Until the 1950s, few, if any, companies paid much attention to measuring the total cost of quality. This information was hidden among various labor, material, and miscellaneous expense categories. Only the most obvious items such as quality department expenses were identified. In the 1950s and 1960s, some enlightened companies began to evaluate and report quality costs for the following reasons:
Products became increasingly more complex
Customer expectations became more sophisticated
Customers demanded service after the sale and expected failure remedy
Both supplier and customer costs increased due to labor and maintenance costs
Technical specialists were added to make improvements
The management objectives needed to be in the monetary terms
The result was a method of defining and measuring the total cost of quality and reporting it on a regular basis, typically monthly or quarterly. This created more visibility into the status of cost control measures and helped identify opportunities for reducing costs by systematic improvements. The costs of poor quality could be up to 15% to 25% of total costs of sales. Since the costs of poor quality are high, the opportunity for improvement easily gets the attention of the management and six sigma improvement teams. If a company has historical data on costs of poor quality, identifying improvement projects with a meaningful business return should be easy. If not, an improvement team may need to collect pertinent data to estimate those costs.
The costs of poor quality could be up to 15% to 25% of total costs of sales.
The total cost of quality (TCQ) has two parts at high level: Cost of Poor Quality and Cost of Good Quality.
Costs of Poor Quality (COPQ)
The costs of poor quality are those associated with providing poor quality products or services, including scrap, rework, and warranty costs. Under this category, there are two categories of costs:
External failure costs: This is the most expensive cost, and it happens when a quality defect makes it all the way to the customer.
Internal failure costs: Failure costs that caught prior to the delivery of the product or service to the customer. Even though the customer doesn’t see these quality issues, internal rework is required to fix the problem.
Costs of Good Quality (COGQ)
The costs of good quality are those associated with prevention of quality issues. In other words, COGQ assures quality at the source.
Prevention cost: The costs of activities specifically designed to prevent poor quality in products or services. Generally speaking, companies get the biggest bang for the buck in this category. Quality Assurance along with lean practices such as training, cross training, robust work instructions, error proofing techniques, 5S, TPM, and so on are some of the effective tools to develop great quality structure.
Appraisal costs: The costs associated with measuring, evaluating, or auditing products or services to ensure conformance to quality standards and performance requirements. These activities are basically known as Quality Control. For the organizations which are far from having a robust quality assurance system, QC is a containment process that protects the customers from receiving defects.
Now that we reviewed the four categories of the Cost of Quality, we will end this article with an easy to remember way to see the impact of activities in each category.
As a rule of thumb, if it costs a company $100 to fix a defect at the customer’s location, it would cost $20 to fix it right before shipment, $10 to catch at the QC gate and $1 not to create a defect at all with a robust QA program.