TQM: Cost of Quality

COQ
Cost of Quality

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 TQM: Cost of Quality

WHY COQ ?

• The language of money is essential, especially for upper

management
• Identify major opportunities for reduction in costs (of poor
quality)
• Identify opportunities for reducing customer dissatisfaction
and associated threats to sales revenue
• Provide a means to measure the results of quality
improvement programs
• Align quality goals with organizational goals.
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 TQM: Cost of Quality

Something to think about !!!

• Net profits for many companies is less than 5% of
sales
• COPQ on the average is 17% of sales
• Total COQ on the average is 25% of sales
• COPQ is some companies is as high as 40%
of sales
• COPQ can be typically 3 to 6 TIMES as large
as profits !!!
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 TQM: Cost of Quality

Don’t Let Poor Quality

Costs Eat Your Profits!

Profits

COPQ

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 TQM: Cost of Quality

THE TRADITIONAL COQ MODEL

• Conformance Costs
– Preventions Costs
– Appraisal Costs

• Non Conformance Costs

– Internal Failure Costs
– External Failure Costs

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 TQM: Cost of Quality

PREVENTION: Costs incurred to keep failure and appraisal

costs to a minimum

• Quality planning: This includes the broad array of activities which collectively
create the overall quality plan and the numerous specialized plans. It includes also
the preparation of procedures needed to communicate these plans to all
concerned.
• New products review: Reliability engineering and other quality-related
activities associated with the launching of new design.
• Quality audits: Evaluating the execution of activities in the overall quality plan
• Supplier quality evaluation: Evaluating supplier quality activities prior to
supplier selection, auditing the activities during the contract, and associated effort
with suppliers
• Quality training: Preparing and conducting quality-related training programs. 6
 TQM: Cost of Quality

Internal Failure Costs: Costs of deficiencies discovered before delivery which are
associated with the failure (non conformity) to meet explicit / implicit requirements of
internal / external customers.

• Scrap: The labor, material, and (usually) overhead on defective product that cannot economically be
repaired. The titles are numerous—scrap, spoilage, defectives, etc.
• Rework: Correcting defectives in physical products or errors in service products
• Failure analysis: Analyzing nonconforming goods or services to determine causes
• Scrap and rework – supplier: Scrap and rework due to nonconforming product received from
suppliers. This also includes the costs to the buyer of resolving supplier quality problems
• Re-inspection / retest: Re-inspection and retest of products that have undergone rework
• Changing processes: Modifying manufacturing or service processes to correct deficiencies
• Changing hardware / software: Changing designs of hardware / software to correct deficiencies
• Downgrading: The difference between the normal selling price and the reduced price due to quality
reasons.
• Variability of product characteristics: Losses that occur even with conforming product
(e.g.,overfill of packages due to variability of filling and measuring equipment).
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• Unplanned downtime of equipment: Loss of capacity of equipment due to failures.
 TQM: Cost of Quality

Appraisal Costs: These are the costs incurred to

determine the degree of conformance to quality
requirements.

• Incoming / in-process / final inspection and tests: Determining

the quality of purchased product, whether by inspection on receipt, by
inspection at the source.
• Product quality audits: Performing quality audits on in-process or
finished products
• Maintaining accuracy of test equipment: Keeping measuring
instruments and equipment in calibration.
• Document review: Examination of paperwork to be sent to customer
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 TQM: Cost of Quality

External failure Costs: costs associated with deficiencies

found after the product is received by the customer. Also
included are lost opportunities for sales revenue

• Warranty charges: The costs involved in replacing or making repairs to

products that are still within the warranty period.
• Returned material: The costs associated with receipt and replacement of
defective product received from the field.
• Allowances: The costs of concessions made to customers due to substandard
products accepted by the customer as is or to conforming product that does not meet
customer needs.
• Customer defections: Profit margin on current revenue lost due to
customers who switch for reasons of quality.
• Liability Costs/Litigation 9
 TQM: Cost of Quality

Example from manufacturing sector: A tire manufacturer

1. Cost of quality failures—
losses
a. Defective stock $3,276 0.37
b. Repairs to product 73,229 8.31
c. Collect scrap 2,288 0.26
d. Waste-scrap 187,428 21.26
e. Consumer adjustments 408,200 46.31
f. Downgrading products 22,838 2.59
g. Customer ill will Not counted
h. Customer policy adjustment Not counted
Total $697,259 79.10%
2. Cost of appraisal
a. Incoming inspection $23,655 2.68
b. Inspection 1 32,582 3.7
c. Inspection 2 25,200 2.86
d. Spot-check inspection 65,910 7.37
Total $147,347 16.61%
3. Cost of prevention 10
a. Local plant quality control engineering $7,848 0.89
TQM: Cost of Quality

TRADITIONAL COQ MODEL

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 TQM: Cost of Quality

THE EMERGING CoQ MODEL

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 TQM: Cost of Quality

AS TQM IS IMPLEMENTED….
Prevention Costs…..

Appraisal Costs…..

Internal Failure Costs….

External Failure Costs…..

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 TQM: Cost of Quality

THE TRADITIONAL / CLASSICAL COQ MODEL

This model was firstly proposed by Juran and had been applied extensively till the
90’s. This model suggests that the costs of poor quality (internal and external
failure costs) decrease with higher quality levels, while the costs of achieving
good quality (appraisal and prevention costs) increases. The total cost
function, representing the sum of both cost categories, has a parabolic shape.
According to Juran’s interpretation, the resulting cost minimum represents the
economically optimal level of quality. The model’s inherent quality–cost trade-
off has widely shaped the perception that the optimal level of quality must be
somewhere below perfection. Therefore the objective of any quality
improvement program should be to find the level of quality (defect rate) that
minimizes the total cost of quality.

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 TQM: Cost of Quality

THE NEW / MODERN COQ MODEL

The new COQ model which is more in agreement with empirical findings from industry
exhibits a weaker increase in appraisal and prevention costs, accounting for a
higher prioritization of prevention and new technological solutions that reduce the
failure rate and make process monitoring feasible. The total cost curve is negatively
sloped and the cost optimum shifts to the perfect quality level (Zero defects)
In fact, the new COQ model reflects Deming’s viewpoint that we do not need a COQ
model to determine an optimal level of quality. Deming asserts that the costs of
selling defective products is so high that quality costs will only be minimized when
there is 100% conformance, or zero defects. Consequently, he thinks that there is
no reason to measure quality costs since the only sensible strategy is to be sure
that no defective products are produced at all.

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 TQM: Cost of Quality

TWO COQ MODELS: A CONTRAST

1. The old model obviously presupposes a company with a poor quality level,
and does not consider that companies might already have a considerable
high quality level when they engage into quality improvement.
2. The old model is a spotlight on the technological proficiency of the time it
was constructed. The prevention of defects has since become more
feasible due to technological advances, which benefits both the finding of
feasible remedies and the methods of process monitoring.
3. Considering unit costs, at higher quality levels, more good products are
available to bear the costs of both prevention and appraisal.
4. The old model makes no reference to the duration for which a company
has been engaged in quality improvement

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 TQM: Cost of Quality

TWO COQ MODELS: A CONTRAST Contd…

5. The quest for quality never ends. A company can make progress, and
even reach the point where it has no quality problems. But unless quality
improvement is a continual activity, all the progress that has been made
will be lost.
6. Improved quality takes time to show itself (in economical terms) and may
have more impact on increasing customer satisfaction and raising market
share than short term benefits and returns

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 TQM: Cost of Quality

GENERIC COQ MODELS

GENERIC COST / ACTIVITY DEVELOPED /
MODEL CATEGORIES PROMOTED BY
P-A-F Prevention + Appraisal + Feigenbaum (1943),
Models Failures Juran (1951),
ASQC(1970)
Crosby’s Conformance + Non- Crosby (1979)
Model Conformance
Process Cost conformance Ross (1977), March
Model + non-conformance (1989)
ABC models value-added Cooper and Kaplan
+ non-value-added (1988)

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 TQM: Cost of Quality

Examples of Quality Costs Associated with Software

Products
PREVENTION: efforts made for
• Staff training
• Early prototyping
• Fault-tolerant design
• Defensive programming
• Usability analysis
• Clear specification
• Accurate internal documentation

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 TQM: Cost of Quality

Examples of Quality Costs Associated with Software

Products
APPRAISAL
• Design review
• Code inspection
• Glass box testing
• Black box testing
• Training testers
• Beta testing
• Usability testing
• Pre-release out-of-box testing by customer service staff

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 TQM: Cost of Quality

Examples of Quality Costs Associated with Software

Products
INTERNAL FAILURE
• Bug fixes
• Regression testing
• Wasted in-house user time
• Wasted tester time
• Wasted programmer time
• Wasted marketer time
• Wasted advertisements
• Direct cost of late shipment
• Opportunity cost of late shipment
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 TQM: Cost of Quality

Examples of Quality Costs Associated with Software

Products
EXTERNAL FAILURE
• Technical support calls
• Investigation of customer complaints
• Refunds and recalls
• Shipping of updated product
• Added expense of supporting multiple versions of the product in the field
• Lost sales
• Lost customer goodwill
• Warranty costs
• Liability costs
• All other costs imposed by law
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 TQM: Cost of Quality

SOME POSSIBLE LIMITATIONS OF COQ

• COQ has a tendency to be short term

• Quality costs are subject to judgment and estimation

• There is a time delay between cause and effect

• Important costs can be easily omitted from the COQ

calculation (Particularly hidden costs)

• Standard accounting conventions do not support COQ

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TQM: Cost of Quality

CASE STUDIES

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