Cost of Quality

Quality is important. It impacts all industries and is a selling point for many companies.

For example, Toyota delivers high-quality products using Jidoka (Automation with Human Touch) and Just in Time methodologies that resonate with customers’ requirements. 

This is why one of the basic definitions of quality is conformance to customer requirements. 

Quality should not be restricted to the inspection of deliverables. It must be built by using procedures that will guide collecting stakeholders’ feedback and updating the processes further to improve efficiency. 

Organizations have discovered the relationship between quality of management and management of quality. Therefore, they are adopting quality tools like Six Sigma, TQM, etc., to ensure that quality is integrated into processes from the beginning. 

Quality comes at a cost because it is a deliberate effort to continually improve processes, products, and services.

However, it pays in the end, as evident in the following testimonials:

“STMicroelecteonics, Inc. reduced lost-day injuries from 1.01 per 100 workers to 0.65 in three years, which is 74% below the industry average, and increased employee satisfaction levels through quality implementation.”1

“Dana Corporation lowered the internal defect rate by more than 75%. Employee turnover went below 1%, and economic value added increased from 15 million USD to 53 million USD in two years.”1

Quality affects the performance and employees’ morale.

What is Quality?

Over the decades, quality played a key role in the success of many organizations. The era of seller’s control has vanished and now buyers drive the market. A poor quality product can impact market leadership. 

Quality has spread from the traditional manufacturing sector to the service industry, hotels, airlines, hospitals, etc. 

Quality can be related to performance, durability, reliability, conformance, serviceability, aesthetics, etc. 

For service industries, timeliness, completeness, courtesy, responsiveness, accuracy, consistency, accessibility, and convenience are important quality parameters.

cost of quality table

A survey asked 86 managers to define quality in the United States. 

Below are the results of the survey.

Various Opinions on Cost of Quality

All these definitions show that customer satisfaction is the essence of quality. When the customer’s expectations are met or exceeded, the product is known to be a high-quality product. A high-quality product causes a reduction in product recall and an increase in sales revenue.

Quality in Project Management

Quality in project management begins with planning. It begins with a vision, and this vision guides the quality processes. In quality planning, the quality metrics and quality management plans are developed.

Quality planning includes quality assurance and control activities. 

The goal of quality assurance (QA) is to follow a preventive approach, as prevention is better than a cure. 

Here, activities like quality audits, design of experiments, data gathering, and analysis are carried out. These activities review the processes in the planning stage to ensure they conform to the requirements.

Quality control includes inspection of deliverables. 

Quality must be designed into processes rather than relying on inspection. Prevention is preferred over inspection. Prevention keeps errors out of the process in the first place.

Cost of Quality

Quality comes at a cost, and the cost can be upfront or resultant. 

The preventive approach invests in quality upfront to keep defects from occurring, while the resultant cost is the cost of failure. 

Cost of Quality is a concept that the project management team needs to understand. 

Since it involves deliberate investment, it must be well planned.

Cost of Quality Chart

Cost of Quality = Cost of Conformance + Cost of Non-conformance

Cost of Conformance

This includes appraisal and prevention costs.

Appraisal and Prevention Cost

Appraisal Cost

Appraisal costs are spent in assessing work process elements. This includes testing, inspection, etc. 

For example, raw materials must be inspected for quality, and equipment and instruments must be calibrated periodically for accuracy and precision.

In-process testing of deliverables ensures they comply with requirements. 

Finally, the finished product is inspected and tested.

Prevention Cost

Prevention cost includes the cost of keeping equipment, employees, and methods from failure. 

Training of personnel makes them skillful, resulting in less chance of poor performance.

Quality planning puts procedures and metrics in place while quality audits verify the use of these standard methods. 

Control processes help prevent and eliminate sources of errors.

Cost of Nonconformance

This includes internal and external failure costs.

Internal Vs External Failure Costs

Internal Failure Costs

Rework impacts profits negatively. Therefore, getting it right the first time is necessary. 

Scrap is a defective product that cannot be repaired. 

Unplanned downtime is losses of person-hours possibly resulting from system failure. 

Downgrading is undervaluing a product due to poor quality, thus incurring losses. 

External Failure Costs

External failures begin with product recalls, causing the return or exchange of products after the manufacturer discovers defects in the product. 

For example, General Motors recalled 30.4 million vehicles worldwide due to faulty ignition switches that could shut down engines without warning and disable power steering. The failure resulted in at least 124 deaths.

Warranty claims include the repair or replacement of a product in the event of failure within a specified tenure. This is a loss to the manufacturer. 

Customer defections are very costly because they could lead to a chain of lost opportunities for business. 

Poor quality also increases the lifetime product cost, as customers have to spend money on repairing the product after its warranty period.

Benefits of the COQ Model

  • It allows organizations to find the optimal cost for a quality investment.
  • It provides a path for further improvements.
  • It saves costs in the long run and increases brand recognition.
  • It helps boost sales.

Summary 

The Cost of the Quality model shows how investment in quality can reduce the overall product cost and increase profits for the organization. It increases brand recognition, improves processes and employee morale, and creates a healthy working environment. 

How has the Cost of Quality affected your processes or product? Please share your experiences through the comments section.

References

  1. Evans, J.R., and Dean, J, W. (2003), “Total Quality: Management, Organization and Strategy”, third edition, Thomson South-Western, pg 3, -5, 96
  2. Juran J. M., and Godfrey, A, B. (1998), “Juran’s Quality Handbook”, fifth edition, McGraw Hill, pg. 2.1-2.5, 8.1-8.25
  3. International Six Sigma Institute, “Six Sigma Revealed Training Book”, second edition, pg. 12.
  4. PMBOK Guide, Project Management Institute, sixth edition, pg. 272-283
  5. https://www.copc.com/about-copc-inc/our-history/
  6. https://global.toyota/en/company/vision-and-philosophy/production-system/
  7. https://www.kiplinger.com/slideshow/investing/t052-s000-10-biggest-product-recalls-of-all-time/index.html