Definition: Cost of Quality
Cost of poor quality (COPQ): The costs associated with providing poor quality products or services. There are four categories: internal failure costs (costs associated with defects found before the customer receives the product or service), external failure costs (costs associated with defects found after the customer receives the product or service), appraisal costs (costs incurred to determine the degree of conformance to quality requirements) and prevention costs (costs incurred to keep failure and appraisal costs to a minimum).
Cost of quality is a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.
Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal and external failure costs.
Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and incurred before actual operation, and they could include:
- Product or service requirements—establishment of specifications for incoming materials, processes, finished products, and services
- Quality planning—creation of plans for quality, reliability, operations, production, and inspection
- Quality assurance—creation and maintenance of the quality system
- Training—development, preparation, and maintenance of programs
Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They could include:
- Verification—checking of incoming material, process setup, and products against agreed specifications
- Quality audits—confirmation that the quality system is functioning correctly
- Supplier rating—assessment and approval of suppliers of products and services
Internal failure costs
Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer. They could include:
- Waste—performance of unnecessary work or holding of stock as a result of errors, poor organization, or communication
- Scrap—defective product or material that cannot be repaired, used, or sold
- Rework or rectification—correction of defective material or errors
- Failure analysis—activity required to establish the causes of internal product or service failure
External failure costs
External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include:
- Repairs and servicing—of both returned products and those in the field
- Warranty claims—failed products that are replaced or services that are re-performed under a guarantee
- Complaints—all work and costs associated with handling and servicing customers’ complaints
- Returns—handling and investigation of rejected or recalled products, including transport costs
Cost of quality and organizational objectives
The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one.
These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities.
Cost of quality is also an important communication tool. Philip Crosby demonstrated what a powerful tool it could be to raise awareness of the importance of quality. He referred to the measure as the “price of nonconformance” and argued that organizations choose to pay for poor quality.
Many organizations will have true quality-related costs as high as 15 to 20 percent of sales revenue, some going as high as 40 percent of total operations. A general rule of thumb is that costs of poor quality in a thriving company will be about 10 to 15 percent of operations. Effective quality improvement programs can reduce this substantially, thus making a direct contribution to profits.
The quality cost system, once established, should become dynamic and have a positive impact on the achievement of the organization’s mission, goals, and objectives.