FICCI CE

Cost of Quality
 Categories of Quality Costs

Quality Costs

Conformance Non-Conformance

Prevention Appraisal Internal failure External failure

FICCI CE

Cost of quality

Cost of quality = Cost of conformance + Cost of non-conformance

• Cost of conformance is the cost of providing products or services as

per the required standards. This can be termed as good amount spent.
(Prevention & Appraisal costs)
• Cost of non-conformance is the failure cost associated with a process
not being operated to the requirements. This can be termed as
unnecessary amount spent.( Internal & External failure costs)
 Prevention Costs

Prevention costs are associated with design, implementation , maintenance,

and planning prior to actual operation in order to avoid defects from
happening.
The emphasis is on the prevention of defects in order to reduce the
probability of producing defective products. Prevention activities lead to
reduction of appraisal costs and both type of failures ( internal and external
).The motto is “Prevention rather than appraisal” .
Activities associated with Prevention costs

Market research
Quality training programs.
Contract review
Design review
Field trials
Supplier evaluation
Process plan review
Process capability review
Design and manufacture of jigs and fixtures
Preventive maintenance
 Appraisal costs

Appraisal costs are spent to detect defects to assure

conformance to quality standards. Appraisal cost activities
sums up to the “cost of checking if things are correct”.The
appraisal costs are focused on the discovery of defects
rather than prevention of defects
 Activities associated with Appraisal costs

Proto type testing

Vendor surveillance
Incoming material inspection
Process inspection/control
Final inspection
Laboratory testing / measurement
Depreciation cost for measuring
Quality audits.
 Internal failure costs

Internal failure costs occurs when results of work fail to

reach designated quality standards , and are detected
before transfer to the customer takes place.
Activities associated with Internal failure costs

Design changes/ corrective action

Scrap due to design changes
Excess inventory
Rectification / reject disposition of purchased material
Rework/rejection in manufacturing
Downgrading of end product
Downtime of plant & machinery
Trouble-shooting & investigation of defects
 External failure costs

External failure costs occur when the product or service

from a process fails to reach designated quality standards ,
and is not detected until after transfer to the customer.
Activities associated with External failure costs

Processing / investigation of customer complaint

Repair/replacement of sold goods
Warranty claims
Product liability & litigation costs
Interest charges on delayed payment due to quality problems
Loss of customer goodwill & sales.
 Size of four categories of quality costs.

The organizations which do not follow TQM,there is less emphasis on

prevention and their main quality efforts are on appraisal with very little
control on internal and external failure costs.
Various studies have shown that quality cost in manufacturing companies the
world over range from 20 % to 30 % of turnover and in the case of service
companies it can go up to 40 % as illustrated in graph on the next slide.
 Size of various quality cost elements
10-15%
Quality costs in % of sales

10-12% The total quality

costs 25-35 %
of turnover.

4-6%

1%

Preventive Appraisal Internal External

Failure Failure
 Impact of TQM on costs.

TQM is primarily aimed to improve the quality of the product , higher

customer satisfaction and better working environment for the employees.
The most dramatic impact of TQM is on reduction of quality costs which
directly effect the profitability .
This is demonstrated by the results of TQM program in Xerox Corp . The
change in various elements of quality cost before and after launching
TQM by Xerox Corp is shown on the next slide.
 Impact of TQM on costs.
An example from Xerox Corp.
35

30

25 Internal
% of sales

Failure

20

15 Internal
Failure
10 Appraisal
Appraisal

5
Prevention
prevention
0
Before TQM After TQM
 1-10-100 Rule

1
Prevention
Rs
10
Stages

Correction Rs

Rs 100
Failure

Rs

Rs
FICCI CE

cost of quality

Traditionally recorded quality cost generally account for only 4 to

5 percent of sales which mainly comprise of cost of scrap, re-work
and warranty.
FICCI CE

Hidden costs of quality

There are additional costs of quality which are hidden and do not appear in
the account books of the company, as they are intangible and difficult to
measure. These additional costs could be as high as 20-25% of sales and
comprise of low conversion efficiency of materials, cost of resolving
customer problems, inadequate resource utilization, high inventory, long
cycle times, more set-up times, penalties due to late delivery and lost
customer loyalty and goodwill.
FICCI CE

Visible and hidden costs

•Scrap
•Rework
Visible costs
•Warranty costs

• Conversion efficiency of materials

• Inadequate resource utilization

• Excessive use of material

• Cost of redesign and re-inspection Hidden Costs
• Cost of resolving customer problems

• Lost customers / Goodwill

• High inventory
FICCI CE

Computing cost of poor quality

Am ount Percentage

Prevention Costs

Quality Administration
QualityEngineering
Reliability Engineering
Training
Total Prevention

Appraisal Costs

Inspection
Test
Vendor Control
Measurement Control
Materials Consumed
Quality Audits
Total Appraisal
FICCI CE

Computing cost of poor quality

Am ount Percentage

Internal Failure Costs

Scrap
Repair & rework
Vendor Losses
Failure Analysis
Total internal

External Failure Costs

Failures-manufacturing
Failures-Engineering
Failure-Sales
W arranty charges
Failure Analysis
Total External

T otal Quality Costs