Cost of quality is the cost a company bears for manufacturing products not meeting quality standards/specifications. In other words, it’s quantifying the wastages and defective units churned out by a firm. The wastage can be attributed to a machine, plant, production line, department, firm, etc. Product quality inspection costs, defective products’ manufacturing costs, etc. comprise cost of quality. The faulty good will be scrapped but its manufacturing costs will be accounted for. Every firm’s objective is to bring down cost of quality and increase net profits, usually through rectifying errors and implementing process improvement measures.
Also called quality cost, cost of quality includes costs relating to rework, delays, redesigns, downtime, material shortages, remedial service, etc. The majority of companies’ costs of quality are 15 to 20 percent of the revenue they generate. Some firms’ costs could even touch 40 percent or go beyond. Ideally, 10 to 15 percent is acceptable and indicates a company’s efficiency. And this acceptable percentage can be decreased further, helping add to the bottom line of the firm.
Categorizing Cost of Quality
Cost of quality can be primarily categorized as cost of good quality or cost of conformance and cost of poor quality or cost of non-conformance. Prevention and appraisal costs are costs of conformance, and internal and external failure costs are costs of non-conformance.
- Prevention cost: Cost incurred to ensure minimum to zero appraisal and failure costs. The cost relates to staff training, preventive maintenance of machines, product testing, quality education, etc.
- Appraisal cost: Cost incurred to ascertain the level of conformance to quality standards and requirements. The cost could be funds spent on process analysis, testing equipment, final inspection, etc.
- Internal failure cost: Cost pertaining to product defects found before the product is sold to the customer. The cost includes costs of product rework, re-testing, scrap, purchase of replacement components, downtime, etc.
- External failure cost: Cost relating to product defects found after the product is sold to the customer. The cost includes costs relating to product return, customer grievances, liability lawsuits, warranty service, and also official product recalls.
The total cost of quality is arrived at by adding conformance and non-conformance costs. External failure costs are the most hurting to a firm – both financially and non-financially as customers who have had a bad experience with a particular seller are unlikely to buy from the same seller again. Prevention cost, on the other hand, is the least expensive. The costs, in fact, are the minimum at the prevention stage and increase as they move up, culminating at external failure costs.
Quantifying Quality Costs
Cost of poor quality such as lost sales, corresponding with aggrieved customers, operator testing, process downtime, etc. is not easy to measure. The company usually estimates these costs. However, cost of good quality that includes training, testing and inspection, scrap, product returns and downgrades, warranty claims, etc. can be easily accounted for.
Measures to Reduce Costs
Reducing cost of quality means a firm should invest in increasing its cost of conformance or cost incurred to ensure the product is manufactured without defects. This would entail investing in quality testing, training, evaluation, etc. If a machine is too old and breaks down frequently, replacing it with a new unit would also help decrease quality costs. Reducing internal and external failure costs completely is possible, but prevention and appraisal costs are measures to maintain quality and therefore cannot be skipped.
Generally, when appraisal and prevention costs go up, external and internal failure costs decrease. Increasing cost of good quality indirectly results in increased sales and profits, since the customers are happy and they come back to buy again and may also recommend the seller to friends, family and acquaintances. The good quality costs may reduce product margins initially, but would prove beneficial in the long run.