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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). As Figure 1 shows: The cost of poor quality affects: Internal and external costs resulting from failing 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.
http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failure-costs/
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Losses due to sales reductions Environmental costs
http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failure-costs/
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Table 1 shows how dramatically the cost of quality as a percentage of sales decreases if the process sigma improves.
Table 1: Sigma Level and the Cost of Quality Sigma Level DPMO Cost of Quality as Percentage of Sales
298,000
67,000
25-40%
6,000
15-25%
233
5-15%
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Less than 1%
Assuming that the average performance of a company is 3 sigma, 25 percent to 40 percent of its annual revenue gets chewed up by the cost of quality. Thus, if this company can improve its quality by 1 sigma level, its net income will increase hugely.
Comments
Michelle Baker
27-01-2011, 23:37
Is your DPMO (shown in your Cost of Quality table), equal to the sum of all the internal and external failures? In other words, the DPMO is the sum of multiple process fallout? Thanks, Reply
Akmal
09-02-2011, 00:14
yes . its the total Defects Per Million Opportunities DPMO: (1,000,000 * Number of Defects) / (Number of Units * Number of opportunities). Reply
zizu
14-03-2011, 03:02
Daryl
04-10-2012, 21:31
Marketing Costs can be included as a response to external failures. Companies may increase marketing to rebuild reputation damage and negative brand image caused by external failures such as litigation or product recall. Reply
philip
30-03-2011, 09:54
Id say in general not zizu, marketing is a normal activity of finding out what customers want, making sure your service or products are aligned to that and then ensuring the customers know about that, this will go on even if your products and services are defect free, right the first time. However if you had to rebrand a product or launch a marketing campaign especially due to poor products or services then I think it would be.
http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failure-costs/
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Reply
Carlos
13-03-2012, 20:18
Are internal failure cost more or less important thatn external failure cost regarding the cost of quality? Reply
Robert Reid
27-08-2013, 19:19
Everything is relative to magnitude; however, cost of a failure making it to the customer is regarded as the ultimate failure and those cost cannot be accurately assessed due to the wide range of implications (E.g. confidence loss impact is hard to gauge because bad news travels fast when someone is dissatisfied). Reply
Pradeep Chellakani
11-06-2012, 23:47
The prevention cost will increase first reducing the appraisal cost (Meaning moving from Inspection to automation and prevention through right design). This will increase the yield from RTY instead of the FPY or classical yield. Reply
R.Chakrapani
02-09-2012, 03:22
Loss of sales due to poor Product image/Brand Image/poor marketing /poor supplier chain bottlenecks,in relation to competition in the same industry needs to be accounted in COQ. RC Reply
Mohd. Haneef
02-11-2012, 05:54
Pam
28-01-2014, 13:24
If there is a planned evolution, such as trimming an impeller blade, that occurs because of data obtained from the first pump test, is that considered a cost of poor quality? My position is that this is NOT COPQ because the first test, the trim, and the second test are planned into the decision on trimming and are planned into the process. Reply
http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failure-costs/
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