Cost of Quality

We all want good quality, but sometimes management focuses more on cost and speed.

So relevant questions include how much do quality-related activities cost? And perhaps even more important, what is the cost of not doing them? What is the cost of not assuring quality?

To answer all these questions, I will want to know the cost of quality. So, let's talk about the cost of quality (COQ).

COQ includes four types of costs:

1. Prevention costs:

These are expenses to prevent quality issues, like planning, training, and audits.

Prevention costs are costs associating with preventing quality failures and nonconforming products or services from reaching a customer. This includes the costs related to quality planning, design reviews, process control, supporting IT systems, training, quality audits and supplier audits. That may seem like a lot but as you will see, if defects occur further down the line, or worse yet, reach the customer, the costs could be much more. It could be 10 times or even 100 times more.

2. Appraisal costs:

These are for checking quality, like tests, inspections, and audits.

They are incurred to determine the degree of conformance to quality requirements. This includes the cost of tests; this could be a pH test for a hand lotion or a stress test for steel or even a QA test for software. There's also the cost of inspections for incoming (You can check more in post Quality at the source ) , in-process and finished goods. Then you have product quality audits. And finally, calibration and maintenance of measurement instruments.

3. Internal failure costs:

These occur when problems are caught before reaching the customer, like rework or machine repairs.

These are incurred because of deficiencies found before delivery of the service output or product to the customer. Examples include all sorts of costs: defective outputs, scrap, rework, rechecking, downgrading, corrective actions, process failures, unplanned machine downtime and repair, redoing due to poor first-time yields, mature review boards or MRBs, and activities associated with addressing internal failures.

4. External failure costs:

These happen when problems reach the customer, like returns or warranty claims.

External failure costs are costs associated with deficiencies found after the customer receives the product or service. Examples include costs due to customer complaints and returns, customer credits, warranty claims, product recalls, product liability, and activities and costs associated with external failures

Now that we know what comprises the cost of quality or COQ, how can it be reduced? To do that, we have to take a look at the composition of COQ. There are categories within it that help us to focus specifically on what we want and what we want is looked at what is wasteful?

Lucky you, there is a subset of COQ called COPQ or the cost of poor quality.

COPQ consists of internal failure costs, external failure costs, and the cost of unnecessary appraisals.

Unnecessary because if things were done right, there is no need for the rechecks, inspections or reviews.

In many companies, annual COPQ is between 20 to 30% of the annual cost of goods sold. Some even as high as 40%. Unlike COQ, all of COPQ is wasteful. That is why when you justify your Six Sigma projects, you focus on the reduction of COPQ.

This is very convincing to management because the cost of poor quality is expressed in monetary terms.

Remember, the language of management is money.

All these costs can seem overwhelming.

Document title: QF-05_Cost of Quality_V1.0

Category: QMS Foundations, Business impact

Document type: Blog article

Level: Beginner