What it means
Quality management means having reliable processes that deliver products and services which meet customer needs and legal requirements. ISO 9000 explains the underlying principles, including customer focus, leadership, involvement of people, process thinking, improvement and evidence-based decisions.
It also sets out the shared vocabulary, so that people in different countries mean the same thing by the same word. The certifiable standard is ISO 9001, which asks a company to document its processes, set quality objectives, measure results and correct problems.
The system must be audited internally and by an independent body. The word certification therefore refers to ISO 9001, even though people often say they are ISO 9000 certified.
For a finance professional, the interest is in cost. Quality problems create hidden costs such as rework, warranty claims, returns and lost customers, and a quality system aims to reduce them.
A widely used framework, the cost of quality, splits these costs into prevention, appraisal, internal failure and external failure. Certification also has a commercial side.
Many public sector buyers and large manufacturers insist that suppliers hold ISO 9001, so a certificate can be the ticket to enter a tender. It may also lower the rate of defects, which improves margins and reduces working capital tied up in rejected stock.
The nuance is that the standard focuses on consistency of process, not on the level of quality itself. A company can be certified and still make a low-grade product, provided it makes it consistently and meets what it has promised customers.
Internal audits are central to making the system work. Staff who are independent of the process being checked review whether the documented procedure matches what happens on the shop floor, and any gaps are logged as corrective actions.
Finance teams can use the record of corrective actions as an early warning of recurring cost problems.
In practice
Real-world examples.
Example
A medical device supplier is asked by a hospital group to show it has a certified quality system. The quality manager prepares its procedures and arranges an audit under ISO 9001. The finance director budgets for annual surveillance audits.
Example
A software company with 40 staff adopts a simple documented process for testing and releasing code. Customer complaints about defects fall within a year. The managing director quotes the improvement in the next investor update.
Example
A food manufacturer tracks scrap and rework costs by production line as part of its quality system. The data shows one line accounts for most of the waste, so the engineers focus their effort there. The saving is recorded in the monthly management accounts.
Formula
Calculation
Cost of quality = prevention costs + appraisal costs + internal failure costs + external failure costs
Suppose a manufacturer with annual revenue of $4,000,000 spends $20,000 on prevention, $35,000 on appraisal (inspection and testing), $60,000 on internal failure (scrap and rework) and $85,000 on external failure (returns and warranty). Cost of quality = 20,000 + 35,000 + 60,000 + 85,000 = $200,000. As a share of revenue this is 200,000 / 4,000,000 = 5%. If a quality programme cut the failure costs by $50,000, the cost of quality would fall to $150,000, or 3.75% of revenue.Case study
Seen in the real world.
Meridian Components is an illustrative, fictional maker of precision parts. Its customers had started to complain about late deliveries and occasional defects, and the finance director suspected the hidden costs were larger than anyone had measured.
She asked the quality team to classify every cost of rework, scrap, returns and inspection for a quarter. The total was far higher than the budget line for quality, and most of it came from external failure, which was the most damaging because it reached customers.
The company introduced a documented quality system based on ISO 9001 and tracked the cost of quality monthly. Over the following year the failure costs fell as a share of revenue, and the illustrative lesson is that quality is easiest to manage once the cost of poor quality is visible.
Watch out
Common mistakes.
- Saying a company is certified to ISO 9000, when certification is awarded against ISO 9001.
- Assuming a certificate guarantees a high-quality product, when it only shows consistent, documented processes.
- Focusing on paperwork alone, when the benefit comes from using the data to improve how work is done.
Questions
People also ask.
What is the difference between ISO 9000 and ISO 9001?
ISO 9000 covers the concepts and vocabulary, while ISO 9001 contains the requirements against which a company is certified.
What are the four categories of the cost of quality?
Prevention, appraisal, internal failure and external failure.
Who audits a company for certification?
An independent certification body carries out the audit and issues the certificate.
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