PAF:

To understand how an increase in quality can reduce costs to improve quality, the company must be
able to know how and why an insufficient quality level can increase its costs. This is a method known as
the PAF “Prevention-appraisal-failure” model and it is one of the three models to reduce costs. These
costs can be classified into four main groups:

1. Prevention cost
2. Appraisal cost
3. Internal failure cost
4. External failure cost

Prevention cost is the cost of any action that is taken to investigate, prevent or reduce the risk of non
conformity. Examples include, Product or service requirements, Quality planning, Quality assurance,
Inspection equipment, Training, etc

Improving Quality is to apply industry’s best practices and through the process of quality control
prevention cost can be greatly minimized. This reduces the labor costs involved during inspection
because of higher quality control in the processes

Appraisal cost is the Cost of evaluating the achievement of quality requirements, Supplier, customer
evaluation of purchased material and Verification, Quality audits, Inspection equipment, Vendor rating,
etc.

Improving Quality is the Cost of evaluating the current processes in place and is a part of audit that helps
the organization to see where its position towards a quality and how the materials and processes help
each other towards meeting or exceeding customer satisfaction. The cost spent towards this is
important to know where the organization is and how close it is to its commitment to quality. A
successful analysis can prevent future costs linked to appraisal. Internal failure cost are the costs arising
within the company due to non-conformities and defects such as costs from Waste, scrap, rework,
inspection, downgrading, failure analysis, etc. Internal costs are the costs that are incurred due to
variation which happens because of defective products. This contributes to additional costs that occur in
rework and scrap. A good quality control system in place can minimize these incidents and help save
costs. Other internal costs include waste and scrap that are usually redundant because of lower quality
and variation that adds up to increased costs. A good practice is to follow “Get it right the first time” and
make sure every process is effective and right the first time. Reduction of manufacturing processes (due
to failure in the system) can lead to additional internal costs to the loss of efficiency and eventually
drives the cost up.
EXTERNAL FAILURE COST:

Costs arising after delivery to customer due to non-conformities and defects are the external failure
costs. Repair and servicing, warranty claims, complaints, returns, liability, loss of good will all are
included and make the company lose a lot of money.

Quality can be improved when the external cost is managed carefully. This is because the external cost is
driven by the customer and can lead to costs such as reputation loss which is harder to recover from
than that of the product itself.

Warranty claims can really bring a company down, as the finished product in the hands of a dissatisfied
customer and can lead to a loss of goodwill which can lead to loss of customers and customer loyalty.
The cost of repair/servicing can lead to a factor of higher costs which needs to be minimized if not
preventable. A good way of reducing warranty claims is by producing a higher quality of goods that
exceed customer satisfaction. The PAF model is a well-known and widely used for quality costing. This
model encourages collection and monitoring of both data and processes in order to improve quality.