COST OF QUALITY

PREPARED BY-
DHINAKARAN.G
contents

1. Definition- Cost of Quality! 10. Benefits of minimizing COQ.

2. History 11. Guidelines
3. What is COST OF 12. Steps in implementing Quality
QUALITY? Costs
4. Categories of Quality Costs 13. Gaining Approval
5. Cost of Poor Quality(COPQ) 14. Relationship
6. Impact of TQM on COQ 15. Investing in Prevention costs.
7. Effects of identifying COQ. 16. Conclusion
17. Bibliography
8. Goal of COQ system
9. Why measure COQ?
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 in
1961.
WHY COQ…??
Traditionally quality performance has been reported to management in terms of
rejection and defective material reports. This vital information is often difficult to analyse
and interpret in terms of costs.
As a result, cost saving opportunities may be overlooked. Successful business
requires financial planning and control. It is advisable that quality failures be presented in
financial terms
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
 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.
Cost of Quality
Quality costs or cost of quality is a means to quantify
the total cost of quality-related efforts and deficiencies.
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 associated with a process not being operated to the
requirements.
• This can be termed as unnecessary amount spent.( Internal & External failure
costs)
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 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 rather than appraisal” .

 In the ideal situation, Prevention costs will be the

largest portion of the Total Cost of Quality

 Typically, prevention is less than 10% of Total COQ

where it should be about 70%
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. THESE ARE ALL PLANNED PROACTIVE
 Field Trials ACTIVITIES.
 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.
“Intellectuals solve problems.
Geniuses prevent them. ”
-- Albert Einstein
Preventive
Cost
Quality planning
Pre-production verification
Design & development of
quality measurement and test
equipment
Calibration and maintenance of
quality measurement and test
equipment
Calibration and maintenance of
production equipment used to
evaluate quality
Supplier assurance
Quality training
Quality auditing
Materials consumed during
Quality Improvement
programs
Appraiser cost Internal Failures External Failures
Cost of escort expenses
incurred to prevent transit
Design Scrap
damages
Cost of trucks halting
charges at Field
Process Scrap
Receiving inspection
Cost of premium freight
paid to deliver the goods
Replacement, rework and
repair
Inspection & Testing warranty Complaints
Cost of trucks halting
charges at Plant
Warranty claims
Inspection and test
equipment Cost for port detention and
demurrages Products rejected and
returned
Cost of trucks halting Cost of Write -offs (Physical
inspection and testing charges at plant for Variance, ) Intrest on Over
incoming containers Due
 Preventive Cost
Responsibility for Data
COQ element Description Cost related To
giving Data source

Activity of planning quality systems Raw data by costing.

Quality Application
and translating product design and Data compiling by ERP
planning engineering
customer quality requirements QA

Design & development Costs of designing, developing and Raw data by costing.
of quality measurement documenting any necessary inspection, NPD Data compiling by ERP
and test equipment testing QA

Calibration and
The cost of calibration and maintenance
maintenance of quality
of gages, templates, jigs, fixtures and QA Cal Lab Manual
measurement and test
similar items
equipment

Calibration and
The cost of calibration and maintenance
maintenance of
of production equipment used to PRD Cal Lab Manual
production equipment
evaluate quality
used to evaluate quality
 Preventive Cost
Responsibility for Data
COQ element Description Cost related To
giving Data source

The initial assessment, subsequent audit

Inward QA,
and surveillance of suppliers to ensure Raw data by costing.
Supplier assurance Process Engg., ERP
they are able to meet and maintain the Data compiling by QA
Purchase team
requisite product quality

Quality training Cost of quality training programmes L&D L&D Manual

Cost for appraising of the entire system

Quality auditing of quality control or specific elements QMD QMD ERP
of the system used by an organisation

Structuring and carrying out

programmes aimed at new levels of Raw data by costing.
Quality Improvement
performance e.g. defect prevention CI Lean ERP
programs
programmes, quality motivation Data compiling by QA
programmes
 Appraiser Cost
Responsibility for Data
COQ element Description Cost related To
giving Data source
Costs associated with testing and
Pre-production measurement of pre-production for the
Process engg Costing ERP
verification purpose of verifying the conformance of
design to quality requirements.

The inspection and testing of incoming

Raw data by costing.
parts, components and materials. Also
Receiving inspection Inward QA ERP
included inspection at the supplier’s
Data compiling by QA
premises by the purchaser’s staff.
The activity of inspection and testing
first during the process of manufacture, Raw data by costing.
Inspection & Testing and then as a final check to establish the QA ERP
quality of the finished product and its Data compiling by QA
packaging.

The depreciation costs of the equipment

Raw data by costing.
Inspection and test and associated facilities;
QA ERP
equipment the cost of setting up and providing for
Data compiling by QA
maintenance and calibration.

Materials consumed
Materials consumed or destroyed during
during inspection QA Costing ERP
the course of destructive tests.
and testing
 Internal Failures
Responsibility for Data
COQ element Description Cost related To
giving Data source
Material, parts, components, and
product end items which fail to conform
Design Scrap PRD Costing ERP
to quality requirements and which
cannot be economically reworked

Material, parts, components, and

Process Scrap product which rejected during PRD Costing ERP
manufacturing process

Cost of trucks halting Cost of trucks halting charges at Plant

SCM Costing ERP
charges at Plant

Cost for port

detention and Cost for port detention and demurrages SCM Costing ERP
demurrages

Cost of trucks halting

Cost of trucks halting charges at plant
charges at plant for SCM Costing ERP
for incoming containers
incoming containers
 External Failures
Responsibility for Data
COQ element Description Cost related To
giving Data source
Cost of escort
expenses incurred to Cost of escort expenses incurred to
SCM Costing ERP
prevent transit prevent transit damages
damages

Cost of trucks halting

Cost of trucks halting charges at Field SCM Costing ERP
charges at Field

Cost of premium
Cost of premium freight paid to deliver
freight paid to SCM Costing ERP
the goods
deliver the goods

The investigation of complaints and

Warranty Complaints provision of compensation for defective QA Costing ERP
products or installation.

Work to repair or replace items found

to be defective by the purchaser and
Warranty claims QA Costing ERP
accepted as the supplier’s liability under
the terms of the warranty.
Cost of Write -offs
(Physical Variance, ) Write offs for physical variance Costing Costing ERP
Interest on Over Due
APPRAISAL COSTS

 Appraisal costs are spent to detect defects to assure conformance to quality standards.
 It is the cost expenditure on inspection and testing.
 Appraisal cost activities sums up to the “cost of checking if things are correct”.
 The appraisal costs are focused on the discovery of defects rather than prevention of defects

 Appraisal Costs should be the second largest

category, but should not exceed prevention costs
Activities associated with appraisal costs

 Inspection/test of purchased material

 In-process and final inspection/test THESE ARE ALL PLANNED
 Product, process or service audits ACTIVITIES
 Calibration of measuring and test equipment
 Maintaining accuracy of testing equipment,performed in terms of periodic
calibration.
 Cost of non-destructive testing such as electric probes,X rays,radiography
etc.
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.
 Quality costs

COST OF COST OF NON-

CONFORMANCE CONFORMANCE

PREVENTION APPRAISAL INTERNAL EXTERNAL

COSTS COSTS FAILURE FAILURE
COSTS COSTS
 Cost of Quality by American Society of Quality
27
Cost of Quality by American Society of Quality

Cost of Quality to be here

Total cost of Quality

Sales turnover Category Cost of Prevention &

Cost of Appraisal

Up to 15% World Class

15 to 30% Industry Average

Cost of failures

>30% Non-Competitive

Internal failure cost : 10 to 12%

Prevention Cost : 1 to 2%
(Costs generated before a product is shipped
(Costs incurred to prevent the occurrence of
as a result of non-conformance to
non-conformances ….)
requirements….)

Appraisal cost : 4 to 6% External failure cost : 10 to 15%

(Costs incurred in measuring and controlling (Costs generated after a product is shipped as
current production to assure conformance to a result of non-conformance to
requirements...) requirements….)
Six Sigma Philosophy of Cost of Quality

Table 1: Sigma Level and the Cost of Quality

Cost of Quality as
Sigma Level DPMO
Percentage of Sales

2 298,000 More than 40%

3 67,000 25-40%

4 6,000 15-25%

5 233 5-15%

6 3.4 Less than 1%

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 program 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 costs.

35 An example from Xerox Corp.

30

25 Internal
% of sales

Failure
20

15 Internal
Failure

10 Appraisal
Appraisal

5
Prevention
prevention
0
Before TQM After TQM
Effects of identifying coq
 Goal of coq system
The goal of using COQ is to increase prevention activities in order to eliminate internal and external failures and
to reduce appraisal activities.
BENEFITS OF minimizing COQ…

Decreases Increases
 Defects  Sales
 Overall Costs  Profit
 Returned Goods  Capacity
 Customer Complaints  Customer Satisfaction
 Owner & Mgmt. Stress  Market Share
 Decrease Legal Costs  Competitive Edge
 Employee Satisfaction
MEASURING COST OF QUALITY…

COQ data can be measured and presented in many different ways.

 % age of sales
 % age of profits
 % age of manufacturing cost
 Rs per direct labor hr
 Rs per unit of product
 Steps in implementing quality costs

The following sequence applies to most organizations -

 1. Review the literature on quality costs or consult others in similar industries who are using the
same tool.
 2. Select one organizational unit of the company to serve as a pilot site. This unit may be one plant,
one large department, one product line, etc.

 3. Discuss the objectives of the study with the key people in the organization.

 4. Collect whatever cost data are conveniently available from the accounting system and use this
information to gain management support to make a full cost study.

 5. Make a proposal to management for a full study. The proposal should provide for a task force of
all concerned parties to identify the work activities that contribute to the cost of poor quality.
Work records, job descriptions, flowcharts, interviews, and brainstorming can be used to identify
the activities.
Steps in implementing quality costs (CONTD.)

 6. Publish a draft of the categories defining the cost of poor quality.

 7. Finalize the definitions and secure management approval.
 8. Secure agreement on responsibility for data collection and report preparation.
 9. Collect and summarize the data. Ideally, this should be done by Accounting.
 10. Present the cost results to management along with the results of a
demonstration quality improvement project (if available). Request authorization to
proceed with a broader companywide program of measuring the costs and
pursuing projects.
Clearly, the sequence must be tailored for each organization.
Gaining approval…

 Establish that the costs are large enough to justify action.

- Use the grand total to demonstrate the need for quality improvement. This is the most
significant figure in a quality cost study.
- Relate the grand total to business measures.

 Estimate the savings and other benefits.

- If the company has never before undertaken an organized program to reduce quality-
related costs, then a reasonable goal is to cut these costs in two, within a space of 5
years.
- Don’t imply that the quality costs can be reduced to zero.
Gaining approval(contd.)

 Calculate the return on investment resulting from improvement in quality.

 Use a successful case history (a “bellwether” project) of quality improvement in the company to
justify a broader program.

 Identify the initial specific improvement projects.

 Propose the structure of the improvement program including organization,problem

selection,training, review of progress, and schedule
Conclusion…

Is Cost related to
Prevention of Non- YES PREVENTION
Conformance?

NO
Is Cost related to
Evaluating the YES APPRAISAL
Conformance ?

NO INTERNAL FAILURE
Is Non-Conformance
Is Cost related to
found prior to
Non-conformance? YES YES
Shipment ?
NO
Not a Quality Cost
NO

EXTERNAL FAILURE
conclusion

 The cost of poor quality can be reported in an endless number of ways.

 It can take a variety of different forms.
 It can represent 10% of a company’s annual sales, or it can represent 40%,
depending on how far they “peel the onion”.
conclusion

 However, once quality costs are presented in the language of money,

misunderstandings evaporate and executives immediately realize the true
significance of the cost of poor quality.

 “Quality costs are dynamic and constantly changing over time.”

BIBLIOGRAPHY

 Juran Quality Control Handbok _5th edition

 Total Quality management by Dale. H. Besterfield
 http://sixsigmabasics.com/six-sigma/statistics/cost-of-quality-coq.html
 costofpoorquality-research-120625132610-phpapp02
THANK YOU!