Cost of Quality

Cost of Quality (CoQ) and Its Role in your Business

The goal of Cost of Quality is to maximize your business while minimizing costs. The unfortunate truth is that quality costs are real and estimated to be at least 25% of your manufacturing cost. Applying the Cost of Quality can help a business understand the number of resources that should be allocated to the right channels to maintain customer satisfaction, quality, and ultimately profit.

Four Types of Cost of Quality

The Cost of Quality has 4 Key Components and can be understood by the below formula. The CoQ can indicate if there is a maldistribution of quality costs.

Good Quality

• Appraisal Costs
  
  Companies invest in appraisal costs to ensure their services and products meet quality standards. This is a part of a quality control that verifies defective services and products are not reaching customers. If appraisal costs are not a focus for a certain company, their reputation might be in danger. One bad review or faulty product can spiral and lead to customer disloyalty.

• Prevention Costs
  
  Different to appraisal costs, prevention costs are actions taken proactively to ensure services and products meet quality standards. A simple example of a prevention cost is training your team to check for defects and repair the damage before it is sent to the customer.

Poor Quality

• Internal Failure Costs
  
  Internal Failure Costs are our first type of poor-quality costs. These are costs the company incurs when there are defects found within the service or product. This is fixed before the customer receives the product or service. Paying for extensive internal costs wastes the business’s time and setbacks the money spent with prevention costs.

• External Failure Costs
  
  The last component of the cost of quality is external failure costs. These are costs incurred due to product failures after they have been sold to customers. These costs are probably most destructive to the business because it results in angry customers who may not rebuy or recommend the company in the future. A company can lose its integrity if there are too many external failure costs.

Why Implement Cost of Quality?

Let’s take a simple example to illustrate the value of Cost of Quality. A meal kit provider delivers high-quality ingredients and easy to follow recipes conveniently to your house. The meal kit provider performs appraisal costs to ensure the ingredients are meeting quality standards. They continuously inspect and test the produce that is being packaged. The provider also has a quality improvement team to analyze prevention costs that can be planned and designed prior to delivering. They find out that zucchinis have received poor user ratings in the past because users received their product wet and expired. The quality team examines the situation and discovers the wholesaler is selling the meal kit provider close to expiry vegetables including zucchini. They are able to rectify the situation in this circumstance by replacing zucchini with squash. This is a type of internal failure costs. The meal kit provider has to pay for rush shipping to deliver the ingredients on time. The company also decides to give their customers a free box for those who received defective in their meal kit. This would be an example of an external failure cost.

In this particular example, the meal kit company should have invested more of their budget in appraisal and prevention costs so they can avoid paying extra for internal and external failure costs. This can be achieved by smart solutions. 

It is important to keep in mind “Quality is the result of a carefully constructed cultural environment. It has to be the fabric of the organization, not part of the fabric” – Phil Crosby.  In most cases, it is more cost effective to invest in good quality – appraisal & prevention costs than to lose customers to poor products and services.

Learn more about how a smart quality platform can help optimize the cost of quality for your business!