CHAPTER 5

Cost of Quality

Learning Objectives
After studying this chapter, you should be able to

∑ understand the concept of cost of quality. ∑ discuss the classification of quality-related

∑ know the quality equation. costs.
∑ learn the concept of cost of poor quality ∑ know quality–cost analysis.
(COPQ). ∑ understand the relation with Poka-Yoke, zero
defects, and Six-Sigma concepts.

5.1 Introduction
Cost of quality is a management tool that focuses attention on areas requiring corrective action. Quality
managers and operations managers use these data and concepts to improve manpower efficiency, reduce
rework/scrap, enhance the company repute, reduce equipment down time, and other processing constraints,
and so on, and, ultimately to improve customer satisfaction. This chapter discusses the elements of cost of
quality and describes how products and services fail to meet customer expectations. Costs associated with
waste, rework, recalls, litigation, and loss of confidence of consumer and shareholder will also be discussed.
 126 Total Quality Management

5.2 Cost of Quality

Before understanding the cost of quality (COQ), let us answer the following questions:
∑∑ Does high-quality product cost high?
∑∑ Does high-cost product mean superior quality product?
∑∑ Does cost increase quality? Or does quality increase cost?
∑∑ Are cost and quality proportional to each other?
If your answers for the above questions are “yes,” then you are also one of the ordinary customers. The
general perception of an ordinary customers is that higher quality product costs high. Also his/her notion is
that high-cost product is a product of superior quality.
∑∑ Then, is there no relationship between the cost and the quality?
Of course, there is certainly a relationship existing between the cost and the quality. But to understand this,
you need to be prepared to accept your innocence and ignorance.
“The cost of quality”
It’s a term that is widely used
— And widely misunderstood.
Sometime back when I went to a home appliances showroom, I found a customer arguing with the shop
proprietor which was very interesting. The proprietor has shown two brands of a refrigerator (say, X and Y,
for ease of understanding). Incidentally, the company representative was also there. Their conversation went
on as follows:
Customer: Can I get a quality refrigerator at your showroom?
Proprietor: Yes sir! We have latest two good-quality brands. This refrigerator X is little costlier than
refrigerator Y.
Customer: Why X is costly?
Proprietor: Sir! It is of high quality.
Customer: You said both are of good quality. Do you mean that Y doesn’t work well?
Proprietor: No! No!! Y also works well.
Customer: Then, why should I pay extra for X if Y also works well?
Proprietor: Though both are of high quality, X is of better quality than Y.
Customer: Am I paying for the quality or for the product?
Proprietor: Sir, you have to pay for quality product.
Customer: That means… you have the product without quality also.
Proprietor: No sir! We don’t have any product without quality. The manufacturer will never send any
product without quality and we can never sell any product without quality.
Customer: Yes! Then, if quality is a part and parcel of the product, why should I additionally pay for the
quality? Further, when both the products are manufactured at the same place, by the same
manufacturer, tested on the same equipment or operator and all being same, what made it to be
paid more?
 Cost of Quality 127

The company representative of the product was observing this conversation and tried to convince the
customer. Meanwhile, the proprietor called a boy and ordered coffee for us.
Company representative: Sir! Perhaps! While manufacturing the product X, there is more possibility of
rejection. In order to recover the cost on these products, the manufacturer might have passed
the quality test.
Customer: That means I am paying for your rejections, but not for my products. Had you not produced
rejections, I would not have this misfortune of paying more. Should… I… pay…for your
mistake?
The answerless representative and the proprietor astounded. Meanwhile, the boy brought the coffee and
served us. The conversation while taking our coffee was further more interesting and was thought-provoking.
Proprietor: Sir! How is the coffee?
Company representative: Sir! Thank you for your coffee. This tastes very good. I am highly satisfied, and so
I do not mind to pay more for this quality.
Proprietor: But everyday it is like this only. I am not finding anything special in it.
Customer: No! I don’t like this taste. I
This coffee tastes very good. I don’t
don’t pay any more because it mind paying extra for this quality.
did not satisfy me. Moreover, You are paying
do you pay more if you are for coffee, not
Every day it is like this. I for the quality
more satisfied? For example, if am not finding anything
a movie satisfies you more, do special in it.
you pay extra and if it doesn’t,
do you take your money back?
The coffee boy intervened in the discussion,
and uttered some words…
Coffee boy: Sirs! You are paying for the
movie not for its quality; so
also, you are paying for the
I don’t pay
coffee, not for the quality. any extra
© SSRK

Whatever it is, the quality is a because i am

part of that coffee. Sirs! Quality not satisfied.
is for free…
Yes! No surprises for the final statement given by the coffee boy in the above example, “Quality is Free.”
It is the grand old concept of Philip Crosby, which is the title of his bestselling book published in 1979. He
emphasized the concept in his second bestseller, Quality without Tears in 1984.

5.2.1 Quality Costs…

What did you understand about the subheading of this paragraph “Quality Costs?” If you have understood
the term “costs” as the noun, then you might understood it as this paragraph explains you various costs of
quality. But again you misunderstood. Here in this subheading, the term “cost” is used as a verb to mean that
it will price or charge or penalize you.
 128 Total Quality Management

The “cost of quality” is not “the cost of producing a quality product.” But in fact, it is the cost of “not
producing a quality product.” This means, the quality will cost, if you do not produce the quality.
If the work is redone, the cost of quality increases. Some cases causing such costs are given as follows:
∑∑ The rework of a product during production.
∑∑ The reworking of a service. Thought for Quality Manager
(TQM) 5.1
∑∑ The resetting of a machine.
∑∑ The retesting in an assembly. Choose any organization or a
manufacturing company of your
∑∑ The redundancy of tooling.
choice and conduct a study as a mini-
∑∑ The correction of an account statement. project for about one or two months
∑∑ The materials returned due to poor quality. with the objective as finding the
∑∑ The searching for tools or consumables. ‘cost of quality’. Find the preventive,
appraisal and failure costs by taking
∑∑ The unorganized work environment.
the data on at least 10 sampled days,
∑∑ The re-cooking in a hotel. if it is not possible to take every day
∑∑ The replacement of a food order in a restaurant. for two months.
∑∑ The reshooting of a movie.
∑∑ The re-editing or republishing due to errors.
In all the above examples, the same work is costing more than once. So, if the work is done correctly right
at the first time, it would not cost. Simply, any cost that would not have been spent if it was perfect contributes
to “the cost of quality.”
Thus, while we put the efforts to improve the process, the “cost of quality” is the term used as a mean to
measure the total cost of quality-related deficiencies and the efforts to control or prevent the deficiencies.

5.2.2 Quality Equation: Cost of Quality

The quality equation is described as the equality relation and balancing between “doing rights” and “not
doing wrongs.” Thus, the quality equation can be expressed as
Doing right things = Not doing wrong things
The quality costs as understood from the above paragraphs are the costs incurred if quality is not produced.
It is interesting to note that the costs of quality address only half of the quality equation. The quality equation
states that quality consists of two equally important conceptual actions. These are
1. Doing the right things
2. Not doing the wrong things
If we closely observe, we can understand that the “cost of quality” addresses only the second half of
quality equation. Let us now examine this.
Doing the right things means manufacturing a product and rendering service as per the specification and
ascertaining the desired features or fitting it for the stated or intended purpose or fulfilling the needs that
satisfy or delight the customer. This action is the fundamental requirement of the product manufacturer or
the service organization. It is obvious and binding of the product or service to claim the promised quality. In
simple words, performing this action provides the authority to the producer for the statement the quality. If
this action is not performed, it does not enable the product or service to reach the customer at all.
 Cost of Quality 129

Not doing the wrong things means avoiding defects and other misbehaviors that results in the product not
performing to its specification/features and forestalling or eluding the deviations that cause customer
dissatisfaction. This action makes the producer responsible and helps him keep the customer not unhappy.
As long as you perform this action, it will not cost you because the customer is not dissatisfied. But the
interesting issue here is that, performing this action attracts the attention of the management and may have to
maintain a preventing team for not to do things wrong by caring, policing, checking, and vigilance. Further,
another team has to be maintained to test or inspect whether there is any error or failure or defect. If at all,
any such defect occurs, the necessary corrections, repairs, reworks, repetitions have to be done. Further, if it
goes unnoticed and reaches the customer, it causes dissatisfaction and attracts unpredictable costs. Thus, if
you do not perform this (not doing the wrong things) action, then it will lead to the dissatisfaction that costs.

Table 5.1 Summary of quality equation vs quality costs

Right Wrong
Quality by authority Quality costs due to rework, rejection, repair, scrap,
Do

Quality does not cost junk and for prevention

Quality costs Quality by responsibility
Not Do

Due to controlling, inspection, testing, and Quality cost is due to supervision maintenance and
vigilance and for appraisal controlling

The above discussion is summarized in Table 5.1. If an operator does only right, he/she does not need
any inspection or no cost of errors. If the operator does not produce the right one, then there will be cost of
repair or rework or rejection. If he/she produces only wrongs, then the inspection cost and controlling costs
are needed. If he/she does not produce wrongs, then it may still cost to regulate the product quality.
We can now analyze that the misunderstanding of the term “cost of quality” or “quality cost” may be
because of the missing clarity between the two aspects of the quality equation and the effect of cost of quality
on the half of the equation only. Perhaps! The misunderstanding is because the misconception that the cost of
quality addresses the first half of the quality equation. But in fact, it addresses the second half.
Further, the first half of the equation (doing right things) can be described as the focal point for concept
of “zero defects.” The central theme of zero defects is “Do Right At First Time” and “Do Right At Every
Time” (DRAFT-DRAET). Thus, doing right always leads to achieve “zero defect.” Doing right things gives
efficiency, whereas doing things right results in effectiveness. This is the core concept of achieving TQM
through “overall equipment effectiveness (OEE)” approach.

5.2.3 Cost of Poor Quality

Quality represents a driver that generates higher profits through Thought for Quality Manager
lowering costs; thus, enabling an authority to command a premium (TQM) 5.2
price in the market. It is possible that an organization could achieve to Choose any organization or a
make quality costs to zero and still go out of business. This problem manufacturing company of your
persists due to its very name, “cost of quality.” By using this choice or the one chosen in TQM-
terminology, we automatically build the impression that quality is a 5.1, and conduct a brain storming
cost. Perhaps! This is giving a large scope for the misconception and session, which may be submitted as a
misunderstanding. However, our discussions through above sections mini-project
 130 Total Quality Management

clarified that quality is not a cost. Thus, the cost for not able to produce quality is the cost of quality as defined
by Juran. Hence, it is more appropriate to use the term “cost of poor quality” (COPQ) instead of “cost of
quality” as described by the quality experts H.J. Harrington and Frank M. Gryna. However, honoring the
tradition and owing to the familiarity, the term “cost of quality” is used to mean the sense of “cost of poor
quality” throughout this book.
The fundamental principle of the cost of quality says that any cost that
Mrs. Lioness! I askedyou
would not have been spent if quality were perfect is a cost of quality. This to bring a deer meet, but
includes the obvious costs such as scrap, junk, waste, rejection, and rework. you brought me a cow.
There are many costs that are far less obvious such as the cost of reordering
to replace defective material and costs due to waiting and searchingænot
only product-based businesses but also the service-based businesses suffer
this cost of poor quality. For example, in a bus you asked the conductor
a ticket to a particular place, but if the conductor gives you ticket for a
different place by oversight, it is the cost of quality. Similarly, if you order
some dishes in a restaurant and the waiter has brought some other or some

© SSRK
part of your order is missed or brought in less or more quantity than what
you ordered, the waiter has to replace or redo or rework which causes the
cost of quality. Though this cost may not directly be imposed on customer
sometimes, but still it affects the producer and indirectly affects the customer and the entire system. Precisely,
quality costs are a measure of the costs specifically associated with the achievement or non-achievement of
product or service at a predetermined quality level. These include all connected issues such as marketing
specifications, end-product and process specifications, purchase orders, engineering drawings, company
procedures, operating instructions, professional or industry standards, government regulations, and any other
document or customer needs that can affect the definition of product or service.

5.2.4 Cost of Quality: Definition

On the basis of the above discussion, we will now define the cost of quality (CoQ or COQ). There are a
number of definitions and interpretations of the term cost of quality. The following are popular definitions:
∑∑ The cost of quality is the difference between the actual cost of making and selling the product or
service and the cost if there were no failures during manufacture or use and no possibility of failures.
∑∑ CoQ equals the actual cost minus no failure cost.
∑∑ CoQ or CoPQ is the cost incurred because of poor quality that may or does exist.
∑∑ The total cost of meeting customer’s needs minus the cost of doing things wrong.
∑∑ The cost incurred due to non-conformance with the required quality.
∑∑ All the costs attributable to the production of quality that is not 100% perfect.
∑∑ Those costs that are the difference between what can be expected from excellent performance and the
current cost that exists.
CoQ is a significant management tool that provides
∑∑ A method for assessing the overall effectiveness of quality program.
∑∑ A means to establishing programs to meet overall needs.
 Cost of Quality 131

∑∑ A method for determining the problem areas and action priorities.

∑∑ A technique to determine the optimum amount of effort between various quality activities.
∑∑ Information for pricing products or bidding on jobs.

Terminal Questions Checkpoint 5.1

Terminal questions on content
1. What do you understand by the term “cost of quality?” Explain.
2. Give any four definitions for the term “cost of quality (CoQ)” and explain.
3. What is “quality equation?” What is its relevance with cost of quality? Discuss.
4. What do you understand by the term “cost of poor quality?” Discuss.
Terminal questions on concept
5. Cost of Quality is the term that is most widely used and most widely misunderstood? Critically
evaluate.
6. Quality costs…! How? Explain.
7. Doing right things = Not doing wrong things. Critically evaluate the equation.
8. “Quality is free.” Do you agree? Justify your answer.
9. Do we pay for the product or for its quality? Clarify with some examples.
10. “Quality is an inherent part of the product for which the customer need not pay and it is the right of
the customer.” Do you agree? Substantiate your answer with evidential supports or case examples.

5.3 Classification of Quality-Related Costs

Before introducing this concept of “cost of quality,” the general notion was that higher quality requires higher
costs, either by buying better materials or machines or by hiring more manpower. Further, in the early days
when “the cost accounting” categorized the financial transactions into revenues and expenses, unfortunately,
no attempts were made to analyze quality-related costs. The manufacturers did not notice significance of
these costs. But later, every one of the organizations started realizing that the costs of quality are not different
from any other costs. Like the costs of maintenance, design, sales, production/operations, and other activities,
they can be budgeted, measured, and analyzed. With this idea, efforts are made in this direction by classifying
quality-related entries. From a company’s general ledger, management could evaluate investments in quality
that contribute to the cost reduction or profit enhancement. Armand V. Feigenbaum was the first to describe
this in 1956 in his article published in Harvard Business Review.
Having specified the quality of design, the operating units have the task of matching it. Feigenbaum first
presented the so-called P-A-F model, with the necessary activities incurring costs that may be separated
into prevention costs, appraisal costs, and failure costs. Failure costs can be further split into those resulting
from internal and external failure. The P-A-F model of Feigenbaum defined the quality cost areas given in
Table 5.2.
 132 Total Quality Management

Table 5.2 Cost areas and their occurrences identified by Feigenbaum

Cost area Occurrence Case examples
Costs of control Prevention To keep defects not to occur Quality plan
(costs of costs at all Statistical process control (SPC)
conformance) Investment decisions
Quality training and workforce development
Product-design verification
Quality systems development
Appraisal While detecting defects Testing/inspection or/and auditing of
costs through inspection, test, audit Input materials
Purchased items
Processed materials
Manufactured items
Machinery and equipment
Experiment setup
Acceptance sampling
Instruments, tools, and consumables
Field or process
Costs of failure Internal Defect/fault indentified Scrap/rejections
of control failure costs internally and to discard or Rework/repair/over processing
(costs of non- repair the defective Material procurement/return costs
conformance)
External Defects that actually reach Complaints in/out of warranty
failure costs customers Product service/liability/recall
Product reliability
Loss of reputation

The basic idea behind quality improvement is that larger investments in prevention derive larger savings in
quality-related failures, costs, and appraisal efforts. Feigenbaum’s categorization helps the organization to
verify this. Once categorized, these quality costs can serve as means to measure, analyze, budget, and predict.
Joseph Moses Juran is another famous quality guru who has put some efforts to categorize the cost of quality.
In his terms, the cost of quality is the cost of poor quality. He categorized the variants of the quality costs
based on account type of factory ledgers. The categorization of quality costs as described by J.M. Juran are
given in Table 5.3.

Table 5.3 Cost areas and their occurrences identified by J.M. Juran
Cost area Account type Examples
Tangible costs Factory accounts ∑ Materials scrapped, rejected, or junked
∑ Labor used on product scrapped, rejected, or junked
∑ Labor, materials, and effort necessary to repair/salvage
∑ Extra operations due to presence of defectives
(Cont.)..
 Cost of Quality 133

Table 5.3 (Cont.)..

Cost area Account type Examples

∑ Efforts of excess production necessitated due to defectives
∑ Additional inspection costs
∑ Investigation of causes of defects

Sales accounts ∑ Discount on seconds

∑ Customer complaints
∑ Charges to quality guarantee account
Intangible costs ∑ Delays and stoppages caused by defectives
∑ Customer goodwill/reputation lost
∑ Loss in morale due to friction between departments

5.4 Quality–Cost Analysis

A quality cost system can be used as a means of showing the return on investment (ROI) through improving
quality (Quality is Free, Crosby). A quality cost system can also provide a means of measuring progress of
the quality improvement process. The modern organizations are treating quality cost accounting systems as
part and parcel of the quality improvement strategy since it helps management to identify the opportunities
and plan for high ROI. In fact, “quality cost accounting” is a part of many quality standards.
If at all any quality cost measurement is done, many organizations track only those quality costs that are
easy to measure (Deming’s visible figures). This can lead to a gross underestimation of the true costs of poor
quality, which in turn results in a lack of emphasis on addressing quality problems and lack of justification
for continuous improvement efforts. Therefore, tracking and properly categorizing quality costs can help
an organization in ensuring the appropriate and consistent allocation of costs with their quality objectives.
Further, it also provides a means of tracking progress over time.
Many organizations routinely track most of the components of quality costs, but cover up them within
their financial reporting system. For instance, some internal failure costs may be interpreted on financial
reports as material usage variance or buried in the system itself such as standard scrap factors included in
the material requirements planning (MRP) system. In such situations, as long as the standard scrap rates are
not exceeded, managers cannot notice and still believe that the system is performing well. This comes into
light only if significant scrap is generated. Similarly, some firms include the standard cost of rework in their
product and hence the production cost systems. In some other companies, salaries of quality inspectors may
be included under factory overhead and testing equipment costs may be shown under capital expenditures.
Therefore, the important aspect of a quality cost system is to explicitly identify all these quality costs so that
the true cost of quality can be brought into light.
Cost of quality is the amount of money a business lost because of not doing right product or service
in the first place. For most businesses, this can run from 15% to 30% of their total costs. The quality
policy should aim at reducing such cost of failures. If it happens it will pull down the cost of appraisal;
of course, a slight increase in cost of prevention may occur. This reduction in COPQ directly adds to
return on investment. But never mind, to increase the prevention cost to keep appraisal and failure costs
 134 Total Quality Management

to minimum, as long as the COPQ is considerably reduced in terms of failure costs. A model of this
discussion is presented in Figure 5.1.

100

COPQ
40
F
30 30
A
20

5
P
Year 1 Year 2

Figure 5.1 COPQ Before and After for Reduction of COPQ. Abbreviations: F, failure; A, appraisal; P,
prevention

5.5 Eliminate Total Quality Costs: A COQ Approach To TQM

We are aware that TQM refers to maintaining the quality from the design to discard of a product or service.
This journey or the process of bringing a product or service experiences various stages such as planning,
designing, procurement, receiving inputs or raw materials, processing, evaluation, storing, distribution,
selling, installation, after sales service and usage, and finally discard. We can divide this total process into
four stages based on the occurrence of cost of quality. More specifically, quality costs are the total cost
incurred against the efforts put in the following stages:
1. Before production, prevention costs: These costs are caused due to the efforts to prevent the
occurrence of failure or defect during the process including avoiding the flaws in planning and
designing the product, process, and production system.
The costs of all activities specifically designed to prevent poor quality in products or services
come under this category. For example,
∑∑ Costs of new product review
∑∑ Quality planning
∑∑ Supplier capability surveys
∑∑ Process capability evaluations
∑∑ Quality improvement team meetings
∑∑ Quality improvement projects
∑∑ Quality education and training
2. During production, internal failure costs: These costs occur if the defect or failure occurs during
the production to correct the failures and defects.
 Cost of Quality 135

These costs result from products or services not conforming to requirements or customer/user
needs. Failure costs are further divided into internal and external failure cost. The internal failure
costs are included under this category, whereas the external failure costs lead to the occurrence of
compensation costs.
Examples of failure costs occurring prior to delivery or I greased it, now it doesn’t
shipment of the product, or the furnishing of a service, to the make any noise!
customer are as follows:
∑∑ Costs of scrap
∑∑ Rework

© SSRK
∑∑ Repair
∑∑ Re-inspection ”
∑∑ Retesting
∑∑ Material review
∑∑ Down grading
3. After production, appraisal costs: These costs occur due to the efforts put in to evaluate,
appraise, and ascertain the predetermined quality level of the product, i.e., confirming the design or
specification.
The costs associated with measuring, evaluating, or auditing products or services to assure
conformance to quality standards and performance requirements.
These include the costs of
∑∑ Incoming and source inspection/test of purchased material
∑∑ In-process and final inspection/test
∑∑ Product, process, or service audits
∑∑ Calibration of measuring and test equipment
∑∑ Associated supplies and materials
4. After sales, external failure cost: After production and sales of the product, during its performance
in the hands of the customer, if it fails or any defect is noticed, then it may cost unpredictably high.
As these are in the hands of customer, these are not controllable by the producer.
The external failure costs occurring after delivery or shipment of the product, and during or after
furnishing of a service, to the customer are included in this class. Examples are the costs of
∑∑ Processing customer complaints
∑∑ Customer returns
∑∑ Warranty claims
∑∑ Product recalls
Of all the above costs, the external failure costs are considered to be the most undesirable
and dangerous too at times. Further, this cost has impact on both customer and seller. A typical
comparison of the external failures borne by both the seller and the customer is presented in
Table 5.4.
 136 Total Quality Management

Table 5.4 Comparison of external failure costs borne by the buyer and the seller
Seller’s external failure costs Customer’s external failure costs
These are the types of costs borne by the seller that These are the types of costs borne by the customer
releases a defective product who buys a defective product
Unnecessary technical support calls Wasted time
Preparation of support answer books Lost data
Refunds and recalls Lost performance or work or business
Coding/ testing of interim bug fix releases Embarrassment
Shipping of updated product Frustrated user quit
Added expense of supporting multiple versions of the Demos or presentations to potential customers fail
product in the field because of the software
Lost sales Cost of replacing product
Lost customer goodwill Cost of reconfiguring the system
Discounts to resellers to encourage them to keep Cost of recovery software
selling the product
Warranty costs Cost of technical support
Liability costs Injury/ death
Government investigations Cost due to poor response
Penalties Mental agony and uncompensated issues
All other costs imposed by law All other costs induced by law

5.5.1 Total Quality Cost

The total quality cost is the sum of all the above costs. It represents the difference between the actual cost of
a product or service, and what the reduced cost would be if there was no possibility of substandard service,
failure of products, or defects in their manufacture. These costs and their stages are shown through a flow
chart (see Figure 5.2).

Before Forestall and

production Prevention cost
prevent
Total quality costs

During Control and

production Appraisal cost
direct
Feed back

After Direct and

Internal failure cost
production correct

After Control and External failure

sales compensat cost

Figure 5.2 Flow chart for total cost of quality

 Cost of Quality 137

Thus,
Total quality cost = CoQ before production + CoQ during production + CoQ after production
= Prevention cost+ Appraisal cost + Internal failure cost + External failure cost
The achieving of TQM depends on how closely an organization is monitoring to minimize to zero
(eliminate) these total quality costs at every stage. This is known as “COQ approach to achieve TQM.”

5.5.2 The Two Dimensions of COQ

For most organizations, quality costs are hidden costs and go unidentified if specific attention is not given.
Because of this, unmeasured quality costs tend to increase. Poor quality impacts companies in two dimensions:
1. Higher cost
2. Lower customer satisfaction
We have already discussed about how it leads to higher cost in the above paragraphs. But the second
dimension, i.e., “lower customer satisfaction” creates price pressure and/or lost sales, which in turn results
in lower revenues. The combination of higher cost and lower revenues eventually brings on a crisis that may
threaten the very existence of the company. Rigorous cost of quality measurement is only the technique for
preventing such occurrence of crisis.
This is interpreted through inverted pyramid [see Figure 5.3(a)].

Delighted
Higher cost customers

Empowerd
Lowered employees
revenue
Higher
Employees
revenue
morale

Customer Lower cost

satisfaction
(a) (b)
Figure 5.3
In contrary, the CoQ approach to TQM can be better understood with the COQ-TQM pyramid [Figure
5.3(b)]. The approach is based on lowering the cost of quality by which the revenue can be enhanced due to
reduced wastage cost or COPQ. This can boost the morale of the employees and thence empower them. This
becomes the cause to customer’s delight; no matter whether he is internal or external.
To have more clarity on this approach, a thorough analysis through quality-cost trade-off is needed.

5.6 Quality–Cost Trade-Off

The history of “quality costs,” dates back to 1951 when the first edition of Juran’s QC Handbook was released.
Quality is Free is the title of the bestselling book published in 1979 authored by another legend in the field of
 138 Total Quality Management

quality, Philip Crosby. He published his second bestseller, Quality without Tears in 1984. He writes one of
“the absolutes” of quality management as the measurement of quality is the price of non-conformance, not
indices. The concepts discussed in these books are widely used today by every organization.
Sometime ago, I went to a cafe at Hyderabad and ordered a black coffee.
The server asked, “which coffee, sir: an ordinary
one or a special one?” What quality makes Because, we
“What is the difference between them?” I asked. this coffee special? give that in a
washed cup!
“Sir, the special one is of high quality and costs
you `10, whereas the ordinary one is of low quality
that costs `5 per cup,” he replied.
[Since black coffee does not even require milk, I

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asked him the reason for the difference in prices. He
told me that it was just because the special coffee was
served in disposable cups.]
A quality product is usually costly. It does not mean that a high-cost product is always of high quality. But
high-quality costs high due to five major reasons. According to
J.M. Juran, the quality costs are the first four types only, but later Rejections and
the fifth was added (see Figure 5.4). Warrant reworks
y claims
1. Cost of prevention of defects: This is the cost incurred
on inspection from the incoming (first) stage to the Costs
outgoing (last) stage of products. This cost includes all of To
those efforts that the management takes to prevent the Additional quality prevent
materials defects
occurrence of the defect. The cost incurred on training
and performing acceptance sampling of raw materials,
conducting SQC, Six-Sigma programs, etc., are included To detect
under this head. defects
2. Cost of detecting the defect: The cost of detecting the
defects include primarily the inspection costs incurred Figure 5.4 Costs of quality
during outgoing stage of products before they are
shipped to the customer. This cost includes all those efforts that the management takes to correct the
defect. Under this head, some industries even include the cost of the damages, loss, theft, transport,
insurance, obsolescence, expiries, etc.
3. Cost of rejection and rework: This includes the cost incurred on scrapping (rejection) the product
due to defect and for the extra work to correct (rework), if possible, the defects. Material cost,
processing cost, inspection cost, and overheads are various costs that go waste. This cost is generally
treated as negative cost since it contributes a lot to losses and, hence, should be avoided, while all
other costs though adds to expenditure, they are still called positive costs because they raise the
reputation of the organization.
4. Cost of reliability and warranty claim: This is the most dangerous cost. As long as the defect is
not passed on to the customer or is detected before it is shipped to the customer, it will be under the
control of the manufacturer and though it causes loss, the manufacturer may still tolerate it. But if
the defect is detected when it is in customer’s hands, it may be disastrous and one cannot estimate
the loss. The loss of reputation, goodwill, and compensations are included under this. The extra
 Cost of Quality 139

attention and cost incurred to avoid and the cost of improving reliability are also included in this
class.
5. Cost of accessories or additional materials: Sometimes the manufacturers enhance the quality of
the product by adding some materials in the dimensions of aesthetics and functional flexibility or
additional functions or performance improvement. This adds some cost to the main product. Such
costs come under this category. For example, speed petrol, double refined oil, additional features in
a mobile, etc., attract more cost than their basic product price.
The analysis of quality-cost trade-off is justified on the following three basic assumptions:
(i) Failures are caused (according to Murphy’s law, if a failure can occur, it will)
(ii) Prevention is cheaper (prevention is better than cure and a stitch in time saves nine)
(iii) Performance can be measured (figures speak better than theories)
J. M. Juran, a legend in the quality field, known for the concepts on “cost of quality,” emphasized on the
inverse relationship between the cost of prevention of the defects and the other types of costs. If the money
spent on prevention of the defects increases, obviously, the cost of detection of defects, cost of rejection, and
cost of guarantee/warranty claims, etc., will decrease (see Figure 5.5). But how long can we go on increasing
the cost of prevention of defects so as to decrease the loss due to defectives? Of course, it is true that the more
the cost of prevention, the less is the cost of detection. But if this cost of prevention is overemphasized, it will
no longer reduce the cost of detection, but in addition, the cost of production may increase. Therefore, a trade-
off should be brought between these so that the total cost is minimum.
Thought for Quality Manager
When the total cost is closely observed, we can find that it first
(TQM) 5.3
decreases and then increases (Figure 5.5). The point where the cost of
quality is minimum is referred to as “the optimum quality level” in Draw quality-cost trade off curve for
the Economics of quality. the TQM 5.1.

Total cost
Cost of Prevention
Total minimum of defects
cost

Cost of detection,
Cost

rejection and
warranty claims

Optimum quality

Low quality
Quality High quality
100%
0% defective
defective

Figure 5.5 Quality–cost trade off

 140 Total Quality Management

Terminal Questions Checkpoint 5.2

Terminal questions on content
1. What do you understand by the term “cost of quality?” What are various types of costs of quality?
2. Classify “costs of quality (CoQ)” and explain each briefly.
3. Write short notes on the following with reference to costs of quality:
a. Prevention cost
b. Appraisal cost
c. Internal failure cost
d. External failure cost
e. Reliability cost
f. Additional features cost
4. Write short notes on the following with reference to costs of quality:
a. Detection cost
b. Prevention cost
c. Warranty claim cost
d. Cost of rejection/rework
e. Additional material cost
f. Accessories cost
5. What do you understand by the term “Quality-cost trade-off?” Discuss.
6. What are the two dimensions of quality? Explain them in detail.
7. Distinguish between failure costs incurred by the seller and the customer.
8. List out various costs related to quality and explain the trade-off between them.
Terminal questions on concept
9. What do you understand by the term “quality accounting?” Explain.
10. Discuss the term “quality cost accounting.”
11. “Failures are causedæpreventions are cheaperæperformance can be measured.” Explain the
statements under the backdrop of TQC.
12. “Figures speak better than the theories.” Evaluate the statement critically under the backdrop of
“cost of poor quality.”
13. Discuss the CoQ approach aimed to reach TQC.
14. Explain various types of quality costs with reference to the stages of production process.

5.7 CoQ: An Old Concept, New Thinking

The concept of CoQ is widely employed in industry and treated as one of the primary functions of QC
departments. Today, both government and commercial organizations are using the concept of CoQ from the
collection of scrap and rework costs to the most sophisticated quality cost program. A clear understanding
 Cost of Quality 141

of the economics of quality and the use of CoQ in support of quality improvement efforts may make the
difference between staying in and leaving the competition.
Manufacturing a quality product, providing a quality service, or doing a quality job with a high degree
of customer satisfaction is not enough. But, the cost of achieving these goals must be carefully managed, in
the interest of safeguarding the reputation on the business or organization for a long term through customer
delight. These costs are true measures of the quality efforts.
Researches reveal that the COPQ can range from 15% to 40% of business costs (e.g., rework, returns,
complaints, reduced service levels, and lost revenue). Most businesses do not know what their quality costs
are because they do not maintain reliable statistics. Quality processes cannot be justified simply because
“everyone else is doing them” but “return on quality (ROQ)” has dramatic impacts as companies grow.
Detecting and correcting errors saves inordinately a large portion of resource such as operator time, efforts,
manpower, machine time, money, material, and so forth. Typically, the cost to eliminate a failure in the final
(customer) phase is 5 times greater than it is at the initial (development or manufacturing) phase. Effective
quality management can reduce production costs because the sooner an error is detected and corrected, the
less costly it will be. The two methods to achieve this are as follows:
1. To operate the processes with a defect-free attitude and
2. To improve the design of the process being operated.
The bane of all our activities is the undesirable work of uncovering and correcting the errors. This is the
part that every business person is trying to minimize, or altogether eliminate. But despite of the best efforts
put by quality managers, the practical experiences have consistently shown this cost to be about 25% of sales
in a manufacturing company and about 35% of operating budget in a service organization. This monetary
figure, according to Crosby, is a percentage of sales, and he suggests that the standard should be reduced
to about 2-3%. This measure has been generally accepted, and many firms use it as a target and measure
of progress. And this new thinking on defect-free attitude for “zero cost of quality” is the origin to moving
towards “zero defects,” achieving “Six-Sigma” and reaching the ultimate goals of total quality management.

5.7.1 Views of Quality Gurus on Cost of Quality

Historically, business managers have assumed that increased quality is associated with increased costæhigher
quality is treated as higher cost. A survey of 94 corporate controllers found that only 31% of the firms
regularly measured costs of quality, and even in these firms productivity was ranked higher than quality as a
factor contributing to profit. Not surprisingly, the major reason for failure to measure these costs was lack of
top management commitment. This view was questioned by the quality pioneers.
J.M. Juran insisted on the inverse relationship between the cost of prevention of the defects and the other
types of costs. As discussed in the previous section (under quality-cost trade off), the more the money spent
on the prevention of the defects, the less will be the costs of detection of defects, rejection, and guarantee/
warranty claims, etc. Juran examined the economics of quality and concluded that benefits outweighed
costs.
Feigenbaum introduced “‘total quality control” and developed the principle that quality is everyone’s
job; thus, expanding the notion of quality cost beyond the manufacturing function. The necessary activities
will incur costs that may be separated into prevention costs, appraisal costs, and failure costs, the so-called
P-A-F model first presented by Feigenbaum. He expressed the idea that so much extra work is performed in
correcting mistakes that there is effectively a hidden plant within any factory. Because quality is everybody’s
 142 Total Quality Management

job, it may become nobody’s job, the idea that quality must be actively managed and have visibility at
the highest levels of management. Total quality control is an effective system for integrating the quality
development, quality maintenance, and quality improvement efforts of the various groups in an organization
so as to enable production and service at the most economical levels which allow full customer satisfaction.
In 1979, Philip Crosby introduced the now popular concept that “quality is free.” Crosby is of the firm
opinion that zero defects is that absolute performance standard and the cost of quality is the price of non-
conformance against that standard. His concept led companies set goals such as Six-Sigma and zero defects.
On the other hand, goals of zero defects may be more costly than the payoff that might accrue.
Another of Crosby’s principles, which he called “absolutes,” is the measurement of quality. The
measurement of quality is the price of non-conformance, not the indices measuring quality by calculating the
price of waste in time, effort, and material. However, this calculation can be used to direct efforts to improve
and measure the improvement.
Today, the view among practitioners seems to fall into one of three categories:
1. Higher quality means higher cost. Quality attributes such as performance and features cost more in
terms of labor, material, design, and other resources. The additional benefits from improved quality
do not compensate for the additional expense.
2. The cost of improving quality is less than the resulting savings. This view, used widely among
Japanese manufacturers, was originally promoted by Deming. The savings resulting from less
rework, scrap, and other direct expenses related to defects are said to account for the focus on
continuous improvement of processes in Japanese firms.
3. Quality costs are those incurred in excess of the costs that would have been incurred if the products
were built or the services were performed exactly right the first time. This view is held by adherents
of the TQM philosophy like Taguchi and others. Costs here mean not only those that are direct but
also those resulting from lost customers, lost market share, and the many hidden costs and foregone
opportunities not identified by modern cost accounting systems.
The attention being given now to the more comprehensive view of the cost of poor quality is a fairly
recent development. Even today, many companies tend to ignore or overlook or downplay this opportunity
because of a continuing focus on production volume or shortsighted focus on production volume or lack of
attention on computing the trade-off between volume and quality. Perhaps! This computational difficulty is
compounded by accounting systems that do not recognize the expenses as manageable.

5.8 ISO 9000 and Cost of Quality

In the recent past, ISO-9000 Standards of Quality Management System has gained fast acceptance throughout
the world. It is the series of guidelines of universal quality systems. Cost of quality is a tool used by the
management for continuous improvement, an important addition to the ISO 9000-2000 revision.
Cost of quality should be incorporated into every quality management system because this tool can and
will identify the means by which a company can gain and retain revenue. The guidelines given by ISO-
9000 provide a pathway to control the COPQ. However, ISO-9000 at best is helpful in keeping COPQ to
a predetermined level. This is represented through a hypothetical graph shown in Figure 5.6. Further, the
control of COPQ through ISO-9000 implementation may help avoid recurrence of any mishaps and disasters
such as nuclear plant catastrophe in Japan, gas leakage in UC plant in Bhopal, and Pasharlapudi Petroleum
burnt out incident of Andhra Pradesh.
 Cost of Quality 143

COPQ
Standard

Before ISO – 9000 After ISO – 9000

Figure 5.6 COPQ graph

5.9 ISO-9000 Controlling COPQ

In fact, the objective of a quality improvement as suggested by Juran should aim to gradually reduce the
standard COPQ and maintain a much lower level as depicted in Figure 5.7. Such approach will do away with
inward stores and inspection facilities as well as stores for substandard and rejected parts which are seen by
ISO-9000 auditors. Tata Steel in 1990s and Motorola-Matsushita in 1970s are the live evidences of such
improvements in quality and decrease in COPQ.

COPQ

Standard

Before quality After quality

improvement projects improvement projects

Figure 5.7 Effect of quality improvement program on quality

5.10 Six-Sigma and Cost of Quality

We have seen during the late 1980s, the Six-Sigma methodology
Thought for Quality Manager
becoming a powerful organizing principle for a number of companies (TQM) 5.4
of which Motorola, General Electric, and Allied Signal are noteworthy.
In fact, the basic aspects of Six-Sigma and the concepts of Cost of Perform a project by conducting
Quality are very close. Six-Sigma focuses on achieving customer a sample survey on at least five
satisfaction through variability reduction. Using cost of quality data products or services and determine
how much percentage is the cost of
can be helpful to target variability reduction efforts that can affect
poor quality of the sales.
more satisfied customers and bottom line results.
 144 Total Quality Management

As discussed earlier, the cost of poor quality may be as high as 25% of the sales for a manufacturing
company and as high as 40% for a service organization. The quality costs are an excellent area that has
a large scope for cost reduction, which will lead to increased productivity. The application of Six-Sigma
approach can well work for such situations. As we know, identifying the cost of quality and taking necessary
measures for the appropriate improvements are the first steps to resolving quality problems. The next step is
to communicate the need for process improvements to the shop floor in a manner that gains buy-in from the
work force. The last step successfully involves the shop floor in resolving the problem forever. Consumer
complaints will be used as an example of the process. Generally speaking, as quality improves, overall cost
is reduced, except in very rare situations like the concept of Six-Sigma, i.e., maybe not more than three per
million cases.
The concept of Six-Sigma and its relation with cost of quality is discussed in the next chapter in detail.

5.11 Uses and Applications of Cost of Quality Information

A competitive product or service based on a balance between the quality and cost factors is the principal goal
of a responsible management and may be aided by a competent analysis of the costs of quality. The analysis
of quality-related costs is a significant management tool that provides
∑∑ a method for assessing the effectiveness of the management of quality and
∑∑ a means of determining problem areas, opportunities, savings, and action priorities.
Therefore, the quality-cost information can be used in a number of ways. A few areas of applications are
as follows:
∑∑ To determine whether quality costs are properly detected, accounted, and controlled.
∑∑ To identify opportunities of profit and establish goals for budgets and profit planning.
∑∑ To identify waste in overhead caused by activities not required by the customer.
∑∑ To optimize purchasing by reducing supplier-related costs.
∑∑ To make capital budgeting and other investment decisions.
∑∑ To identify redundant systems.
∑∑ To identify quality problems.
∑∑ As a measure of an objective performance appraisal.
∑∑ As a tool for Pareto analysis to distinguish between the “vital few” and the “trivial many.”
∑∑ As a management tool for comparative measures of input-output relationships such as the cost of
reliability efforts versus warranty costs.
∑∑ As a strategic management tool to allocate resources for strategy formulation and implementation.

Terminal Questions Checkpoint 5.3

Terminal Questions on Content
1. Discuss “cost of quality” and its relation with ISO-9000.
2. Discuss “cost of quality” and its relation with Six-Sigma.

3. List out the uses and applications of “Quality” in terms.
4. Explain the term “Cost of Costs” with effect from the cost of compallies.
Terminal questions on concept
5. Discuss the relation of cost of quality with ISO-9000 and Six-Sigma.
6. The objective of a quality improvement as suggested by Juran should aim to gradually reduce the
standard COPQ. Explain.
7. “Higher quality means higher cost.” Is it true? Discuss.
8. “The cost of improving quality is less than the resulting savings.” Critically evaluate the statement.
Key Concepts
1. Quality equation: Doing Right Things = Not
doing wrong things
2. Prevention costs: The costs of all activities 11.
designed to prevent poor quality in products or
services.
3. Appraisal costs: The costs associated with
measuring, evaluating, or auditing products 12.
or services to assure conformance to quality
standards and performance requirements.
4. Failure costs: The costs resulting from products
or services not conforming to requirements or
customer/user needs.
5. Internal failure costs: Failure costs occurring 13.
prior to delivery or shipment of the product, or
the furnishing of a service, to the customer, such
as costs of scrap, rework, repair, re-inspection, 14.
retesting, material review, and down grading.
6. External failure costs: Failure costs occurring
after delivery or shipment of the product, and
during or after furnishing of a service to the
customer.
7. The two dimensions of COQ: Higher cost and
lower customer satisfaction. 15.
8. Total quality costs: The sum of all the costs
related to quality. It represents the difference 16.
between the actual cost of a product or service,
and what the reduced cost would be if there was
no possibility of substandard service, failure of
products, or defects in their manufacture.
9. Detection cost: The cost of all those efforts that 17.
the management takes to correct the defect.
10. Rejection and rework cost: The cost incurred on
Cost of Quality 145
scrapping (rejection) the product due to defect and
for the extra work to correct (rework).
Reliability cost or warranty claim cost: The cost
of loss of reputation, goodwill, and compensations
to failure or defective product detected by the
customer.
Cost of accessories or additional material: The
cost incurred due to the manufacturer enhances the
quality of the product by adding some materials
in the dimensions of aesthetics and functional
flexibility or additional functions or performance
improvement.
Quality–cost trade-off: The relationship between
the cost of prevention of the defects and the other
types of costs and their optimization.
Return on quality: Return on quality (ROQ)
refers to the premium price that an organization
can demand for providing higher quality product
or service than the required normal level through
showing a difference with improved material or
better service levels or added features or functions
or characteristic.
Poka-Yoke: The “mistake proofing,” i.e., to
anticipate and eliminate the mistakes.
Zero defects: The zero-defect concept is a
formula for a management program which seeks
the voluntary participation of work-people in
undertaking personnel responsibility for securing
a high level of error-free work performance.
Six-Sigma: Six-Sigma focuses on achieving
customer satisfaction through variability
reduction.
 146 Total Quality Management

Case Study 1

How Industry Uses Cost of Quality

Conduct a survey to discover if and how the food industry uses cost of quality. The results show the percentage
of companies that use cost of quality and how it is collected, analyzed, and utilized. Specific examples are
described.
The survey should answer the following questions:
∑∑ What process is currently used to identify projects for corrective action teams and capital expenditures?
∑∑ How effective are these processes?
∑∑ How is the success of the project measured?
∑∑ Who is involved in identifying projects and measuring their success?
∑∑ How well is the root cause of a problem identified prior to implementation of corrective action?
∑∑ Do we find that the problem still exists after implementation of corrective action?
∑∑ How successful have ERP projects been in reducing costs and cycle time?

Case Study 2
Choose any software industry of your choice and identify various costs associated with quality and fit the
same in the following table. Conduct Pareto analysis or cause-and-effect analysis.

Table C5.1 Examples of quality costs associated with software products

Prevention Appraisal Internal failure External failure
Staff training requirement Design review Bug fixes Technical support calls
analysis
Early prototyping Code inspection Regression testing Preparation of support answer
books
Fault tolerant design Glass box testing Wasted in house Investigation of customer
user time complaints
Defensive programming Black box testing Wasted tester time Refunds and recalls
Usability analysis Training testers Wasted writer time Coding/testing of interim bug fix
releases
Clear specification Test automation Wasted marketer Shipping of updated product
time
Accurate internal Usability testing Wasted Added expense of supporting
documentation advertisements multiple versions of the product in
the field
(Cont.)..

Table C5.1 (Cont.)..
Prevention
Evaluation of the reliability
of development tolls (before
buying them) or of other
potential components of the
product
Cost of Quality 147
Appraisal Internal failure External failure
Pre-release out Direct cost of late PR work to soften drafts of harsh
of box testing by shipment reviews
customer service
staff
Opportunity cost of Lost sales
the late shipment
Lost customer goodwill
Discounts to resellers to encourage
them to keep selling the product.
Warranty costs
Liability costs
Government investigations
(penalties)
All other costs imposed by law