Cost of Quality
The Cost of Quality (CoQ) is a financial measure used in business to quantify the total cost of producing a quality product. It is not just the cost of creating a quality product or service, but the cost of not creating a quality product or service. This concept is used in Six Sigma, Lean Manufacturing, and other quality control methodologies.
The Cost of Quality can be broken down into four categories:
- Prevention Costs: These are costs incurred to prevent defects and errors from occurring in the first place. Examples include quality planning, training, process control, and quality improvement initiatives.
- Appraisal Costs: These are costs associated with measuring and monitoring activities to ensure quality standards are being met. Examples include inspection and testing, quality audits, and verification of stock.
- Internal Failure Costs: These are costs related to defects that are found before the product or service is delivered to the customer. Examples include waste, scrap, rework or rectification, and failure analysis.
- External Failure Costs: These are costs associated with defects that are found after the product or service has been delivered to the customer. Examples include repairs and servicing, warranty claims, complaints handling, and returns due to defects.
A key goal of quality management is to reduce the cost of poor quality (sum of internal and external failure costs) by investing in prevention and appraisal costs. By identifying and addressing quality issues early, organizations can often save money in the long term and ensure customer satisfaction.
Example of Cost of Quality
Let’s consider a company that manufactures bicycles.
- Prevention Costs: The company invests in high-quality materials to prevent defects. It also trains employees on best practices for assembling bicycles and implements a quality management system to guide its manufacturing process. Furthermore, the company may invest in research and development to design more durable and efficient bicycles. These are all examples of prevention costs.
- Appraisal Costs: To ensure that the bicycles meet its quality standards, the company tests every bicycle before it leaves the factory. It also periodically audits its manufacturing process to look for areas of improvement. The cost of these testing procedures and audits are considered appraisal costs.
- Internal Failure Costs: During testing, some bicycles are found to have faulty brakes. The cost of repairing these bicycles before they are shipped to customers, as well as the cost of wasted time and materials, are internal failure costs.
- External Failure Costs: Some faulty bicycles are not caught during testing and are sold to customers. When customers complain, the company has to accept returns, refund money, repair or replace the faulty bicycles, and handle the customer complaints. In addition, the company may suffer lost sales due to a damaged reputation. These are all examples of external failure costs.
By investing in prevention and appraisal costs, the company can reduce the occurrence of defects, thereby lowering its internal and external failure costs. Over time, this should lead to a lower total cost of quality, improved customer satisfaction, and increased profitability.