Cost of Quality (COQ)

For everything you wanted to know on building leadership and management, refer Shyam Bhatawdekar’s website: http://shyam.bhatawdekar.com

(Refer our High Quality Management Encyclopedia “Management Universe” at: http://management-universe.blogspot.com/)

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: http://total-quality-concept.blogspot.com/ (TQM), http://quality-function-deployment.blogspot.com/ (Quality Function Deployment- QFD and House of Quality), http://total-productive-maintenance.blogspot.com/ (TPM), http://six-sigma-system.blogspot.com/ (Six Sigma), http://5s-housekeeping.blogspot.com/ (5S Housekeeping), http://kaizen-improvement.blogspot.com/ (Kaizen), http://gemba-kaizen-improvement.blogspot.com/ (Gemba Kaizen), http://quality-circles.blogspot.com/ (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:

Prevention costs
Appraisal costs

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

Internal failure costs
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.

For More Guidance, Assistance, Training and Consultation

Contact: prodcons@prodcons.com

Also refer: http://prodcons-group.blogspot.com/, http://training-development-function.blogspot.com/ and http://productivity-consultants.blogspot.com/

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Cost of Quality (COQ)

Tuesday, February 24, 2009

Cost of Quality (COQ)

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