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Learning outcomes
Cost of Quality or Cost of Poor Quality
Prof (Dr.) Chamaru De Alwis
If you wants to stay in Business,
give your 100% commitment to
Quality
• Define Cost of quality or cost of poor quality
• Understand why it is important
• Understand Quality funders point of view
• Explain elements of the Cost of Quality
• Explain Traditional Out look of the cost of Quality
• Explain Quality is free
• Explain Quality Loss function
The efficiency of a business is measured in
terms of Rupees
Examples
• Nasa : Space shuttle Challenger
• Reasons for failure
• Supplier mutual Relationship
• Ignore the voice of the engineers
• Ignore the factors
• Total Loss
• 7 people
• US $ 4 billion
• Learning : If u know the facts, make
decisions base on that
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2009–11 Toyota vehicle recalls Some more …..

Toyota –recall 9 million cars
• • Net profits for many companies is less than 5% of sales
Why it happened
Quality become second, They wants to
• • The cost of poor quality can exceed 20% of the sales (dollars) in
become Word largest car manufacture manufacturing companies and 35% of the sales (dollars) in service
organizations
Less employee engagement
Do not use best performances • • COPQ is typically 4 to 7 TIMES as large as
loss profits
• US $ 5. 5 billions

Why is Quality Cost

Important?

Research indicates that

2/3rd of the quality costs may be reduced of their
present level, within 3 years, by the commitment
of the organization to a process of continuous
improvement and company-wide quality improvement

COST OF QUALITY
• Total Quality Costs represent the difference between the
 Quality costs are defined as costs associated with non- actual (current) cost of a product or service and what the
achievement of product/service quality. reduced cost would be if there were no possibility of
 In simple terms, quality cost is the cost of poor products/services.
substandard service, failure to meet specifications, failure
of products, or defects in their manufacture.
 Quality costs cross department boundaries by involving all
activities of the organization – marketing, purchasing, design, Actual Cost of Product – Perfect Product
manufacturing, service, etc.
 The price of nonconformance (Philip Crosby) or the cost of • Cost which disappear of systems, Process and procedures
poor quality (Joseph Juran), the term 'Cost of Quality', refers will perfect
to the costs associated with providing poor quality product or
service.
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Elements of the Cost of Quality External Failure Costs

These are the costs of trying correct defects and errors after receipt by the customer

• Customer complaint costs • Product liability costs

• Prevention Cost : The experience gained from the identification and elimination • costs of investigating and
of specific causes of failures and their costs is utilized to prevent the recurrence satisfactorily responding to a • litigation costs resulting
of the same or similar failures in other products or services. customer complaint resulting from product liability
from a poor-quality product and customer injury
• Appraisal Cost : This category has the responsibility for evaluating a product or
service at sequential stages, from design to first delivery and throughout the • Product return costs • Lost sales costs
production process, to determine its acceptability for continuation in the • costs of handling and • costs incurred because
production or life cycle. replacing poor-quality customers are
products returned by dissatisfied with poor
• Internal Failure Cost L Whenever quality appraisals are performed, the customer
quality products and do
possibility exists for discovery of a failure to meet requirements. When this • Warranty claims costs not make additional
happens, unscheduled and possibly unbudgeted expenses are automatically • costs of complying with purchases
incurred product warranties
• External Failure Cost : This category includes all costs incurred due to actual or
suspected non-conforming product or service after delivery to the customer

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Internal Failure Costs

These costs are incurred when defects and errors are found before shipment or delivery to Appraisal Costs
the customer

• Scrap costs
• costs of poor-quality
products that must be
discarded, including labor,
material, and indirect
costs
• Rework costs
• costs of fixing defective
products to conform to
quality specifications
• Process failure costs
• costs of determining why
production process is
producing poor-quality
products
• Process downtime costs
• costs of shutting down
productive process to fix
problem
• Price-downgrading costs
• costs of discounting poor-
quality products—that is,
selling products as
“seconds”
• These are the costs of determining the current quality of the
production system or inspection and testing through
sampling
• Inspection and testing
• costs of testing and inspecting materials, parts, and product at various stages and at
the end of a process
• Test equipment costs
• costs of maintaining equipment used in testing quality characteristics of products
• Operator costs
• costs of time spent by operators to gather data for testing product quality, to make
equipment adjustments to maintain quality, and to stop work to assess quality

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Prevention Costs Again : Cost of Quality Categories

• Quality planning costs
• costs of developing and
implementing quality
management program
• Product-design costs
• costs of designing products
with quality characteristics
• Process costs
• costs expended to make sure
productive process conforms
to quality specifications
• Training costs
• costs of developing and
• Prevention :
putting on quality training
programs for employees
and management
• Information costs
• costs of acquiring and
maintaining data related to
quality, and development
of reports on quality
performance
• Marketing/Customer relevant cost( Ex: Marketing research, Customer and
user perception surveys or focus groups)
• Production Service/Design Development (. Ex: Design quality progress
reviews, Design support activities, Product design qualification tests)
• Purchasing (Supplier reviews, Supplier rating, Purchase order technical data
reviews, Supplier quality planning)
• Operations (Manufacturing or Service) (Ex: Operations process validation,
Operations quality planning, Quality education)
• Quality Administration ( Ex : Administrative salaries, Administrative
expenses, Quality program planning, Quality performance reporting)

•
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Appraisal Cost Internal Failure Cost

• Purchasing Appraisal Costs (Ex: Receiving or incoming inspections
and tests, Measurement equipment and Qualification of supplier
product)
• Operations (Manufacturing or Service) Appraisal Costs ( Ex :
Planned operations, Inspections , Tests , Audit, Setup inspections
and tests)
• External Appraisal Costs (Field performance evaluations, Special
product evaluations , Evaluations of field stock and spare parts)
• Review of Test and Inspection Data
• Product or Service Design Failure Costs (Internal)( Ex : Design corrective
action , Rework due to design changes , Scrap due to design change,
Production liaison costs)
• Purchasing Failure Costs (Ex : Purchased material reject disposition costs
• Purchased material replacement costs, Supplier corrective action, Rework of
supplier rejects, Uncontrolled material losses)
• Operations (Product or Service) Failure Costs (Ex :Material review and
corrective action costs. Operations rework and repair costs, Internal failure
labor losses)

External Failure Cost Relationship

• Complaint Investigations of Customer or User Service
• Returned Goods
•High Appraisal Cost + High Internal
• Retrofit and Recall Costs Failure Cost + High External Failure Cost
• Warranty Claims Brings
• Liability Costs
• Penalties Lot of Defects
• Customers or User Goodwill
• Lost Sales

As an organization gains a broader definition of poor quality,

Traditional Cost of Quality the hidden portion of the iceberg becomes apparent.
(4-5% of Sales) Waste Customer Returns
Rejects
Testing Costs Inspection Costs
When quality costs are initially determined, the categories Rework Recalls

included are the visible ones as depicted in the iceberg

below. Excessive Overtime
Pricing or Late Paperwork High Costs
Billing Errors
Waste Customer Returns
Excessive Field
Services Expenses Lack of Follow-up
Incorrectly Completed
Sales Order
on Current Programs
Excessive
Rejects Employee Turnover Planning Delays Excess Inventory
Testing Costs Inspection Costs Customer Allowances
Unused Capacity
Complaint
Handling
Rework Recalls Premium Freight Costs Time with
Dissatisfied Customer
Excessive
Overdue Receivables System Costs

Development Cost of Failed Product

Hidden COQ: The costs
COQ ranges
incurred to deal with
from 15-25%
these chronic
of Sales
problems

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Visible and Invisible Cost of poor Quality Cost of Quality – Finding the way of incentives
Prevention Costs
Visible Invisible
Benefit
• Scraps • Conversation efficiency of Materials Appraisal Costs
• Inadequate resource Utilization
• Rework
$
(under utilization of the capacity)
• Warranty Issues • Excessive use of materials Repair Costs Prevention Costs
• Control, redesign and re-inspections
• Cost of resolving of customer Appraisal Costs
Failure Costs
complains • Internal Repair Costs
• Lost customer goodwill • External
Failure Costs
• High inventory
Before Quality After Quality
Cost Cost
Alignment Alignment

Traditional outlook of Cost of Quality

Quality+ Competitiveness Theory
Economic conformance level (ECL)
• Continues quality Impartment can target 100% quality
Continues Quality Improvement

Increase defect free out put

Cost route Market
benefits Reduce cost of Increase competitive route
(Good operations position benefits
Quality (profit +
led to less Increase market survival)
High price
cost) share
Increase revenue

Increase profit

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Quality is free
Taguchi Quality Loss Function

Customer tolerance bar

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Return on Quality (ROQ) Classifying Quality Costs

Profit is maximized at the The optimum quality level is always achieved before
optimum quality level. maximum attainable profit is reached.

Cost
Total Revenues & Costs

Revenues

Max Profit

Optimum Quality

Quality
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Conclusion
• Quality costs can be used by management in its pursuit of
quality improvement, customer satisfaction, market share
and profit enhancement.
• When quality costs are too low, it is a sign of management
effectiveness that can affect the organization's competitive
position.