July 3

Understanding the Hidden Costs of Poor Quality

(Note: The above video is a part of our Certified Quality Process Analyst (CQPA) exam preparation course on Udemy. Click here to get a special discount on this course.)

In this post we delve into a crucial aspect of quality management: the cost of poor quality. Often, we only consider the visible costs associated with poor quality, such as rejections, rework, and customer complaints. However, there are numerous hidden costs that are equally impactful but often overlooked. In this article, we explore these hidden costs and their implications for organizations.

Visible Costs:

When we think of the cost of poor quality, we immediately envision the visible costs incurred when something goes wrong. These include the expenses related to repairing, reworking, or addressing customer complaints. These costs are tangible and easily identifiable. However, it's important to note that they are just the tip of the iceberg.

Hidden Costs:

Beyond the visible costs, there exists a myriad of hidden costs that organizations often fail to consider. These costs can have a significant impact on overall business performance and include:

  1. Lost Sales and Reputation: Poor quality products or services can lead to lost sales and a decline in the company's reputation. While it may be challenging to quantify these costs, they are significant and should not be underestimated.
  2. Excess Inventory: Producing faulty products or services results in excess inventory that cannot be sold. This accumulation of inventory requires storage space, ongoing maintenance, and ties up valuable financial resources.
  3. Additional Controls: To compensate for poor quality, organizations may implement additional quality controls, such as extra inspections or quality checks. These measures come with their own associated costs.
  4. Investigations, Fines, and Legal Fees: When quality issues arise, organizations may need to conduct investigations, face regulatory fines, or even incur legal fees. These unforeseen expenses can quickly add up and impact the bottom line.

The Iceberg Analogy:

To better understand the cost of poor quality, we can use the analogy of an iceberg. Just like an iceberg, where only about 10% is visible above the waterline, the visible costs represent only a fraction of the total cost. The hidden costs, similar to the massive portion below the waterline, make up the majority of the overall cost of poor quality.

Classification of Costs:

To further analyze the cost of quality, we can classify it into four components:

  1. Prevention Cost: Prevention costs are incurred to avoid quality issues. Examples include quality planning, education and training, design and supplier reviews, system audits, and process planning and control.
  2. Appraisal Cost: Appraisal costs are associated with checking and testing activities. This includes receiving inspections, in-process inspections, final inspections, supplier acceptance sampling, product audits, and calibration.
  3. Internal Failure Cost: Internal failure costs are incurred when failures occur within the organization. These costs include rework, scrap, downtime, and the additional resources required to address internal quality issues.
  4. External Failure Cost: External failure costs arise when quality issues impact customers or end-users. They may include warranty claims, customer returns, product recalls, reputational damage, and legal actions.


Understanding the hidden costs of poor quality is crucial for organizations striving to deliver superior products and services. By recognizing both the visible and hidden costs, companies can make informed decisions and implement effective quality management strategies. By investing in prevention, conducting thorough appraisals, and minimizing internal and external failures, organizations can enhance their reputation, customer satisfaction, and overall profitability.

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