What is Cost of Quality (CoQ)?
Cost of Quality is a technique defining and measuring where and what amount of a companies’ resources are being used for prevention activities and maintaining product quality as opposed to the costs resulting from internal and external failures.
Six Sigma lets you work out the cost of quality by estimating:
- The cost of production of the wasted original product
- The cost of recall
- Scrapping or rework
- The additional work done to rectify the original product
- The resultant cost of recall
- The cost of manpower working with the product before, during and after the recall
- The cost of losing business
- Negative publicity
- Their impact on stock price
- The delay in working on another product or another feature for the same product
If there are litigations and fines, then they add up to the costs as well and can bring a business on its knees. So while it is hard to say how much it costs to make a quality product, it is easier to calculate how much it will cost a company that neglects quality.
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Importance of Cost of Quality
The economic environment is becoming increasingly more competitive. Many companies are promoting quality as the core customer value and consider it to be a key success factor for achieving competitiveness.
There are various alternatives available to the customer for almost every product on the market. The better-performing companies set themselves apart by listening to the voice of the customer and supplying products according to the customers’ requirements while maintaining a high level of quality and dependability. These companies gain their advantage by measuring and reporting the cost of quality (COQ).
The Cost of Quality can be portrayed by the sum of two factors, the Cost of Good Quality (COGQ) and the Cost of Poor Quality (COPQ).
COQ = COGQ + COPQ
The Cost of Quality incorporates all associated costs with the quality of a product, from preventive costs intended to reduce failures, cost of process controls to maintain quality levels, and the costs related to both internal and external failures.
Why Implement Cost of Quality (COQ)?
The efficient utilization and implementation of the Cost of Quality technique enable an organization to assess the number of resources being used for the Cost of Good Quality and the Cost of Poor Quality. With this crucial information, the organization can determine where to allocate resources to improve product quality and the outcome.
- Improve product quality and reduce costs through the implementation of the Cost of Quality technique.
- Evaluate the effectiveness of quality systems using the Cost of Quality approach.
- Identify problem areas impacting product quality and cost.
- Accurately leverage opportunities to enhance product quality and cost-effectiveness.
Lowering Cost of Quality (CoQ) with a Modern EQMS Solution
How to Measure the Cost of Quality (COQ)
Cost of Quality calculation differs from organization to organization. Many times, organizations determine the Cost of Quality by calculating total warranty dollars as a percentage of sales.
But this method looks externally at the Cost of Quality and not internally. For better understanding, a more comprehensive overview of all quality costs is essential.
- Prevention Cost (PC)
- Appraisal cost (AC)
- Internal Failure Cost (IFC)
- External Failure Cost (EFC)
The cost of Quality is categorized by:
By applying these four categories to the original Cost of Quality equation, which states that Cost of Quality is the sum of Cost of Good Quality and the Cost of Poor Quality, the basic equation can be expanded as shown below:
- The Cost of Good Quality is the total of Prevention Cost and Appraisal Cost (COGQ = PC + AC)
- The Cost of Poor Quality is the addition of Internal and External Failure Costs (COPQ = IFC + EFC)
By combining the above equations, the Cost of Quality can be more defined, as shown below:
COQ = COGQ+ COPQ = (PC + AC) + (IFC + EFC)
What are the Types of Costs of Quality?
Prevention costs
Signify the costs incurred with the efforts taken to prevent the occurrence of defects. Prevention Costs imply the following:
- Developing a quality management system and the associated quality planning documents
- Establishing product specifications, new product development based on that, and testing
- Proper employee quality awareness and training and supplier evaluation
- An analysis of the quality audit and quality improvement program
Appraisal costs
Represent the costs incurred with inspected tests and performed checks to determine whether the particular requirements are met. Appraisal costs can include the following:
- Inspections and tests of incoming material and products, finished product acceptance, test equipment purchase, and maintenance
- Inspection and test documentation and employees’ wages
- An analysis of the inspection and test results
- Supplier assessments
The internal failure costs
Describe the costs incurred to rectify all the nonconformities found before the product supply to the recipient. Internal failure is determined by the following:
- Heaps of scrap
- Costs of reprocessing and repeating the tests
- Performing product remedy, rework and repair operations
- Product downgrading costs and costs associated with failure analysis
- Machine breakdown due to inappropriate maintenance and trash due to inadequately designed processes
The external failure costs
Depict the costs incurred to correct all the nonconformities found after the product supply to the recipient. External failure costs indicate the following:
- Customer complaints and product or material returns
- Damages due to poor packaging and penalties for delays in deliveries
- Providing service and repair costs
- Incorrect sales orders and incomplete BOMs
- Warranty claims
Taguchi’s Loss Function
The Taguchi Quality Loss Function (QLF) is a statistical function, proposed by the Japanese quality expert Genichi Taguchi, which states that the quality loss function is used to estimate costs when the product or process characteristics are switched from the target value. This is represented by the following equation:
L= k(y-T) ^2 where L= Quality loss
y = the actual size of the product
T = Target value
k = Proportionality constant.
This is also known as parameter design, which is a selection of a parameter level to make the process robust against environmental changes with the smallest variation.
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What is the Cost of Good Quality (CoGQ)?
The Cost of Good Quality (CoGQ) represents investments made to prevent poor quality and ensure high-quality products and services. It includes costs associated with:
Prevention Costs: Incurred to prevent defects and errors before occurrence, examples include quality planning, training, process improvement, and preventive maintenance.
Appraisal Costs: Associated with evaluating and verifying product and service quality, examples include inspection, testing, and quality audits.
What is the Cost of Poor Quality (CoPQ)?
The Cost of Poor Quality (CoPQ) denotes the financial setbacks incurred by a company resulting from subpar products or services. It encompasses all expenses tied to errors, defects, and inefficiencies throughout the production and delivery process.
Categories of CoPQ:
Internal Failure Costs: These expenses occur before the product reaches the customer and encompass scrap, rework, reinspection, and warranty claims.
External Failure Costs: These costs arise after the product reaches the customer and encompass returns, repairs, product recalls, lost customer satisfaction, and legal liabilities.
How the Cost of Poor Quality in manufacturing industry affect the business?
High Cost of Poor Quality in manufacturing can significantly affect the business in several ways:
- Reduced Profitability: Directly impacting profitability through lost revenue from scrap, rework, returns, and warranty claims.
- Damaged Reputation: Poor quality products can lead to customer dissatisfaction, damaging brand reputation and affecting future sales and market share.
- Decreased Productivity: Rework and scrap result in wasted time and resources, lowering overall production efficiency.
- Increased Compliance Risk: Non-compliance with quality standards may lead to fines or penalties from regulatory bodies.
- Reduced Employee Morale: Poor quality can cause frustration among employees, impacting overall job satisfaction and performance.
As subject matter experts, they knew exactly how to translate our company processes, and do them more effectively within the application.
Glenn Cann, President,
AOC Global Services and AOC Program Solutions
What are the Ways of Perceiving Cost of Quality
There are several ways of perceiving the Cost of Quality while they can be contradictory towards each other.
Reduce Quality Costs and Boost ROI
Your business is transformed in many ways to reduce costs across every level of your manufacturing operations if the quality is embedded within every operation. With a quality manufacturing approach, the cost of quality initiatives become a powerful tool to improve return on investment.
Reduce the cost of waste, scrap, and rework
Relying solely on a final inspection for quality control can be too late. If a process differs from specification anywhere in the production line, that finished product goes directly to the waste bin, accumulating the incalculable costs in rework and materials. You must monitor product and process quality in real-time at every critical operation so that plant operators can adjust and eliminate variations before they cause costly waste.
Turn customer complaints into customer satisfaction
When you can identify and rectify product and process variations early before your final inspection and reach to customers or if customers are having issues or concerns, then you should provide immediate access to reporting for responding to customer queries quickly. This can build a stronger bond, more repeat orders, and better customer relationships.
Build brand equity and gain a competitive advantage
Extensive data collection and quality control analysis capabilities, automated alerts, and aggregated access to historical data enable unparalleled product consistency to meet your customers’ expectations and elevate your brand as the premium producer in your industry.
-
Reduce Quality Costs and Boost ROI
Your business is transformed in many ways to reduce costs across every level of your manufacturing operations if the quality is embedded within every operation. With a quality manufacturing approach, the cost of quality initiatives become a powerful tool to improve return on investment.
-
Reduce the cost of waste, scrap, and rework
Relying solely on a final inspection for quality control can be too late. If a process differs from specification anywhere in the production line, that finished product goes directly to the waste bin, accumulating the incalculable costs in rework and materials. You must monitor product and process quality in real-time at every critical operation so that plant operators can adjust and eliminate variations before they cause costly waste.
-
Turn customer complaints into customer satisfaction
When you can identify and rectify product and process variations early before your final inspection and reach to customers or if customers are having issues or concerns, then you should provide immediate access to reporting for responding to customer queries quickly. This can build a stronger bond, more repeat orders, and better customer relationships.
-
Build brand equity and gain a competitive advantage
Extensive data collection and quality control analysis capabilities, automated alerts, and aggregated access to historical data enable unparalleled product consistency to meet your customers’ expectations and elevate your brand as the premium producer in your industry.
Implement the Cost of Quality while reducing the cost to determine where to allocate resources to improve product quality
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Frequently Asked Questions
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TCoQ represents the sum of CoPQ and CoGQ, offering a comprehensive view of the total cost associated with quality in an organization. Analyzing TCoQ helps identify areas for improvement and prioritize quality initiatives for maximum return on investment.
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