EM416/EA302

COST OF QUALITY
What is Quality cost?

A quality cost is considered to be any cost that the company would not
have incurred if the quality of the product or service were perfect.

Cost of Quality
Quality is measured by the cost of quality
which is the cost of non conformance-
which means the cost of doing things
wrong

PHILIP CROSBY
What will it cost to improve quality?
What will it cost not to improve quality?
Hewlett-Packard estimated that the cost of
not doing things right the first time was 25-
30% of revenues

Motorola has reduced the cost of quality by

about 5% of total sales, or about $480
million per year
Cost of Quality- definitions

• 3M quality cost equals actual cost minus no failure cost

• Costs incurred because poor quality may or does exist
• Cost of not meeting consumer’s requirements- the cost of doing
things wrong
3 views of cost of quality

• Higher quality means higher cost- the additional

benefits do not compensate for the additional
expense
• The cost of improving quality is less than the
resulting savings- Japanese view; savings from less
rework, scrap, and other direct expenses related to
defects
• Quality costs are those incurred in excess of if the
product was built right the first time- lost
customers, lost market share and foregone
opportunities
4 categories of COQ

• Prevention
• Appraisal
• Internal failure
• External failure
Quality costs

Total quality costs are the sum of prevention costs, appraisal costs, and
internal and external failure costs.

Cost of Quality
Prevention

• Activities which prevent defects from occurring; quality planning,

production reviews, training and engineering analysis to ensure that
poor quality is not produced
Appraisal

• Costs incurred to identify poor quality products after they occur but
before shipment e.g inspection
Failure

• Either during production (internal) or after the product is shipped

(external)

• Internal failure costs includes machine downtime, poor quality

materials, scrap, rework

• External failure costs include warranty costs, customer loss, market

share etc
Quality costs increase over time

Liability costs
Failure Costs

Failure found by customer

Field repair costs

Failure found at installation

Failure found at final inspection

Failure found at onset of manufacture
Failure found during design phase
Prevention Costs

Time when failure found

Cost of Quality
ICEBERG ANALOGY- hidden costs not seen
Hidden Costs of Poor Quality

Reprocessing
Customer returns
Rejects
Warranty expenses

Lost sales Loss of goodwill

Overtime to correct errors
Process downtime
Extra inventory Delays

Premium freight costs Extra process capacity

Extra inventory

Cost of Quality
Balanced Score Card
TQM Element Financial Measure Non-financial Measure

Results of customer
satisfaction survey.
Customer External failure cost.
On-time delivery.
satisfaction Field service expense.
Number of customer
complaints.

Defect rates
Yields
Appraisal cost.
Internal Lead times
Internal failure cost.
performance Idle capacity
Prevention cost.
Unscheduled machine
downtime

Cost of Quality
Traditional Model

Total quality costs

Failure costs
unit of product
Cost per good

Cost of appraisal
plus prevention

0% Quality of conformance 100%

Emerging COQ Model

Total quality costs

Failure costs
unit of product
Cost per good

Cost of appraisal
plus prevention

0% Quality of conformance 100%

Prevention Cost should take priority
COQ as motivator

• Companies under TQM do not focus on quality cost minimization.

• Quality improvement projects tend to focus on zero defects or defect
reduction to the six-sigma level.
The 1-10-100 Rule of COQ
Prevention 1, correction 10, failure 100
The 1-10-100 Rule

Prevention
$ 1
Correction
$ 10

Failure
$

$ 100

$
COQ Theme

• Costs are not incurred or allocated, but rather caused.

• Cost information does not solve quality problems, nor does it suggest
specific solutions.
• Problems are solved by tracing the cause of a quality deficiency.
Use of COQ information

• To identify profit opportunities

• To make capital budgeting decisions
• To improve purchasing and other supplier related
costs
• To identify waste in overhead
• To identify redundant systems
• To determine whether COQ are well distributed
• As an objective performance appraisal measure