HISTORY • The emphasis is on the prevention of defects in order

• It was Joseph Juran who first discussed the cost of to reduce the probability of producing defective
quality analysis in 1951 in the first edition of “Quality products.
Control Handbook.” • Prevention activities lead to reduction of appraisal
• It was Armand Feigenbaum who identified four costs and both type of failures (internal and
quality cost categories in 1956 in “Total Quality external).
Control” in the Harvard Business Review, vol. 34 • The motto is “Prevention rather than appraisal.”
• The Quality Cost Committee was established by the ✓ In the ideal situation, prevention costs will be the
then ASQC in 1961. largest portion of the Total Costs of Quality
✓ Typically, prevention is less than 10% of Total COQ
WHAT IS COST OF QUALITY? where it should be about 70%.
• It is the term that is widely used and widely
misunderstood. ACTIVITIES ASSOCIATED WITH PREVENTION COSTS
• The “cost of quality” is not the price of creating a • Market research
quality product or service. • Quality planning: it includes the cost associated with
• It’s the cost of NOT creating a quality product or creating the entire quality plan, communication of
service. quality plans to all the employees.
• New product review: cost of reliability and other
Every time work is redone, the cost of quality increases. quality related activities associated to launching new
Examples include: designs.
• The reworking of a manufactured item. • Tolerance analysis before design release.
• The retesting of an assembly. • Field Trials
• The rebuilding of a tool. • Costs of research and development activities,
• The correction of a bank statement. analysis, and correction of causes and defects.
• The reworking of a service, such as the reprocessing • Cost of training: it consists of either training the
of a loan operation or the replacement of a food workers, supervisors and managers. Cost involved in
order in a restaurant. arranging training programs, attending technical
exhibitions, seminars, and conferences etc.
Cost of Quality = cost of conformance + cost of non- • Quality audits: cost involved in evaluating the
conformance execution of activities in overall quality plans
• Cost of conformance is the cost incurred in ensuring involved in the organization.
that things are done right the first time. • Cost involved in prevention of defects, it may be
• It is the cost of providing products or services as per technical or non-technical.
the required standards.
• This can be termed as good amount spent. APPRAISAL COSTS
(Prevention and Appraisal Costs) • Appraisal costs are spent to detect defects to assure
conformance to quality standards.
• Cost of non-conformance is cost incurred as a result • It is the cost expenditure on inspection and testing.
of not doing things right the first time. • Appraisal cost activities sum up to the “cost of
• It is the failure cost associated with a process not checking if things are correct.”
being operated to the requirements. • The appraisal costs are focused on the discover of
• This can be termed as unnecessary amount spent. defects rather than prevention of defects
(Internal and External failure costs) ✓ Appraisal costs should be the second largest
category, but should not exceed prevention costs
PREVENTION COSTS
• Prevention costs are associated with design, ACTIVITIES ASSOCIATED WITH APPRAISAL COSTS
implementation, maintenance, and planning prior to • Inspection/test of purchased material
actual operation, in order to avoid defects from • In-process and final inspection/test
happening.
• Product, process or service audits COST OF POOR QUALITY (COPQ)
• Calibration of measuring and test equipment • “How much is it costing our organization by not doing
• Maintaining accuracy of testing equipment, a good job on quality?” thus we will use the term
performed in terms of periodic calibration. “cost of poor quality.”
• Cost of non-destructive testing such as electric • The obvious and visible costs are a small portion of
probes, x-rays, radiography, etc. the overall COPQ. The bottom of the iceberg
represents the majority of the COPQ and are not
INTERNAL FAILURE COSTS easily identified and quantified.
• These are the failure cost occurring prior to deliver or • By revealing new hidden costs of poor quality, a
shipment of the product, or the furnishing of a company can prevent the production of a
service to the customer nonconforming product.
• These are the cost that would disappear if no defect
is found in the product before dispatching.

ACTIVITIRD ASSOCIATED WITH INTERNAL FAILURE

COSTS
• Cost of rework, scrap, defectives, waste etc.
• Cost of re-inspection, retest to verify the
performance analysis
• Cost of 100% inspection
• Changing processes: modifying manufacturing or
service processes to correct deficiencies
• Lost production due to supplier materials and own
material
INPACT OF TQM ON COSTS
EXTERNAL FAILURE COSTS
• TQM is primarily aimed to improve the quality of the
These are the costs incurred after the product is
product, higher customer satisfaction and better
dispatched to the consumer.
working environment for the employees. The most
It may include the cost to the business of providing a bad
dramatic impact of TQM is on reduction of quality
service or product and this may also result into
costs which is directly affect the profitability.
cancellation of order.
• This is demonstrated by the results of TQM program
These costs also would disappear if there were no
in Xerox Corp. The change in various elements of
deficiencies.
quality cost before and after launching TQM by Xerox
Corp is shown on the next slide.
ACTIVITIES ASSOCIATED WITH EXTERNAL FAILURE
COSTS
• Warranty charges
• Compliant adjustment: costs of investigation and
adjustment of justified complaints attributed to
defective product or installation.
• Returned material: cost associated with receipt and
replacement of defective product received from the
field.
• Recalling of the product, due some reasons such as
safety, health, accidents etc.,
• Allowances: the costs of concessions made to
customers due to substandard products accepted by
the customer as is or to conforming product that
does not meet customer needs.
 BENEFITS OF MINIMIZING COQ.
DECREASES
• Defects
• Overall costs
• Returned goods
• Customer complaints
• Owner and mgmt. stress
• Decrease legal costs

INCREASES
• Sales
• Profit
• Capacity
• Customer satisfaction
• Market share
• Competitive edge
GOAL OF COQ SYSTEM
• Employee satisfaction
The goal of using COQ is to increase prevention activities
in order to eliminate internal and external failures and to
MEASURING COST OF QUALITY
reduce appraisal activities.
COQ data can be measured and presented in many
different ways.
• % age of sales
• % age of profits
• % age of manufacturing cost
• Rs per direct labor hr.
• Rs per unit of product

STEPS IN IMPLEMENTING QUALITY COSTS

The following sequence applies to most organizations:
1. Review the literature on quality costs or consult
others in similar industries who are using the
WHY MEASURE COQ? same tool
• “When you measure what you are speaking about 2. Select one organizational unit of the company to
and express it in numbers, you know something serve as a pilot site. This unit may be one plant,
about it” – Kevin one large department, one product line, etc.
• “You cannot manage what you cannot measure” – 3. Discuss the objectives of the study with the key
Anon people in the organization
4. Collect whatever cost data are conveniently
Measure COQ – WHY? available from the accounting system and use
• COQ can be used to identify quality improvement this information to gain management support to
candidates make a full cost study.
• COQ provides one measure of comparing the success 5. Make a proposal to management for a full study.
of projects The proposal should provide for a task force of all
• COQ can provide cost data for motivational purpose concerned parties to identify the work activities
that contribute to the cost of poor quality. Work
✓ “Money is the language of management; you need to records, job descriptions, flowcharts, interviews,
show them the numbers” – Crosby and brainstorming can be used to identify the
activities.
 6. Publish a draft of the categories defining the cost
of poor quality.
7. Finalize the definitions and secure management
approval.
8. Secure agreement on responsibility for data
collection and report preparation
9. Collect and summarize the data. Ideally, this
should be done by accounting.
10. Present the cost results to management along
with the results demonstration quality
improvement project (if available). Request
authorization to proceed with a broader
company wide program of measuring the costs
and pursuing projects.

Clearly, the sequence must be tailored for each

organization.

GAINING APPROVAL
• Establish that the costs are large enough to justify
action
✓ Use the grand total to demonstrate the need for
quality improvement. This is the most significant
figure in a quality cost study.
✓ Relate the grand total to business measures.
• Estimate the savings and other benefits.
✓ If the company has never before undertaken an
organized program to reduce quality-related
costs, then a reasonable goal is to cut these costs
in two, within a space of 5 years
✓ Don’t imply that the quality costs can be reduced
to zero.
• Calculate the return on investment resulting from
improvement in quality
• Use a successful case history (a “bellwether” project)
of quality improvement in the company to justify a
broader program.
• Identify the initial specific improvement projects.
• Propose the structure of the improvement program
including organization, problem selection, training,
review of progress, and schedule
CONCLUSION
• The cost of poor quality can be reported in an endless
number of ways
• It can take a variety of different forms
• It can represent 10% of a company’s annual sales, or
it can represent 40% depending on how far they
“peel the onion.”