Calculating Cost of Quality

Demands of the competitive global economy have placed a strong emphasis on quality across every industry, and it shows no signs of going away; B2B and B2C customers expect perfect quality. Meeting the customer’s expectations and specifications at a high degree of accuracy is no longer expected to come at a premium — it is just expected. Calculating the cost of quality is an important first step in identifying areas of opportunity to add value to the customer while reducing costs and remaining competitive.

Costs of quality (COQ) are those costs incurred through both meeting and not meeting the customer’s quality expectations. In other words, there are costs associated with defects, but producing a defect-free product or service has a cost as well. Calculating these costs serves the purpose of identifying just how much the organization spends to meet the customer’s expectations, and how much it spends when it does not. Knowing these values allows management and team members across the company to take action in ensuring high quality at a lower cost. While analyzing the COQ at an organization leads to the revelation of uncomfortable truths about the state of quality control at the company, the process is important for eliminating waste associated with poor quality. These talks often require a mindset and culture shift from viewing product quality defects as individual failures to seeing them as opportunities to improve quality as a collective team.

Specifically, quality-related costs are broken up into two distinct groups: Cost of Good Quality (COGQ) and Cost of Poor Quality (COPQ). Any activity associated with preventing defects or dealing with defects can be considered a COQ, and below is a summary of how to properly identify them.

Cost of Good Quality

COGQ is further divided into two sections: Prevention and Appraisal. Prevention costs are essentially any activities that occur with the intention of limiting variation that does not suit the customer’s expectations. Any modern quality management system — like Advanced Product Quality Planning (APQP) in the automotive industry — has activities devoted to preventing quality defects. Failure Modes and Effects Analysis (FMEA), Measurement Systems Analysis (MSA), Production Part Approval Process (PPAP), and the development of control plans are all good examples of this type of quality management. Appraisals, such as ensuring equipment is properly calibrated, or auditing the quality management system itself, are sources of “good” quality costs. There are numerous processes associated with the prevention of defects, or “failure,” and the following list, while not exhaustive, provides a good look at some of those processes:

Prevention

• Error Proofing
• Capability Assessments
• Training
• Design Review

Appraisals

• Quality Auditing
• Inspection/Testing
• Calibrating Equipment
• Supplier Assessment

Cost of Poor Quality

COPQ, like its counterpart COGQ, is also divided into different categories. All costs of poor quality are associated with failures — any quality variation that does not meet the customer’s expectations — and are distinguished by where the failure is discovered. Internal failure costs, the first category, refer to costs incurred through catching a defect before it is passed along to the customer. The process of scrapping a defective product is a good example. The second category, external failure costs, is the opposite. In this scenario, defects have been passed all the way through to the customer, and there are costs to reconciling that. Anyone who has ever ordered an item online only to return it has experienced firsthand external failure costs associated with poor quality. External failure costs often carry an additional qualitative costs associated with company brand damage that may have long-term negative effects. Below are some examples of internal and external failure costs associated with producing a product or providing a service:

Internal Failure Costs

• Rework
• Scrap
• Downtime
• Shortages
• Re-Testing
• Re-Designing
• Stoppages

External Failure Costs

• Grievances
• Recalls
• Sales Reductions
• Returns
• Repairs & Servicing
• Warranty Claims

Conclusion

By calculating the COQ, both good and poor, an organization can properly analyze, take action on, and control the quality systems in place. Understanding the current COQ required to provide the customer with a product or service that meets their expectations allows the organization to strategically pinpoint and eliminate waste associated with internal and external failures, resulting in a leaner, more profitable operation. Enhancing your organization’s approach to calculating COQ is as much a culture change initiative challenge as it is a process improvement, where planning and cross-functional team buy-in is required to ensure long-term COQ calculation repeatability and success.

We hope this post aids you and your team’s efforts in outlining the many factors that impact the COQ, the associated benefits of uncovering the specific COQ issues at a deeper level, and the value of the many lasting benefits of pursuing perfect quality.

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