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Cost of Quality

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Manish Dhar
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18 views3 pages

Cost of Quality

Uploaded by

Manish Dhar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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COST OF QUALITY (COQ)

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)


• Appraisal costs
• Internal failure costs
• External failure costs
• Prevention costs
• COQ and organizational objectives

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 three categories:

1. Appraisal costs are costs incurred to determine the degree of conformance to quality
requirements.
2. Internal failure costs are costs associated with defects found before the customer
receives the product or service.
3. 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.

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

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

COST OF QUALITY AND ORGANIZATIONAL


OBJECTIVES
The costs of doing a quality job, conducting quality improvements, and achieving goals
must be carefully managed so that the long-term effect of quality on the organization is a
desirable one.

These costs must be a true measure of the quality effort, and they are best determined
from an analysis of the costs of quality. Such an analysis provides a method of assessing
the effectiveness of the management of quality and a means of determining problem
areas, opportunities, savings, and action priorities.

Cost of quality is also an important communication tool. Philip Crosby demonstrated what
a powerful tool it could be to raise awareness of the importance of quality. He referred to
the measure as the "price of nonconformance" and argued that organizations choose to
pay for poor quality.

Many organizations will have true quality-related costs as high as 15-20% of sales
revenue, some going as high as 40% of total operations. A general rule of thumb is that
costs of poor quality in a thriving company will be about 10-15% of operations. Effective
quality improvement programs can reduce this substantially, thus making a direct
contribution to profits.

The quality cost system, once established, should become dynamic and have a positive
impact on the achievement of the organization’s mission, goals, and objectives.

Cost of Quality Example

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