Armand V. Feigenbaum first described the concept of the cost of poor quality in a 1956 Harvard Business Review article.
Cost of quality refers to costs incurred while ensuring that you get high-quality deliverables. It also includes the cost of dealing with any defects in your work. This is different from the cost of production, which refers to the total amount spent on labour and materials.
The cost of quality can be categorized into four categories:
- Prevention Cost
- Appraisal Cost
- Internal Failure Cost and
- External Failure Cost
1. Prevention Costs:
Prevention costs are the costs of all activities that are designed to prevent poor quality from arising in products or services. The examples of the prevention costs include:
- Quality planning
- Education and training
- Conducting design reviews
- Supplier reviews and selection
- Quality system audits
- Process planning and control
- Product modifications
- Equipment upgrades
2. Appraisal Costs:
Appraisal costs are costs that are incurred to ensure the conformance to quality standards and performance requirements. The examples of the appraisal costs include:
- Test and inspection (receiving, in-process and final)
- Supplier acceptance sampling
- Product Audits
3. 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 examples 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
4. External Failure Costs:
External Failure Costs are the costs that are associated with defects found after the customer receives the product or service. The examples of the external failure costs include:
- Sales returns and allowances
- Replacing defective products
- Service level agreement penalties
- Complaint handling
- Field service labor and parts costs incurred due to warranty obligations
- Product recalls / Legal claims
- Lost customers and opportunities
- Processing of customer complaints
Classification of the Cost of Quality - Some Examples:
Let's look at some examples to understand the classification we discussed above.
1. Cost of getting company certified to ISO 9001
This will be a prevention cost, as our intention is to establish a system to avoid problems from happening in the first place.
2. The cost of quality-related training
This will also be a prevention cost, as the training is being delivered to avoid or prevent poor quality.
3. Review of drawings
This is an appraisal cost, as in this case, you are checking if the drawings have been made correctly.
4. Preparation of quality management system and inspection procedures
This will be a prevention cost, as the quality management system and inspection procedures help us avoid quality problems.
5. Product recall and warranty repairs
This will obviously be an external failure cost.
6. Defects found by customers after receiving the product
Once again, this will be an external failure cost.
7. Inspection and re-inspection of the repaired product
These will be internal failure costs.
Visible vs Invisible Cost of Quality:
Cost of quality can also be classified as visible and invisible costs (also called the hidden costs). The below graphic explains both of these types of costs.
In conclusion, it is important for companies to understand what they need to do to reduce their overall cost of quality. This will help them improve their business processes and operations, which ultimately lead to better profitability.
The worst type of cost out of these four categories of the cost of poor quality is the external failure costs. Organizations should make their best effort to reduce the external failure cost.
Spending more on prevention and appraisal costs usually leads to a reduction in internal and external failure costs.