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Tuesday, February 24, 2009

Cost of Quality (COQ)

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(Refer our High Quality Management Encyclopedia “Management Universe” at:

Quality Costs: Definition

  • Also termed as cost of quality (COQ)
  • COQ should not be misunderstood as the cost of making a quality product or service. It is the cost of not making a quality product or service. Or it is the cost that an organization will have to suffer due to poor quality product/service.
  • Understanding the cost of quality concept shatters the general perception or paradigm that higher quality requires higher costs. In fact, it is the other way round.
  • Therefore, quality saves; quality is free.

It will be a great idea to refer to these URLs: (TQM), (Quality Function Deployment- QFD and House of Quality), (TPM), (Six Sigma), (5S Housekeeping), (Kaizen), (Gemba Kaizen), (Quality Circles)

First Time Right Saves; Rework is Expensive

  • The quality cost is barest minimum when the goods produced or services given are first time right and are with zero defects.
  • When you cannot produce, right the first time, you may have to carry out rework on them to make it of acceptable quality.
  • Rework means: literally doing it all over again and that may cost almost twice as much of the cost of first time right product. Worse, it will be a reworked product/service that can never match the quality of first time right one since rework is usually done using a less capable process ( not using the process which is used for normal manufacturing line and which has better process capability).

Components of Costs of Quality

Costs of conformance (Cost of control): It has two components:

  1. Prevention costs
  2. Appraisal costs

Costs of non conformance (Cost of failure of control): It has two components:

  1. Internal failure costs
  2. External failure costs

Prevention Costs

  • The costs of any action taken to investigate, prevent or reduce defects and failures.
  • The costs of all the efforts to keep defects from occurring at all.
  • The costs of quality planning, quality enhancement projects, quality training and development, supplier quality capability evaluation, process capability improvement, new product quality review etc.

Appraisal Costs

  • The costs of assessing the quality achieved.
  • The costs of detecting defects through inspection/audit and test procedures and sifting out defects from OK products.
  • The costs of inspection of bought out materials at the source or in-coming point in the organization, in process inspection, final product inspection, calibration of inspection/test instruments and equipment etc.

Internal Failure Costs

  • The costs arising within the manufacturing organization of failure to achieve quality specified (before transfer of ownership to the customer).
  • The costs of defects identified internally and then, rejecting/scrapping or reworking on the defective items.
  • The costs of lost lead times/cycle times and delayed delivery to customers.
  • The costs of scrapping/discarding, rework/repair, re-inspection/re-testing, downgrading the produced items fetching lower price/lower image.

External Failure Costs

  • The costs arising outside the organization of failure to achieve quality specified (after the transfer of ownership to the customer).
  • The costs associated with the defects that actually reach customers and field failures.
  • The costs of lost goodwill and image, lost existing and prospective customers, recalls, returned goods, free replacements for defective goods, processing of warranty claims/customer complaints etc.

Proportions of Costs

The estimates of proportion of these four quality costs are given below:

  • Preventive costs: $1
  • Appraisal costs: $10 (if you are not interested in investing $1 on preventive costs)
  • Internal failure costs: $100 (if you are not interested in investing $1 on preventive costs)
  • External failure costs: $1000 (if you are not interested in investing $1 on preventive costs)

Quality is Free; Quality Saves

Look at the proportions of costs carefully. What's the inference? It says clearly that if you invest wisely $1 in prevention costs, you can avoid/eliminate the appraisal costs, internal failure costs and external failure costs which total up to $1110.

Invest $1 in establishing quality systems and save $1110. Net savings: $1109.

So, quality is not only free, it saves.

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