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COST OF QUALITY COST OF QUALITY 

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COST OF QUALITY Quality costs are defined as the

costs associated with the non-

conformances to the specificationsor intended use.

Simply stated quality cost is thecost of poor products or services.

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COST OF

QUALITYQuality cost crosses departmental lineby involving all activities of organization.

Purchasing

Design

Manufacturing Services

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COST OF QUALITY Cost of poor quality can exceed 20%

of sales amount in the manufacturing

organization and 35% in the services.

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COST OF QUALITY A quality cost program is a

comprehensive system, not merely a

fire fighting program. For example, one response to customer

problem is to increase the inspection.

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Intangible---Difficult to Measure

(soft)• Re-work• Lost loyalty

• Liability• Redundant procedures• Potential customer lost

•Hidden Factory

•Hidden Office

Tangible—Measurable (hard)• Inspection/Second checks• Warranty Claims• Billing errors

• Rework 

• Rejects

• Scrap

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COST OF QUALITY1. INTERNAL FAILURE COST

2. EXTERNAL FAILURE COST

3. APPRAISAL COST

4. PREVENTION COST

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INTERNAL FAILURE COST The cost of deficiencies discoveredbefore the delivery which are

associated with non-conformancesto meet the requirements of external or internal customer.

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INTERNAL FAILURE COST

Failure to meet customerrequirements

Cost of inefficient process

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Internal Failure CostFAILURE TO MEET CUSTOMER REQUIREMENTS & NEEDS

 The labor, material, overhead ondefective products

Rework – correcting defectives inphysical products or errors inservices.

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internal failure costFAILURE TO MEET CUSTOMER REQUIREMENTS & NEEDS

Failure analysis

Analyzing non-conforming goods /services to determine causes.

Scrap and rework of goods receivedfrom suppliers –

also includes cost to buyers of resolvingsupplier quality problem.

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internal failure costFAILURE TO MEET CUSTOMER REQUIREMENTS & NEEDS

100% sorting, inspection-findingdefective units in lots which contain

high level of defectives. Re-inspection/retest of products that

have undergone rework or other

revision.

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internal failure costFAILURE TO MEET CUSTOMER REQUIREMENTS & NEEDS

Changing process – modifyingmanufacturing or services to correct

deficiencies.

Changing design to correct deficiencies

Re-designing the hardware/ software.

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internal failure cost

FAILURE TO MEET CUSTOMER REQUIREMENTS & NEEDS

Scrap in support operations-defective items in indirect

operations. Downgrading difference between

normal and reduced selling pricedue to quality reasons.

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Internal failure cost

COST OF INSUFFICIENT PROCESS

Variation of process characteristicsfrom the best practice

Losses due to cycle time and cost of process as compared to the bestpractice (internal or external)

Non value added activities – redundant

operation, sorting inspections and othernon value added activities.

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External failure cost

Failure to meet customer requirements & needs

Lost opportunities for sale

Cost associated with deficiencies thatare found after a product is receivedby the customer.

External failure cost

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EXTERNAL FAILURE COSTFAILURE TO MEET CUSTOMERS REQUIREMENTS AND NEEDS

Warranty charges –cost of replacing or making repaired productstill within warranty.

Complaint adjustment – the cost of investigation and adjustmentof complaints.

Returned material – the cost of defective products received andreplaced from the field.

Allowances – the cost of concession due to substandard product

accepted by customer.

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EXTERNAL FAILURE COSTFAILURE TO MEET CUSTOMERS REQUIREMENTS AND NEEDS

Re-work on support operations – correctingerrors on billing and other external processes.

Revenues losses in support operations – failureto collect on receivables from some customers.

Recall products – modify or update products orfield service facilities to a new design change

level (design deficiencies).

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EXTERNAL FAILURE COSTFAILURE TO MEET CUSTOMERS REQUIREMENTS AND NEEDS

Customer defection – revenues lost due tocustomer who switches over to anotherproduct for reason of quality e.g. Contracts

that have been cancelled due to poor quality.

Inadequate processes to meet customersneeds.

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APPRAISAL COST

Cost incurred to determine thedegree of conformance toquality requirements.

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APPRAISAL COST

Incoming inspection and test

Determine the quality of purchasedraw material

In process inspection and test

In process evaluation of conformanceto requirements.

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APPRAISAL COST

Final inspection and test

Evaluation of conformance torequirements for productacceptance.

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APPRAISAL COST

Evaluation of stock – testing products in fieldstorage or in stock to evaluate degradation.

Maintaining accuracy of test equipments

Keeping measuring instruments and equipmentsin calibration.

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APPRAISAL COST

In collecting appraisal cost what isdecisive is the kind of work done andnot the department name.

 The work may be done by the chemistin the laboratory, by testers ininspection, or by external firm engaged

for purpose of testing.

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Prevention Cost

Quality planning - Activities which collectivelycreate the overall quality plan

New product review – reliability engineering

and other quality related activities with thelaunching of the new design.

Process planning – process capability studies,inspection, planning and other activitiesassociated with the launching of the new

design. Quality audits – evaluating the execution of 

activities in the overall quality plan.

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Prevention Cost

 Training – preparing and conductingquality related training programs.

Some of this work may be done by the personnel whoare not on the payroll of the quality department, thedecisive criterion is the type of work not the name of department performing the work.

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Prevention Cost

Supplier quality evaluation

Evaluating quality prior to supplierselection, auditing the activitiesduring the contract and associatedefforts with the suppliers.

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Nutshellis

Internal failure cost

External failure cost Appraisal cost

Prevention cost

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Which cost would you like to decrease?

Which cost would you like to increase?

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 The 1-10-100 Rule

Re

 Rs

Rs

Rs

Rs

1

10

100

Prevention

Correction

Failure