Cost of quality

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 What is CoQ?
• Cost of Quality can be defined as the cost
which is allied with the quality of a product. It
is the sum total of costs which is incurred
while maintaining quality up to standard levels
plus the cost of failure to maintain that level.

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 Introduction

• Cost of quality
• Cost of poor quality
• Cost of good quality

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 Total Cost of Quality
Cost of Poor Quality (COPQ)
Internal Failure Costs: Services or products not meeting the
requirements of the consumers or users and is found before the time
of the release of services and products to the external customers.
External Failure Costs: When customers are dissatisfied due to
deficiency found at post delivery period of products

 Cost of Good Quality (COGQ)

Appraisal Costs: The necessity to control services as well as the
products to make certain a high excellence level in all the stages
 Prevention Costs: Costs that are designed to prevent poor quality
from arising in products or services

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 Why do we need to know COQ?

• This tool speaks in the language of management

• Research shows that cost of poor quality can range from 15 %
to 40 % of the business costs
• It can prioritize quality improvement actions
• Cost of quality data shows how profit is affected by quality

• It helps identify the redundant activities

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 Hidden Failure Costs

Scrap Rework
Warranty

Engineering time
Management time
Shop and field downtime
Increased inventory
Decreased capacity
Customer dissatisfaction
Lost sales
Lost customer trust

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 Cost of Poor Quality (COPQ)

Internal Failure Costs:

Scrap or product waste
Rework
Re-inspection of the process (what went wrong?)
Material review and revision
Retraining

External Failure Costs:

Processing customer complaints
Bad customer reviews
Reduction in customer loyalty
Reduction in sales
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 Cost of Good Quality (COGQ)
Prevention Costs:
 New product review
 Quality planning
 Supplier capability
 Process capability evaluations
 Quality improvement team meetings and projects
 Quality education and training

Appraisal Costs :
 Incoming and source inspection/test of purchased
material
 In-process and final inspection/test
 Product, process or service audits
 Calibration of measuring and test equipment
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 Preventive costs:

Preventive costs are the cost of all activities specifically

designed to prevent poor quality product or service.

These costs are incurred to keep appraisal and failure costs at

minimum.

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 Examples of preventive costs:

• Market surveys
• Pilot scale projects and testing
• Vendor evaluation and testing
• Quality improvement projects
• Customer survey

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 Appraisal costs:

These are the costs associated with measuring, evaluating or

auditing product or service to assure conformance to
standard or performance requirement.

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 Examples of Appraisal costs:

• Internal audits
• Incoming material inspection
• Laboratory testing
• In process material inspection
• Final product inspection
• Automated testing tools

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 Cost of Poor Quality (COPQ)

Internal Failure Costs:

Scrap or product waste
Rework
Re-inspection of the process (what went wrong?)
Material review and revision
Retraining

External Failure Costs:

Processing customer complaints
Bad customer reviews
Reduction in customer loyalty
Reduction in sales
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 Internal failure cost

These are the costs incurred when product or service fail to

meet quality requirements prior to the transfer of ownership
to the customer.

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 Examples of internal failure costs:

• Rework
• Scrap
• Overtime
• Downtime
• Redesign
• Downgrading
• Retesting
• Scrap & rework

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 Examples of external failure costs:

• Warranty costs
• Customer dissatisfaction
• Loss of market share
• Price concession
• Premium freight
• Product recalls
• Time spent to resolve customer complaints
• Restocking costs
• Other penalties

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 Measuring cost of quality

COQ data can be measured and presented in many different

ways.

• % age of sales
• % age of profits
• % age of manufacturing cost
• Rs per direct labor hr
• Rs per unit of product

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Relationship between costs of quality

When the cost of achieving good quality increases; cost

of poor quality decreases automatically.

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 Benefits of using quality costs

• Quantify the size of the quality problem

• Identify major opportunities for cost reductions
• It helps in Identification of opportunities for reducing customer
dissatisfaction and associated threats to product salability
• Measures the results of quality improvement activities
• Align quality goals with organizational goals
• Set cost reduction targets

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Cost Quality Model

Classical Model of Optimum Quality Cost

 Summary
– Cost of quality
• Internal failure cost
• External failure costs
• Appraisal costs
• Prevention costs
– Measuring cost of quality
– Relationship between costs of quality
– Benefits of using quality costs
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