FICCI CE

Cost of Quality
 Categories of Quality Costs

Quality Costs

Conformance Non-Conformance

Prevention Appraisal Internal failure External failure

FICCI CE

Cost of quality

Cost of quality = Cost of conformance + Cost of non-conformance

• Cost of conformance is the cost of providing products or services as

per the required standards. This can be termed as good amount spent.
(Prevention & Appraisal costs)
• Cost of non-conformance is the failure cost associated with a process
not being operated to the requirements. This can be termed as
unnecessary amount spent.( Internal & External failure costs)
 Prevention Costs

➣ Prevention costs are associated with design, implementation , maintenance,

and planning prior to actual operation in order to avoid defects from
happening.
➣ The emphasis is on the prevention of defects in order to reduce the
probability of producing defective products. Prevention activities lead to
reduction of appraisal costs and both type of failures ( internal and external ).
The motto is “Prevention rather than appraisal” .
 Activities associated with Prevention costs

➣ Market research
➣ Quality training programs.
➣ Contract review
➣ Design review
➣ Field trials
➣ Supplier evaluation
➣ Process plan review
➣ Process capability review
➣ Design and manufacture of jigs and fixtures
➣ Preventive maintenance
 Appraisal costs

Appraisal costs are spent to detect defects to assure conformance to

quality standards. Appraisal cost activities sums up to the “cost of
checking if things are correct”.The appraisal costs are focused on the
discovery of defects rather than prevention of defects
 Activities associated with Appraisal costs

➣ Proto type testing

➣ Vendor surveillance
➣ Incoming material inspection
➣ Process inspection/control
➣ Final inspection
➣ Laboratory testing / measurement
➣ Depreciation cost for measuring
➣ Quality audits.
 Internal failure costs

Internal failure costs occurs when results of work fail to reach designated
quality standards , and are detected before transfer to the customer takes
place.
 Activities associated with Internal failure costs

➣ Design changes/ corrective action

➣ Scrap due to design changes
➣ Excess inventory
➣ Rectification / reject disposition of
purchased material
➣ Rework/rejection in manufacturing
➣ Downgrading of end product
➣ Downtime of plant & machinery
➣ Trouble-shooting & investigation of
defects
 External failure costs

External failure costs occur when the product or service from a

process fails to reach designated quality standards , and is not
detected until after transfer to the customer.
Activities associated with External failure costs

➣ Processing / investigation of customer complaint

➣ Repair/replacement of sold goods
➣ Warranty claims
➣ Product liability & litigation costs
➣ Interest charges on delayed payment due to quality problems
➣ Loss of customer goodwill & sales.
 Size of four categories of quality costs.

➣ The organizations which do not follow TQM,there is less emphasis on

prevention and their main quality efforts are on appraisal with very little
control on internal and external failure costs.
➣ Various studies have shown that quality cost in manufacturing companies
the world over range from 20 % to 30 % of turnover and in the case of
service companies it can go up to 40 % as illustrated in graph on the next
slide.
 Size of various quality cost elements
10-15%
Quality costs in % of sales

10-12% The total quality

costs 25-35 %
of turnover.

4-6%

1%

Preventive Appraisal Internal External

Failure Failure
 Impact of TQM on costs.

➣ TQM is primarily aimed to improve the quality of the product , higher

customer satisfaction and better working environment for the employees.
The most dramatic impact of TQM is on reduction of quality costs which
directly effect the profitability .
➣ This is demonstrated by the results of TQM program in Xerox Corp . The
change in various elements of quality cost before and after launching
TQM by Xerox Corp is shown on the next slide.
 Impact of TQM on costs.
An example from Xerox Corp.
35

30

25 Internal
% of sales

Failure

20

15 Internal
Failure
10 Appraisal
Appraisal

5
Prevention
prevention
0
Before TQM After TQM
 1-10-100 Rule

1
Prevention Rs

Cost of rectifying defect

Rs
10
Stages

Correction Rs
Rs

Rs
Rs 100
Failure
Rs
Rs
Rs
Rs
FICCI CE

cost of quality

Traditionally recorded quality cost generally account for only 4 to

5 percent of sales which mainly comprise of cost of scrap, re-work
and warranty.
FICCI CE

Hidden costs of quality

There are additional costs of quality which are hidden and do not appear
in the account books of the company, as they are intangible and difficult to
measure. These additional costs could be as high as 20-25% of sales and
comprise of low conversion efficiency of materials, cost of resolving
customer problems, inadequate resource utilization, high inventory, long
cycle times, more set-up times, penalties due to late delivery and lost
customer loyalty and goodwill.
FICCI CE

Visible and hidden costs

•Scrap
•Rework Visible costs
•Warranty costs

• Conversion efficiency of materials

• Inadequate resource utilization

• Excessive use of material

• Cost of redesign and re-inspection Hidden Costs

• Cost of resolving customer problems

• Lost customers / Goodwill

• High inventory
FICCI CE

Computing cost of poor quality

Am ount Percentage

Prevention Costs

Quality Administration
QualityEngineering
Reliability Engineering
Training
Total Prevention

Appraisal Costs

Inspection
Test
Vendor Control
Measurement Control
Materials Consumed
Quality Audits
Total Appraisal
FICCI CE

Computing cost of poor quality

Am ount Percentage

Internal Failure Costs

Scrap
Repair & rework
Vendor Losses
Failure Analysis
Total internal

External Failure Costs

Failures-manufacturing
Failures-Engineering
Failure-Sales
W arranty charges
Failure Analysis
Total External

T otal Quality Costs