Cost of Quality

Visible and hidden

costs

Visible costs
Scrap
Rework
Warranty costs

Hidden Costs
Conversion efficiency of materials
Inadequate resource utilization
Excessive use of material
Cost of redesign and re-inspection
Cost of resolving customer problems
Lost customers / Goodwill
High inventory

Categories of Quality Costs

Quality Costs

Conformance

Prevention

Non-Conformance

Appraisal

Internal failure

External failure

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 checks & 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.

Examples
Internal failure costs

Design changes/ corrective action

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

of

of

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
Quality costs in % of sales

10-15%

10-12%

The total quality

costs 25-35 %
of turnover.

4-6%

1%

Preventive

Appraisal

Internal
Failure

External
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

% of sales

30
25

Internal
Failure

20
15
10

Internal
Failure
Appraisal

Appraisal

5
0

prevention

Before TQM

Prevention

After TQM

Stages

Prevention

Correction

Failure

Rs
Rs
Rs
Rs
Rs

Rs

Rs

10

R
s

Rs

100

Rs

Cost of rectifying defect

1-10-100 Rule

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.

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.