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Hidden Cost of Quality: A Review

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 Hidden Cost of Quality: A Review
Amar Murumkar1, Dr. S.N. Teli2, Dr. U. M. Bhushi3, Dr. A. S. Deshpande4
1
PG Student, Saraswati College of Engineering, Kharghar, Navi Mumbai
2
Professor, Mechanical Engg. Dept., Bharati Vidyapeeth College of Engineering, Kharghar
3
Principal, Sahyadri College of Engineering and Management, Mangaluru, Karnataka
4
Principal, Gogte Institute of Technology, Belagavi, Karnataka.

Abstract

The objective of this paper is to give a survey of research literature and models on the
topic of COQ and to provide a basic understanding of quality costs. The present study addresses
need by first refining the traditional ‘Prevention–Appraisal–Failure’ (PAF) categories of
quality costs and hidden costs. In this paper, we propose that prevention, appraisal and failure
are not the only quality costs. There are other hidden costs that are identified. This paper
presents benefits and issues related with COQ by various researchers. A case study is presented
on assessment of indirect quality cost. The company should identify such invisible quality costs
to reduce customer dissatisfaction and retain them. This study aims at discussing COQ to
improve quality and reduce the cost of product simultaneously.

Keywords: Cost of Quality, Hidden Costs, COQ Models

Introduction

What survive organization in the today’s competitive market is customer satisfaction

which leads to increase sales and profit. One of the most effective items that influence customer
satisfaction is quality, so most of the organizations pay attention to quality and spend money
to create an appropriate level of quality in their products or services. Also organizations have
a special attention to the cost while the reasonable and acceptable level of cost can be another
competitive weapon for them. If an organization does not consider to quality they will face with
direct and indirect cost resulting from remanufacturing or lost customer respectively, so
organizations try to reduce these costs where cost reduction will be impossible if they are not
recognized and measured and managed properly, as Dane explained “to manage we must
control, to control we must measure, to measure we must define, to define we must quantify".
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 cost. This can only happen 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 managers. To collect quality costs an
organization needs to adopt a framework to classify costs; however, there is no general
agreement on a single broad definition of quality costs. The broad concept of the “economics
of quality” can be traced back to the early 1950s when the “cost of quality” (COQ) was first
propounded in Juran’s Quality Control Handbook and in Feigenbaum’s Total Quality Control.
Since then, many quality-control experts have written about quality-cost systems; and the

1
importance of quality-related costs has been increasingly recognized. Quality-related costs
represent a considerable proportion of a company’s total costs and sales.
A number of studies have examined the measurement of quality costs and the quality
level. In 1993 Juran and Gryna (1993) claimed that in production companies, the annual costs
of poor quality amounted to approximately 15% of sales, and in service companies to
approximately 30% of production costs. In 2001 Giakatis, Enkawa, and Washitani stated that
quality costs ranged from 5 to 30% of sales. Chiadamrong in 2003 estimated their proportion
around 10% of production costs, while Kent (2005) stated that the total quality costs were 5-
15% of turnover. Experts estimate that the cost due to poor quality can range as high as 40%
of total sales with the industry average running close to 25%. Many feel that it should be only
about one-tenth of this amount, or about 2.5%. This is clearly an area where substantial savings
can be achieved. Yet a survey conducted by Grant Thornton, a major accounting and consulting
firm in the United States, reported that while 83% of companies surveyed said that quality is a
top priority, less than one-third have calculated costs associated with quality.

Cost of Quality or Quality Costs

The concept of Cost of Quality (COQ) has been around for many years. Dr. Joseph M.
Juran in 1951 in his Quality Control Handbook included a section on COQ. The Quality Cost
Committee under the Quality Management Division was established by the American Society
for Quality (ASQ) in 1961. However it was Philip B. Crosby who popularized the use of COQ
because of his book Quality is Free in 1979. As Machowski and Dale said “There is no general
agreement on a single broad definition of quality costs” , however the COQ is the sum of costs
incurred to guarantee and sustain acceptable quality level (cost of good quality) plus the loss
for failing to achieve that specific quality level (cost of poor quality).
In other words COQ is understood as the sum of non-conformance and conformance
costs while Cost of non-conformance is the cost of poor quality affected by service and product
failures and cost of conformance is the fee paid for prevention of poor quality .Furthermore
some other researchers identified COQ as a performance measurement tool that provides a
measure of cost specifically related to the achievement or non-achievement of services or
product quality .These various approaches to categorize and identify the quality costs resulted
in different quality cost models.
In general, the cost of quality (COQ) is the total of the cost incurred for quality control
process and the cost of product defect. Measuring quality costs are an essential step in achieving
competitiveness because these costs are strongly related to the company’s annual revenue. One
of the most important categories of quality costs is that of external failure costs. Within this
quality cost category, there are the claims against the warranty (Cauchick, 2004). COQ
concepts affect operating costs, profitability, and consumer needs. Higher product quality
standards have been a trend among world-class manufacturers since the 1960s. Several studies
indicate that COQ is around 30% of total manufacturing costs. Measuring the quality cost in a
small-scale industry is very important and useful. It helps to identify the specific quality levels
and ultimately improves the quality (Chopra and Garg, 2011). The objectives of having a COQ
system in the industry are (Uyar, 2008); (i) Overall quality improvement; (ii) To set cost
reduction targets and measure progress; (iii) To have better control of quality activities; (iv) To
have better strategic plans; (v) To evaluate the effectiveness of the quality system; (vi) To

2
motivate employees (Srivastava, 2008) explained taxonomy of quality costs for his research
study as shown in Figure 1.
Quality Costs

Tangible Costs Intangible Costs

• Lost Current Sales
• Lost Future Sales
Prevention Costs Appraisal Costs Failure Costs • Loss to Society
e.g. e.g.
• Retests
• Validations
• MIS
• Internal Audit
Internal External
Generation e.g. e.g.
• Area Line Clearances • Rework • Customer Complaint
• Approvals Education • Concessional • Rodent Damage
&Training Pouch Busting • Glass Bottle
• Deviation Breakages
• Expired Products
FIGURE 1: TAXONOMY OF QUALITY COSTS

(Burns, 1976) measured the quality costs in a machine-tool company and these costs
were the equivalent of 5% of the sales turnover. The allocation of the quality costs was
prevention 3.3 %, appraisal 40.3% and failure 56.4%. In a study of a steel foundry, (Moyers
and Gilmore, 1979) reported the quality costs at 38% of sales. The quality costs were allocated
as prevention costs 6%, appraisal costs 14% and failure cost 80%. Generally, in the literature,
quality costs are reported to be between 5% to 30% of sales. Organizations should consider
COQ as an integrated approach and long-term process, and focus on the cost factors to improve
customer satisfaction. The COQ had a direct impact on the overall financial goal of a company,
even a small reduction in COQ may boost the profitability of a company by a significant
amount.
Taguchi method was developed by Dr. Genichi Taguchi as shown in Figure 2. It
combined engineering and statistical methods that achieve rapid improvements in cost and
quality by optimizing product design and manufacturing processes. Taguchi defined quality as
“the loss imparted to society from the time the product is shipped.” Fundamental to this
approach to quality engineering is this concept of loss. He associated loss with every product
that meets the customer’s hand. This loss includes, among other things, consumer
dissatisfaction, added warranty costs to the producer, and loss due to a company’s bad
reputation, which leads to eventual loss of market share (Campanella, 1999).

3
Where, K= Cost Coefficient, X = Value of Quality Characteristic and Y= Loss in $

FIGURE 2: TAGUCHI QUALITY LOSS FUNCTION

Quality Costs are usually quantified in terms of scrap and rework, warranty or other
tangible costs. As we saw, however, these constitute only the “tip of the iceberg” as shown in
Figure 3. As the company gains a broader definition of poor quality, the hidden portion of
iceberg becomes apparent. The bottom of the iceberg represents the majority of the cost of poor
quality and at the remaining are hidden costs or long-term losses related to
engineering/management time, inventory, customer dissatisfaction, and loss of company’s bad
reputation, which leads to eventual loss of market share value (DeFeo, 2001).

FIGURE 3: COST OF POOR QUALITY

Cost of Quality Model

(Feigenbaum, 1951) classified the costs associated with conformity along four
dimensions: (1) Prevention Cost; (2) Appraisal Cost; (3) Internal Failure Cost; (4) External
Failure Cost. Prevention cost increases, the total number of errors will decrease, thereby
reducing the total error cost. Appraisal costs on the other hand, do not reduce the total number
of errors. The only detect the error before the product is delivered to the customer. The
improvement of quality through quality cost reduction (defect reduction, rework, reduce waste,
eliminate and machine idle time reduction) leads to productivity improvements (Harrington,
1987).

4
 (Carr and Ponoemon,1994) observe the following relationships: internal failure is the
most expensive and prevention are the least expensive quality cost component, the combination
of internal and external failure costs is always higher than prevention and appraisal costs, and
the quality rejects rate decreases with increased volume output. Moreover, this study suggests
that only internal failure and external failure costs have a statistically significant correlation
with the level of quality.
The use of COQ models in practice that is the implementation of a quality costing
system and cost of quality reporting in the companies. COQ models into five groups of generic
models as mentioned below Table I (Schiffauerova and Thomson, 2006).

TABLE I: GENERIC COQ MODELS AND COST CATEGORIES

Generic Cost /activity categories Examples of publications

Model describing, analyzing or developing
the model
P-A-F Prevention+ appraisal+ failure Feigenbaum, 1956; Purgslove and
models Dale, 1995; Merino, 1998; Chang et
al, 1996; Sorquist, 1997b; Plunkett
and Dale, 1998b; Tatikonda and
Tatikonda, 1996; Bottorff, 1997;
Israeli and Fisher, 1991; Gupta and
Campbell, 1995; Burgee, 1994.
Crosby’s Conformance + non- Suminsky, 1994; Denton and
model conformance Kowalski, 1998.
Prevention + appraisal Sandoval-Chavez and Beruvides,
+failure + opportunity 1988;
Opportunity Murderers' and Ansari, 1987.
or intangible Conformance Carr, 1992; Malchi and McGurk,
cost models +non-conformance + 2001.
Opportunity
Tangibles + intangibles Juran et al., 1975.
P-A-F (failure cost includes Heagy, 1991.
opportunity cost)
Process cost Conformance +non- Ross, 1977, Marsh, 1989; Goulden
Models Conformance and Rawlins, 1995; Crossfield and
Dale, 1990
ABC Value-added + non-value- Cooper, 1988; Cooper and Kaplan,
Models added 1988; Tsai, 1998; Jorgenson and
Enkerlin, 1992; Dawes and Siff, 1993

The basic assumptions of the PAF (Prevention-Appraisal-Failure) model are that

investment in the areas of appraisal will reduce failure costs and that further investment in
prevention activities and other similar preventive measures will also reduce failure costs.
(Porter and Rayner, 1992). Crosby sees quality as “conformance to requirements”, and

5
therefore, defines the cost of quality as the sum of price of conformance and price of non-
conformance (Crosby, 1979). Intangible costs are costs that can be only estimated such as
profits, not earned because of the lost customers and reduction in revenue owing to non-
conformance. (Sandoval and Beruvides, 1998) incorporate opportunity losses into traditional
P-A-F quality expenses. According to them, opportunity losses may be broken down into three
components: Under-utilization of installed capacity, inadequate material handling and poor
delivery of service.
The process cost model developed by Ross (1977) and first used for quality costing by
Marsh (1989) represents quality cost systems that focus on process rather than products or
services. Process cost is the total cost of conformance and nonconformance of a process. The
use of a process cost model is suggested as a preferred method for quality costing within total
quality management (TQM) as it recognizes the importance of process cost measurement and
ownership, and represents a more integrated approach to quality than a P-A-F model (Porter
and Rayner, 1992).
Tsai (1998) proposes an integrated COQ-ABC framework, in which ABC and COQ
systems are merged and share a common database to supply various cost and non-financial
information for related management techniques. The long-term goal of ABC systems is to
eliminate non-value added activities and to continuously improve processes, activities, and
quality so that no defects are produced. The ABC approach costs of their respective activities
and the cost of activities to cost objects.
The various models of the cost of quality and stated that the cost is the driving force for
successful business process and to be competitive in the today’s business, it is very much
required that one has to be cost competitive and shown is as Table II (Schiffauerova and
Thomson, 2006).
TABLE II: COST OF QUALITY MODELS

Company COQ Model Base for Reported gains Reference

COQ
Calculation
Hydro PAF % of annual • COQ reduced Purgslov
Coatings, UK (COQ = sales turnover from 4.1% to e and
(Industrial P+A+IF+EF) % of raw 2.5% in 4 years Dale,
coatings material usage • Investment in 1995;
manufacturing) quality paid Purgslov
back in the first
e and
year. Dale,199
6
British PAF % of total • The objective to Hesford and
Aerospace (COQ = manufacturing reduce cow by Dale, 1991
Dynamics, UK P+A+F) cost one third in one
(Aerospace) year
Allis-Chalmers PAF % of product • COQ reduced Kohl, 1976
Corporation, (COQ = sales from 4.5% to
US P+A+IF+EF) 1.5% in 3 years

6
 Solid State Crosby % of the • COQ reduced Denton and
Circuits (COQ = COC revenue from 37% to Kowalski,
+ CONC) 17% 1988

Lebanon Steel Opportunities % of sales • The objective to Moyer and

Foundry, USA & alternative reduce failure Gilmore,
COQ = costs by50% 1979
P+A+F
COQ - Cost of Quality; CONC – Cost of non conformance ; IF- Internal Failure;
EF- Extrenal failure; COC - Cost of Conformance; P – Prevention Cost; A-
Apprisail Cost; F=IF+EF

The model most frequent used at companies is the P-A-F model (Porte and Rayner,
1992). The most visible difference observed in Table 2, a variety of the selected basis for COQ
calculation. The frequently used among the studied companies is a calculation of COQ as a %
age of total sales or company turnover. Even if, the same calculation base is used, there are still
wide variations in published Figures, because every quality costing system is usually adjusted
according to every company’s specific needs, and different elements are included or deemed
unimportant at and left out of the calculations.
The above mentioned classical view of quality cost behaviour in the P-A-F model holds
that an optimum economic quality exists at the level at which the cost of securing higher quality
would exceed the benefits of the improved quality (BS 4778, 1987). This concept is, however,
often challenged, and it is argued that there is no economic level of quality, that, the spending
on prevention could be always justified and that optimum quality level in fact equals zero
defects. Shank and Govindarajan (1994) discuss the two conflicting views of the economic
level of quality costs that are shown in Figure 4 (Schiffauerova and Thomson, 2006). The
results of the quality cost simulation study Burgess (1996) suggest that both views can be
reconciled within one model. Burgess supports the classical view in certain time constrained
conditions, whereas under an infinite time horizon the modern view prevails.

FIGURE 4: CLASSIC AND NEW MODEL OF COQ

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Indirect Quality Cost and Hidden Quality Cost

The term ‘hidden’ cost is used to indicate failure costs that are inadequately recorded
in company accounts and/or failure costs that are never actually discovered. Such ‘hidden’ costs
might be manifested as extra manufacturing costs as a result of defects or as additional costs
for materials, machining time, and inventory space for scrapped and reworked parts. Indeed
have asserted that they might amount to 10–15% of turnover, and suggested that they could
constitute up to 10% of actual production costs. Some researchers also estimated that the hidden
quality costs are more than three times of the visible costs. Quality failures bear substantial
hidden costs.
Although they cannot be easily measured, they exist, they cost and they hurt. Among
other things, such hidden costs include deterioration of the company’s reputation, loss of
customers, project delays, increased overheads and liability payments.

Table III describes costs that are considered in hidden costs as defined by various researchers
referred in this paper.

TABLE III: COST ITEMS INVOLVED IN HIDDEN COSTS AS DEFINED BY VARIOUS RESEARCHERS.

Researchers Cost items involved in Hidden Costs

Chen and Tang (1992)
Juran and Gryna
(1993)
Harry and Schroeder
(2000)
Giakatis and Washitani
(2001)
Chen and Yang (2002)
- loss of productivity, overtime to make up production,
customer dissatisfaction costs, loss-of-reputation costs
- lost scales, process downtime, extra inventory, lost
discounts , damaged goods, premium freight costs,
customer allowances, overtime to correct errors, loss of
goodwill, paperwork errors, delays, obsolete inventory,
incorrect orders shipped , extra process capacity
- the cost of “handed back”, the resultant costs of the defect
bypass the quality-control system, the extra costs in terms
of additional labor hours and inventor, the opportunity cost
of lost customer loyalty
- unsuccessful prevention activities plus the sequential
losses, unsuccessful appraisal activities plus the sequential
losses, the inefficiency of production equipment, over
quality
- waste of human resources, equipment, and time, the costs
caused by inadequate quality, delivery, reliability, increase
engineering time, increase management time, shop and
field downtime, delivery problem, lost order, lost market
share, decreased capacity

More hidden quality costs can be expected with further investigation, for example, the
quality costs of employee motivation (or the lack of it), which is a new area of quality cost that
has never been explored previously. Dale and Plunkett (1999), included loss of sales due to

8
poor quality. The implication of this study is that a traditional accounting system is inadequate
to meet the need of tracking quality costs. Most researchers agree that the magnitude of the
hidden quality costs is just too big to be ignored (Campanella, 1999). The importance of the
manufacturing loss and design loss is made clear if we consider how large they are. They are
more than three times the traditional quality costs, and they represent a figure around 30% of
the company’s throughput. If we take into account that the company concerned has already
reached a very high level in quality costing, the figures should be much higher in other
situations. Manufacturing loss and design loss are too large to ignore them (Giakatis and
Washitani, 2001). Bhote (1995) argues the value of customer loyalty and suggests that the loss
of repeat sales from dissatisfied, customers or the inability to win new customers because of
unfavorable word-of-mouth publicity is the most important yet least known aspect of quality
costs. He further argues that companies must somehow understand their customer loyalty
situation in order to make sound quality management decisions. Quality failures bear
substantial hidden costs. Although they cannot be easily measured, they exist, they cost and
they hurt. Among other things, such hidden costs include deterioration of the company’s
reputation, loss of customers, project delays, increased overheads, and liability payments. A
company that cares about its long-term performance and reputation must consider the hidden
costs as if they were as tangible as the measurable costs (Rosenfeld, 2009). A significant portion
of hidden quality costs which may be termed an “opportunity loss”.

Benefits of Cost of Quality System

The Table IV illustrates the benefits of cost of quality system highlights by various authors.

TABLE IV: BENEFITS OF COST OF QUALITY SYSTEM

Authors Benefits
Harrington 1. Getting management attention - talking to management in
(1999) dollars provides them within a formation that they can relate to.
It takes quality out of the abstract and makes it a reality that can
effectively compete with cost and schedule.
2. Changing the way, the employee thinks about errors. Employees
need to understand the cost of errors they make.
3. Providing a better return on the problem-solving efforts- poor-
quality cost ``dollarizes'' problems so that corrective action can
be directed at the solutions that will bring maximum return.
Carson (1986) 1. It establishes the economics of quality in the organization and
can justify the implementation of a quality Improvement
Program.
2. It promotes awareness of quality problems and provides
motivation to solve them.
3. It defines major loss areas and enables targets to be set.
4. It provides an effective performance measure and control.
Lari and 1. Identifying areas where quality costs savings are possible and
Arben (2013) reducing total Quality Costs.

9
 2. Allowing unexplored or underestimated processes to become
focal points for improvement opportunities.
3. Helping managers and employees understand and control
processes.
4. Allowing the measurement of COQ to become more systematic
and effective.

From the above Table IV, we conclude that COQ is a powerful tool for management that
understands the magnitude of the quality problem, pinpoints opportunities for improvement
and measures the progress being made by the improvements. And also, the quality costing
system has the potential to become an excellent tool in the overall management of a business.

Establishing Quality Cost System

The objective of the quality cost system is to identify areas where quality improvements
can be achieved (Rodchua, 2006). (Maria, Elaine, and David , 2009) surveyed, that companies
had implemented a quality cost system for which the main implementation reasons were to: (1)
Increase product/service quality; (2) Achieve significant cost reductions; (3) Prioritize
improvement actions with the highest potential payoff; (4) Increase the company’s
competitiveness. The Table V illustrates the steps for establishing a quality cost system
explained by various authors.

TABLE V: ESTABLISHING QUALITY COST SYSTEM

Authors Steps for Establishing Cost of Quality System

Rodchua 1. Making a team for quality cost program implementation.
(2006) 2. To decide about quality cost base (it may be numbered of direct labour
hour, sales amount, product units).
3. To collect cost of quality data.
4. Analysing the cost of quality data.
5. Finding out ways and means to reduce Quality Costs.
6. Repeating the same top management and convincing them for any
proposed investment (if any).
7. Implementing the agreed proposed changes in the whole system.
Chopra 1. Constitute “Cost of Quality” team
(2011) 2. Define its scope of work
3. Creating awareness among employees
4. Identify the quality-related activities
5. Formulate the methodology for assigning money cost to quality-
related activities
6. Assign money to cost to all quality activities.
7. Place these activities under different cost of quality categories
(Prevention, Appraisal, Internal failure costs and External failure
costs).

10
 Lari and 1. Define Quality Costs for operational processes
Arben 2. Provide a data collection structure to collect quality costs data related
(2013) to business process
3. Use a systematic approach and an integrated, cost function to
calculate the overall COQ
4. Monitor changes in costs
5. Create a cycle of cost improvement and enhancement of operational
process performance
6. Create a man-machine knowledge base system to suggest solutions
that may improve the overall performance of organizations through
the improvement of operational processes
Harrington 1. Step1: Develop a financial and promising implementation team
(1987) 2. Step 2: Present the poor –quality- cost concept to top Management
3. Step 3: Develop the implementation plan
4. Step 4: Select a trial area
5. Step 5: Start the program in the selected area.
6. Step 6: Identify and classify poor-quality-cost elements for the
selected area
7. Step 7: Determine staging for each poor quality-cost element
8. Step 8: Establish inputs to the poor-quality –cost system
9. Step 9: Establish a required output format
10. Step 10: Establish the additional data system required to support the
poor quality
11. Step 11: Review the status with the plant management team
12. Step 12: Start the trail period
13. Step 13: Review the monthly poor-quality- cost report
14. Step 14: Based on the findings, modify the program as required.
15. Step 15: Expand the program to the reminder of the plant and the
company.

The above Table V concludes that, COQ system approach is well organized and systematic
method.

Issues and Difficulties for Cost of Quality System

The Table VI illustrates the issues and difficulties for tracking of COQ of various authors.
TABLE VI: ISSUES AND DIFFICULTIES IN TRACKING OF COQ

Authors Findings
Montgomery 1. Using COQ information as a scorekeeping tool rather than as a
(1996) driver for continual improvement
2. Preoccupation with perfection in determining the COQ figures.
3. Underestimation of the depth and extent of commitments
required to be made in prevention.

11
 Shepherd 1. Limited correlation between the accounting or finance numbers
(1998) and those reported as a result of COQ.
2. Limited (or no) involvement of finance in creating the numbers.
3. The impact of quality failure on the administrative / overhead and
selling costs was not well understood; cost of quality used.
4. The impact of process failures was often ignored, when this did
not result in product failures (e.g. Down time from lack of quality
maintenance).
Roden and 1. Most of the difficulties encountered were addressed with the
Dale (2001) involvement of senior management, which should make any
make any subsequent cost collections easier.
2. Low level of investment by the company in prevention activity,
characterized by a lack of resources in the departments most
closely related to prevention activities.
3. The lack of cost visibility, and this is a major stumbling block to
the collection of quality cost data.
4. The culture of the firm is not particularly open and such is not
conducive to an investigation as widespread and searching as
quality costing.

Reducing the cost of poor quality will increase the overall profit more than doubling sales.
Most of companies are spending more than three times as much for poor quality as they are
making in profit. Customers are willing to pay more initially to reduce their life-cycle cost.
Reducing poor-quality cost has the advantage of providing better quality, which will increase
the demand for products, resulting companies capturing a bigger market share. The good thing
about reducing poor-quality cost is that both the customers and the company gain (Harrington,
1987).
Another approach that focuses on the relationship between suppliers, companies and
customers. Suppliers, being a source of material, are an important in any supply chain; and
thus evaluating a supplier’s quality-related activities is of utmost importance. Improving the
quality of all supply chain processes leads to cost reductions, improved resource utilization,
and improved process efficiency. So, that next section covers the literature survey on supplier
quality management.

Case Study: Assessment of Quality Cost Plant-I

Plant-I manufactures heavy vehicles. To ready itself for business continuation, this
company obtained Euro III / Euro IV emission certification. This could be met only with
improvement in the technology and quality. The cost of the exhaust system was typically INR
2000/- per vehicle. This went up significantly to comply with changes in noise and emission
regulations, raising the cost of the BOM (Bill of Material) and making the exhaust system
among the top 3 contributors to cost of manufacture. A typical Euro III exhaust system costs
INR 15000 (increased 7.5 times). Hence the need to focus on a high-ticket item, i.e. exhaust
system. In this company, the focus was on assessment of indirect quality cost. We identified
quality improvement opportunities for exhaust systems since they are critical aspects of the

12
vehicle attribute engineering. Investigation was conducted into four categories as mentioned
below:
• Manufacturing (Suppliers)
• Incoming and Handling (In-House)
• Chassis Assembly (In-House)
• Design and Development.
The collected images were subjected to thorough observations and the identified cost
of bad quality converted into opportunities for quality improvement. Then after ascertaining
the impacts of bad qualities (Indirect quality costs), the same was conveyed to the company.
The impact of indirect quality is huge but difficult to measure. The company should identify
such invisible quality costs to reduce customer dissatisfaction and retain them.

Manufacturing (Supplier): The opportunities for quality improvement for manufacturing

suppliers are shown in Table VII.

TABLE VII: OPPORTUNITIES FOR QUALITY IMPROVEMENT FOR MANUFACTURING(SUPPLIERS)

Opportunity for Impact Observations

improvement
Bending • Inconsistency in
product quality which
can lead to assembly
difficulties;
• Exhaust assembly;
• Assembled in stressed
conditions;
• Score marks.
• Poor aesthetic looks
Wrinkles • Clamp insertion and
Improvement
fitment issue;
• Increase in back
pressure;
• Poor aesthetic looks;
• Reduced durability;
• Corrosion initiation
from wrinkles.
Flaring /Sizing • Gas leakage;
– Irregularity • Difficulties in pipe
in roundness assembly insertion;
• Pipe clamp mounting
issue.

13
 Welding Quality • Potential leakages;
• Whistling noise;
• Weld penetration.

Paint Quality • Poor resistance to

corrosion;
• Poor aesthetics;
• Paint stickiness.

Flaring /Sizing – • Fitment issue;

Step sizing • Gas leakage.

Incoming and Handling: Opportunities for quality improvement for incoming and handling
are shown in Table VIII.

TABLE VIII: OPPORTUNITIES FOR QUALITY IMPROVEMENT FOR INCOMING AND HANDLING

Opportunities Impact Observations

for improvement
Muffler inlet • Fitment issues;
damage – • Gas leakage.
damage due to
handling

Packing tapes • Difficulty in

used for silencer assembly line to
inlet and outlet remove the tape;
(instead of end • Debris of tapes
caps) – Not enters the muffler
removed fully and clog the
during assembly DOC / Muffler.

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 Handling of • Dents on the
silencers on silencer;
shop floor • Scratches on heat
shield impacting
aesthetics;
• Scraping off paint
leading corrosion.
Exhaust pipe • Gas Leakage;
edge damage • Fitment Issues –
Insertion;
• Clamp insertion.

Pipe storage on • Inlet and outlet

trolleys damage;
• Difficulty in
insertion;
• Gas leakage.

•
Quality Improvement opportunities for Chassis Assembly:

Opportunities for quality improvement for chassis assembly are shown in Table IX.

TABLE IX: OPPORTUNITIES FOR QUALITY IMPROVEMENT FOR CHASSIS ASSEMBLY

Opportunities for Impact Observation

improvement s
Bracket orientation • Residual stress on the
not controlled – exhaust pipes and brackets,
most of the brackets leads to failure;
are assembled in • Gas leakage due to
Strained / tilted misalignment;
position. • Clash with adjacent
components;
First pipe assembly •• Poor aesthetics;
Residual stress on the TC
with TC elbow with • Mounting rubber
casing leads to TCdamage.
failure;
the help of tommy • Residual stress on the
bars. exhaust pipes and brackets,
leads to failure;
• Gas leakage due to
misalignment.

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 Muffler assembled • Clash with adjacent
with an angle / tilt components like propeller
position. shaft, fuel tank, etc.;
• Not able to align exhaust
pipe with
TC elbow while engine drop;
• Gas leakage due to mouth
expansion.
Exhaust system • Damage to complete exhaust
alignment by system
kicking. • Rubber mounts damage.

Flex pipe handling / • Premature failure of

assembly process flex pipe;
first pipe self- • Flex pipe winding loosening;
weight straining • Gas leakage through flex
flex pipe if not pipe.
connected with
engine TC.

Design and Development: The opportunities forquality improvement in design and

development are shown in Table X.

TABLE X: OPPORTUNITIES FOR QUALITY IMPROVEMENT FOR DESIGN AND DEVELOPMENT

Opportunities for Impact Observations

Improvement
Exhaust jet hitting the • Tyre heating which leads to
tires. faster tyre wear;
• Smoke deposition at the
adjacent tyre aggregates.

Muffler mounting
bracket tightening nut • Increased roll out time.
accessibility issue in
SCR system.

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 O-clamp design - • Clamp tightening not effective;
bolt/nut not sitting • Leads to gas leakage;
properly. • Unwanted stress at radius.

lex pipe strained due • Premature flex pipe and Second support
to shorter length of bracket failures bracket modified to
second mtg., bracket. suit

The above mentioned typical issues impacting indirect cost of quality lead to customer
dissatisfaction during warranty period. This will be cost incurred to company as well as cost
incurred to customers, leading to loss of company reputation. This is a huge factor and difficult
to measure. The loss to companies could be calculated knowing the labour charge for rework,
material cost etc.

Reduction of Quality Cost Using Six Sigma

A Six Sigma initiative is designed to change the culture in an organization by the way
of break through improvement in all aspects of the business. Six Sigma is a business strategy
that seeks to identify and eliminate causes of errors or defects or failures in business processes
by focusing on outputs that are critical to customers. It is also known as measure of quality that
strives for near elimination of defects using statistical methods. It is a powerful approach to
process improvement, reduced cost, increased business profitability and revenue growth.
In process improvement efforts, a defect per million opportunities (DPMO) is a measure
of process performance. DPMO is stated in opportunities per million units for convenience. To
achieve Six Sigma, a process must not produce more than 3.4 DPMO. A Six Sigma opportunity
is then the total quantity of chances for a defect. This is accomplished through the use of two
Six Sigma sub-methodologies: Define Measure, Analyze, Improve, and Control (DMAIC) and
Define, Measure, Analyze, Design, and Verify (DMADV). The Six Sigma DMAIC is an
improvement system for existing processes falling below specification and looking for
incremental improvement. The Six Sigma DMADV is an improvement system used to develop
new processes or products at Six Sigma quality levels.

TABLE XI: SIGMA LEVEL AND THE COST OF QUALITY

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 Sigma Level DPMO Quality Level COPQ (% of Sales)
2 309,000 69% Over 40%
3 67,000 93.3% 25–40%
4 6,200 99.4% 15–25%
5 230 99.98% 5–10%
6 3.4 99.997% 0–5%

Cost of quality is measure of quality level. Cost of quality is correlated with company’s
bottom line & lean six sigma is the process of asking questions that lead to tangible &
quantifiable answers that ultimately produce profitable results. Typical North American
company’s average sigma level is around 3 sigma. In other words, 25 to 30 % of most
company’s annual revenue gets chewed up by their cost of quality. Thus if company can
improve its quality by 1 sigma level, its net income will increase hugely, approximately 10 %
net income improvement, see the Table XI. Making use of six sigma concept helps keep the
quality of the product controlled in a pleasing way to avoid unnecessary downsizing of one’s
overall profits. In cases where business quality costs starts to limit incoming profits, the best
way to save everything is employing the six sigma methodology to the entire operation. This
can not only boost the quality of the business output, but the morale of the employees as well.

Conclusion

The literature review of the COQ suggests that companies that use COQ programs have
been quite successful in reducing COQ and in improving quality for the customer. The model
most commonly implemented in practice is the classical P-A-F approach; however, other
quality cost categorizations are documented as being used with success. Here hidden cost play
a major role in cost increasing element, it can be identified and quantified in COQ model
focusing as to eliminate task. Indirect poor quality costs include the intangible costs of customer
dissatisfaction, loss of reputation, and resultant loss of sales.
Companies may make significant investments into quality improvement programs such
as Six-Sigma or Kaizen, and managers need to be able to assess the return on investment of
these programs. As discussed in case study the impact of indirect quality is huge but difficult
to measure. The study findings points out the fact that the hidden cost of quality is more than
3 times higher than the direct quality cost elements in the manufacturing firm and most of these
hidden costs can be reduced or even eliminated by proper tracking and understanding the root
causes. The company should identify such invisible quality costs to reduce customer
dissatisfaction and retain them.
Ignoring COQ can make goods and services more expensive, which affect
competitiveness, salaries, jobs and standard of living. Organizations should consider COQ as
an integrated approach and long-term process, and focus. An accurate measurement of quality
costs has many potential benefits. These include: (i) focusing upon areas of poor performance
that need improvement; (ii) assisting in the overall control of quality; and (iii) raising the firm’s
competitive advantage through higher quality and lower costs.
Making use of six sigma concept helps keep the quality of the product controlled in a
pleasing way to avoid unnecessary downsizing of one’s overall profits. A well-planned and

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suitably implemented cost of quality programme can reduce quality costs to 2.5 per cent of total
revenue (Crosby, 1980). It is therefore important that the cost of quality is used as a
management tool and as an indicator of the economic health of the organisation. The COQ had
a directly impact on the overall financial goal of a company. Even a small reduction in COQ
may boost the profitability of a company by a significant amount. COQ technique resulted in
cost cutting as well as quality improvement. Hence, efforts should be made to reduce the COQ
as much as possible.

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