What is Cost of Quality?
Cost of quality (CoQ) is a method for calculating the costs companies incur ensuring that products meet quality standards, as well as the costs of producing goods that fail to meet quality standards.
The goal of calculating the cost of quality is to create an understanding of how quality impacts the bottom line. Whether it’s the cost of scrap and rework associated with poor quality, or the expense of audits and maintenance associated with good quality, both count. Cost of quality gives manufacturers an opportunity to analyze, and thus improve their quality operations.
This two-pronged approach to quality can be categorized as “control” (good quality) vs. “failure of control” (bad quality).
Example of what's included in Cost of Quality
To illustrate what is factored in to cost of quality, let's look at a chocolate manufacturer. Some costs that might be tracked include:
Sourcing high-quality ingredients
Training staff on chocolate-making techniques
Regular inspections for quality control
Calibrating machinery for consistent results
Defective chocolate products
Production issues due to equipment malfunction
Rework due to production errors
Customer refunds or order returns
Gain control of quality escapes and costs
Error-proof inspection steps, track defects and rework, and ensure only high-quality materials and parts move downstream.
Calculating the Cost of Quality
The cost of quality is quantifiable. The method for calculating COQ varies from business to business. However, the basic equations are the same:
Cost of Quality (COQ) = Cost of Good Quality (COGQ) + Cost of Poor Quality (COPQ)
Cost of Good Quality (COGQ) = Prevention Cost (PC) + Appraisal Cost (AC)
Cost of Poor Quality (COPQ) = Internal Failures Cost (IFC) + External Failures Cost (EFC)
Businesses can clearly define the cost of quality with this equation:
COQ = COGQ + COPQ = (PC + AC) + (IFC + EFC)
Understanding the Components of the Cost of Quality (COQ)
There are generally four types of cost of quality, bucketed into two categories:
Cost of Conformance
Cost of Non-conformance
Cost of Conformance
This is the cost a business incurs while ensuring that its product meets quality standards. The cost of conformance includes two costs:
Prevention Cost
As its name suggests, this expense covers activities that prevent poor product quality. A company takes a pre-emptive approach to addressing potential quality problems early to eliminate or at least reduce quality issues later. The goal is to stop, or decrease the likelihood of, having defective goods, manufacturing errors, or wastage. A company incurs prevention costs before launching the manufacturing operation.
Prevention costs include:
Training
Quality planning
Quality assurance
Establishing product requirements
Appraisal Cost
This cost reflects the activities a business engages in to inspect a product for defects. It does this before product delivery.
Appraisal costs include these processes:
Quality auditing
Product verification
Supplier rating
Project managers rely on more preventive controls for better quality. It is a better way to ensure a defect-free product and save money than identifying quality issues after production.
Cost of Non-Conformance
Businesses incur non-conformance costs when their product fails to meet defined quality standards. These failure costs fall under two types:
Internal Failure Costs
After a company identifies defective goods, it can scrap or rework these products. This process falls under the category of internal failure cost. Identifying defects internally ensures only quality goods reach the customer.
Internal failure costs cover the following:
Product rework or modification
Scrapping defective goods
Downtime due to equipment malfunction, errors, or poor management
External Failure Costs
A company incurs external failure costs long after the defective product has left the production facility. This means the company failed to detect the defective product and delivered it to the customer.
This incurs costs like repairs, warranty claims, and replacements, which the company will bear. External failure costs may also include other intangible liabilities such as:
Damaged reputation and loss of sales due to negative product reviews
Loss of future business opportunities with customers due to mistrust
While these aren’t quantifiable, they affect the company’s profitability.
A company can reduce its external failures by asserting control over internal quality measures. When faced with external failures, acting quickly to rebuild customer relations can ease future losses.
The Significance of Quality Costs in Business
The manufacturing landscape is becoming increasingly competitive. Customers and clients have numerous options, which means businesses are held to higher quality standards than ever before.
The cost of poor quality (COPQ) has a significant impact on a company’s profitability. Higher poor quality costs can edge it out of the competition. Poor quality products can damage a company’s reputation profoundly. Only when a business takes its defects, errors, and manufacturing missteps seriously can it hold its own among others.
Besides tangible costs, businesses must also consider missed sales opportunities because of customer distrust. Taking steps to ensure good quality at the outset incurs fewer costs than restoring customer relationships or correcting errors later. Doing so will significantly reduce the cost of poor quality. It will also help businesses build a good track record in their niche.
Role in Strategic Decision-Making
Accurately and consistently measuring the cost of quality is a win-win for companies. It helps detect gaps in quality performance and identify essential areas for improvement. Using this information, businesses can make better management decisions. They can invest in targeted training initiatives and commit resources to possible problematic stages of the product lifecycle.
Using quality cost data can help businesses determine the true profitability of their product.
Quality Costs and Customer Satisfaction
External quality issues can amplify associated costs. For example, a company can lose potential business due to negative reviews about its product. Or, a batch of defective products can result in mounting warranty or repair claims.
A better way to ensure customer satisfaction is to address quality issues before they attract external attention. It is much easier to internally identify and resolve quality issues.
Conclusion
Companies should be proactive in managing the cost of quality and heavily invest in prevention and appraisal costs in order to reduce exposure to both internal failure and external failure costs. This can be achieved by a variety of methods such as machine monitoring or adoption of IIoT technology.
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