Cost of Quality

Cost of quality is the most widely used and widely misunderstood terminology in industries. It is another term that has inadvertently created confusion. Cost of quality is not the cost that we usually spend in producing quality products or delivering efficient services, it is actually the cost that company incurs on account for not meeting the customer requirements. Fundamentally, every time a work is redone, the cost of quality increases. Obvious examples are the reworking of a manufacturing item, the retesting of an assembly, correction of a bank statement or replacement of a food order in a restaurant.

Hidden quality costs:

Companies that measure COQ for the first time are shocked at what they have found. Scrap, rework and claims are the well known losses in industries and managers usually ignore the intensity of hidden losses behind the surface and that are actually responsible for sinking the ship. Figure shows the hidden costs of quality and the multiplier effect.

This tool speaks in the language of management and research shows that quality costs can range from 15 % to 20% of the total business costs

Prevention costs:

It includes costs of all activities specifically designed to prevent poor quality in products or services.

* Quality education & training

* Quality improvement projects

* Supplier evaluations

* Process capability evaluations

* Preventive maintenance

* Design reviews

* Market research

Appraisal costs:

The costs associated with measuring, evaluating and auditing products or services to assure conformance to quality standards and performance requirements.

* Finished product inspection

* Raw material inspection

* In process material inspection

* Calibration of testing equipments

* Product, process or service audits

* Internal audits

Internal Failure costs:

These are the costs incurred when product or service fail to meet quality requirements prior to the transfer of ownership to the customer.

* Costs of scrap

* Rework

* Reinspection & retesting

* Material review