Quality

Costs of Quality-CoQ

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Cost of Quality-CoQ

The concept of Cost of Quality – CoQ – is simple yet central to

Quality. It attaches a monetary value to quality activities.

Therefore, the organization can direct its efforts to where it

matters most.

Feigenbaum introduced this theme in 1957 with the

Prevention+Appraisal+Failure model (PAF)

(early studies started in 1943).

Philip Crosby popularized the use of CoQ in his book Quality is

Free in 1979.

Several current quality system standards, ISO 9000, QS-9000,

AS-9000, reference the use of CoQ for quality improvement.

Other models include ABC approach (Activity Based Costing)

and the Process Approach

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Cost of Quality-CoQ

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Internal Failure Costs (also known as Costs of Poor Quality-CoPQ)

Internal failure costs are costs that are caused by products orservices not conforming to requirements or customer/user needsand are found before delivery of products and services to externalcustomers.They would have otherwise led to the customer not beingsatisfied. Deficiencies are caused both by errors in products andinefficiencies in processes. Examples include the costs for:

Rework

Delays

Re-designing

Shortages

Failure analysis

Re-testing

Downgrading

Downtime

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External Failure Costs(also known as Costs of Poor Quality-CoPQ)

External failure costs are costs that are caused by deficiencies

found after delivery of products and services to external

customers, which lead to customer dissatisfaction. Examples

include the costs for:

Complaints

Repairing goods and redoing services

Warranties

Customers’ bad will

Losses due to sales reductions

Environmental costs

Fines

Recent cases: Toyota recalls, GM car model ignition switch,…

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Prevention Costs

Prevention costs are costs of all activities that are designed to

prevent poor quality from arising in products or services.

Examples include the costs for:

Quality planning (including product and process

design)

Supplier evaluation

New product review

Error proofing

Capability evaluations

Quality improvement team meetings

Quality improvement projects

Quality education and training

…

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Appraisal Costs

Appraisal costs are costs that occur because of the need to

control products and services to ensure a high quality level in all

stages, conformance to quality standards and performance

requirements. Examples include the costs for:

Checking and testing purchased goods and services

In-process and final inspection/testing

Field testing

Product, process or service audits

Calibration of measuring and test equipment

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CoQ-The total quality costs

The Total Quality Costs are then the sum of these costs.They represent the difference between the actual cost of aproduct or service and the potential (reduced) cost given nosubstandard service or no defective products.

Many of the costs of quality are hidden and difficult to identify by

formal measurement systems. The iceberg model is very often

used to illustrate this matter: only a minority of the costs of poor

and good quality are obvious – appear above the surface of the

water. But there is a huge potential for reducing costs under the

water. Identifying and improving these costs will significantly

reduce the costs of doing business.

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The Iceberg Model of Cost of Quality

Figure 2: The Iceberg Model of Cost of Quality

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CoQ-Traditional View

CoQ (contemporary view)

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Generic CoQ models and cost categories (A literature survey of Cost of Quality models-Vaxevanidis, Petropoulos-Journal of

Engineering Annals-2008 )

PAF models: Prevention + Appraisal + Failure

Crosby’s model : Prevention + Appraisal + Failure + Opportunity

Opportunity or intangible cost models:

Conformance + Non-conformance ;

Conformance + Non-conformance + Opportunity

Tangibles + Intangibles

PAF (failure cost includes opportunity cost)

Process cost models: Conformance + Non-conformance

Activity Based Costing (ABC) models:

Value-added + Non-value-added

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Examples of detailed metrics for CoQInternational Journal of Quality and Reliability Management, Vol.23, No.4, 2006

Cost of assets and materials

Cost of preventive labour

Cost of appraisal labour

Cost of defects per 100 pieces

Cost of late deliveries

% of repeat sales

Time between service calls

Number of non-conforming calls

Number of complaints received

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Global metrics for CoQ

International Journal of Quality and Reliability Management, Vol.23, No.4, 2006

RoQ = increase in profit / cost of quality improvement program

Quality rate = input – (quality defects + startup defects + rework) / input

Process quality = (available time – rework time) / available time

First time quality (% product with no rework)

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Total CoQ/Sales

CoPQ/Sales

CoQ/Sales

CoPQ/Total CoQ

Other relevant (e.g., individual proportion of a CoQ or a CoPQ )

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Paper Mill – April 2004 Report -Example

• Sales: $220,000,000

• COQ (Prevention+Appraisal): $7,600,000

• COPQ: $35,300,000

• Total COQ: $42,900,000

• EBITDA: $12,678,000

• Net Profit: $3,150,000

• Net Profit/Sales = 1.43%

COPQ/Sales = 16,5% (!)

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COPQ Estimate (% of sales)

• 20-30% for manufacturing firms

• 30-50% for service firms Baatz, E.D. “What is Return on Quality, and Why You Should Care,”

Electronic Business, Oct. 1992,p. 61.

• 25% for U.S. companies

• 5% for Japanese companies Band, William. “Marketers Need to Understand the High Cost of Poor

Quality.” Sales and Marketing Management in Canada. Nov. 1989: 56-59.

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Main references

The Certified Manager of Quality Handbook-

Westcott (Introd,Ch. 13)

Quality Mgt-Goetsch/Davies (Ch. 2)

Juran´s Quality Handbook-Juran/De Feo

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