BA 13 OPERATIONS MANAGEMENT (TQM)

PRELIMS
(MODULE NO. 2)

A.
TOPIC LEARNING OBJECTIVES
Quality Cost • Definition of Quality Cost
• Determine the role of Quality Cost in
Cost of Quality (COQ) • Define what is COQ
• Enumerate the three types of COQ
• Understand the Prevention costs
• Understand the Appraisal Costs
• Understand the Failure Cost
• Appreciate the classes of Failure Cost
Reducing Costs • Understand the progressive reduction
Prevention, Appraisal Costs, and
Failure Cost
Hidden Costs • Determine what are hidden costs

B. DISCUSSION

Quality Cost

Introduction

TQM was evolved to satisfy customers in the most economical way. Quality means cost effectiveness. It
means reducing expenditure by eliminating wastes through systematic quality management approach.

TQM aims at gradual reduction of wasteful expenditure and eventually their total elimination

Cost of Quality

Cost of Quality (COQ) is the sum of costs incurred by an

organization in preventing poor quality. There are essentially
three types of Quality Costs:
1. Prevention Costs
2. Appraisal Costs
2. Failure Costs

MODULE NO. 2: (BSAIS-2) PREPARED BY:

ROBERTO TORRES, MBA, CHRA, RBP
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Prevention costs

Are the planned costs incurred by an organization to ensure that no

defects occur in any stages such as design, development, production
and delivery of a product or service. Prevention costs include training
and education of employees, process improvement efforts, process
control etc.

Appraisal Costs

Are costs that are incurred in verifying, checking, or evaluating a product or service
at various stages during manufacturing or delivering. They are incurred due to lack
of confidence in the quality of the product or service either due to the incoming
material or due to the process. Appraisal costs include incoming inspection, internal
product audit, supplier evaluation etc.

Failure Cost

Are incurred by the organization because the product or service did not
meet the expected requirement and the product had to be fixed or
replaced or the service had to be repeated. The failure costs are due to
the incurred failure of the organization to control defects in the product.

Classifications of Failure Costs

1. Internal Failure Costs – includes costs of every failure that takes place before the product is delivered to the
customers.
2. External Failure Costs – costs of failure of the product after its delivery to the customers.

Reducing Costs

-Reduction and Prevention Cost

Prevention cost has to be incurred. Every preventive activity should have been pre planned to avoid waste
during the process.

-Progressive Reduction of Appraisal Costs

Inspection is an essential before assessing a new vendor, a new process or a new product line. Inspection
generates a lot of information. This information should be utilized skillfully by the organization to reduce future
costs.

MODULE NO. 2: (BSAIS-2) PREPARED BY:

ROBERTO TORRES, MBA, CHRA, RBP
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-Reducing the Failure Costs

Manufacturing or delivery of a product or service with defects is a total waste. Everything should be done right
the first time and every time. Scraps and rework are the biggest wastes in any organization. As rework reduces
the value of the output, it only increases hassles and scraps.

-Hidden Costs

There are many costs which cannot be identified easily. They may be defined as hidden costs. These may
include: customer-incurred costs, lost reputation cost etc

C. EVALUATION
Please accomplish the requirement indicated. Take a picture of your answer in yellow paper and email it to
bobtorres.ccsfp@gmail.com with your name as the subject.

Reflection Paper

Based on the article below and of the discussion, answer:

1. Do COQs can be eliminated in a company? Why yes/no?
2. Do the Gurus of TQM has the same aspect of understanding of COQ? Explain

Article:

The Process Improvement Efforts Actually Decreased Cost.1

November 20, 2017

“Cost is more important than quality but quality is the best way to reduce cost.” — Genichi Taguchi

Cost of quality. Three small words; one big phrase. It appears like a straightforward expression, but there is
enough misinformation floating around that quality professionals are compelled to take to their blogs and write
about what cost of quality is and—just as importantly—what it is not. The most common misperception of cost
of quality is that the term refers to the cost of creating a quality product. This might be because people are still
under the impression that higher quality equals higher costs, either through supplies or labor. That simply isn’t
the case.

Armand Feigenbaum described cost of quality (or quality costs) in the Harvard Business Review (1956).
Feigenbaum explained that cost of quality is a means to quantify the total cost of quality-related projects and
deficiencies. Cost of quality began to show that process improvement efforts actually decreased cost.

Another way of stating it is, in the words of Philip Crosby, “The cost of quality is the expense of doing things
wrong.” Crosby also called it “the price of nonconformance,” and argued that, rather than simply occurring
through the course of business, organizations choose to incur these costs. This statement helps us home in on
a single meaning of the phrase and how we use it.

1
https://www.qualitymag.com/articles/94343-cost-of-quality. date retrieved: 14 August 2020

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ROBERTO TORRES, MBA, CHRA, RBP
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In The ASQ Quality Improvement Pocket Guide: Basic History, Concepts, Tools, and Relationships (ASQ
Quality Press, 2013), Grace Duffy explains, “Cost of quality is a methodology that allows an organization to
determine the extent to which its resources are used for activities that prevent poor quality, that appraise the
quality of the organization’s products or services, and that result from internal and external failures.” Cultivating
this information, Duffy continues, allows your organization to determine potential savings through process
improvements. In using this methodology, you will want to track the quality-related activities that incur costs in
four areas:

1. Prevention costs are incurred to prevent quality problems, and they could include: product
requirements, quality planning, quality assurance, and training.
2. Appraisal costs are measuring and monitoring activities, including: verification, quality audits, and
supplier rating.
3. Internal failure costs are incurred to remedy defects discovered before the product or service is
delivered to the customer, including: waste, scrap, rework or rectification, and failure analysis.
4. External failure costs remedy defects customers discover and could include: repairs and services,
warranty claims, complaints, and returns.
“These costs must be a true measure of the quality effort, and they are best determined from an analysis of the
costs of quality,” Duffy says. “Such an analysis provides a method of assessing the effectiveness of the
management of quality and a means of determining problem areas, opportunities, savings, and action
priorities.” She notes that a well-performing company will have quality-related costs between 10 and 15% of
total operations but that organizations might see these costs hovering around 40%.

It is essential that once the quality cost system is established, it is dynamic and integrated into the
organization’s mission, goals, and objectives.

“The costs of poor quality are tangible,” stated author Subir Chowdhury, “they will cost you customers and
money, and ultimately affect the success of your business.”

In the article, “Lasting Impression: Quality management’s positive impact on the economy,” in ASQ’s QP
magazine, Rip Stauffer and Debra Owens report on a Center for Economic and Business Research study
showing that every dollar spent on a quality management program returned:

$6 in revenue
$16 in cost reduction
$3 in profit.
This is a significant return on investment. A return due to quality methodology.

MODULE NO. 2: (BSAIS-2) PREPARED BY:

ROBERTO TORRES, MBA, CHRA, RBP
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