Cost Benefit

November 25, 2009

You need a range of tool and techniques to arrive at an effective as well as efficient quality management plan. Cost benefit analysis is one such tool used. It is well known that meeting quality requirements leads to less rework, higher productivity and less costs. All of that lead to stakeholder satisfaction. To judge the effectiveness of each quality management step one has to compare the costs of such actions to the benefits that accrue from them each.

Cost Benefit Analysis

To do this analysis properly you need to be able to list all the benefits, for each of the action that accrues. You have to find and be able to quantify the benefits. You total them up as the positive factors and add up all the benefits. Similarly you have to quantify, total up and take out the negative factors from the benefits. A positive balance indicates a positive cost benefit for the action planned. The quantum of the margin will tell you how advisable and desirable the action is depending on the size of the balance. The trick here is to be able to completely quantify all the benefits and similarly all the costs.

Cost benefit analysis depends completely on our ability to attach a monetary value to every factor that we are considering. This may include even such imponderables as the value of loss of life and limb in a given situation. In the quality situation customer satisfaction or the sponsor/stakeholder satisfaction may be difficult to pin down in money terms. Some indirect assessments will have to be made regarding increase in sale or in market share due to the improvement in quality. If you can pin it down, these benefits can be quantified in big numbers compared to whatever costs in ensuring the quality improvement might involve.

This can be further complicated by the fact that these money values need to be calculated on the basis of time value of money. That again introduces some imponderables. While in a stable economy it may not be difficult to assess interest rates over the years and arrive at a present value of money earned due to quality improvements; any such calculations done prior the current recession are bound to go wrong. If there are purchases of capital equipment involved, you’ll have to worry about amortization, financing costs (if applicable) and so on. What can really help here is the way things are done in your organization or the organizational process assets.

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2 Responses to Cost Benefit

  1. Irma Lomasney on May 31, 2010 at 5:32 pm

    Howdy there,Terrific blog dude! i am Fed up with using RSS feeds and do you use twitter?so i can follow you there:D.
    PS:Do you thought putting video to your web site to keep the readers more interested?I think it works.Best wishes, Irma Lomasney

    • Puneet Kuthiala, PMP on June 14, 2010 at 2:25 pm

      thanks Irma. My twitter id is justpmblog. Just set up synchronization between my blog and tweeter, hope it will work. Keep coming back…

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