10/20/22, 11:18 AM COQ | Cost of Quality | Quality-One

Cost of Quality (COQ)

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COQ
– Cost of Quality –
⇓  Introduction to COQ
⇓  What is COQ
⇓  Why Implement COQ
⇓  How to Measure COQ
⇓  Learn More About COQ

Introduction to Cost of Quality (COQ)

The business climate is becoming increasingly more
competitive. There are multiple options available to the
consumer for nearly every product on the market. Companies
must stay price competitive to survive. The top performing
companies set themselves apart from the competition by
listening to the voice of the customer and providing products
that meet the customer’s requirements while maintaining a
high level of quality and dependability. These companies
measure Cost of Quality and use the information gained to
their advantage. The principle of Cost of Quality is similar to a
commercial that aired years ago on television that advertised
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oil filters. The tag line was “Pay Me Now or Pay Me Later”. The
message was that preventive maintenance of your vehicle
could prevent more costly repairs down the road. Cost of
Quality is much the same. An organization can choose to
invest in upfront quality costs to reduce or prevent failures or
pay in the end when the defect is eventually discovered by the
customer. In too many cases organizations choose the latter.
Product failures can result in increased warranty costs and
possibly even product recalls. The impact to the bottom line
can be devastating. In addition, there are the hard to measure
costs incurred through loss of brand equity and possible
decline in future sales. Cost of Quality can have an immense
impact on a company’s bottom line, positive or negative.

What is Cost of Quality (COQ)

Cost of Quality is a methodology used to define and measure
where and what amount of an organization’s resources are
being used for prevention activities and maintaining product
quality as opposed to the costs resulting from  internal and
external failures. The Cost of Quality can be represented by
the sum of two factors. The Cost of Good Quality and the Cost
of Poor Quality equals the Cost of Quality, as represented in
the basic equation below:
CoQ = CoGQ + CoPQ
The Cost of Quality equation looks simple but in reality it is
more complex. The Cost of Quality includes all costs
associated with the quality of a product from preventive costs
intended to reduce or eliminate failures, cost of process
controls to maintain quality levels and the costs related to
failures both internal and external.

Why Implement Cost of Quality (COQ)

Effective use and implementation of Cost of Quality
methodology enables an organization to accurately measure
the amount of resources being used for Cost of Good Quality
and Cost of Poor Quality. With this valuable information the
organization can determine where to allocate resources to
improve product quality and the bottom line. To further
illustrate the value of cost of quality, review the following

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example. The name of the company has been changed but the
content represents actual events and results.
Alpha Company once measured Cost of Quality as the amount
of warranty cost versus total sales. This method only examined
the Cost of Poor Quality. This data did reveal a problem area
in the facility. It was discovered that customer part shortages
originating from one work cell were resulting in warranty costs
of over $400,000 in one year. A team was formed to
investigate and perform Root Cause Analysis (RCA) of the
shortages and a plan was developed to redesign the work cell
for an estimated cost of $60,000. With management approval,
the work cell was redesigned with a revised layout, pick bins,
dedicated locations for all the parts, process controls were
defined and implemented and several additional
improvements were made. The changes reduced tact times
and the number of operators required for the process. This
provided resources for the addition of quality technicians to
regularly audit and maintain the process on all shifts. Within
the first year of operation, shortages were reduced by 50%
equaling a $200,000 reduction in warranty costs. The project
resulted in a positive impact on the bottom line of $140,000 in
the first year. Alpha Company has since implemented
processes to measure and reduce scrap, improved process
controls and introduced new quality metrics throughout the
organization. They are now actively measuring and evaluating
both the cost of good quality and poor quality.
In the example above, the Cost of Poor Quality (CoPQ) was
having a major impact on the bottom line. Through an
investment in the Cost of Good Quality (CoGQ), Alpha
Company achieved a significant reduction in the Cost of
Quality. There are opportunities for improvement in processes
at most organizations. It has been estimated that the Cost of
Quality usually amounts to between 15-40% of business costs.
The goal of implementing Cost of Quality methodology is to
maximize product quality while minimizing cost. Cost of
Quality methodology provides the detailed information that
management needs to accurately evaluate the effectiveness of
their quality systems, identify problem areas and opportunities
for improvement.

How to Measure Cost of Quality (COQ)

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The methods for calculating Cost of Quality vary from

company to company. In many cases, organizations like the
one described in the previous example, determine the Cost of
Quality by calculating total warranty dollars as a percentage of
sales. Unfortunately this method is only looking externally at
the Cost of Quality and not looking internally. In order to gain
a better understanding, a more comprehensive look at all
quality costs is required.

The Cost of Quality can be divided into four categories. They

include Prevention, Appraisal, Internal Failure and External
Failure. Within each of the four categories there are numerous
possible sources of cost related to good or poor quality. Some
examples of typical sources of Cost of Quality are listed below.

The Cost of Good Quality (CoGQ)

1. Prevention Costs – costs incurred from activities intended
to keep failures to a minimum. These can include, but are
not limited to, the following:
Establishing Product Specifications
Quality Planning
New Product Development and Testing
Development of a Quality Management System
(QMS)
Proper Employee Training
2. Appraisal Costs – costs incurred to maintain acceptable
product quality levels. Appraisal costs can include, but
are not limited to, the following:
Incoming Material Inspections
Process Controls
Check Fixtures
Quality Audits
Supplier Assessments

The Cost of Poor Quality (CoPQ)

3. Internal Failures – costs associated with defects found
before the product or service reaches the customer.
Internal Failures may include, but are not limited to, the
following examples:
Excessive Scrap
Product Re-work
Waste due to poorly designed processes
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Machine breakdown due to improper maintenance

Costs associated with failure analysis
4. External Failures – costs associated with defects found
after the customer receives the product or service.
External Failures may include, but are not limited to, the
following examples:
Service and Repair Costs
Warranty Claims
Customer Complaints
Product or Material Returns
Incorrect Sales Orders
Incomplete BOMs
Shipping Damage due to Inadequate Packaging

These four categories can now be applied to the original Cost

of Quality equation. Our original equation stated that the Cost
of Quality is the sum of Cost of Good Quality and Cost of Poor
Quality. This is still true however the basic equation can be
expanded by applying the categories within both the Cost of
Good Quality and the Cost of Poor Quality.

The Cost of Good Quality is the sum of Prevention Cost

and Appraisal Cost (CoGQ = PC + AC)
The Cost of Poor Quality is the sum of Internal and
External Failure Costs (CoPQ = IFC + EFC)

By combining the equations, Cost of Quality can be more

accurately defined, as shown in the equation below:

COQ = (PC + AC) + (IFC + EFC)

One important factor to note is that the Cost of Quality
equation is nonlinear. Investing in the Cost of Good Quality
does not necessarily mean that the overall Cost of Quality will
increase. In fact, when the resources are invested in the right
areas, the Cost of Quality should decrease. When failures are
prevented / detected prior to leaving the facility and reaching
the customer, Cost of Poor Quality will be reduced.

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Cost of Quality Example

Learn More About Cost of Quality (COQ)

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and Process Development through Consulting, Training and
Project Support. Quality-One provides Knowledge, Guidance
and Direction in Quality and Reliability activities, tailored to
your unique wants, needs and desires. Let us help you
Discover the Value of COQ Consulting, COQ Training or COQ
Project Support.

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