Part 7 – Pay Me Now, Or Pay Me Later

This article is unabashedly directed at two audiences: the product design/discovery team, and senior management.  It may not be obvious, or not often discussed, but  these two groups have considerable “skin in the game” with regard to downstream implications of product quality.

Two different viewpoints of this topic are presented in this article.  The first viewpoint is a “macroscopic” one that the Project Management Institute (PMI) calls “The Cost of Quality.”  The second is a more “microscopic” viewpoint that we call the “The Cost of Requirements.”  The two viewpoints are related, but they give different viewpoints of the sources of costs that an organization incurs to achieve high quality product.  One focuses in particular on the downstream financial repercussions of low quality product.

The PMI, as part of their internationally recognized best-practices in the PMBOK Guide[1], divides the “Cost of Quality” into two broad categories: the costs of “conformance” and the costs of “nonconformance.”  The costs of “conformance” arise from activities intended to “prevent” bad quality from occurring in a product.  Many of these activities occur during design.  Some also are activities to evaluate the quality of a product, such as inspection during manufacture.

The costs of “nonconformance” arise from failure of the product to achieve quality.  These include costs that arise while the product is “internal” to the organization (scrap, rework, etc.) and costs that arise when the product is “external” to the organization (warranty costs, lost business, liabilities, etc.).  The relationships between these cost categories as described by the PMBOK guide is illustrated in the figure below.  Also included is somewhat more detail of what the costs “are.”

This is an informative way to talk about the costs related to quality in the design and manufacture of a product. Even so, it is given at a very high level, and many more specific costs are present in reality.  The PMI is not the only organization that has attempted to describe the cost of quality: the American society for Quality (ASQ) has semi-quantitively described the Total Cost of Quality as: TCOQ = Cost of Conformance (COC) + Cost of Nonconformance (CONC) = [Prevention + Appraisal] +[Internal Failure + External Failure] = P + A + IF + EF.

For our current purposes, we wish to focus on the broad categories of costs of conformance versus nonconformance, and how these categories relate to costs incurred by an organization in satisfying Design Controls (as defined by 21 CFR Part 820, ISO 13485, etc.).

Let’s look first at the “Costs of Conformance,” which are incurred during design and manufacture.  They are about training people, documenting what you are doing, qualifying and validating equipment and processes, taking time to make sure the team is “on the same page” and ensure that all truly understand what the project objectives and deliverables are.  They also include appraisal costs (costs associated with measuring, evaluating or auditing products/services to assure conformance to requirements) and prevention costs (the costs of all activities designed to prevent internal or external failure in products or services).  Think about it: these are the very activities expected by design controls.  The PMI describes these activities as “costs” … and they are just that.  But they are necessary and expected costs, and typically are a one-time expenditure.  That they are “costs” does not alter the conclusion that these activities are accepted best-practices.  There should be no mystery that the FDA and ISO give them a specific title: “Design Controls.”  Here we have another example, as discussed in our first writing in this series (“A Quality System is Not Enough”) of alignment between widely accepted best-practices in engineering and project management and regulatory “requirements” for quality systems.

Above, we say that these costs / activities are “necessary and expected.”  This is because – and this is a point that should be firmly held in mind by both product design teams and senior management – if those “costs of conformance” are not spent effectively, the organization will inevitably incur the “costs of nonconformance.”  These costs of nonconformance are spent after the design process due to failures of quality, are typically not planned for, and are frequently dealt within a panicked, non-efficient, error-prone way.

One perspective on this is that costs of conformance are essentially an “investment” that when effectively spent, lead to profits downstream.  Conversely, costs of nonconformance are simply a loss with no downstream profit resulting from them.  Making the situation worse is that the “costs of nonconformance” are recurring and typically far exceed those for conformance. They can, and often do, impact the health of the organization – both in terms of organizational profit margin and morale of the employees.  They can threaten the very existence of the organization.

In other words, as the old FRAM[2] marketing slogan goes: pay me now or pay me later.

The product design team’s immediate reward system is often built around delivering the design to manufacturing within a given budget and within a defined schedule.  BUT – when they hand the design off to manufacturing the design team is not divorced from the downstream impacts if the “costs of conformance” (i.e. well-executed design controls) are not well spent.  The downstream costs of a poor quality design are felt by the entire organization.  These downstream costs include low manufacturing yield, scrap, customer support costs, recalls, law suits, etc.

Members of the product design team need to understand the following statements: the overall organization will answer first to its shareholders.  Profit margin is paramount.  When that profit margin is threatened, the Finance function will look first to cut expenses in organizational functions that are not “value added[3].”  R&D, not being involved in daily generation of revenue, is not “value added.”  Thus, creation and launch of a low quality design will threaten your job two, five, seven years down the road.

Senior management needs to understand the same things, with the added responsibility of managing long term risk to the organization.  Short term gains by being quick to market are easily offset by long term losses and expenses, and it is these long term costs that can threaten the existence of the company.  Poor employee morale resulting from the threat of reductions in force creates a vicious cycle of poor execution and resulting loss of product quality.  The personal threat to management then comes from the shareholders if profit margin and company growth are not maintained.

All this results from decisions during a design process that may have occurred years ago.

In the vignette in the first article of this series, we saw this play out as a series of “reductions is force,” followed by a removal of senior management by the Board of Directors.

Pay me now or pay me later.

Note also that the above issues arise in part from differing incentives for different functional groups.  It is also an example of how lack of coordination at a higher level above the leaders of the various functional groups can have a profound impact on the health of the organization (and thus the employment security of the employees).  R&D can be incentivized to get that design into production within a given budget and schedule, but it does not directly see (or answer to) the later “costs of nonconformance.”  Manufacturing might be incentivized by manufacturing rates and cost reductions, but the fundamental die on quality is cast during the design process.  Seldom are the two coordinated regarding what really matters to the organization: maintenance of long term profit margin.

Now to the necessary question of how can these issues be addressed? Some hint of this comes from taking a slightly different perspective of those “costs of conformance.”  Recognizing that the “costs of conformance” are really just another view of design controls, and design controls are intimately related to product Requirements – let’s ask the following question: how much does a Requirement cost?  This is that second more “microscopic” viewpoint that we call “The Cost of Requirements.”

When we define a product Requirement (formally, in the system engineering and design controls sense, with associated needs for verification and validation), we explicitly incur costs of: definition and documentation of the requirement, associated design activities to meet the requirement, component and assembly specification, test design and test method verification, test execution and documentation of results, manufacturing process design, validation, and monitoring, inspection, post market surveillance, customer support and training, and more.  Each formally defined product requirement obligates us to significant up front and ongoing recurring expenses.

In an earlier article (“Is this Really a Requirement?”) we argued for the benefits of carefully defining, and rigorously keeping to an absolute minimum, the number of formal requirement statements for a product.  Further, we argued the need to design only to those requirement statements.  In that earlier article, the argument was around project focus, minimization of “gold plating”, and forceful rejection of distractions from meeting the design objectives.  Here, the benefits of that careful selection of product requirements is seen to be more solid: money.  A focused set of requirements require less money to design and execute to.  It also reduces the long-term risk to the organization by reducing risks for regulatory action due to findings of non-conformance (whether due to lack of documentation of conformance or real failure of product quality) and reduced customer support produced by a less confusing or simpler product design.

In addition to the above, all of the points discussed in the preceding article regarding Design for Manufacturability hold, and should be followed.  With focused attention on a limited number of requirements and application of design for manufacturability on those limited requirements, the likelihood of effectively investing the “costs of conformance” is increased – and the “costs of nonconformance” will be decreased.

© 2017 DPMInsight, LLC all right reserved.

About the Authors:

Cushing Hamlen

Over 27 years of experience in industry, including 20 years with Medtronic, where he worked and consulted with many organizational functions, including research, systems engineering, product design, process design, manufacturing, and vendor management.  He has also worked with development, regulatory submission, and clinical trials of combination products using the pharma (IND) regulatory pathway.  He has been extensively involved with quality system (FDA and ISO) use and design, and is particularly concerned about effective understanding and use of product requirements and design controls.  He has formally taught elements of systems engineering, design for six sigma, Lean, and six sigma.  Cushing has degrees in chemistry and chemical engineering, is certified as a Project Management Professional, is certified as a Master Black Belt in Lean Sigma, and is the owner/member of DPMInsight, LLC (

Bob Parsons

Over 26 years of experience in leading Quality Assurance, Validation and remediation efforts in FDA regulated Medical Device and Pharmaceutical industry. Experience includes product development life cycle management from initial VOC through New Product Introductions (NPI), sustainable manufacturing, and end of life product management.  Technical expertise in quality system gap assessment, system enhancement, alignment and implementation of all quality elements including design controls, risk management, purchasing controls, change control and post-market surveillance.  Regulatory experience includes; ISO 13485, 9001 and 14971 certification, providing guidance for FDA PMA/510K and CE clearance, designated Management Representative, company representative and lead during FDA and ISO audits, 483 and warning letter resolution with experience working within consent-decree environments.

Michael B. Falkow

Michael Falkow is a Quality Specialist with Raland Compliance Partners. He has served as a regulatory compliance and quality assurance executive with multi-facility/international companies and was an FDA Compliance Officer and Senior Investigator/Drug Specialist.  Michael has subject matter expertise for quality and regulatory compliance, quality auditing, quality assurance, quality control, supplier evaluation and certification, and compliance remediation.  He has been approved by FDA as a GMP certifying authority and is qualified to provide Expert Witness testimony for GMPs.  Currently – Adjunct Professor at Mercer County Community College – teaching courses on Clinical Development for Certificate Program in Clinical Research as part of Drexel University’s Masters Degree in Clinical Development.

[1] A Guide to the Project Management Body of Knowledge (PMBOK Guide), 5th ed. the Project Management Institute. 2013

[2] FRAM Group IP LLC.

[3]  In Lean, a non-value added step is something that the customers do not see as evidenced in the final product.  Thus inspections, rework, etc. are non-value added steps.  It is likely difficult for many to agree with or accept the following: the customer sees the output of Manufacture, not R&D, so R&D is non-value added.  From Finance’s perspective, R&D does not contribute to the cash flow of the organization (neither do Quality, Regulatory, Clinical, etc.).

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