Generally speaking, the cost of poor quality is the combined actual and implied loss of revenue that a company endures when products and services do not conform to customer requirements or satisfy their perceived needs. These costs include product/service abandonment, customer dissatisfaction, loss of reputation, sales returns and allowances, complaint handling, and the list goes on.
If you are attempting to convey the value of quality to management, you must do so in the language of management — costs. Cost of poor quality (COPQ) consists of four basic elements: prevention, appraisal, internal failures and external failures. These represent the four critical components necessary to understanding the basis of quality costing. So, let’s learn more about these costs.
Prevention should be regarded favorably. It’s more of an investment in excellent quality than a cost of bad quality. I suppose it is a cost because we do spend money on prevention. The expenses of prevention include efforts done to prevent poor quality. You’ve heard the adage, “an ounce of prevention is worth a pound of cure.” That is exactly how it works in terms of quality.
If you are unable to include design in quality from the beginning then you will have to include inspection, verifications and measurements of processes as well as products to ensure quality at the end as well as deal with the internal and external failure costs. Prevention is where a quality manager should focus. Unfortunately most quality managers end up focusing on correction instead of prevention.
Prevention cost examples include:
- Quality control plans
- Lean error proofing
- Capability studies
- Supplier evaluations
- New product reviews
- Policies, procedures, and work instructions
- Quality improvement meetings, projects, events
- Failure Modes Effects Analysis (FMEA)
- Quality awareness, education, and training
Appraisal costs can be categorized as inspection and testing costs. Appraisal costs focus on the work necessary to ensure prior work is productive and thus ensure conformance to standards and performance requirements.
Examples include the costs for:
- Source inspection
- First Article Inspection (FAI)
- In-process inspection or final testing
- Internal Auditing of product, process or services
- Voice of the Customer audits
- Measuring and test equipment calibration
Internal failure costs occur before the product is shipped or the service is completed, to the customer. I also like to look at process failures too and not stop at common material failures only.
Internal failure examples include:
- Scrap and Rework
- Re-inspection and Re-testing
- Material review
- Safety accidents
- Process failures, data entry errors, missing information
- Missed process steps
- Expedited shipping
- Supplier returns processing
External failure costs occur anytime after the product is shipped or the service is completed. When looking at external failures that occur years in the future, it is important to attribute the failure to the proper production year (born on date) to find the cause of the failures.
External examples include:
- Processing customer complaints, claims, or returns
- The actual customer return
- Warranty claims
- Product recalls
- Lost sales
Costs are defined as the sum of costs incurred during the life of a product. Customers desire high-quality items or services at a fair price. To ensure that customers will receive a product or service that is worth the money, the organization should spend more on customer satisfaction and product development rather than prevention and appraisal costs.
Failure to realize the necessity of defining, assessing and solving a quality problem in terms of monetary values will only squander a significant amount of a company’s operational budget. While some components will always have an impact on quality to some extent, discovering techniques to improve quality still holds a great importance. So, according to you, what kind of measure should a company undertake during such situations?