COST OF QUALITY

Both good and poor quality come with associated costs, and it is very important for an organization to set out thinking of what type of quality costs it is willing to incur. While at this, it is also important to think of the consequence of the choice made.

Costs do not result from only producing and fixing failures; a high amount of costs comes from ensuring that good products are produced. The cost of quality is explained here as a more comprehensive concept covering the cost of poor quality and the cost of good quality. In short, any cost that would not have been expended if the quality were perfect contributes to the cost of quality.

As defined by Philip B. Crosby in his book Quality Is Free, the cost of quality has two main components: the cost of good quality (or the cost of conformance) and the cost of poor quality (or the cost of non-conformance).

• The cost of poor-quality affects:
  • Internal and external costs resulting from failure to meet requirements.
• The cost of good quality affects:
  • Costs for investing in the prevention of non-conformance to requirements.
  • Costs for appraising a product or service for conformance to requirements.

Quality costs fall into the following four categories:

• Prevention Costs: incurred to keep a quality problem from occurring. It is the least expensive type of quality cost, and so is highly recommended. For example, proper employee training in assembling products and statistical process control for spotting processes that are beginning to generate defective goods. A focus on prevention tends to reduce preventable scrap costs. Other examples of prevention costs include quality planning, supplier evaluation, error proofing.

• Appraisal Costs: As with prevention costs, an appraisal cost is incurred in order to keep a quality problem from occurring. This is done through a variety of inspections. The least expensive is having production workers inspect both incoming and outgoing parts to and from their workstations, which catches problems faster than other types of inspection. Other appraisal costs include the destruction of goods as part of the testing process, and supervision of the testing staff. Other examples include field testing, process audits.

• Internal Failure Costs: An internal failure cost is incurred when a defective product is produced. This appears in the form of scrapped or reworked goods. The cost of rework is part of this cost. Others include delays, re-designing, shortages, re-testing, downtime, downgrading

• External Failure Costs: This is incurred when a defective product was produced and released to a customer. This cost is much more expensive because it includes the cost of product recalls, warranty claims, field service, and potentially even the legal costs associated with customer lawsuits. It also includes a relatively unquantifiable cost, which is the cost of losing customers/ reputational damage.

Where do Quality Costs Occur?

Quality costs can arise anywhere in an organization. There may be product design issues that begin in the engineering department, as well as manufacturing problems that can create product flaws. Further, the Procurement department may acquire substandard components that result in product flaws. In addition, the order entry department may have incorrectly entered a customer order, so the customer receives the wrong product. These issues all result in quality costs.

Impact of Quality Costs on Profitability

In closing, as an organization which would you rather invest in “Good cost of quality” OR “Poor Quality Costs”?

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