COST OF QUALITY

Prepared by- PQE Truong (Robert)

 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 DEFINITION

The term “QUALITY COSTS” has different meanings to different

people.

 Some equate “QUALITY COSTS” with the costs of poor quality (mainly the costs of
finding and correcting defective work).
 Others equate the term with the costs to attain quality.
 Still others use the term to mean the costs of running the Quality department.
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 HISTORY

• It was Joseph Juran who first discussed the cost of quality analysis in
1951 in the first edition of “Quality Control Handbook”

• And it was Armand Feigenbaum who identified

four quality cost categories in 1956 in “Total
Quality Control” in the Harvard Business Review,
Vol. 34
• The Quality Cost Committee was established by the then
ASQC(American society for quality control) in 1961.
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 WHAT IS COST OF QUALITY?

• It is the term that is widely used and widely misunderstood.

• The "cost of quality" is not the price of creating a quality product or
service.
• It's the cost of NOT creating a quality product or service.
WHAT IS COST OF QUALITY?

Every time work is redone, the cost of quality increases.

Examples include:
• The reworking of a manufactured item.
• The retesting of an assembly.
• The rebuilding of a tool.
• The correction of a poor quality.
• Stop line cost when happened quality issue.
 WHAT IS COST OF QUALITY?

Cost of quality = Cost of conformance + Cost of non-conformance

• Cost of conformance is the cost incurred in ensuring that things are done right the
first time.
• It is the cost of providing products or services as per the required standards.
• This can be termed as good amount spent. (Prevention & Appraisal costs)

• Cost of non-conformance is cost incurred as a result of not doing things right the first
time.
• It is the failure cost related a process not being operated to the requirements.
• This is unnecessary amount spent.( Internal & External failure costs)
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 CATEGORIES OF QUALITY COSTS

Quality Costs

COST OF COST OF NON-

CONFORMANCE CONFORMANCE

PREVENTION APPRAISAL INTERNAL EXTERNAL

COSTS COSTS FAILURE FAILURE
COSTS COSTS
 PREVENTION COSTS
• Prevention costs are related to design, implementation , maintenance, and planning before actual operation, in order to avoid defects from
happening.

• Mainly 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 rather than appraisal” .

ACTIVITIES ASSOCIATED WITH PREVENTION COSTS

• Market Research

• Quality planning : It includes the cost associated with creating the entire quality plan , communication of quality plans to all the
employees.

• New product review :Cost of reliability and other quality related activities associated to launching new designs.

• Tolerance analysis before design release.

• Field Trials

• Cost of research and development activities , analysis and correction of causes and defects.

• Cost of training : It consists of either training the workers , supervisors and managers .Cost involved in
arranging training programs, attending technical exhibitions , seminars and conferences etc.

• Quality audits : Cost involved in evaluating the execution of activities in overall quality plans involved in the organization.

• Cost involved in prevention of defects ,it may be technical or non-technical.

 APPRAISAL COSTS
• Appraisal costs are spent to detect defects to assure conformance to quality standards.
• It is the cost for inspection and testing.
• Appraisal cost activities sums up to the “cost of checking every things are correct or not”.
• The appraisal costs are focused on the detection of defects rather than prevention of defects

ACTIVITIES ASSOCIATED WITH APPRAISAL COSTS

• Inspection/test of purchased material
• In-process and final inspection/test
• Product, process or service audits
• Calibration of measuring and test equipment
• Maintaining accuracy of testing equipment, performed in
terms of periodic calibration
 INTERNAL FAILURE COSTS
• These are the failure costs occurring prior to delivery or shipment of the product, or
the furnishing of a service, to the customer.
• These are the costs that would disappear if no defect is found in the product before
dispatching.
ACTIVITIES ASSOCIATED WITH INTERNAL FAILURE COSTS
• Cost of rework , scrap , defectives , waste etc.
• Cost of re-inspection , re-tests to verify the performance analysis.
• Cost of 100% inspection.
• Changing processes: Modifying manufacturing or service
processes to correct deficiencies
• Lost production due to supplier materials and own material.
 EXTERNAL FAILURE COSTS
• These are the costs incurred after the product is dispatched to the consumer.
• It may include the cost to the business of providing a bad service
or product and this may also result into cancellation of order.
• These costs also would disappear if there were no deficiencies.

ACTIVITIES ASSOCIATED WITH EXTERNAL FAILURE COSTS

• Warranty charges

• Complaint adjustment : Costs of investigation and adjustment of justified complaints attributed to

defective product or installation.

• Returned material : Costs associated with receipt and replacement of defective product received from the
field.

• Recalling of the product,due some reasons such as safety,health

,accidents etc.

• Allowances : The costs of concessions made to customers due to substandard products accepted by the
customer as is or to conforming product that does not meet customer needs.
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 COST OF POOR QUALITY (COPQ)

 “How much is it costing our organization

by not doing a good job on quality?” So
we will use the term “cost of poor quality.”

 The obvious and visible costs are a small

portion of the overall COPQ. The
bottom of the iceberg represents the
majority of the COPQ and are not easily
identified and quantified.

By calculate costs of poor quality, a company

can prevent the production of a nonconforming
product.
 QUALITY COSTS

COST OF COST OF NON-

CONFORMANCE CONFORMANCE
(Cost of Good quality) (Cost of Poor quality)

PREVENTION APPRAISAL INTERNAL EXTERNAL

COSTS COSTS FAILURE COSTS FAILURE COSTS
 Profit
Effect of Cost of Poor Quality?

Normal Profit = Product price - Production cost

Production cost
Abnormal Profit = Product price - +
Cost of Poor
Quality
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 WHY MEASURE
COQ?

“When you measure what you are speaking about and express it
in numbers, you know something about it” – Kelvin

 You cannot manage what you cannot measure ” – Anon

 WHY MEASURE COQ?

• Measure COQ - Why?

 COQ can be used to identify quality improvement candidates

 COQ provides one measure of comparing the success of projects
 COQ can provide cost data for motivational purpose

 Money is the language of management, you need to show them the numbers
- Crosby
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
 BENEFITS OF MINIMIZING COQ…

Decreases Increases
• Defects • Sales
• Overall Costs • Profit
• Returned Goods • Capacity
• Customer Complaints • Customer Satisfaction
• Owner & Mgmt. Stress • Market Share
 CONTENTS
1. Definition- Cost of Quality!
2. History
3. What is COST OF QUALITY?
4. Categories of Quality Costs
5. Cost of Poor Quality(COPQ)
6. Why measure COQ?
7. Benefits of minimizing COQ.
8. Case Study (Ex.)
CASE STUDY: H&S MOTORS
“Intellectuals solve problems.

Geniuses prevent them. ”

-- Albert Einstein
THANK YOU!