Cost of Quality

​The concept of the cost of poor quality was first described by Armand V. Feigenbaum in a 1956 Harvard Business Review article.

CLASSIFICATION:

The cost of quality can be categorized into four categories:

  • Prevention Cost
  • Appraisal Cost
  • Internal Failure Cost and
  • External Failure Cost
​PREVENTION COSTS:

Prevention costs are the costs of all activities that are designed to prevent poor quality from arising in products or services. The example of the prevention costs include:

  • Quality planning
  • ​Education and training
  • ​Conducting design reviews
  • ​Supplier reviews and selection
  • ​Quality system audits
  • ​Process planning and control
​APPRAISAL COSTS: 

Appraisal costs are costs that ​are incurred to ensure the conformance to quality standards and performance requirements. The example of the ​appraisal costs include:

  • ​Test and inspection (receiving, in-process and final)
  • ​Supplier acceptance sampling
  • ​Product Audits
  • ​Calibration
​INTERNAL FAILURE COSTS: 

​Internal Failure Costs are the costs that are associated with defects found within the organization before ​after the customer receives the product or service. The example of ​the internal failure costs include:

  • ​In-process scrap and rework
  • ​Troubleshooting and repairing
  • ​Design changes
  • ​Inventory required to support poor process yields and rejected lots
  • ​Re-inspection / retest of reworked items
​EXTERNAL FAILURE COSTS:​ ​

External Failure Costs are the costs that are associated with defects found ​​after the customer receives the product or service. The example of ​the ​external failure costs include:

  • ​Sales returns and allowances
  • ​Service level agreement penalties
  • ​Complaint handling
  • ​Field service labor and parts costs incurred due to warranty obligations
  • ​Recall / Legal claims
  • Lost customers and opportunities
  • ​Downgrading

​Visible vs. Invisible Cost:

Cost of quality can also be classified as visible and invisible costs. The below graphics explains both of these types of costs.


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