Cost of Quality

How does one put a dollar figure to quality-related activities? In this post, we address the main areas of concern when it comes to financially measuring quality (or the lack of). Cost of quality refers to the costs of not producing a quality product or service. It is an important measure that showcases how much, dollar-wise, a firm is spending on activities that need to be performed in order for the product or service be of an acceptable quality. With a bit of variation in the literature on cost of quality, the main four areas of concern, and  the areas in which you can build a case for justifying doing things right the first time, are:

Prevention costs: what are the costs related to avoiding an issue with a product or service? Consider quality planing, training, preliminary process evaluation, management systems development, product design inspection (or verification), and so on. These are the costs a company must address even before it starts to produce a good or deliver a service.

Appraisal costs: calibrating, auditing, acceptance-testing, inspecting, and any other cost associated with the checking phase of a product or service development. Companies that are TQM-oriented usually educate employees to be a constant checker, however there are still clearly identifiable appraisal costs in any organizational setting.

Internal failure: these costs include scraping, reworking, downgrading, down-valuing, and material-reviewing to name a few. This is perhaps the most easily and visually identifiable costs of any process. It is important to mention that for the service industry, these can also be related to data loss, disruption in service, and errors in processing orders.

External failure: the costs that any organization want to avoid at all costs (no pun intended). Not only this is about cash outflow but it also refers to issues in which a company does not want to have. Warranty issues, product recall, defects, returns, complaints management, and the one we should be most concerned about: the loss of reputation.

Be mindful that sometimes certain costs (such as prevention costs) may deliver a reasonable benefit after all. Perhaps it is there that quality practitioners should be more focused on, in order for the product's or service's other costs be minimal. Evaluating the right costs is an important piece of any quality or process improvement engagement. eZSigma can help your organization in successfully achieving this milestone.