Medical Device & Diagnostic Industry Magazine | MDDI Article Index Originally published May 1996 Ashweni Sahni and Chris Gaertner

May 1, 1996

13 Min Read
QUALITY : Conducting Cost/Benefit Analyses of Implementing Total Quality Management

Medical Device & Diagnostic Industry Magazine | MDDI Article Index

Originally published May 1996

Ashweni Sahni and Chris Gaertner

In the 1980s, total quality management (TQM) was successfully adopted by a large number of U.S. companies, including many device manufacturers. In the 1990s, however, the usefulness and cost-effectiveness of TQM has received mixed reviews from a variety of quarters. Manufacturers with an interest in this strategy are now reconsidering whether it is really the best fit for their companies.

Like any tool or methodology, TQM can be a success or failure depending on how well it is planned, implemented, measured, and encouraged. Few would disagree that continuous improvement offers substantial benefits for manufacturers. As a basic tenet of TQM, continuous improvement can enable manufacturers to meet the competitive pressures of the global economy head-on, and to develop strategies for making products that are both high in quality and commercially successful.

For device manufacturers faced with a competitive marketplace made up of increasingly demanding customers, continuous improvement can be more than merely a formal system of business management. Companies that do not continuously improve everything they do for their customers may soon find themselves out of business.

The challenge for device company managers is how to determine whether implementing TQM or continuous improvement is a worthwhile effort. This article explores several of the possible ways that manufacturers can use to analyze the value of investing in TQM, and presents the results of one such cost/benefit analysis.


There are several commonly used methods for evaluating the performance of a business management system that can be applied to TQM. However, not all such methods reveal enough information to enable the manufacturer to determine whether implementing such a system is the right strategy for the company. Following are the several ways to look at TQM, with a brief commentary on the advantages and disadvantages of each.

Overall Business Performance. One approach that companies sometimes use to evaluate the contribution of TQM is to watch the overall performance of the company as the strategy is implemented. According to this method, any change in business performance can be traced to TQM, and any company whose business is improving will find that TQM is an excellent strategy.

The problem with this method of evaluation is that it leaves open too many questions about the actual relationship of TQM to the company's performance. Since many factors operate simultaneously to make a company function, it is really not possible to be certain that TQM alone is responsible for changes in the company's business. Good business strategy, marketing and sales skills, and even the behavior of competitors can have an equally important impact on a company's results or performance. Unless the whole organization works in synchrony as a well-oiled machine--and nothing in the organization changes except for the implementation of TQM--it is very difficult to isolate the contribution of TQM merely by watching the bottom line.

Cost of Quality (COQ) Approach. The cost of quality approach is scientific and logical, but it is also a technique that is difficult to implement. As a result, few companies have successfully implemented TQM and used the cost of quality approach to determine and explain its success.

This approach seeks to assign the costs of a quality program to discrete categories that can then be evaluated to determine what a company has invested to create a successful program. The approach can fail for one of three reasons: the inherent difficulty in explaining its concepts, failure to establish a baseline of costs to be used as a point of comparison, or problems in calculating and assigning costs to proper categories such as prevention, appraisal, internal failure, and external failure. While many companies use this method to quantify their reductions in cycle times, scrap, and rework, few take the necessary next step of converting this information into hard dollar figures. Consequently, all their work to establish categories of costs is wasted, and they never manage to show how their quality management system is resulting in a gradual reduction of overall costs.

Return on Investment (ROI) Approach. This method is essentially a further elaboration of the cost of quality approach that emphasizes the financial aspects of a company's investments in TQM. It enables the manufacturer to determine how much was invested, how much return there was on that investment during a specified period, and what the rate of return was. With this information, the manufacturer can also calculate how long the payback period will be for the investment.

In simple terms, the ROI approach enables a company to determine how much it spends on TQM each year, and how much it saves through that investment. Since these were the questions that were ultimately of interest to us, we selected this method to evaluate our company's implementation of a TQM program.


The analysis that we conducted focused on the implementation of TQM in the operations division of a biomedical device manufacturing company. As a starting point, the company trained a number of teams and empowered them to implement TQM principles. To ensure that evaluation of the program would be as full as possible, certain measurements and records were made prior to initiation of the program. These were later compared with similar measurements and records made after the TQM program had been implemented.

Although the TQM program improved the company's quality management and efficiency, this was not used as an excuse to reduce the company's workforce. In short, no one lost their job as a result of TQM. Instead, when new-found efficiencies resulted in reduced manpower requirements, employees were retrained and transferred elsewhere in the organization. On the other hand, greater efficiencies made it possible for the company to avoid filling positions vacated when employees retired or otherwise left the company. The company's ability to downsize through attrition without experiencing disruptions in quality or efficiency was an important benefit of implementing TQM.

Applications and Assumptions. The tangible costs of TQM were measured in the same way that capital expenditures are commonly reported. Costs were first estimated from current budget plans, and then confirmed from existing documents. Cash flows, direct labor costs, and support labor costs were measured and tracked as part of normal business operations.

Similarly, the benefits of TQM improvements were manifested in existing measures of production efficiency, output, and scrap. Measurements of direct tangible benefits were based on actual ones drawn from existing production management systems.

In a bias toward a conservative approach, costs were assigned liberally and benefits conservatively. Figure 1 illustrates the company's investment in TQM during the first four years of the program; Figure 2 shows the corresponding benefits resulting from the program. While the company's investment occurred every year--first as an initial investment in implementation and then as a means of maintaining the TQM culture--benefits began to appear only after the first year of the program. The most telling depiction is Figure 3, which shows the net benefits of the TQM program. The net benefit for a particular year, of course, is the overall benefit minus the investment for that year. It is also interesting to note that cumulative benefits kept on increasing over the four years that the program has been in effect.


The money that a company invests in TQM is generally spent in one of two ways: either as part of the initial costs of implementing TQM, such as training, education, materials, people's time away from work, and so on; or as part of the ongoing expenses required to maintain the program without significant changes.

Initial Costs. The costs involved in initiating the TQM program consisted of two major items: training and team development. The majority of initial training costs were opportunity costs, including the time of both the trainees and their employee trainers. These costs did not involve cash flows out of the company, but were a trade-off for productive time. Secondary to these opportunity costs were the costs of training materials and off-site activities used during the training cycle.

Table I displays the company's investment in various categories of training as a percent of the total dollars spent for training and team development. To create a common baseline, all employees received a basic level of TQM training focusing on concepts and examples. In addition, everyone attended training sessions on the seven basic problem-solving tools. For a smaller number of facilitators and others in leadership and technical roles, specialized training was provided on topics such as statistical process control (SPC) and design of experiments (DOE).

Implementation was considered to require more than formal training. Team skills and team development were also considered major ingredients for success. To ensure that the costs of team development were fully represented, a full year of team activity for each operator was included in the initial costs of implementation. This team development cost was by far the most significant cost of implementation.

On the other hand, team training costs were not considered for the company's office and technical staff. This omission was made deliberately, in light of the fact that many such staff already possessed the team skills required for their participation in the program.

Continuing Investment in TQM. The continuing costs of reinforcing initial training and keeping teams in place are incurred annually. However, actual out-of-pocket expenses are usually negligible; the majority of the costs occur through lost opportunities to manufacture products.

In the operations division that implemented this TQM program, all operators are members of their assembly-line team and are often also members of specialized teams, such as employee suggestion programs and task-oriented teams. During the course of the year, it is expected that the typical employee's team-related activities will include regular team meetings, additional training sessions, management communication meetings, and meetings to prepare investigations and reports. To enable employees to participate in these team activities, the division allocated 7% (150 hours per year) of the employee's total worktime (see Table I).


The benefits of implementing the TQM program came from three sources: reductions in manufacturing costs, reductions in scrap, and reductions in overhead costs (see Figure 4).

Reductions in Manufacturing Costs. Calculations of manufacturing cost savings were based on figures drawn from the company's production management system. Information provided by this system included both TQM-driven and engineering-driven changes (see Figure 5). Total TQM-driven improvements were calculated as the fraction of the total improvement remaining after engineering project improvements had been isolated.

The manufacturing cost improvements shown in Figure 5 are real reductions in cash flow, which were achieved through attrition and through reduced use of temporary employees. Opportunity costs were not considered tangible savings.

Reductions in Material Scrap. Scrap reductions are usually the improvements most apparent to production line teams. Programs to reduce scrap enable companies to draw a direct correlation between the contribution of a particular production team or operator and the output of their production line. The money saved through such efforts can be readily measured, giving employees an immediate sense of value, accomplishment, and ownership.

In this program, floor scrap was categorized by type and source and ultimately reduced through the efforts of production line teams, scrap teams, the company's manufacturing and engineering groups, and suppliers. By certifying its suppliers, the company was able to reduce the number of lots rejected and scrapped at receiving.

Material scrap was a measure tracked by the company's production management system (see Figure 6). Together with direct labor costs, scrap costs are among the most important measures of any significant change in production. The scrap figures recorded for this report included material costs only; scrap-related labor was included under manufacturing cost reductions. Reductions in material scrap represent actual cash flow savings that take the form of fewer component lots ordered.

Reductions in Overhead Costs. One of the TQM strategies used to attain continuous improvement on the manufacturing floor was to place both responsibility and authority for an activity as close to its source as possible. A significant application of this strategy was the integration of the traditional quality control (QC) function into the production line. Product and process quality were made the responsibility of each production line, to be carried out as an in-process effort rather than as a separate QC function.

In turn, the QC group was reorganized and given the task of auditing the production lines for compliance with their own procedures. The result was a reduced need for QC personnel, which the company was able to accommodate through internal transfers and attrition. Overall, these changes reduced production overhead by cutting both direct labor costs and employee benefits. As shown in Figures 2 and 3, these reductions represented real savings in the company's cash expenses.

In conjunction with the TQM program, the company also negotiated new supplier agreements requiring quality improvements that permitted savings to be found in the area of incoming inspections. In some cases, assured supplier quality enabled the company to eliminate incoming inspection altogether, and to move incoming materials directly to the production area. The incoming inspection area also reduced overhead by implementing improved inspection methods.


While companies always look for tangible benefits, they often forget to determine or really appreciate intangible benefits. One of the biggest such benefits of TQM is the change in culture--that is, in the way people think, speak, and conduct day-to-day business in the organization. Because of their heightened awareness and skill level in the organization, the employees who received TQM training are better prepared to capitalize on opportunities for improvement.

Similarly, such employees are also better prepared to solve problems in the most efficient and effective manner. Any time there is a problem or issue, a cross-functional team is formed to follow the plan-do-check-act cycle of problem solving. Because these employees are empowered by the TQM philosophy, their self-esteem is higher and they feel recognized and respected. The final effect is that they feel good about themselves and the company, and they contribute at a higher level toward meeting organizational goals.

Another intangible benefit is that the organization as a whole is better prepared to satisfy customers with its products and services. The team spirit developed during implementation of the TQM process removes functional barriers in the organization; employees look at one another as customers and strive to meet each other's requirements. These are only a few of the intangible benefits that can be gained by implementing TQM principles.


In this case, the authors found that implementation of TQM was a wise and worthwhile investment. If it is implemented properly and in true spirit, TQM can definitely keep an organization at the leading edge in the marketplace.

However, none of this can come to fruition without a commitment from the company's management. Once management is committed to supporting the program, careful strategic planning, implementation, and continued effort can readily make it a success year after year. It should become part of the company culture. The quality consciousness, awareness, and commitment to total quality should come to employees as naturally as breathing.

Ashweni Sahni is director of quality systems at SIMS Deltec, Inc. (St. Paul, MN). Chris Gaertner is an operations industrial engineer at SIMS Deltec.

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