Lean Learning’s #2 ‘Cost Of Quality’

The term ‘Cost of Quality’ is very widely used and widely misunderstood in within many companies.

The ‘Cost of Quality’ is not the price of creating a Quality product or service. The true ‘Cost of Quality’ is the cost of NOT creating a Quality  product or service.

A lot of companies do not fully understand the effect that a poor Quality process has on the business. Poor Quality not only affects customers, it also has a dramatic effect on lead times, delivery, and most importantly profitability.

Consider that every time rework is undertaken, the cost of Quality increases. Obvious examples include:

•  The correction of a bank statement

•  The reprinting of a lost document

•  The reworking of a manufactured item

•  The retesting of an assembly

•  The replacement of a over cooked meal in a restaurant

These costs would not have been incurred if Quality were perfect. In order to fully understand this concept, consider the costs that would be eliminated if Quality within the process was perfect.  Consider costs such as: incoming raw material inspection; corrective engineering change orders, scrap, in-process control systems, downtime, material and labour rework charges, Quality personnel labour costs, field service repair personnel, returned goods processing, customer warranty claims and many others.

These are all costly processes and consume resources and time. They are normally considered necessary non value added steps. In other words, they cannot be eliminated because of significant risk to the customer.

Calculating the Total Cost of Quality.

In order to calculate the Total Cost of Quality the cost of the following operations need to be considered:

•   Prevention

•   Inspection

•   Internal Failure

•   External Failure

The overall Cost of Quality (COQ) is calculated using the following equation:

COQ = Prevention  Costs + Inspection Costs + Failure Costs

Prevention Costs

Prevention Costs are defined as all activities which have been designed into the process to specifically prevent poor Quality in products or services. Examples of these costs include:

•             New product development reviews

•             Supplier development work including capability surveys

•             Internal process capability development and  evaluations

•             Quality planning activities

•             Quality improvement team meetings

•             Quality education and training

Inspection Costs

Costs are defined as all activities associated with measuring, evaluating or auditing products or services to assure conformance to Quality standards and performance requirements.

Examples of these costs include:

•             Incoming and source inspection and testing of purchased material

•             In-process inspection processes

•             Final inspection and test

•             Internal audits

•             Maintaining of records

•             Calibration of measuring and test equipment

•             Purchase of associated equipment, supplies and materials

Failure Costs

Failure costs fall into two clear categories, Internal and External failure.

 Internal Failure Costs

Internal failure costs are the costs that occur prior to delivery of a product or service to the customer. Examples of these costs include:

•             Rework

•             Re-inspection

•             Retesting

•             Scrap costs

External Failure Costs

External Failure costs occur after delivery of the product or service to the customer. Examples of these costs include:

•             Processing Customer returns

•             Rework under Warranty claims

•             Processing customer complaints

•             Replacing the product

•             Product recalls

By far the most expensive of all these categories is failure. Both internal and external failures. The cost of the original product, the cost of the replacement, the cost of processing, can cost up to three times the cost of the original product or service.

This is an extract from Practical Quality by Graham Ross and Barry Jeffrey. If you would like to know more why not follow the link