COST OF QUALITY

Cost of quality (COQ) is defined as a methodology that allows an organization to determine the extent to
which its resources are used for activities that prevent poor quality, that appraise the quality of the
organization’s products or services, and that result from internal and external failures. Having such
information allows an organization to determine the potential savings to be gained by implementing process
improvements.

 Cost of poor quality (COPQ)

 Prevention costs
 Appraisal costs
 Internal failure costs
 External failure costs

WHAT IS COST OF POOR QUALITY (COPQ)?

Cost of poor quality (COPQ) is defined as the costs associated with providing poor quality products or
services. There are four categories:

1. Prevention costs are costs incurred to keep failure and appraisal costs to a minimum.
2. Appraisal costs are costs incurred to determine the degree of conformance to quality requirements.
3. Internal failure costs are costs associated with defects found before the customer receives the product or
service.
4. External failure costs are costs associated with defects found after the customer receives the product or
service.

Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal
and external failure costs.

PREVENTION COSTS

Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the
design, implementation, and maintenance of the quality management system. They are planned and
incurred before actual operation, and they could include:

 Product or service requirements: Establishment of specifications for incoming materials, processes,

finished products, and services
 Quality planning: Creation of plans for quality, reliability, operations, production, and inspection
 Quality assurance: Creation and maintenance of the quality system
 Training: Development, preparation, and maintenance of programs
 APPRAISAL COSTS

Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are
associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and
services to ensure that they conform to specifications. They could include:

 Verification: Checking of incoming material, process setup, and products against agreed specifications
 Quality audits: Confirmation that the quality system is functioning correctly
 Supplier rating: Assessment and approval of suppliers of products and services

INTERNAL FAILURE COSTS

Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to
the customer. These costs occur when the results of work fail to reach design quality standards and are
detected before they are transferred to the customer. They could include:

 Waste: Performance of unnecessary work or holding of stock as a result of errors, poor organization, or
communication
 Scrap: Defective product or material that cannot be repaired, used, or sold
 Rework or rectification: Correction of defective material or errors
 Failure analysis: Activity required to establish the causes of internal product or service failure

EXTERNAL FAILURE COSTS

External failure costs are incurred to remedy defects discovered by customers. These costs occur when
products or services that fail to reach design quality standards are not detected until after transfer to the
customer. They could include:

 Repairs and servicing: Of both returned products and those in the field
 Warranty claims: Failed products that are replaced or services that are re-performed under a guarantee
 Complaints: All work and costs associated with handling and servicing customers’ complaints
 Returns: Handling and investigation of rejected or recalled products, including transport costs
QUALITY GURUS
Philip Crosby:

The Four Absolutes of Quality Management:

• Quality is conformance to requirements

• Quality prevention is preferable to quality inspection

• Zero defects is the quality performance standard

• Quality is measured in monetary terms – the price of non-conformance

14 Steps to Quality Improvement:

• Management is committed to quality – and this is clear to all

• Create quality improvement teams – with (senior) representatives from all departments.

• Measure processes to determine current and potential quality issues.

• Calculate the cost of (poor) quality

• Raise quality awareness of all employees

• Take action to correct quality issues

• Monitor progress of quality improvement – establish a zero defects committee.

• Train employees in quality improvement

• Hold “zero defects” days

• Encourage employees to create their own quality improvement goals

• Encourage employee communication with management about obstacles to quality

• Recognize participants’ effort

• Create quality councils

• Do it all over again – quality improvement does not end

Dr. Edwards Deming

Deming’s Fourteen Obligations of Top Management

• Create constancy of purpose for improvement of product and service. Allocate resources to provide
for long range needs rather than only short term profitability

• Adopt the new philosophy. We can no longer live with commonly accepted levels of delays,
mistakes, defective materials, and defective workmanship.

• Cease dependency on mass inspection to achieve quality. Quality is achieved by building quality
into the product in the first place.

• End the practice of awarding business on the basis of price tag alone. The aim is to minimize total
cost, not merely initial cost. Establish long term relationship with suppliers to develop loyalty and trust.

• Improve constantly and forever every processfor planning, production, and service. It is
management’s job to work continually on improving total system.

• Institute training on the job for all, including management, to make better use of every employee.
New skills are required to keep up with changes in products and processes.

• Adopt and institute leadership aimed at helping people do a better job. Management must ensure
that immediate action taken on issues that are detrimental to quality.

• Drive out fear so that everybody may work effectively and more productively for the company.

• Break down barriers between departments and staff areas. Everyone must work together to tackle
problems that may be encountered with products or service.

• Eliminate slogans and exhortations for the work force as they create adversarial relationships.
Also, bulk of the causes of low quality & productivity belong to the system and lie beyond the power of the
work force.

• Eliminate arbitrary numerical targets for the workforce and management. Substitute aids and
helpful leadership in order to achieve continual improvement.

• Remove barriers that rob people of pride of workmanship. This includes the annual appraisal of
performance and Management by Objective.

• Encourage education. Institute a vigorous program of education and self-improvement for everyone

• Clearly define top management’s permanent commitment to ever improving quality and
productivity. Put everybody in the company to work to accomplish the transformation. Support is not
enough, action is required.
Dr. Armand Feigenbaum

• Developed Total Quality Control (TQC) philosophy

• Quote: “Quality is everybody’s job, but because it is everybody’s job, it can become nobody’s job
without the proper leadership and organization.”

Steps to quality:

• Quality leadership

• Modern quality technology

• Organizational commitment

Dr. Kaoru Ishikawa

• Known as father of Japanese quality control effort

• Established concept of Company Wide Quality Control (CWQC) – participation from the top to the
bottom of an organization and from the start to the finish of the product life cycle

• Started Quality Circles – bottom up approach – members from within the department and solve
problems on a continuous basis

• The fishbone diagram is also called Ishikawa diagram in his honor

• Introduced concept that the next process is your customer

Dr. Joseph Juran

Juran’s Quality Trilogy (compared to financial management):

• Quality planning (financial budgeting) – create process that will enable one to meet the desired
goals

• Quality control (cost control) – monitor and adjust the process

• Quality improvement (profit improvement) – move the process to a better and improved state of
control through projects

Key points of Juran’s approach to quality improvement:

5. Create awareness of the need for quality improvement

6. Make quality improvement everyone’s job

7. Create infrastructure for quality improvement

8. Train the organization in quality improvement techniques

9. Review progress towards quality improvement regularly

10. Recognize winning teams

11. Institutionalize quality improvement by including quality

12. Concentration on both external and internal customers

Dr. Walter Shewhart

• Shewhart’s control charts are widely used to monitor processes. Problems are framed in terms of
special cause (assignable cause) and common cause (chance-cause).

• The Shewhart Cycle – PDCA Problem Solving Process:

• Plan – what changes are desirable? What data is needed?

• Do – carry out the change or test decided upon

• Check – observe the effects of the change or the test

• Act – what we learned from the change should lead to improvement or activity

• Referred to as the “Father of Statistical Quality Control”

Dr. Genichi Taguchi

• The lack of quality should be measured as function of deviation from the nominal value of the
quality characteristic. Thus, quality is best achieved by minimizing the deviation from target (minimizing
variation).

• Quality should be designed into the product and not inspected into it. The product should be so
designed that it is immune to causes of variation.
EVOLUTION OF TQM: TIMELINE & HISTORY

1920s  Some of the first seeds of quality management were planted as the principles of scientific
management swept through U.S. industry.
 Businesses clearly separated the processes of planning and carrying out the plan, and union
opposition arose as workers were deprived of a voice in the conditions and functions of their
work.
 The Hawthorne experiments in the late 1920s showed how worker productivity could be
impacted by participation.

1930s  Walter Shewhart developed the methods for statistical analysis and control of quality.

1950s  W. Edwards Deming taught methods for statistical analysis and control of quality to Japanese
engineers and executives. This can be considered the origin of TQM.
 Joseph M. Juran taught the concepts of controlling quality and managerial breakthrough.
 Armand V. Feigenbaum’s book Total Quality Control, a forerunner for the present
understanding of TQM, was published.
 Philip B. Crosby’s promotion of zero defects paved the way for quality improvement in many
companies.

1968  The Japanese named their approach to total quality "companywide quality control." It is around
this time that the term quality management systems arises.
 Kaoru Ishikawa’s synthesis of the philosophy contributed to Japan’s ascendancy as a quality
leader.

Today  TQM is the name for the philosophy of a broad and systemic approach to managing
organizational quality.
 Quality standards such as the ISO 9000 series and quality award programs such as the
Deming Prize and the Malcolm Baldrige National Quality Award specify principles and
processes that comprise TQM.
 TQM as a term to describe an organization's quality policy and procedure has fallen out of
favor as international standards for quality management have been developed. Please see our
series of pages on quality management systems for more information