7/10/2018 Cost of Quality: Not Only Failure Costs

Cost of Quality: Not Only Failure Costs

Arne Buthmann 22

When calculating the business case for a Six Sigma project, the cost of poor quality (COPQ), which is the cost caused through producing defects, is a commonly used concept.
Within the total amount of quality cost, however, COPQ represents only a certain proportion. Costs do not result from only producing and fixing failures; a high amount of costs
comes from ensuring that good products are produced. This article explains the cost of quality as a more comprehensive concept covering the cost of poor quality and the cost of
good quality. In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality.

Cost of Quality
As defined by Philip B. Crosby in his book Quality Is Free, the cost of quality has two main components: the cost of good quality (or the cost of conformance) and the cost of poor
quality (or the cost of non-conformance). As Figure 1 shows:

The cost of poor quality affects:

Internal and external costs resulting from failing to meet requirements.

The cost of good quality affects:

Costs for investing in the prevention of non-conformance to requirements.

Costs for appraising a product or service for conformance to requirements.

Figure 1: Cost of Quality

Cost of Poor Quality: Internal Failure Costs

Internal failure costs are costs that are caused by products or services not conforming to requirements or customer/user needs and are found before delivery of products and
services to external customers. They would have otherwise led to the customer not being satisfied. Deficiencies are caused both by errors in products and inefficiencies in
processes. Examples include the costs for:

Rework
Delays
Re-designing
Shortages
Failure analysis
Re-testing
Downgrading
Downtime
Lack of flexibility and adaptability

Cost of Poor Quality: External Failure Costs

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

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7/10/2018 Cost of Quality: Not Only Failure Costs

Cost of Good Quality: 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
Supplier evaluation
New product review
Error proofing
Capability evaluations
Quality improvement team meetings
Quality improvement projects
Quality education and training

Cost of Good Quality: 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/test
Field testing
Product, process or service audits
Calibration of measuring and test equipment

The total quality costs are then the sum of these costs. They represent the difference between the actual cost of a product or service and the potential (reduced) cost given no
substandard 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.

Figure 2: The Iceberg Model of Cost of Quality

The Six Sigma Philosophy of Cost of Quality

What is the relation between the cost of good quality and the cost of poor quality? The traditional view would be to conclude that if a company wants to reduce defects and by this
reduce the cost of poor quality, the cost of good quality would have to be increased, meaning higher investments in any kind of checking, testing, evaluation, training of operators,
etc. Following the Six Sigma philosophy, however, of building quality into process, service and products and doing things right the first time, the increase of the cost of good quality,
while striving for zero defect performance, can be smoothed if processes get better.

As Figure 3 shows, business processes with better process sigma will have significantly lower prevention and appraisal costs. Although you will never fully eliminate appraisal and
prevention costs (as opposed to failure costs that in an ideal zero defect world would also be zero), their reduction due to better process performance will be significant.

Figure 3: Traditional Management View vs. Six Sigma Philosophy

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7/10/2018 Cost of Quality: Not Only Failure Costs

Table 1 shows how dramatically the cost of quality as a percentage of sales decreases if the process sigma improves.

Table 1: Sigma Level and the Cost of Quality

Sigma Level DPMO Cost of Quality as Percentage of Sales

2 298,000 More than 40%

3 67,000 25-40%

4 6,000 15-25%

5 233 5-15%

6 3.4 Less than 1%

Assuming that the average performance of a company is 3 sigma, 25 percent to 40 percent of its annual revenue gets chewed up by the cost of quality. Thus, if this company can
improve its quality by 1 sigma level, its net income will increase hugely.

See Also

Septic Tank Pumping Cost

Cost Per Kilowatt Hour

Online Six Sigma Courses

Project Management Tools

Lean Six Sigma Training

Comments

Michelle Baker
Is your DPMO (shown in your Cost of Quality table), equal to the sum of all the internal and external failures?

In other words, the DPMO is the sum of multiple process fallout?

Thanks,

Reply

Akmal
yes . its the total Defects Per Million Opportunities

DPMO: (1,000,000 * Number of Defects) / (Number of Units * Number of opportunities).

Reply

zizu

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7/10/2018 Cost of Quality: Not Only Failure Costs

does cost of quality include marketing costs?

Reply

Daryl
Marketing Costs can be included as a response to external failures.
Companies may increase marketing to rebuild reputation damage and negative brand image caused by external failures such as litigation or product recall.

Reply

philip
I’d say in general not zizu, marketing is a normal activity of finding out what customers want, making sure your service or products are aligned to that and then
ensuring the customers know about that, this will go on even if your products and services are defect free, right the first time. However if you had to rebrand a product
or launch a marketing campaign especially due to poor products or services then I think it would be.

Reply

Carlos
Are internal failure cost more or less important thatn external failure cost regarding the cost of quality?

Reply

Robert Reid
Everything is relative to magnitude; however, cost of a failure making it to the customer is regarded as the ultimate failure and those cost cannot be
accurately assessed due to the wide range of implications (E.g. confidence loss impact is hard to gauge because bad news travels fast when someone is
dissatisfied).

Reply

Pradeep Chellakani
The prevention cost will increase first reducing the appraisal cost (Meaning moving from Inspection to automation and prevention through right design). This will
increase the yield from RTY instead of the FPY or classical yield.

Reply

R.Chakrapani
Loss of sales due to poor Product image/Brand Image/poor marketing /poor supplier chain bottlenecks,in relation to competition in the same industry needs to be
accounted in COQ.

RC

Reply

Mohd. Haneef
what is the relation b/w scrap & COQ.

Reply

Pam
If there is a planned evolution, such as trimming an impeller blade, that occurs because of data obtained from the first pump test, is that considered a cost of poor
quality?

My position is that this is NOT COPQ because the first test, the trim, and the second test are planned into the decision on trimming and are planned into the process.

Reply

DanJ
Hi, great summary. Question – are the Sigma Levels and Cost of Quality equal for services vs. manufacturing companies? Our service centers do a lot ITIL incident,
problem, change, and service management and I am interested in being able to measure COPQ for failed changes, incidents, etc.

thanks in advance,

-Dan

Reply

Makary

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7/10/2018 Cost of Quality: Not Only Failure Costs

Question is what is better

keeping bad quality service and poor prices
or high level of quality and high prices.
maybe sometimes mix is the best way???

Reply

Saji
Is there any example for The cost of poor quality that incurred high internal or external costs ???

Reply

Arun sathish RS
Useful

Reply

Jonathan (JT)
This was very useful and help me to understand the Cost of Quality and the potential cost reduction of the items list below water.

Reply

Ryan
Hi, what is the source or source data for Table 1 – is it also from Crosby?

And do you find the cost of quality as a percentage sales changes by industry (i.e., software vs. auto manufacturing)? Thanks!

Reply

Ashok Yadav
Obsolete inventory due to production phaseout should comes under which category?

Reply

Arjan Busch
Hi Ashok, given production phase out of a product or service is due to change in customer need resulting in sales drop and given inventory cannot be reused
in other products or services this should be regarded as COPQ.

Reply

Brdurais
What should be the % distribution of the COQs in a software industry. Should CoQ prevention be higher than CoQ-Appraisal? I have always evidenced that the
appraisal cost is more than the prevention

Reply

Serien Nowailati
Hi,

How do you think these quality costs are related to LSS?

Thanks

Reply

Nick
I am just starting the Six Sigma process and learning about COQ and DPMO but my question is related to Table 1. How do those numbers get populated? How do you
assume that a company that is performing at 3 sigma is between 25-40% with 67,000 DPMO?

Reply

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