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TQM
18,5 Managing cost of quality: insight
into industry practice
Andrea Schiffauerova
542 Department of Mathematics and Industrial Engineering, Ecole Polytechnique
de Montreal, Montreal, Canada, and
Vince Thomson
Department of Mechanical Engineering, McGill University, Montreal, Canada

Abstract
Purpose – The objective of this paper is to present results of the study of the quality costing
practices at four large successful multinational companies.
Design/methodology/approach – The method of benchmarking was used for the purpose of this
study. Company representatives, who were invited for a benchmarking session, described the quality
management programs running at their companies. Direct observation and archival records data
collection were also used to extract more precise information for the following analysis and discussion.
Findings – The findings of the study show that all four companies use systematic quality initiatives;
however, a formal cost of quality (CoQ) methodology was only employed at one of them. This is in
agreement with the literature findings arguing that a CoQ approach is not utilized in most quality
management programs.
Originality/value – This paper discusses and compares the quality programs of four companies and
explains the benefits of the eventual adoption of a CoQ approach in each case. The analysis provides a
new insight into company practice, useful both for academic research and industry.
Keywords Quality costs, Multinational companies, Quality programmes
Paper type Case study

Introduction
Improving quality is considered by many to be the best way to enhance customer
satisfaction, to reduce manufacturing costs and to increase productivity. Any serious
attempt to improve quality must take into account the costs associated with achieving
quality, since nowadays it does not suffice to meet customer requirements, it must be
done at the lowest possible cost as well. This can only happen by reducing the costs
needed to achieve quality, and the reduction of these costs is only possible if they are
identified and measured. The identification itself is not straightforward, because there
is no general agreement on a single broad definition of quality costs. However,
according to Dale and Plunkett (1995), it is now widely accepted that quality costs are
the costs incurred in the design, implementation, operation and maintenance of
a quality management system, the cost of resources committed to continuous
improvement, the costs of system, product and service failures, and all other necessary
costs and non-value added activities required to achieve a quality product or service.
Measuring and reporting these costs should be considered a critical issue for any
The TQM Magazine manager who aims to achieve competitiveness in today’s markets.
Vol. 18 No. 5, 2006
pp. 542-550 There are several methods that can be used to collect, categorize and measure
q Emerald Group Publishing Limited
0954-478X
quality costs. The traditional P-A-F method suggested by Juran (1951) and
DOI 10.1108/09544780610685502 Feigenbaum (1956) classifies quality costs into prevention, appraisal and failure
costs. Prevention costs are associated with actions taken to ensure that a process Managing cost of
provides quality products and services, appraisal costs are associated with measuring quality
the level of quality attained by the process, and failure costs are incurred to correct
quality in products and services before (internal) or after (external) delivery to the
customer. The cost categories of Crosby’s (1979) model are similar to the P-A-F scheme.
Crosby sees quality as “conformance to requirements” and therefore, defines the cost of
quality (CoQ) as the sum of price of conformance and price of non-conformance 543
(Crosby, 1979). The price of conformance is the cost involved in making certain things
that are done right the first time and the price of non-conformance is the money wasted
when work fails to conform to customer requirements. Another formal quality costing
approach is the process cost model, which was developed by Ross (1977) and first used
for quality costing by Marsh (1989); it represents quality cost systems that focus on
process rather than products or services. Several references propose CoQ models that
include the additional category of intangible costs. These are costs that can be only
estimated such as profits not earned because of lost customers and reduction in
revenue owing to non-conformance. The importance of opportunity and intangible
costs for quality costing has been recently emphasized in the literature. Dale and
Plunkett (1999) describe a less formal method based on collecting quality costs by
department. Another recently proposed CoQ methodology is a method based on a team
approach, in which the aim is to identify the costs associated with things that have
gone wrong in a process (Robison, 1997).
No matter which quality costing approach is used, the main idea behind the CoQ
analysis is the linking of improvement activities with associated costs and customer
expectations, thus allowing targeted action for reducing quality costs and increasing
quality improvement benefits. Therefore, a realistic estimate of CoQ, which is the
appropriate tradeoff between the levels of conformance and non-conformance costs,
should be considered an essential element of any quality initiative and a crucial issue
for any manager. A number of organizations are now seeking both theoretical advice
and practical evidence about quality-related costs and the implementation of quality
costing systems.
A reasonable amount of detailed information on various methods of categorization,
collection and measurement of quality costs can be found in the literature (Plunkett and
Dale, 1987; Williams et al., 1999; Schiffauerova and Thomson, 2006). However, there
are only a few published, practical examples from industry that give specifics about
the costs that are included or excluded in quality costing and about how the costs are
practically collected and measured. More detailed descriptions of CoQ systems from
industry can be found in Whitehall (1986), Hesford and Dale (1991) and Purgslove and
Dale (1996). This paper intends to contribute to this area by providing an analysis of
the quality costing practices of four successful companies.

Research intent and methodology

The objective of this research was to obtain and analyze data concerning the practices
of successful companies in the area of quality management. Specifically, the main
interest was to investigate if these companies collect, measure and monitor quality
costs, which kinds of costs were considered in the calculations, and whether any formal
CoQ approach was used. The analysis provided a new insight into company practice,
useful not only for academic research, but also for use by industry.
TQM Four companies were selected to participate in the research. The main objective of
18,5 the selection was to identify the organizations with well established quality programs
belonging to the different industrial sectors. Companies serving the same market could
have been reluctant to share details concerning their quality practices with
competition. This paper keeps the company names confidential and refers to them
as company A, B, C and D.
544 A benchmarking session took place at McGill University. The quality management
programs running at the four companies were described by company representatives.
The organizations utilized this occasion as an opportunity to obtain new information
on the practices used at other companies and to mutually compare their experiences,
efforts and successes.

Summary of the benchmarking session

This section summarizes the initiatives in the field of CoQ for the four participants.
A comparative analysis of their quality strategies and final remarks follow.

Company A
Company A is a telecommunication company. It has very complex products, and
therefore, the number of opportunities for defects per unit is very high (45,000 defect
opportunities per assembly).
However, company A’s customers expect zero defects. Quality initiatives, therefore,
play an important role in the company’s product management.
Company A’s model for CoQ measurement and calculation follow the P-A-F model,
where CoQ ¼ (P þ A þ F(internal þ external) þ other costs)/cost of goods sold.
Company A is well aware of formal CoQ methods and it has clearly determined its CoQ
definitions. It knows exactly what are its conformance and non-conformance costs;
however, it struggles to find out the shape of its CoQ curves, and hence, an optimum
CoQ tactic. The search for an optimum CoQ is difficult because the business cycle
changes often (every 2 years or less); product lines are released in phases, and
component obsolescence and multiple engineering changes are quite common. Every
change causes a new search for an optimum CoQ; moreover, different product lines
require separate review, and variable volumes reduce optimization opportunities.
Company A uses an activity-based management approach, which means that it uses
activity-based costing (ABC) to determine cost categories. It maps financial categories
into activity costs, and activities performed at cost centers are rolled up to aggregate
quality costs and percentages. In this way, the company obtains exact information
about every category: prevention costs, appraisal costs, as well as internal and external
failure costs. An example of activity costs is given in Table I, and the resulting CoQ
chart with cost of conformance (COC) and cost of non-conformance (CONC) indicated is
shown in Figure 1.
Company A uses other metrics for performance comparisons, such as “new versus
mature product” or “part number based CoQ ratio.” CoQ is measured at individual test
stages, which allows trend analysis and comparison using mature product as the
benchmark for new product. Figure 2 shows the decreasing trend of CoQ for
manufacturing operations. The graph shows a decrease for all CoQ components;
however, it is failure costs which show the biggest reduction, about 40 percent over
18 months. The breakdown of CoQ and its cost values are measured quarterly.
 Managing cost of
Activity – primary CoQ category Activity (percent) Cost categories
quality
Product defects Failure – internal 8 Salaries
Change management Prevention 12 Depreciation
Internal quality issues Failure – internal 17 Suppliers
External quality issues Failure – external 9 Others
DFX, NPI support Prevention 4 545
Prototype support Prevention 6
Product deliverables Appraisal 22
Manufacturing tools Prevention 6
Quality reporting Appraisal 10
Other Cost of business 6
Totals 100 Table I.
Example of activity costs
Notes: DFX – design for excellence; NPI – new product introduction in company A

Figure 1.
CoQ chart for company A

Figure 2.
CoQ in manufacturing
operations for company A
shown on a relative cost
scale
TQM Company A has been using their CoQ methodology successfully. The company
18,5 declares savings in quality costs, has quality improvement in every part of their
process, and achieves very aggressive improvement targets. Moreover, the end
customer directly benefits from the in-house quality initiative. As a result, customer
satisfaction is increasing.

546 Company B
Company B is a multinational microelectronics company, which dedicates a lot of effort
to quality improvement. Their far-reaching and successful quality improvement
program is the main axis of their quality initiatives. The program includes continuous
improvement focused on process as well as extensive education and training on quality
for all employees.
Despite the fact that there is a great interest in reducing non-conformance cost,
company B does not measure, report or chart CoQ. It does not use any formal CoQ
model and does not try to optimize CoQ. Nevertheless, it does reduce cost due to poor
quality through its continuous improvement activities. The company has a strong
operations and process focus, where emphasis is put on process yield and cycle time
improvement. It believes that a continuous quality improvement program focused on
process will provide the opportunities for quality improvement and thus reduction
in CoQ.

Company C
Company C is in the aerospace industry and emphasizes products with near
zero defects.
Company C describes its cost of poor quality model as an iceberg philosophy, where
just a few categories for poor quality cost are measured and monitored. This is,
however, just the tip of the iceberg, since most of the cost factors leading to poor
quality are non-visible or completely hidden (and non-quantifiable).
Company C has implemented a process that allows tracking of all non-quality
events and associated root causes as well as corrective actions and lessons learned.
It puts full attention into measuring the cost of poor quality. It has four main quality
ratings, which measure non-conformities (scrap, rework, etc.), poor adherence to
specifications (internal, external, customers’ suppliers’), number of defective parts in
parts per million, and on-time delivery. Their cost of non-quality is systematically
reduced through a corporate-wide initiative based on continuous improvement. It also
uses a sophisticated IT system for tracking quality. Although company C has had
success in improving the value of non-conforming quality costs, it does not use any
CoQ model, and it does not include the CoQ among its calculation elements.

Company D
Company D is a manufacturer of home products. It has set its quality level at a fixed
warranty rate, and it attempts to optimize its quality effort to achieve this target. At the
time of the benchmarking session, the company did not measure CoQ; however, it was
planning to do so and was building a CoQ model. The envisioned CoQ program
was based on a P-A-F model. The strategy of company D was to directly attack failure
costs in an attempt to drive them down, to invest in the right prevention activities to
bring about improvements, to reduce appraisal costs according to achieved results, and Managing cost of
to continuously evaluate and redirect prevention efforts to gain further improvements. quality
Discussion
Table II shows a comparison of the quality initiatives and CoQ effort carried out by the
four companies. The following discussion is focused on the relation between the quality
strategies and the industrial sectors, on the kinds of CoQ models used, on the 547
satisfaction with company efforts, the results stemming from the quality costing
programs, and the recommendations by the authors of this paper.

Quality strategies
The business environment, which is the industry sector and product line, dictates the
strategy adopted by the companies to assure achievement of the required level of quality.
Companies A, B and C all work in high-tech industries that require very high levels of
quality, and therefore, they all have quite elaborate quality and productivity improvement
systems with the objective to achieve zero or near zero defects. Company D, which serves
home product markets, uses a fixed rate of return through its warranty policy as its quality
limit. The company, however, does have a continuous improvement program.

Quality costs
Table II suggests that company A is the only one that in fact measures both kinds of
quality costs, conformance and non-conformance. This allows the company to search
for the right balance between the amount spent on quality and the resulting benefits.
Companies B and C both regard reducing non-conformance cost as a high priority,
and therefore, they exert substantial efforts in measuring and monitoring failures and
other non-conformances. At the same time, they use elaborate, systematic quality
improvement programs in order to reach a zero defect quality level. The direction of
these initiatives is consistent with the industry quality environment, which tolerates
absolutely no defect, no matter what the cost is. Conformance costs are consequently
given much less attention in the quality management programs and measuring them
together with the CONC is, therefore, disregarded.
The situation for company D is, however, quite different. Even though the company
also does not measure conformance costs, the nature of its own quality strategy
suggests that it would benefit greatly if it started doing so. Identification and
measurement of both kinds of the quality costs would certainly improve the quality
policy that company D follows. The policy has a determined rate of return as its quality

Industry Formal CoQ Quality Program

Company sector Quality strategy Quality costs model efforts satisfaction

A Telecom Zero defect CONC þ COC P-A-F þ ABC Intensive High

B Electronics Zero defect CONC None Intensive High
C Aerospace Zero defect CONC None Intensive High
D Home Percentage of CONC None Moderate Moderate
products allowable defects Table II.
Comparison of quality
Notes: COC, cost of conformance; CONC, cost of non-conformance; P-A-F, traditional model including: initiatives of four
prevention þ appraisal þ failure costs; and ABC, activity-based costing companies
TQM limit. Being able to find an appropriate tradeoff between conformance and
18,5 non-conformance costs would help company D determine an optimal level of effort
towards achieving quality.

Formal CoQ methods

Literature (Porter and Rayner, 1992; Schiffauerova and Thomson, 2006) suggests that,
548 if quality costs are measured by companies, then the classical P-A-F model is the one
most frequently used in practice. Even within the limited sample of four companies,
P-A-F was the only model encountered. Company A is currently calculating its quality
costs according to the traditional categorization of prevention, appraisal and failure
costs. Moreover, company D claims that it is planning to utilize this model in the near
future as well. The results of this research, therefore, confirm other researchers’
findings on the frequency of the use of the P-A-F method in industry. Focus by
companies on the classical P-A-F methodology is not surprising; however, there are
several other alternatives available for monitoring CoQ. Other quality costing methods,
such as Crosby’s model or process cost model, are being used with success
(Schiffauerova and Thomson, 2006). Every company has to choose an appropriate CoQ
method that suits its needs and its situation best. For a detailed checklist of the issues
to be considered when deciding on a CoQ approach, Dale and Plunkett (1995).
ABC is considered to be more compatible with quality cost measurement systems
than traditional accounting. Although most CoQ measurement methods are
activity/process oriented, traditional cost accounting establishes cost accounts by
the categories of expenses instead of activities. Thus, many CoQ elements need to
be estimated or collected by other methods. There is no consensus method on how to
allocate overheads to CoQ elements and no adequate method to trace quality costs
to their sources (Tsai, 1998). The use of ABC for a CoQ calculation is, therefore, an
appealing alternative, and company A is benefiting from this powerful combination.
The employment of a CoQ approach together with ABC enables company A to obtain
exact information about every CoQ category: prevention costs, appraisal costs as well
as internal and external failure costs.
Companies B and C do not utilize any formal quality costing system. This is in
agreement with the common suggestion that the CoQ approach is not fully appreciated
by organizations and the practical use of formal quality costing in industry is quite rare.

Satisfaction with quality efforts

The quality initiatives of companies A, B, and C are very elaborate and the amount of
effort is intensive. Whether they use a formal CoQ method or they solely aim at a
reduction in the cost of poor quality, the companies obtain excellent results from their
quality programs. All three companies mentioned a high satisfaction with their quality
efforts during the benchmarking session. Judging by the success of company A with its
CoQ program, we suggest that companies B and C would benefit from measuring CoQ,
and that they would be surprised if they knew their real quality costs. These
companies should select an appropriate CoQ model that suits the company’s situation
and implement the quality costing methodology in order to improve the efficiency of
their quality initiatives. Monitoring quality costs would allow them to better identify
target areas for cost reduction and quality improvement. Moreover, sufficient savings
should occur to justify CoQ measurement expenses.
 Company D has a continuous improvement program that brings it moderate results Managing cost of
and is already looking to improve it by implementing a CoQ strategy. As mentioned quality
above, the implementation of a suitable CoQ method would secure reduced costs and
improved quality benefits for company D.

Summary 549
Even though quality is nowadays considered to be a critical success factor for
achieving competitiveness, the CoQ approach is not fully appreciated by organizations,
and only a minority of them use formal quality costing methods. The four companies
that participated in the benchmarking session with McGill University on CoQ have
systematic quality initiatives, and have been successful in improving quality and
reducing the CONC. However, the only company that measures CoQ and uses a
formalized CoQ model is company A. Company D is at the point of starting to use this
quality measurement tool as well; however, it is at the beginning of this path. On the
other hand, company B and company C focus their quality efforts solely on continuous
quality improvement. They measure, monitor and work mostly with the CONC, and do
not formally include COC in their analysis.
It was recommended that companies B, C and D set up a suitable formal quality
costing system compatible with the needs and the situation of each company. For
companies B and C this program will mainly facilitate identification of the target areas
for quality improvement and cost reduction in quality effort. For company D it would
also help balance its quality costs and establish an optimal level of effort towards
achieving quality. CoQ programs should be part of any quality management program.
The methodology is not complex and is well documented. CoQ programs provide a
good method for identification and measurement of quality costs, and thus allow
targeted action for reducing CoQ. Further education on the practical level is needed for
managers to understand better the CoQ concept in order to appreciate fully the benefits
of the approach, to increase their ability to implement a CoQ measurement system and
to save money.

References
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About the authors

Andrea Schiffauerova is studying the structures of innovative networks, knowledge flows and
the performance of the firms within industrial clusters for her PhD. She has also participated in
projects in cost of quality, technical information transfer, risk management, quality function
deployment and engineering change. Andrea Schiffauerova is the corresponding author and can
be contacted at: andrea.schiffauerova@polymtl.ca
Vince Thomson is a Werner Graupe Professor of Manufacturing Automation. He has been
involved in manufacturing and information technology related research for the past 25 years at
McGill University and the National Research Council (Canada). His research has ranged from
shop floor control and production scheduling to the present interest in real-time control and
process management in manufacturing. His process management research has focused on new
product introduction, concurrent engineering and manufacturing support in terms of
coordination, metrics, and process principles. E-mail: vince.thomson@mcgill.ca

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