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Cost of Quality: Not Only Failure Costs

Usually when a company thinks of cost of quality (COQ) what they have in mind is cost of poor quality, but as Arne Buthmann explains for iSixSigma: Costs do not result from only producing and fixing failures; a high amount of costs come from ensuring that good products are produced.

Cost of Quality Equations

Citing Philip B. Crosby’s popular 1979 book Quality is Free, Buthman divides COQ into categories of good and poor quality.

  • The cost of poor quality (COPQ) = non-compliance = internal1 and external2 failure costs
  • The cost of good quality (COGQ) = compliance = appraisal3 and prevention4 costs

The Cost of Poor Quality

1. Internal failure costs are deficiencies in products or processes that are discovered before they can disappoint the customer, such as reworking, delays, re-testing, and a host of other shortfalls.   

2. The external failure cost is related to deficiencies that are discovered by the customer, thereby damaging customer satisfaction. Such failures manifest as complaints, warranties, repairs, or general bad will toward the company. 

The Cost of Good Quality

3. Prevention costs are those that cancel out internal failures, and include quality planning and improvement, new product reviews, and supplier evaluations to name a few.

4. Appraisal costs are the counter to external failures, and involve field testing, product audits or in-process inspections.  

Six Sigma Approach to COQ

Many in the business world assume that a reduction in COPQ implies an increase in COGQ. However, the Six Sigma approach stresses a reduction of appraisal and prevention costs. At the ideal Sigma level of six, cost of quality as a percentage of total sales revenue is reduced from 40% to just 1%. As you can imagine, understanding the full scope of what COQ entails and applying that insight through a Six Sigma approach promises huge savings for the enterprise.

Read the entire post at: http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failure-costs/

About Eric Anderson

Eric Anderson is a staff writer for CAI's Accelerating IT Success. He is an intern at Computer Aid Inc., pursuing his master's degree in communications at Penn State University.

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