Cost of Quality

Production and Operations Management Assignment

1. Cost of quality

Cost of quality is defined as the cost which is allied with the quality of a product. It is the sum total of incurred cost while maintaining standard level of quality as well as the cost of failure to maintain that level. Cost of Quality is not incurred if the quality is free from faults.

Cost of quality therefore isn’t the price of producing quality product or service. It is the cost of NOT creating a quality product or service.

Cost of quality therefore, broadly consist of several factors. Namely,

1. Internal failure cost
2. External failure cost
3. Appraisal cost
4. Prevention cost

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1. Internal failure cost. Internal failure costs are costs that are caused by products or services not conforming to requirements or customer/user needs and are found before delivery of products and services to external customers. It takes place internally, or before a product leaves manufacturing line.

They would have otherwise led to the customer not being satisfied. Deficiencies are caused both by errors in products and inefficiencies in processes.

         Some causes of internal failure cost involves, rework, delays, material shortages,         analysis failures, lack of flexibility and adaptability, product scrapping, etc.

1. External failure cost. External failure costs are costs that are caused by defects found after the product or services has been delivered to customer, which lead to customer dissatisfaction.

It takes place externally, outside the production line after the product has been delivered into the customer's hand.

        Some examples of external failure cost includes, complaints, repairing goods,         customers bad impression, sales loss, repairing goods, re-servicing of customers.

1. Prevention cost. These are cost that are incurred from activities that are designed to prevent or minimize poor quality from arising in products or services.

        Good use of prevention cost will prevent rise of both internal and external failure         cost.

        Examples of prevention cost includes, quality planning, supplier evaluation, error         proofing, product review(Especially for new products), hiring skilled and or         experienced workers.

1. Appraisal cost. These are cost that are incurred because of the need to ensure a certain level of conformance in the quality of products and services in all stages.

        Appraisal cost are therefore associated with evaluating or auditing products and         services to quality standards and performance requirements.

        Examples of appraisal cost includes, field testing, products and services audits, final         product inspection, equipment test and inspection.

Low cost of quality is therefore associated with customer's satisfaction and good company reputation. If an organization can continually prove itself to be reliable, customer's will keep coming back and this will keep the organization going.

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The graph shows that there is a minimum Total Quality cost, which is a combination of prevention, appraisal and failure. Reducing any of these reduces the total. The key to minimum cost, is striking the correct balance between the three.

Clearly prevention reduces both appraisal and failure costs, however eventually the cost of prevention itself starts to increase the total cost and so this must be controlled and set at an effective level.

2. Internal failure cost and how to control them.

The internal business environment comprises of factors within the company which will impact the success and approach of their business operations. Unlike the external environment, the company has control over these factors.

It is therefore important to recognize the potential opportunities and threats outside the company operations. However, managing the strengths of internal operations is the key to reducing failure cost and contribute to the business success.

It is therefore important to control and ultimately reduce the internal failure cost of a company.

Ways to control internal failure cost:

1. Employee's training: Staff training is essential for specific purposes related to your business as the cost of turnover will cause a company's productivity to fall, sales to decline, and current staff requiring to work more hours. Morale among employee's will also suffer.

Survey indicates that at least 40% of employee's who receive poor job training leave their positions within the first year.

        It is therefore important to implement some form of staff training as this will cause         employee to have greater job satisfaction as well as improve productivity as a         satisfied employee is likely stay longer as well as be better equipped to handle         customer's inquiries, make a sale or use a computer system.