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COST OF QUALITY
The reason quality has gained such prominence is that organizations have gained an understanding of the high cost of poor quality. Quality affects all aspects of the organization and has dramatic cost implications. The most obvious consequence occurs when poor quality creates dissatisfied customers and eventually leads to loss of business. However, quality has many other costs, which can be divided into two categories. The first category consists of costs necessary for achieving high quality, which are called quality control costs. These are of two types: prevention costs and appraisal costs. The second category consists of the cost consequences of poor quality, which are called quality failure costs. These include external failure costs and internal failure costs. The first two costs are incurred in the hope of preventing the second two. Prevention costs are all costs incurred in the process of preventing poor quality from occurring. They include quality planning costs, such as the costs of developing and implementing a quality plan. Also included are the costs of product and process design, from collecting customer information to designing processes that achieve conformance to specifications. Employee training in quality measurement is included as part of this cost, as well as the costs of maintaining records of information and data related to quality. Appraisal costs are incurred in the process of uncovering defects. They include the cost of quality inspections, product testing, and performing audits to make sure that quality standards are being met. Also included in this
category are the costs of worker time spent measuring quality and the cost of equipment used for quality appraisal. Internal failure costs are associated with discovering poor product quality before the product reaches the customer site. One type of internal failure cost is rework, which is the cost of correcting the defective item. Sometimes the item is so defective that it cannot be corrected and must be thrown away. This is called scrap, and its costs include all the material, labor, and machine cost spent in producing the defective product. External failure Costs are incurred when inferior products are delivered to customers. They include cost of handling customer complaints, warranty replacements, repairs of returned products and cost arising from a damaged company reputation.
Hence we can tabulate the above details with suitable examples as below:
Prevention costs Ensuring the failures do not happen
Example:
• Quality training
• Quality circles
• Statistical process control activities
• System Development for prevention
• Quality improvement
Appraisal costs Checking for failures
Example:
• Testing and inspecting materials
• Final product testing and inspecting
• WIP testing and inspecting
• Package inspection
• Depreciation of testing equipment
Internal failure costs Keeping defective products from falling into the hands of customers
Example:
• Cost of Scrap (net of realization)
• Cost of Spoilage
• Cost of Rework
• Down time due to defect in quality
• Retesting
External failure cost Costs of defects discovered by the customers
Example:
• Cost of field servicing
• Cost of handling complaints
• Warranty repairs
• Lost sales
• Warranty replacements
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