Quality Costs

Many think that quality costs money and adversely affects profits. But these costs are the costs of doing it wrong first time . Quality in the long run results in increased profitability. For example if we design the product right first time, build it right first time - we save all the costs of redesign, rework, scrap, resetting, repair, warranty work etc. Quality is Free

Quality and Profit
If the organization does not offer high quality product or service, it will soon go out of business. But just having high quality will not be enough, because your competitors will also have the high quality. To win, companies will need to offer high quality for a lower price than their competitors. This requires organizations to identify and reduce

High Quality

Lower price

Quality Costs
Quality costs are all those costs that arise from not performing a task the right way the first time. 1. Prevention Costs 2. Appraisal Costs 3. Internal Failure Costs 4. External Failure Costs

Prevention Costs

Prevention costs are associated with design, implementation, maintenance and planning prior to actual operation in order to avoid defects from happening. The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures (internal and external). The motto is “Prevention


Activities associated with Prevention costs
¢ ¢ ¢ ¢ ¢ ¢ ¢ ¢ ¢ ¢ ¢

Market research Quality training programmes Contract review Design review Field trials Supplier evaluation,Supplier Q programs Process plan review Process capability review Design and manufacture of jigs and fixtures Preventive maintenance Engineering changes for easy Producibility Make Certain programs –data reqments,Q measurements

Appraisal costs

Appraisal costs are spent to detect defects to assure conformance to quality standards. Appraisal cost activities sums up to the “cost of checking whether things are correct”. The appraisal costs are focused on the discovery of defects rather than prevention of defects

Activities associated with Appraisal costs
Proto type testing ¢ Vendor surveillance ¢ Incoming material inspection ¢ Process inspection/control ¢ Final inspection- product, package ¢ Laboratory testing/measurement ¢ Field testing ¢ Depreciation cost for measuring ¢ Quality audits

Internal failure costs

Internal failure costs occurs when results of work fail to reach designated quality standards, and are detected before transfer to the customer takes place.

Activities associated with Internal failure costs
¢ ¢ ¢ ¢

¢ ¢ ¢ ¢

Design changes/ corrective action Scrap due to design changes Excess inventory Rectification / reject disposition purchased material Rework/rejection in manufacturing Downgrading of end product Downtime of plant & machinery Trouble-shooting & investigation defects



External failure costs

External failure costs occur when the product or service from a process fails to reach designated quality standards, and is not detected until or after transfer to the customer.

Activities associated with External failure costs

¢ ¢ ¢ ¢


Processing/investigation of customer complaints Repair/replacement of sold goods Warranty claims Product liability & litigation costs Interest charges on delayed payment due to quality problems Loss of customer goodwill & sales.

Size of four categories of quality costs


organizations which do not follow TQM, there is less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs. studies have shown that quality cost in manufacturing companies world over range from 20% to 30% of turnover and in the case of service companies it can go up to 40 %.


Size of various quality cost elements
Quality costs in % of sales 10-15%


The total quality costs 25-35 % of turnover.


1% Preventive Appraisal Internal Failure External Failure

Impact of TQM on costs.
TQM is primarily aimed to improve the quality of the product , higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly effect the profitability . ¢ This is demonstrated by the results of TQM programme in Xerox Corp . The change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide.

Impact of TQM on Quality Costs An example from Xerox Corp.
35 30 % of sales
25 20 15 10 5 0

Internal Failure Appraisal Prevention

Before TQM

After TQM


Prevention Correction Failure

Rs Rs Rs Rs Rs



10 100


Cost of rectifying defect

1-10-100 Rule

Visible costs

• Scrap • Rework • Warranty costs

• Excessive use of material

• High inventory • Low plant utilization • Cost of redesign and re inspection • Cost of resolving customer problems • Cost associated with poor quality Hiddenof purchased material Costs • Cost of non value adding activities • Opportunity cost of lost customers