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“Higher quality is less expensive to product than lower quality”- W. Edwards Deming
Quality comes with a cost. Often we have found companies struggling to strike a fine balance with the quality and cost. Quality managers sometimes struggles to make management understands the financial aspects of quality. Return on Investment is often the question asked by the management while investing something for improving the quality. But before that, a quality manager must understand the term “Total cost of Quality” so that he can well justify the need for improvement.
Total Cost of Quality is a method to define and measure the amount of resources an organization is utilizing for a product. Total Cost of Quality is the sum of Cost of Good Quality (CoGQ) and Cost of Poor Quality (CoPQ).
CoQ = CoGQ + CoPQ
Cost of Quality enables an organization to determine the allocation of resources and gives an idea on how the quality can be improved.
Cost of Good Quality are investments made to produce good quality products. These are referred as opportunities for improvement in organizations. Cost of Poor Quality can be defined as the monetary loss to an organization due to products and processes not meeting the defined quality objectives. These are mainly due to cost of non-conformities, cost of lost opportunities for sales value and cost of inefficient processes. Total Cost of Quality is collectively defined into four categories
- Internal Failure Cost are the cost due to deficiencies associated with the product failure to meet the customer needs before delivery of the product. This is the cost of an inefficient process. For example, scrap, rework, retest, changing process, redesigning, failure analysis, etc. Cost of an inefficient process are:
– Inventory shrinkage
– Non-value added activities
– Variation in product characteristics
– Sudden equipment downtime
- External Failure Cost are the cost due to deficiencies associated with the product failure to meet the customer needs after the delivery of the product or/and lost of opportunities for sales revenue. Such cost will disappear in the absence of deficiencies. Failure to meet customer requirements and needs may be due to warranty changes, returned materials, complaint adjustments, allowances, rework or penalties due to poor quality. Customer defections and lost of new customers due to incapability of meeting customer needs are the major reasons for lost opportunities for sales revenue.
- Appraisal Cost are the costs incurred for determining the degree of conformance of the product quality. These costs are associated with the customers and supplier’s evaluation of acquiring products, services, materials or processes. For e.g.- document review, inspections, quality audits, stock evaluation, maintaining accuracy of test equipment’s.
- Prevention Cost are the costs incurred to prevent failure and to keep appraisal cost to bare minimum. These costs are mainly associated with the implementation, maintenance and designing of the quality management system. These are planned and incurred before the operation is actually performed. For e.g.- quality planning, new product review, process planning, process control, supplier quality evaluation, training. Design Qualification Testing including FTA, FMEA and FMECA falls under the prevention cost activities.
Another cost, namely the Hidden Quality Cost are the types of costs which are difficult to estimate and thus can lead to an understatement of the cost of poor quality. This can include:
- Potential lost sales
- Redesign cost due to poor quality
- Equipment downtime
- Scrap/Reword
- Extra process equipment capacity
- Costs due to changing process
- Software changes cost
- Costs due to defects and errors
- Not reported costs related to scraps and errors
- Poor quality cost within a supplier’s price
- Extra process costs due to excessive product variability
Optimum Cost of Quality is the cost incurred which produces a desirable product with the least cost. The model for optimum cost has three curves:
- Failure cost- These costs are equal to zero when the product is 100% good and rises to infinity when the product is 100% defective
- Appraisal and Prevention cost- These costs are zero at 100% defective and rises with perfection
- Total Quality Cost- Sum of curve 1 and 2 represents the total quality cost, i.e.- the total cost of quality per good unit of product
This can be seen in Optimum Quality Cost model that prevention and appraisal cost are inversely proportional to failure cost. Total Quality Cost is at the minimum to the point where the cost of prevention and appraisal equals the cost of failure. The Total Cost of Quality is represented as the sum of the two curves and the location of the minimum point is referred to as the Optimum Point which is the cost required to produce an acceptable product with the least possible cost.
Total Quality Costs can be decreased by identification of root cause of the quality problems and elimination or reducing of the same. A study of the cost elements can be significant for determining the extent of resource utilization and for redesigning of a product which can lower the life cycle cost of the product, thus increasing the sales revenue leading to greater profit for an organization. Formal quality cost assessment is essential as it acts as a guide for improvement by revealing the areas which demand attention for improvement and the size of the problem related to quality.
