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The Cost Of Quality

Posted on January 9, 2012 by lavanyasukumar Cost of quality is the “Language of Money” between the quality professionals and project managers. This term is widely misunderstood. It isn’t the cost of creating a quality product. It actually is, the cost of NOT creating a quality product. Quality scoreboards speak for themselves much more that any kind of bug/ audit reports and one of the best tools used to communicate with the upper management. As the cost of quality keeps increasing, our product quality increases but what we fail to realize is that our profit margin decreases tremendously. A quick understanding of Cost Of Quality (COQ) calculation: COQ = Internal cost + External cost + Preventive cost + Appraisal cost Internal Cost:
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Rework Re testing/ regression testing Downtime/ Delays

External Cost:
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Customer Complaints Post production Defects Interim releases

Preventive Cost:
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Review Training Planning Meetings

Appraisal Costs:
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Test equipment and maintenance Release testing Audits

That does not mean we don’t plan but we need to evaluate the minimum time and effort required to conduct each of these activities effectively. To account for this additional effort we can:   Push the project deadline. we must ensure that we calculate our cost of quality and maintain this value within allowable limits. leading to stress There are many ways to avoid such unforeseen situations and reduce the COQ.Every planned activity is a cost. . leading to work without payment Work additional hours. Following suggestions can be the starting point:      Do things right the first time Learn from past experience Conduct periodic Defect Analysis meetings Identify preventive measures instead of corrective measures Conduct a cost benefit analysis At every stage of our project. Keep in mind the following while calculation this magic number:      Be very careful while calculating this cost as many parameters are not taken into account Costs must be categorized accurately Have upper and lower cut off limits to witness the trend Get inputs from every team member Track unit cost data Reviewing the cost of quality over a period of time helps the project team identify possible areas for change / improvement and ultimately aids the organization to achieve its goals. We often hear managers say “ Our Company has a wonderful code /test review process and every feature is thoroughly reviewed and approved before release”. objectives and brand image. The more time you spend on review. But the extent to which the product is reviewed attributes to the cost of quality. Here is a good example of how COQ is misused. the review effort increases and this in turn increases the COQ. What is wrong with this statement? Review is a good practice and absolutely necessary.

One example would be rework and repair resulting from acceptance testing. Value-added (V). It . exclusive of any additional effort to ensure quality. Another example would be the actual costs incurred during warranty support. and the development of project standards and procedures. training.Cost of Quality Categories Category Codes The Cost of Quality category codes are the following:      Prevention Costs (P). Appraisal Costs Appraisal costs are costs incurred to identify defects after the fact. An example is fixing faults detected during internal testing. Each of these is discussed in more detail below. Value-added effort includes any activities and tasks that modify or convert data from a "raw" state to a useful one. External Error Costs (E). Prevention Costs Prevention costs are investments made ahead of time in an effort to ensure conformance to requirements. Appraisal Costs (A). Value-Added Value-added refers to the basic costs of producing the product or performing the service. External Error Costs External error costs are the costs of rework and repair after delivery to a customer. Examples include activities such as walk-throughs and testing. Internal Error Costs Internal error costs are the costs of rework and repair before delivery to a customer. Examples include activities such as orientation of team members. Internal Error Costs (I). from the customer's viewpoint.

Whether a task is considered a cost of quality or a cost of doing business (i." For these reasons. value-added) is sometimes a matter of perspective . The objective in analyzing cost of quality is to minimize the overall cost by finding the optimum level of prevention and appraisal costs that minimizes internal and external error costs..e. it is important that all Cost of Quality reporting is handled consistently in accordance with the . Discussion Prevention costs and appraisal costs are costs of ensuring that the product conforms to its original specifications and is fit for its intended use. such as the effort expended to create project deliverables. The cost of value-added activities is not a cost of quality. Internal error costs and external error costs are the costs of correcting the problems detected.there is not always a "correct answer.is effort that the customer values and is "visibly" paying for.

This concept was questioned by quality pioneers like Juran and Feigenbaum. . The retesting of an assembly The rebuilding of a tool The correction of a bank statement The reworking of a service. In 1979 Crosby introduced the new popular concept that “quality is free”. the cost of quality increases. The cost of improving quality is less than the resultant savings: Deming promoted this view. Feigenbaum introduced “total quality control” and developed the principles that quality is everyone’s job. Inspection cost. The savings result from less rework. The additional benefits from improved quality do not compensate for the additional expenses. Obvious examples include:     The reworking of a manufactured item. which is still widely accepted in Japan. quality gurus — Nameer @ 4:51 pm Definition of cost of Quality It’s a term that’s widely used – and widely misunderstood. catergories of quality cost. internal failure cost. thus expending the notion of quality cost beyond the manufacturing function. and other costly resources. Feigenbaum.Cost of Quality Filed under: cost of quality — Tags: appraisal cost. external failure cost. and other direct expenses related to defects. design. It’s the cost of NOT creating a quality product or service. Juran. Juran examined economics of quality and concluded the benefits outweighed the costs. higher quality meant higher cost. such as the reprocessing of a loan operation or the replacement of a food order in a restaurant Historical Views of Quality Gurus about cost of quality Historically. business managers have assumed that increased quality is accompanied by increased cost. This paved the way of continuous process improvement among Japanese firms. Every time work is redone. Three different views held by the management professionals about Cost of Quality Today view of quality cost among practitioners seems fall into three categories: Higher quality means higher cost: Quality attributes such as performance and features cost more in terms of labor. cost of quality. Deming. prevention cost. material. The “cost of quality” isn’t the price of creating a quality product or service. scrap. COQ.

Quality costs are those incurred in excess of those that would have been incurred if product were built or service performed exactly right the first time: This view is held by adherents of the TQM philosophy. and many hidden costs and foregone opportunities not identified by modern cost accounting systems. Example: Scrap. Example: Inspection. Costs include not only those that are direct. evaluating or auditing). warranty claims. process reviews. material downgrades 3. but also those resulting from lost customers. quality improvement teams. Inspection (appraisal) Cost: Cost incurred to determine the degree of conformance to quality requirements (measuring. process or service audits. External Failure Cost 2. product recalls. supplier surveys. Example: New product review. Internal Failure Cost: Cost associated with defects found before the customer receives the product or service. Categorization of Quality Costs The cost of quality is generally classified into four categories: 1. quality planning. rework. material review. External Failure Cost: Cost associated with defects found after the customer receives the product or service. re-testing. testing. Prevention Cost: Cost incurred to prevent (keep failure and appraisal cost to a minimum) poor quality. 4. Internal Failure Cost 3. Example: Processing customer complaints. lost market share. calibration of measuring and test equipment. re-inspection. customer returns. Prevention Cost 1. education and training. . Inspection (appraisal) Cost 4. 2.