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Cost of Quality

The document discusses the costs of quality, which it divides into the cost of poor quality and the cost of good quality. The cost of poor quality includes internal failure costs from defects found before delivery and external failure costs from customer issues. The cost of good quality consists of prevention costs to avoid defects and appraisal costs to check for quality. Following a Six Sigma approach can improve processes and reduce costs by catching fewer defects internally rather than fixing issues externally. The document advocates measuring costs of quality to identify areas for improvement and lower total quality costs.

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343 views4 pages

Cost of Quality

The document discusses the costs of quality, which it divides into the cost of poor quality and the cost of good quality. The cost of poor quality includes internal failure costs from defects found before delivery and external failure costs from customer issues. The cost of good quality consists of prevention costs to avoid defects and appraisal costs to check for quality. Following a Six Sigma approach can improve processes and reduce costs by catching fewer defects internally rather than fixing issues externally. The document advocates measuring costs of quality to identify areas for improvement and lower total quality costs.

Uploaded by

nowsheenbd
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Cost of Quality

Cost of quality refers to the sum of costs incurred to prevent non-conformance from happening and
the costs incurred when non-conformance in products and system occurs which is commonly known
as cost of poor quality Cost of poor quality is actually the cost of doing things wrong Cost of poor
quality refers to the costs associated with providing poor quality product or service

o
o

As defined by Philip B. Crosby in his book Quality Is Free, the cost of quality has two main
components: the cost of good quality (or the cost of conformance) and the cost of poor quality
(or the cost of non-conformance). As Figure 1 shows:
The cost of poor quality affects:
Internal and external costs resulting from failing to meet requirements.
The cost of good quality affects:
Costs for investing in the prevention of non-conformance to requirements.
Costs for appraising a product or service for conformance to requirements.
Figure 1: Cost of Quality

Cost of Poor Quality: Internal Failure Costs


Internal failure costs are costs that are caused by products or services not conforming to
requirements or customer/user needs and are found before delivery of products and services to
external customers. They would have otherwise led to the customer not being satisfied.
Deficiencies are caused both by errors in products and inefficiencies in processes. Examples
include the costs for:

Rework
Delays
Re-designing
Shortages
Failure analysis
Re-testing
Downgrading
Downtime
Lack of flexibility and adaptability

Cost of Poor Quality: External Failure Costs


External failure costs are costs that are caused by deficiencies found after delivery of products
and services to external customers, which lead to customer dissatisfaction. Examples include the
costs for:

Complaints
Repairing goods and redoing services
Warranties
Customers bad will
Losses due to sales reductions
Environmental costs
Cost of Good Quality: Prevention Costs
Prevention costs are costs of all activities that are designed to prevent poor quality from arising
in products or services. Examples include the costs for:
Quality planning
Supplier evaluation
New product review
Error proofing
Capability evaluations
Quality improvement team meetings
Quality improvement projects
Quality education and training
Cost of Good Quality: Appraisal Costs
Appraisal costs are costs that occur because of the need to control products and services to
ensure a high quality level in all stages, conformance to quality standards and performance
requirements. Examples include the costs for:

Checking and testing purchased goods and services


In-process and final inspection/test
Field testing
Product, process or service audits
Calibration of measuring and test equipment
The total quality costs are then the sum of these costs. They represent the difference between the
actual cost of a product or service and the potential (reduced) cost given no substandard service
or no defective products.

Many of the costs of quality are hidden and difficult to identify by formal measurement systems.
The iceberg model is very often used to illustrate this matter: Only a minority of the costs of poor
and good quality are obvious appear above the surface of the water. But there is a huge
potential for reducing costs under the water. Identifying and improving these costs will
significantly reduce the costs of doing business.
Figure 2: The Iceberg Model of Cost of Quality

The Six Sigma Philosophy of Cost of Quality


What is the relation between the cost of good quality and the cost of poor quality? The traditional
view would be to conclude that if a company wants to reduce defects and by this reduce the cost
of poor quality, the cost of good quality would have to be increased, meaning higher investments
in any kind of checking, testing, evaluation, training of operators, etc. Following the Six Sigma
philosophy, however, of building quality into process, service and products and doing things
right the first time, the increase of the cost of good quality, while striving for zero defect
performance, can be smoothed if processes get better.
As Figure 3 shows, business processes with better process sigma will have significantly lower
prevention and appraisal costs. Although you will never fully eliminate appraisal and prevention
costs (as opposed to failure costs that in an ideal zero defect world would also be zero), their
reduction due to better process performance will be significant.
Figure 3: Traditional Management View vs. Six Sigma Philosophy

Table 1 shows how dramatically the cost of quality as a percentage of sales decreases if the
process sigma improves.
Table 1: Sigma Level and the Cost of Quality
Sigma Level

DPMO

Cost of Quality as Percentage of Sales

298,000

More than 40%

67,000

25-40%

6,000

15-25%

233

5-15%

3.4

Less than 1%

Assuming that the average performance of a company is 3 sigma, 25 percent to 40 percent of its
annual revenue gets chewed up by the cost of quality. Thus, if this company can improve its
quality by 1 sigma level, its net income will increase hugely.
Conclusion
In order to improve quality, an organization must take into account the costs associated with
achieving quality since the objective of continuous improvement programs is not only to meet
customer requirements, but also to do it at the lowest, possible, cost. This can only obtained by
reducing the costs needed to achieve quality, and the reduction of these costs is only possible if
they are identified and measured Therefore, measuring and reporting the cost of quality (CoQ)
should be considered an important issue for achieving quality excellence.

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