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17/10/2015

CostofQuality:NotOnlyFailureCosts

CostofQuality:NotOnlyFailureCosts
ArneButhmann 14
WhencalculatingthebusinesscaseforaSixSigmaproject,thecostofpoorquality(COPQ),whichisthecostcausedthroughproducingdefects,isacommonly
usedconcept.Withinthetotalamountofqualitycost,however,COPQrepresentsonlyacertainproportion.Costsdonotresultfromonlyproducingandfixing
failuresahighamountofcostscomesfromensuringthatgoodproductsareproduced.Thisarticleexplainsthecostofqualityasamorecomprehensive
conceptcoveringthecostofpoorqualityandthecostofgoodquality.Inshort,anycostthatwouldnothavebeenexpendedifqualitywereperfectcontributesto
thecostofquality.

CostofQuality
AsdefinedbyPhilipB.CrosbyinhisbookQualityIsFree,thecostofqualityhastwomaincomponents:thecostofgoodquality(orthecostofconformance)and
thecostofpoorquality(orthecostofnonconformance).AsFigure1shows:
Thecostofpoorqualityaffects:
Internalandexternalcostsresultingfromfailingtomeetrequirements.
Thecostofgoodqualityaffects:
Costsforinvestinginthepreventionofnonconformancetorequirements.
Costsforappraisingaproductorserviceforconformancetorequirements.

Figure1:CostofQuality

CostofPoorQuality:InternalFailureCosts
Internalfailurecostsarecoststhatarecausedbyproductsorservicesnotconformingtorequirementsorcustomer/userneedsandarefoundbeforedeliveryof
productsandservicestoexternalcustomers.Theywouldhaveotherwiseledtothecustomernotbeingsatisfied.Deficienciesarecausedbothbyerrorsin
productsandinefficienciesinprocesses.Examplesincludethecostsfor:
Rework
Delays
Redesigning
Shortages
Failureanalysis
Retesting
Downgrading
Downtime
Lackofflexibilityandadaptability

CostofPoorQuality:ExternalFailureCosts
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CostofQuality:NotOnlyFailureCosts

Externalfailurecostsarecoststhatarecausedbydeficienciesfoundafterdeliveryofproductsandservicestoexternalcustomers,whichleadtocustomer
dissatisfaction.Examplesincludethecostsfor:
Complaints
Repairinggoodsandredoingservices
Warranties
Customersbadwill
Lossesduetosalesreductions
Environmentalcosts

CostofGoodQuality:PreventionCosts
Preventioncostsarecostsofallactivitiesthataredesignedtopreventpoorqualityfromarisinginproductsorservices.Examplesincludethecostsfor:
Qualityplanning
Supplierevaluation
Newproductreview
Errorproofing
Capabilityevaluations
Qualityimprovementteammeetings
Qualityimprovementprojects
Qualityeducationandtraining

CostofGoodQuality:AppraisalCosts
Appraisalcostsarecoststhatoccurbecauseoftheneedtocontrolproductsandservicestoensureahighqualitylevelinallstages,conformancetoquality
standardsandperformancerequirements.Examplesincludethecostsfor:
Checkingandtestingpurchasedgoodsandservices
Inprocessandfinalinspection/test
Fieldtesting
Product,processorserviceaudits
Calibrationofmeasuringandtestequipment
Thetotalqualitycostsarethenthesumofthesecosts.Theyrepresentthedifferencebetweentheactualcostofaproductorserviceandthepotential(reduced)
costgivennosubstandardserviceornodefectiveproducts.
Manyofthecostsofqualityarehiddenanddifficulttoidentifybyformalmeasurementsystems.Theicebergmodelisveryoftenusedtoillustratethismatter:Only
aminorityofthecostsofpoorandgoodqualityareobviousappearabovethesurfaceofthewater.Butthereisahugepotentialforreducingcostsunderthe
water.Identifyingandimprovingthesecostswillsignificantlyreducethecostsofdoingbusiness.

Figure2:TheIcebergModelofCostofQuality

TheSixSigmaPhilosophyofCostofQuality
Whatistherelationbetweenthecostofgoodqualityandthecostofpoorquality?Thetraditionalviewwouldbetoconcludethatifacompanywantstoreduce
defectsandbythisreducethecostofpoorquality,thecostofgoodqualitywouldhavetobeincreased,meaninghigherinvestmentsinanykindofchecking,
testing,evaluation,trainingofoperators,etc.FollowingtheSixSigmaphilosophy,however,ofbuildingqualityintoprocess,serviceandproductsanddoing

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thingsrightthefirsttime,theincreaseofthecostofgoodquality,whilestrivingforzerodefectperformance,canbesmoothedifprocessesgetbetter.
AsFigure3shows,businessprocesseswithbetterprocesssigmawillhavesignificantlylowerpreventionandappraisalcosts.Althoughyouwillneverfully
eliminateappraisalandpreventioncosts(asopposedtofailurecoststhatinanidealzerodefectworldwouldalsobezero),theirreductionduetobetterprocess
performancewillbesignificant.

Figure3:TraditionalManagementViewvs.SixSigmaPhilosophy

Table1showshowdramaticallythecostofqualityasapercentageofsalesdecreasesiftheprocesssigmaimproves.

Table1:SigmaLevelandtheCostofQuality
SigmaLevel

DPMO

CostofQualityasPercentageofSales

298,000

Morethan40%

67,000

2540%

6,000

1525%

233

515%

3.4

Lessthan1%

Assumingthattheaverageperformanceofacompanyis3sigma,25percentto40percentofitsannualrevenuegetschewedupbythecostofquality.Thus,if
thiscompanycanimproveitsqualityby1sigmalevel,itsnetincomewillincreasehugely.

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Withthiscourseyouwillbeabletotrainanyoneinyourcompanyonthepropertechniquesforachievingproperresolutionofanytypeof
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Comments
MichelleBaker
IsyourDPMO(showninyourCostofQualitytable),equaltothesumofalltheinternalandexternalfailures?
Inotherwords,theDPMOisthesumofmultipleprocessfallout?
Thanks,
Reply

Akmal
yes.itsthetotalDefectsPerMillionOpportunities

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CostofQuality:NotOnlyFailureCosts
DPMO:(1,000,000*NumberofDefects)/(NumberofUnits*Numberofopportunities).
Reply

zizu
doescostofqualityincludemarketingcosts?
Reply

Daryl
MarketingCostscanbeincludedasaresponsetoexternalfailures.
Companiesmayincreasemarketingtorebuildreputationdamageandnegativebrandimagecausedbyexternalfailuressuchas
litigationorproductrecall.
Reply

philip
Idsayingeneralnotzizu,marketingisanormalactivityoffindingoutwhatcustomerswant,makingsureyourserviceorproductsarealignedto
thatandthenensuringthecustomersknowaboutthat,thiswillgoonevenifyourproductsandservicesaredefectfree,rightthefirsttime.
HoweverifyouhadtorebrandaproductorlaunchamarketingcampaignespeciallyduetopoorproductsorservicesthenIthinkitwouldbe.
Reply

Carlos
Areinternalfailurecostmoreorlessimportantthatnexternalfailurecostregardingthecostofquality?
Reply

RobertReid
Everythingisrelativetomagnitudehowever,costofafailuremakingittothecustomerisregardedastheultimatefailureandthosecost
cannotbeaccuratelyassessedduetothewiderangeofimplications(E.g.confidencelossimpactishardtogaugebecausebadnews
travelsfastwhensomeoneisdissatisfied).
Reply

PradeepChellakani
Thepreventioncostwillincreasefirstreducingtheappraisalcost(MeaningmovingfromInspectiontoautomationandpreventionthroughright
design).ThiswillincreasetheyieldfromRTYinsteadoftheFPYorclassicalyield.
Reply

R.Chakrapani
LossofsalesduetopoorProductimage/BrandImage/poormarketing/poorsupplierchainbottlenecks,inrelationtocompetitioninthesame
industryneedstobeaccountedinCOQ.
RC
Reply

Mohd.Haneef
whatistherelationb/wscrap&COQ.
Reply

Pam
Ifthereisaplannedevolution,suchastrimminganimpellerblade,thatoccursbecauseofdataobtainedfromthefirstpumptest,isthat
consideredacostofpoorquality?
MypositionisthatthisisNOTCOPQbecausethefirsttest,thetrim,andthesecondtestareplannedintothedecisionontrimmingandare
plannedintotheprocess.
Reply

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CostofQuality:NotOnlyFailureCosts
DanJ
Hi,greatsummary.QuestionaretheSigmaLevelsandCostofQualityequalforservicesvs.manufacturingcompanies?Ourservicecentersdo
alotITILincident,problem,change,andservicemanagementandIaminterestedinbeingabletomeasureCOPQforfailedchanges,incidents,
etc.
thanksinadvance,
Dan
Reply

Makary
Questioniswhatisbetter
keepingbadqualityserviceandpoorprices
orhighlevelofqualityandhighprices.
maybesometimesmixisthebestway???
Reply

Saji
IsthereanyexampleforThecostofpoorqualitythatincurredhighinternalorexternalcosts???
Reply

NEWJOB

DTEEnergy SupervisingEngineer&Ombudsman

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