In any conversation about quality management programs and practice, there almost always arises the question of 'quality costs'. It's apparently passé to avoid such a discussion, as every person is supposed to have an opinion, and to be associated in the gauging of these costs. However, what are these costs, how are they meaningful to the management of quality, and also, how are they added up?

In the UK there have been a number of attempts to establish a formula for such calculations, each iteration having something to offer, but to the uninitiated they all lack one real feature as a national Standard - a clear explanation of the what & why of such costs.

One such costs collection mechanism involves the separation of costs associated with Prevention (of defects) from those of Failure (also of defects). The implied result of these expenses is that Prevention costs, if properly managed, should pave the way to the lessening or even complete absence of Failure costs. This is all good theory until you try to identify such costs. There is in this scenario a further category of costs - Appraisal, but including this group only adds confusion to the process.

Imagine an organisation that manufactures a domestic product, say a dishwasher. This organisation like any other has to purchase some items from other suppliers, and as the procured items arrive at the facility they are processed to ascertain their acceptability. Clearly the labour involved in this assessment process has to be paid for, and yet it contributes nothing to the final dishwasher. Because the product evaluation appears to have some value in preventing defective items arriving at the production location, these costs are typically assessed as Quality Costs. But are they Prevention Costs or Failure Costs? One argument would define them as prevention, since they prevent defective items reaching the product line. Another perspective is that they're actually failure costs, because if the products were as they're supposed to be, and the suppliers were able to deliver perfect products, then these product inspections wouldn't be required. The failure therefore lies with the procurement group that has not adequately managed the selection and use of competent suppliers.

This debate can go on for an eternity - without conclusion, and some other system for identifying and delegating costs is still needed. The real purpose of cost measurement is surely to facilitate cost reduction, and the removal of the arcane distinction between one cost group and another is a first step to success. Transaction Costing is the mechanism for achieving this objective, where the costs additional to those reasonably expected for an effective process are identified and collected. Transaction costs analysis is a process reasonably free from the debate that surrounds any quality cost assessment, and provides a direct measurement of the 'hidden' costs of any operation or transaction. It forces the organisation to examine current practices, and make decisions regarding directly measured costs that could be removed from the business. It doesn't make the removal any easier, but it does ensure that costs are correctly allocated to the inefficiencies they represent, leaving business managers free from the confusion created by the quality costs structure, and with unambiguous evidence of the cost of inefficient practices prevalent in their organisation.