Determining the Cost of Quality (Celebrating 10 Years of Quarterly News)


The first Pro QC Quarterly Newsletter was distributed in June of 2007. And, the first Feature Article highlighted the Cost of Quality. Today, a decade later, Determining the Cost of Quality remains one of our most frequently viewed articles, second to more specific QC inspection sampling related inquires. In recognition of ten years of Quarterly Quality News, we wanted to reprint the original Feature Article. ------------- Quality costs assist in measuring a broad range of activities by providing an effective system of crosschecks, which are ultimately used for measuring a company's inputs and outputs. The analysis of this data aids in reducing the overall costs and allows for the pinpointing of major problem areas for improvement activities. In addition, it allows for realistic and effective budgeting. With such a large data pool available and so many different approaches to determining results, it is easy to be left with useless and skewed information. By gaining a broader understanding of the various quality cost components, one can expect to process the necessary information in a more accurate and resourceful manner. Making intelligent investments in quality not only reduces the costs associated with poor quality, but produces additional business as well. Quality costs can be split into two fairly generalized, yet fundamental categories. These include conformance and non-conformance items. Non-conformance is the price paid for not having a successfully implemented quality system. Scrap material, time wasted, rework, downtime, and warranty activities are all examples of non-conformance costs. Conformance, on the other hand, is the bottom-line idea of quality assurance. Planning and prevention, documentation, inspections, quality training, and auditing are all examples of conformance related costs. Conformance and non-conformance can be further distributed into four specialized categories, which include prevention, appraisal, internal and external failures. Prevention and appraisal costs are specialized categories of conformance items. These costs are usually associated with designing, implementing and maintaining a quality system, as well as any additional costs that are incurred by avoiding defects. Examples generally include production and/or service reliability, preventative maintenance and evaluation, tools and gauges, and testing equipment. Appraisal costs are associated with measuring, evaluating and checking products and services to ensure that they adhere to specified quality standards. These might include inspection fees, efficiency losses, or customer satisfaction. Internal and external failures are specialized categories of non-conformance items. Internal failures are those that are discovered in-house, such as rejected lots, reinspections, overtime, rework of defective units, or returned products. External failure costs are the costs that are incurred through the customer. Examples may include downtime, legal actions, shipping, equipment failure, warranty and administrative costs, or complaint processing. In addition to analyzing the easily quantifiable costs of quality, it is important to also evaluate more subtle and difficult to quantify factors. These may vary greatly due to industry or individual organization, but may include loss of customers or a market, higher inventories, wear and tear on equipment and facilities, or indirect labor and paperwork. With a keen understanding of specific quality costs and a detailed improvement plan in progress, businesses are able to gain a competitive edge. And, with the necessary tools and knowledge on-hand, sound and profitable decisions can be made. A key point to remember is that quality is a continuous process. Within this process, there are immediate and tangible results that can occur. * A decrease in costs due to less reworking, consequently producing less scrap * An improvement in cycle time due to less time being spent on correcting mistakes, and more time being spent on value added activities * An improvement in productivity due to less time being spent on reworking nonconformities * An overall improvement in service * An overall improvement in costs ------------- Also relevant is the ROI: * Every $1 spent on a quality management returned $6 in revenue, $16 in cost reduction and 3% in profit. * Quality management reduces costs an average of 4.8%. * 94% of organizations agree quality management was significant driver of success. 83% of organizations agree that without quality management, they could not justify their pricing to customers. * ISO 9001 ROI was evaluated in a 2010 Harvard Business School study. The study found that adopters experienced higher rates of survival, increased wages, reduction in waste generation and enhanced worker productivity. For more information regarding Pro QC's quality solutions, contact us at We look forward to another decade of updates!

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