rans

ac-

tions

due

to a

dditi

onal

pr

omot

iona

l uni

ts.

REP

LEN

ISH

(Man

age

stor

e &

cus

tom

er o

rder

s)In

tern

al F

ailu

reEx

tern

al F

ailu

reA

ppra

isal

Prev

entio

nP

rodu

ctC

usto

mer

ser

vice

bet

wee

n bu

yers

and

sup

plie

rs

with

in th

e su

pply

cha

in.

• S

crap

and

rew

ork

due

to im

prop

er o

rder

ing.

• Lo

ss o

f cus

tom

er g

ood

will

due

to p

rodu

ct

shor

tage

.

• R

ecei

ving

insp

ectio

n at

st

ore.

• Q

ualit

y au

dit a

t sto

re.

• P

roce

ss m

easu

rem

ent

and

cont

rols

at s

tore

.

Focu

s on

pre

vent

ion

of

impr

oper

ord

erin

g of

pr

oduc

t qua

ntity

, inf

or-

mat

ion

accu

racy

, and

tim

ely

deliv

ery

to fi

nal

mem

ber i

n su

pply

cha

in

thro

ugh:

Qua

lity

plan

ning

;Q

ualit

y im

prov

emen

t pr

ojec

ts;

Qua

lity

data

gat

herin

g,

anal

ysis

, and

repo

rting

;S

tatis

tical

pro

cess

co

ntro

l;P

roce

ss c

ontro

l act

iviti

es.

TAB

LE 2

. (co

ntinu

ed )

99Back to Basics: Using Cost of Quality to ManageIn

form

atio

nP

oor d

ata

with

in s

yste

m.

• In

accu

raci

es in

sto

re

orde

rs d

ue to

inac

cura

te

data

on

retu

rns.

• In

accu

rate

ly p

redi

ctin

g or

sto

ckin

g or

ders

.

Qua

lity

audi

t for

dat

a ac

cura

cy.

Logi

stic

sIn

corr

ectly

fulfi

lling

ord

ers

with

in s

uppl

y ch

ain.

Del

iver

y er

rors

to s

tore

sh

elve

s.Q

ualit

y au

dit o

f del

iver

y sy

stem

.

Fina

ncia

lLo

st re

venu

e fro

m lo

ss o

f cu

stom

er g

oodw

ill.

Proc

ure

Mat

eria

ls

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Pro

duct

• S

crap

, rew

ork,

re-

insp

ectio

n, b

oth

forw

ard

and

reve

rse

mov

emen

t.•

Cor

rect

ive

actio

ns to

de

term

ine

caus

e of

raw

m

ater

ial f

ailu

re.

• D

ownt

ime

to re

pair

or s

end

units

bac

k to

su

pplie

r.•

Failu

re to

pur

chas

e re

quire

d qu

antit

ies

or

qual

ity o

f mat

eria

ls.

• P

roce

ss fa

ilure

s.•

Ret

urns

and

war

rant

y cl

aim

s.

• Lo

ss o

f goo

dwill

due

to

defe

ctiv

e m

ater

ials

at

fi nal

cus

tom

er.

• P

rodu

ct li

abili

ty, c

om-

plai

nts,

war

rant

y co

sts

at fi

nal c

usto

mer

site

, bu

t dire

cted

at p

artic

ular

ra

w m

ater

ial.

Sup

plie

r Cer

tifi c

atio

n P

rogr

ams.

Sup

plie

r sel

ectio

n w

ithin

th

e su

pply

cha

in.

• M

aint

enan

ce o

f tes

ting

equi

pmen

t.•

Qua

lity

audi

ts.

• C

alib

ratio

n of

qua

lity

equi

pmen

t.•

In-p

roce

ss in

spec

tion

of

inco

min

g m

ater

ials

.•

Lab

test

ing

(inte

rnal

and

ex

tern

al).

• Q

ualit

y pl

anni

ng a

nd

cont

rols

to e

nsur

e in

tern

al p

rodu

ct q

ualit

y.•

Sta

tistic

al p

roce

ss

cont

rols

.•

Qua

lity

impr

ovem

ent

proc

esse

s.

(conti

nued

on ne

xt pa

ge)

100 THE BRC ACADEMY JOURNAL OF BUSINESSPr

ocur

e M

ater

ials

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

• W

areh

ouse

/inve

ntor

y re

duct

ion

cost

s du

e to

re

turn

s.•

Pro

duct

liab

ility

, com

-pl

aint

s, w

arra

nty

cost

s w

ithin

the

chai

n.In

form

atio

n•

Inve

ntor

y tra

ckin

g sy

stem

failu

res

and

inac

cura

cies

.•

Per

sonn

el a

nd e

quip

-m

ent c

osts

incu

rred

due

to

inco

rrec

t cha

rges

.

• In

accu

raci

es o

f raw

m

ater

ial d

ata.

Rel

iabi

lity

test

ing.

Qua

lity

data

gat

herin

g,

anal

ysis

, and

repo

rting

.

Logi

stic

s•

Del

iver

y fa

ilure

cos

ts

with

in s

uppl

y ch

ain:

ex

pedi

ting,

pre

miu

m

trans

porta

tion,

dow

n-tim

e, h

oldi

ng a

nd

adm

inis

tratio

n du

e to

ea

rly o

r lat

e de

liver

ies.

• In

tern

al c

osts

for

repa

ir, a

nd o

pera

tiona

l e-

proc

urem

ent o

f raw

m

ater

ials

.•

Logi

stic

s er

rors

incl

ud-

ing

late

del

iver

ies,

pr

emiu

m fr

eigh

t, an

d da

mag

e in

tran

sit.

• A

dditi

onal

cos

ts

incu

rred

if p

artn

er lo

gis-

tics

supp

lier m

ust s

eek

addi

tiona

l sup

port

to

deliv

er c

ompo

nent

s.•

Com

pone

nt d

amag

e th

at o

ccur

s in

tran

sit t

o fi n

al c

usto

mer

or r

etur

n to

cha

in.

• In

tern

al c

osts

for

e-pr

ocur

emen

t of r

aw

mat

eria

ls.

• A

udit

deliv

ery

syst

em.

Qua

lity

plan

ning

and

pro

-ce

ss c

ontro

ls to

ens

ure

prop

er d

eliv

ery.

TAB

LE 2

. (co

ntinu

ed )

101Back to Basics: Using Cost of Quality to Manage•

Impr

oper

ly la

belin

g or

pa

ckag

ing

mat

eria

ls

with

in th

e su

pply

cha

in.

• A

dditi

onal

repa

ckag

-in

g du

e to

def

ectiv

e m

ater

ials

.

Fina

ncia

lTr

ansa

ctio

n in

accu

raci

es

and

lack

of t

imel

ines

s.P

rofi t

loss

due

to

defe

ctiv

es.

Aud

it pr

oced

ures

to

ensu

re d

ata

inte

grity

fo

r com

pone

nt c

ostin

g.

Qua

lity

plan

ning

and

pr

oces

s co

ntro

ls

to e

nsur

e ac

cura

te

fi nan

cial

tran

sact

ions

.

Prod

uce

Mat

eria

ls

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Pro

duct

Cor

rect

ive

actio

ns o

n pr

oduc

t def

ects

with

in

supp

ly c

hain

.•

Scr

ap, r

ewor

k,

re- in

spec

tion

of re

wor

k w

ithin

the

supp

ly c

hain

bo

th fo

rwar

d an

d re

vers

e m

ovem

ent.

• D

ownt

ime

with

in

supp

ly c

hain

, ad

ditio

nal p

roce

ssin

g tim

e.•

Ove

rtim

e an

d ad

ditio

nal

proc

essi

ng.

• R

etur

ned

and

repa

ired

good

s.•

Pro

duct

liab

ility

.•

War

rant

y.•

Dis

asse

mbl

y,

scra

p, re

wor

k an

d re

-insp

ectio

n.•

Re-

rece

ivin

g an

d re

- pac

kagi

ng o

f de

fect

ive

unit.

• Te

stin

g an

d in

spec

tion

at fi

nal p

rodu

ctio

n si

te.

• In

stru

men

t m

aint

enan

ce.

• Q

ualit

y en

gine

erin

g an

d pl

anni

ng fo

r pro

cess

m

easu

rem

ent a

nd

cont

rol.

• Q

ualit

y pl

anni

ng a

nd

cont

rols

to e

nsur

e pr

od-

uct q

ualit

y at

pro

duct

ion

site

.•

Sta

tistic

al p

roce

ss c

on-

trols

on

com

plet

ed u

nit.

• Q

ualit

y im

prov

emen

t pr

oces

ses.

( conti

nued

on ne

xt pa

ge)

102 THE BRC ACADEMY JOURNAL OF BUSINESSPr

oduc

e M

ater

ials

In

tern

al F

ailu

reEx

tern

al F

ailu

reA

ppra

isal

Prev

entio

nIn

form

atio

n•

Inve

ntor

y tra

ckin

g sy

stem

s fa

ilure

s:

data

tran

sact

ions

in

accu

raci

es.

• E

-pro

cure

men

t—m

ain-

tena

nce,

repa

ir, a

nd

oper

atio

n ite

ms.

Inac

cura

te in

form

atio

n fo

rwar

ded

from

cus

-to

mer

to p

rodu

ctio

n re

sulti

ng in

too

man

y or

too

few

uni

ts.

• Te

sts

and

insp

ectio

n to

en

sure

dat

a re

liabi

lity.

• R

epai

r of t

est e

quip

-m

ent f

or d

ata

appr

aisa

l.•

Gat

herin

g da

ta re

liabi

lity

info

rmat

ion.

Qua

lity

data

gat

herin

g,

anal

ysis

, and

repo

rting

at

fi na

l pro

duct

ion

site

.

Logi

stic

s•

Del

ivery

of t

he p

rodu

ct b

ack

to o

rigin

ator

of d

efec

t.•

Re-

rece

ivin

g,

repa

ckag

ing

and

re-c

onta

iner

izat

ion.

• Lo

gist

ics

erro

rs re

sulti

ng

in la

te d

eliv

erie

s, p

re-

miu

m fr

eigh

t, an

d da

m-

age

in tr

ansi

t.

• A

dditi

onal

pre

miu

ms

to s

atis

fy in

accu

rate

ly

plan

ned

dem

and.

Logi

stic

s au

dits

.Q

ualit

y pl

anni

ng a

nd

proc

ess

cont

rols

.

Fina

ncia

lFi

nanc

ial t

rans

actio

ns

inac

cura

cies

.A

dditi

onal

uni

t pro

-ce

ssin

g du

e to

dat

a in

accu

raci

es.

Aud

it pr

oced

ures

to

ensu

re d

ata

inte

grity

for

prod

uctio

n.

Qua

lity

plan

ning

and

pro

-ce

ss c

ontro

ls to

ens

ure

fi nan

cial

tran

sact

ions

at

fi nal

pro

duct

ion

site

are

ac

cura

te a

nd re

liabl

e.St

ore

and

stag

e pr

oduc

tsIn

tern

al F

ailu

reEx

tern

al F

ailu

reA

ppra

isal

Prev

entio

nP

rodu

ct•

Obs

oles

cenc

e.•

Dam

age

due

to

impr

oper

han

dlin

g an

d st

ore

with

in w

areh

ouse

.

• D

isas

sem

bly

and

re-

asse

mbl

y of

def

ectiv

e un

it at

sta

ging

site

.

• Te

stin

g th

at o

ccur

s du

r-in

g st

agin

g.•

Aud

it pr

oced

ures

for

stag

ing.

Qua

lity

plan

ning

, pro

cess

co

ntro

l and

trai

ning

co

sts

for i

nter

nal s

tagi

ng

and

stor

age

oper

atio

ns.

TAB

LE 2

. (co

ntinu

ed )

103Back to Basics: Using Cost of Quality to Manage•

Re-

pack

agin

g of

uni

ts

at w

areh

ouse

due

to

inac

cura

te fo

reca

sts.

• W

areh

ouse

/inve

ntor

y re

duct

ion

cost

s du

e to

def

ectiv

e m

ater

ial

retu

rn.

• In

abilit

y to

pro

perly

as

sem

ble

unit

at s

tagi

ng

oper

atio

n w

ithin

war

e-ho

use

due

to im

prop

er

train

ing,

def

ectiv

e co

mpo

nent

s, o

r mis

sing

pa

rts, d

ocum

enta

tion

or

pack

agin

g.•

Add

ition

al s

tora

ge d

ue

to in

accu

raci

es in

fi na

l cu

stom

er o

rder

.

• A

udit

stor

age

proc

edur

es•

Test

ing

equi

pmen

t and

la

bor.

Info

rmat

ion

• In

vent

ory

forw

ard

and

reve

rse

track

ing

sys-

tem

s fa

ilure

s w

ithin

w

areh

ousi

ng

syst

ems.

• Im

prop

er d

ocum

en-

tatio

n fo

r sta

ging

, pa

ckag

ing

and

con-

tain

eriz

atio

n w

ithin

w

areh

ouse

.

Inac

cura

te d

ata

trans

mit-

ted

from

fi na

l cus

tom

er

to s

tagi

ng o

r war

ehou

se

site

.

• Au

dit d

ata

proc

edur

es to

en

sure

dat

a in

tegr

ity.

• Te

stin

g eq

uipm

ent a

nd

labo

r.

Qua

lity

plan

ning

and

pr

oces

s co

ntro

ls

deve

lope

d to

eva

luat

e da

ta in

tegr

ity.

(conti

nued

on ne

xt pa

ge)

104 THE BRC ACADEMY JOURNAL OF BUSINESSSt

ore

and

stag

e pr

oduc

tsIn

tern

al F

ailu

reEx

tern

al F

ailu

reA

ppra

isal

Prev

entio

nLo

gist

ics

Del

iver

y fa

ilure

cos

ts

from

/to s

tagi

ng a

nd

war

ehou

sing

pro

cess

es

with

in s

uppl

y ch

ain

incl

udin

g ex

pedi

ting,

pr

emiu

m tr

ansp

orta

tion,

do

wnt

ime

with

in s

tagi

ng

oper

atio

ns, h

oldi

ng a

nd

adm

inis

tratio

n du

e to

ea

rly a

nd la

te d

eliv

erie

s.

Del

iver

y fa

ilure

cos

ts

from

/to s

tagi

ng a

nd

war

ehou

sing

pro

cess

es

from

cus

tom

er b

ack

to

war

ehou

se in

clud

ing

expe

ditin

g, p

rem

ium

tra

nspo

rtatio

n, d

own-

time

with

in s

tagi

ng

oper

atio

ns, h

oldi

ng a

nd

adm

inis

tratio

n du

e to

ea

rly a

nd la

te d

eliv

erie

s.

• A

udit

logi

stic

s sy

stem

.•

Test

ing

equi

pmen

t and

la

bor.

Qua

lity

plan

ning

and

pro

-ce

ss c

ontro

ls d

evel

oped

to

acc

urat

ely

stag

e an

d w

areh

ouse

pro

duct

.

Fina

ncia

lQ

ualit

y pl

anni

ng a

nd p

ro-

cess

con

trols

dev

elop

ed

to a

ccur

atel

y re

cord

an

d tra

nsm

it up

-to-d

ate

fi nan

cial

info

rmat

ion.

Del

iver

pro

duct

sIn

tern

al F

ailu

reEx

tern

al F

ailu

reA

ppra

isal

Prev

entio

nIn

form

atio

nP

rodu

ct d

eliv

ery

sche

d-ul

es o

r qua

ntiti

es

inac

cura

cies

.

• In

accu

raci

es in

pro

d-uc

t del

iver

y sc

hedu

les

or q

uant

ities

to fi

nal

dest

inat

ion.

• A

udit

proc

edur

es to

en

sure

dat

a in

tegr

ity

with

logi

stic

s pr

ovid

ers

with

in c

hain

and

to fi

nal

dest

inat

ion.

• Te

stin

g.

Qua

lity

train

ing

for p

er-

sonn

el to

ens

ure

data

in

tegr

atio

n w

ith lo

gist

ics

info

rmat

ion.

Qua

lity

plan

ning

and

pro

-ce

ss c

ontro

ls to

ens

ure

data

inte

grat

ion.

TAB

LE 2

. (co

ntinu

ed )

105Back to Basics: Using Cost of Quality to ManageLo

gist

ics

• R

e-de

liver

y of

def

ec-

tive

mat

eria

ls to

orig

inal

ow

ner i

n su

pply

cha

in.

• P

rodu

ct lo

ss in

tran

sit

with

in s

uppl

y ch

ain.

Re-

deliv

ery

of d

efec

tive

mat

eria

ls fr

om c

usto

mer

ba

ck to

sup

ply

chai

n.P

rodu

ct lo

ss in

tran

sit f

rom

su

pply

cha

in to

fi na

l de

stin

atio

n.

Aud

it pr

oced

ures

.Q

ualit

y pl

anni

ng a

nd p

ro-

cess

con

trols

to e

nsur

e de

liver

y.

Man

age

invo

ices

Inte

rnal

Fai

lure

Exte

rnal

Fai

lure

App

rais

alPr

even

tion

Info

rmat

ion

• In

accu

raci

es in

dat

a.•

Per

sonn

el a

nd e

quip

-m

ent i

ncur

red

due

to

inco

rrec

tly c

harg

ing

for

non-

issu

ed u

nit,

too

man

y, o

r too

few

with

in

the

supp

ly c

hain

.

• Fa

ilure

to re

port

need

fo

r pro

duct

by

cust

omer

or

inac

cura

te re

port

from

cus

tom

er.

• Q

ualit

y au

dit o

f pro

ce-

dure

s to

ens

ure

trans

ac-

tions

bet

wee

n fi n

anci

al

info

rmat

ion

and

data

are

lin

ked

prop

erly.

• Te

stin

g.

Qua

lity

train

ing

for a

ll ac

coun

ting

and fi n

anci

al

pers

onne

l.•

Qua

lity

plan

ning

and

pr

oces

s co

ntro

ls to

en

sure

dat

a an

d fi n

an-

cial

inte

ract

ions

are

ac

cura

te a

nd re

liabl

e.

Fina

ncia

lFi

nanc

ial i

nfor

mat

ion

inac

cura

cies

.•

Pot

entia

l los

s of

goo

d w

ill d

ue to

inco

rrec

tly

char

ging

or o

verc

harg

-in

g a

cust

omer

.P

oten

tial l

oss

of re

venu

e du

e to

impr

oper

bill

ing

and

loss

of r

ecor

d.

• Q

ualit

y au

dit o

f pr

oced

ures

.Te

stin

g.

• Q

ualit

y pl

anni

ng a

nd

proc

ess

cont

rols

to

ensu

re fi

nanc

ial t

rans

-ac

tions

are

acc

urat

e an

d re

liabl

e.


move a good product to the fi nal customer to replace the defective one may be categorized as a promotional external failure cost. Replenishment includes product, data, and information fulfi llment in both the forward and reverse directions for normal forecasted fl ow, that is, non-promo-tional activities. For example, additional replenishment COQ includes the costs to scrap an incorrect product due to improper ordering.

With reference to Table 2, manage store orders, customer orders, and invoices are information processing responsibilities as they coordi-nate the fi nancial and product transactions. Material procurement and production, which are operational procedures, need to be coordinated with data and fi nancial transactions. Procure materials, the process to attain the various raw materials for the supply chain, are mainly inter-nal to the chain. For example, poor quality procurement within a supply chain includes the fl oor mat recall on Toyota vehicles. Product produc-tion produces the fi nished good within the supply chain, with a focus on assembly and disassembly procedures. Storage, staging, and deliv-ery are mainly logistics functions and need to be coordinated with data management.

DISCUSSION

COQ evolved as a critical organizational measure during the quality revolution of the 1980’s. Here, we propose a framework for potential quality cost mapping by supply chain business processes. The model differs from other current performance measurement models as it incor-porates a COQ business process perspective into the supply chain and includes logistics and marketing processes. Although efforts to imple-ment a COQ supply chain system will require time and fi nancial invest-ment, personnel are familiar with COQ, making it simpler and less expensive to employ such measures. Current company COQ systems can be extended to the supply chain. The entire supply chain can focus on process and continuous improvement through concentrating on remov-ing non-value added activities in the system.


There are several advantages to managers developing this model for their supply chains. To begin, the model standardizes the supply chain measurement system while simultaneously, and equally emphasizing, quality, delivery and cost measurement. A common unit of measure—money—is used to track and focus quality, delivery, and cost improve-ment efforts. Supply chain business strategies can be integrated through evaluating their business processes on a common, integrated measure instead of a wide variety of measures. Furthermore, instead of various Key Performance Indicators, COQ can be tracked through accounting systems. Product, logistics, information, and fi nancial quality are inte-grated into a single quality measure. The proposed mapping links quality and timeliness with the more commonly used cost measurements. COQ can be utilized as a benchmarking and improvement technique. Since it focuses on a common metric—money, it offers the additional benefi t of industry and product comparisons. A score card based on COQ can be used to evaluate supply chain quality effectiveness.

One of the biggest advantages in using this model is that it focuses the entire supply chain attention on the fi nal customer—not the internal ones. Marketing, operations, and fi nancial efforts are integrated. Often forgotten areas for quality and cost improvement, such as promotion, logistics, purchasing, and merchandising, are included. Similar to the TCO model and total supply chain costs model, total COQ is the focal point for performance and improvement efforts through reducing non-value added activities within business processes. Managers can utilize the COQ business process mapping to evaluate continuous improvement efforts and work toward total COQ reduction. A long-term measure, COQ should not be utilized to guide short-term managerial decision-making. However, tracking COQ trends can provide powerful insight into cost reduction, quality improvements, and improved service times. Over time, like an organization, a supply chain that focuses on COQ will learn to accurately categorize costs and reduce total COQ. Instead of redis-tributing COQ within the supply chain, the model mapping increases managerial understanding and focus efforts on total COQ reduction.


Managerial attention shifts from less effective external quality measures to total supply chain COQ.

Why should a manager focus on the processes of introduction, replen-ishment, merchandising and promotion? With respect to ‘introduction’ processes, roughly 80% of a product’s costs can be attributed to decisions made during design [Cooper and Slagmulder, 1999]. Evaluation of the ‘replenishment’ process assists managers to take a long-term perspective for accurately evaluating purchasing and logistics costs. ‘Merchandis-ing’ COQ specifi cally focuses on the critical juncture between the entire supply chain and fi nal customer. Merchandising, which includes scrap-ping or reworking defective purchased materials potentially caused by non-conforming suppliers, potentially adds 50% to the product’s non-conformance cost [Crosby, 1979]. The ‘promotion’ process addresses supply chain uncertainty. Through tracking these costs, managers can focus on reducing non-value added costs that are incurred throughout the entire supply chain.

The framework is an extension of organizational accounting pro-cedures, such as ABC, that evolved to capture value-added operations and reduce COQ. Several accounting systems effective in Japan are not easily transferred to the West [Cooper and Slagmulder, 1999]; however adaptation of this framework may assist in implementation of these sys-tems. Inter-organizational cost management, target costing, and chained target costing can be incorporated into the model in the product life cycle ‘introduction’ stage. Also, kaizen can be used in the model for ‘replen-ishment’. Hence, the accounting systems we discussed can be utilized in the model, but allow for one single supply chain performance measure-ment and fi t into current Western practices. Through information sys-tems, the COQ business process model can be implemented and create a viable, accurate, global performance management system.

As mentioned previously, not all supply chain COQ will fi t neatly into the proposed categories. However, as long as the supply chain uses a consistent set of costs to monitor quality, COQ trends over time can pro-vide powerful insight into cost management. Even if some supply chain costs are inaccurately mapped to a category, as long as the model is


consistent, it will be effective since it is the total COQ that is important. Preventing defective products from reaching the fi nal customer will result in signifi cant cost reductions for all supply chain members. Therefore, managers’ efforts should focus on eliminating or reducing the potential for a defective unit to reach the fi nal customer.

How does the model compare to other models, such as SCOR? SCOR, a successful, well-accepted supply chain management model, includes COQ as part of its measurement system. The critical difference is the model’s focus on the internal supply chain as essentially “one entity”. SCOR evaluates the linkages between each supply chain member in sim-ilar business processes. SCOR processes are similar to the model as plan, source, make and delivery focus on internal activities similar to intro-duction and replenishment, while return focuses on defective product.

What about other network structures? The “kingdom” network struc-ture provides a centralized location for COQ data gathering and decision-making, and provides a forum for COQ business process implementation. A genuine concern with the kingdom structure is that in spite of a cen-tralized data and decision-making location, fi rms are still autonomous entities keenly sensitive to their own self-interests. Information sharing is detrimental to this self-interest, thus inhibiting cooperation; however, this can be overcome. For example, VCA use by retailer J. Sainsbury provided a structured methodology for facilitating division of costs, ben-efi ts and investments from supply chain improvements and improving inter-fi rm relationships [Dekker, 2003]. However, before VCA can be implemented, it is necessary for fi rms to build a mutual level of trust so that exchange of information can easily take place. Formal control creation, including contractual and confi dentiality agreements, can help build goodwill and strengthen inter-fi rm relationships.

Although we cited a signifi cant number of advantages to our model, the model has a few disadvantages, including transcending different accounting systems, implementation, using the model in other network and global formats, alternative models, and a lack of a demonstrated case. The different accounting systems and monetary valuations across supply chains are major problems with implementing this model.


The model does not take different currencies and exchange rates in a global supply chain into account. Business process COQ mapping is diffi cult to implement for other network forms where a centralized information sharing location does not exist for data gathering and decision-making [Cooper and Slagmulder, 1999]. The model offers a proposed framework for business process COQ; however, exact catego-rization needs to be developed by the supply chain. Alternative, popular and accepted measurement systems, such as SCOR, would be diffi cult to circumvent with a different performance measurement system. Due to proprietary requirements, a major drawback of this model is the lack of a demonstrated real-world application. Recently, a nonlinear program-ming formulation incorporating COQ into supply chain design decisions [Ramudhin, Alzaman and Bulgak, 2008] highlighted the importance of including quality suppliers in the supply chain system. The COQ busi-ness process mapping is based upon theoretical and intuitive information. Actual test cases are lacking, potentially due to confi dentiality issues. However, this framework should encourage supply chain management discussions on COQ business processes mapping as a supply chain qual-ity improvement and cost reduction technique.


REFERENCES

British Standards Institute (1992). BS6143: Guide to Economics of Quality Part 1, British Standards Institute, London.

British Standards Institute (1990). Process Cost Model, Part 2, Prevention Appraisal and Failure Model, British Standards Institute, London.

Carr, L.P. and Ng, J. (1995). Total cost control: Nissan and its U.K. sup-plier partnerships. Management Accounting Research, 6, 347–365.

Cooper, R. and Slagmulder, R. (1999). Supply Chain Development for the Lean Enterprise, Productivity, Portland, Oregon.

Crosby, P. (1979). Quality is Free. New York: McGraw Hill.

Dekker, H.C. (2003). Value Chain Analysis In Inter-fi rm Relationships: A Field Study. Management Accounting Research, 14, 1–23.

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Fawcett, S. and Cooper, M.B. (1998). Logistics Performance Measurement and Customer Success. Industrial Marketing Management, vol 27, n 4.

Handfi eld, R. and Nichols, E. (1999). Introduction to Supply Chain Management. Prentice Hall, New Jersey.

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Lummus, R.R., Vokurka, R.J. and Alber, K.L. (1998). Strategic supply chain planning. Production and Inventory Management Journal. Falls Church; third quarter, pp. 1–14.

Morgan, J. (2000). How effective are your measurement systems? Pur-chasing; Boston; Dec. 8, 2000, 26–28.

Ramudhin, A., Alzaman, C. and Bulgak, A. (2008). Incorporating cost of quality into supply chain design. Journal of Quality in Maintenance Engineering, vol. 14, no 1. pp. 71–86.

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