Cost of Quality is?

Many organizations do evaluate financial performance, budget, spending, profit, loss, return on investment, and cost of quality! In today’s competitive environment and thin profit margin, no organization can afford wastage within the organization, high warranty cost, and product recall.

What is the cost of quality?

Cost of Quality is a terminology used in the manufacturing industry to measure cost associated to

• Achieve quality goals,
• Customer satisfaction,
• Prevention action, and corrective action (failure cost).

In simple words, the cost of quality is nothing but a direct or indirect cost associated with quality assurance, quality control, rejection cost, rework cost, and warranty cost. Cost of quality includes both prevention cost and corrective cost.

Cost of quality may not be ignored, it sounds less significant but it may contribute more to reduce profit margin! How? Let’s understand first, the cost of quality and how to control it!

Cost of quality formula

Let’s review the following formulas to calculate the cost of quality,

Cost of Quality = Cost of Good Quality + Cost of Poor Quality

Cost of Quality = (Cost of Conformance) + Cost of Non-Conformance)

Cost of Quality = (Prevention Cost + Appraisal Cost) + (Internal failure cost + External failure cost)

Cost of Conformance = Prevention Cost + Appraisal Cost

Cost of non-conformance = Internal failure cost + External Failure Cost

Why the cost of quality is an important key performance indicator?

• Cost of quality is essential to measure the cost associated with delivering quality product/service to a customer and cover warranty cost.
• This KPI helps to assess, whether an organization is losing money or making a profit?

In today’s competitive environment no organization can afford the cost of poor quality and cost of over quality as well.

• 100% inspection of components lot received from the supplier is a wastage of time, money, resources.
• Excessive and non-value added documentation is also a waste of time, effort, and resources.

Top essential reasons to measure the cost of quality,

1. To measure internal rework cost and time.
2. To measure rejection and scrap cost.
3. To measure return on investment (ROI) of infrastructure, machinery, mistake-proofing measures.
4. To measure prevention cost.
5. To measure appraisal cost.
6. To measure failure cost (internal & external failure cost).

Cost of quality examples

Let’s understand how to measure key elements of cost of quality & cost of quality components.

1. Cost of Poor Quality

1.1 Internal Failure Cost

1.2 External Failure Cost

2. Cost of Good Quality

2.1 Appraisal Cost

2.2 Prevention Cost

1.1 Types of Internal Failure Cost

1. Rejection & Rework	1.1 Handling rejection activities 1.2 Product rework and re-inspection and re-testing 1.3 Repair and rework material cost 1.4 Handling scrap and disposition cost of scrap
2. Inventory & Storage	2.1 Warehouse rent cost 2.2 FIFO & LIFO cost 2.3 Product preservation cost (handling, temperature and humidity control cost) 2.4 Excess inventory cost 2.5 Expired material cost
3. CAPA	3.1 Failure analysis and testing cost 3.2 Corrective and Preventive action cost
4. Machine Breakdown	4.1 Machine breakdown and maintenance cost 4.2 Machine preventive and history card cost

1.2 Types of External Failure Cost

1. Warranty & Product Recall	1. Warranty and field failure cost 2. Product Re-call cost 3. Product re-work and part replacement cost 4. Cost of re-designing product 5. Cost of engineering change 6. Penalties (by regulatory or government bodies) 7. Customer complaint handling cost 8. Return to vendor material cost 9. Product downtime cost
2. Service & Installation Cost	2.1 High installation and de-installation cost 2.2 High transportation cost 2.3 High Service cost (due to remote location)

2.1 Types of Appraisal Cost

1. Inspection	1.1 Incoming inspection 1.2 In-process inspection 1.3 Final inspection 1.4 Prototype inspection 1.5 First Article inspection (FAI)
2. Testing	2.1 Product Testing (Verification and Validation) 2.2 Prototype testing 2.3 Accelerated product testing 2.4 Reliability and Durability analysis and testing 2.5 Inter-laboratory testing 2.6 Proficiency Testing
3. Audit	3.1 Internal Audit (QMS) 3.2 External Audit (Certification Audit, Regulatory body audit) 3.3 Supplier Audit 3.4 Process Audit 3.5 Product Audit
4. Calibration	4.1 Tool Calibration (in-house and by external lab) 4.2 Gage R&R and MSA study 4.3 Machine Maintenance
5. WI & SOP	5.1 Work instruction (WI) drafting and release 5.2 Standard Operating Procedure (SOP) drafting and release 5.3 Procedure Review
6. Storage & Preservation	6.1 Temperature and Humidity control cost 6.2 FIFO and material handling cost 6.3 Packaging cost
7. IT-Quality Tools	Cost of IT tools like FMEA tool, Reliability analysis tool, CAPA Tool

2.2 Types of Prevention Cost

1. Employee Selection & Training	1.1 Hiring employees 1.2 Regular training to operators and officers 1.3 Job definition and roles and responsibilities 1.4 Training to dealer and distributors 1.5 Training to suppliers
2. Mistake Proofing & Automation	2.1 Mistake proofing implementation cost and investment 2.2 Fixture design and fabrication cost 2.3 Equipment Maintenance cost 2.4 Process automation cost
3. APQP (Quality Assurance) (Advanced Product Quality Planning)	3.1 R&D cost 3.2 Product Testing Cost 3.3 Field Testing 3.4 Cost of D-FMEA, P-FMEA, Control Plan, PPAP

How to control the cost of quality?

Following quality tools help to control the cost of quality, however, the following tools may add up cost in prevention cost.

1. 6 Sigma
2. Kaizen
3. Total Quality Management
4. Corrective and Preventive Action
5. Lean Manufacturing
6. Pareto analysis
7. Fishbone (5M & 1E)
8. 5S system
9. Statistical Process Control
10. 5 Why Why Analysis

Following steps helps to reduce and control the cost of quality. Following steps helps to reduce and control the cost of quality. There are many areas where the organization can concentrate however following the 5m-1e method helps to control and reduce the cost of quality.

Man (Training, manpower deployment)	Identify non-value added activities in the employee training, hiring process, skill set matrix review, A. Instead of a quarterly review of the skill set matrix, a half-yearly or yearly skill set matrix review will help to save both employees and managers time. B. Role-based quality training – Not every employee needs to train on 6 sigma or other quality tools. Save training costs SMARTLY! C. Inspection is waste and it requires additional manpower, optimizing inspection activities saves/avoids additional cost.
Method	A. Simplified WI and method helps not only employees to perform the job but also saves time and cost for the organization. B. Follow dynamic inspection plan, instead of each lot inspection prefer to skip lot inspection of incoming raw material. C. Conduct incoming inspection of critical raw materials, for non-critical raw materials, prefer inspection report from supplier for each lot. This saves inspection time and cost. D. Instead of in-process inspection, conduct process capability assessment (Cp and Cpk). This will give more confidence about the process instead of human-dependent inspection E. Identify non-value added activities in SOP/Method and eliminate them.
Material	A. Identify safety stock of required material and avoid over inventory. B. Keep material which is required temperature and humidity control as per drawing and MSDS.  C. Material that requires only room temperature level control, avoid preservation of materials inside temperature and humidity control environment. D. FIFO & LIFO specify with the help of ERP system, avoid manual tracking of FIFO/LIFO.
Machine	A. Not all tools need to be calibrated every year. If instrument/equipment is not used frequently, decrease the calibration frequency. You can save calibration costs. B. Machine breakdown not only affects production but also adds up the cost of quality. Implement Total Quality Management (TQM) and Total Productive Maintenance (TPM). C. Machine capability study also helps to assess process capability.
Environment	A. Identify waste in EHS (Environment, Health, and Safety) activities, and eliminate it without compromising environmental norms, health, and safety measures. B. Identify waste, waiting, and overproduction in environment control. Eg. Instead of a separate temperature and humidity control room, prefer small chambers it will save initial investment but also operating costs.
Measure (financial measurement)	A. Measure return to vendor cost including transportation cost per supplier and debit or chargeback supplier based on agreement. B. Measure internal rejection and publish monthly rejection costs in local currency. This activity spreads awareness among employees about waste internal rejection but also makes them avoid such waste. C. Measure warranty cost per product line, per part, and per supplier. This KPI helps to focus on product or process improvement. Use the Pareto tool for data analysis. D. Do review waste and rejection data in local currency in the management review meeting. Leadership may direct employees to find out ways/methods to reduce rejection/waste.

Conclusion @ Cost of Quality!

We hope this blog post helped you to understand the cost of quality and ways to control it! Stay tuned for the quality blog post!