Calculating the Cost of Quality

In this lesson, you’re expected to learn about:
– the various definitions of quality
– how to calculate the cost of quality

Quality has many definitions because it is viewed differently from many perspectives.

Judgment-based criteria are synonymous with superiority or excellence, which is abstract, subjective, and difficult to quantify.

Product-based criteria assume that higher levels or amounts of product characteristics are equivalent to higher quality and that quality has a direct relationship with price.

User-based criteria define that quality is fitness for intended use or how well a product performs its intended function. It is basically dictated by user wants and needs.

Value-based criteria focus on the relationship of usefulness or satisfaction of a product or service to price. This means a customer can purchase a generic product at a lower price if it performs the same way as the brand-name product.

Manufacturing-based criteria mean conformance to specifications (e.g., engineering or manufacturing) that are important to customers. Taguchi opposes the manufacturing-based definition of quality due to built-in defects to be produced at a higher cost.

Customer-driven quality is meeting or exceeding customer expectations. This definition is simple and powerful; hence, most companies use it.

A Japanese professor, Noriaki Kano, suggested three classes of customer requirements in understanding customer’s needs in the marketplace: dissatisfiers, satisfiers, and delighters.

– Customers are dissatisfied when the features that they assumed or expected are not present in a product.
– Customers are satisfied when the features that they wanted are present in a product, although those features are not expected.
– Customers are delighted when the features that they did not assume or expect are present in a product because the features exceed their expectations.

Critical-to-quality (CTQ) is a quality measurement technique that dictates a product’s output specifications in terms of a customer’s needs, wants, and expectations, whether the customer is internal or external to an organization.

CTQ focuses on customer requirements, design and test parameters, mistake-proofing, quality robustness, and control charts.

Calculate the Cost of Quality

The cost of quality (COQ) means the price of non-conformance to standards, policies, or procedures. COQ is the cost of doing things wrong, which results in poor quality of products or services.

COQ is really the cost of poor quality. There are four categories of COQ which are:

1) Prevention Costs

Prevention costs are associated with reducing the potential for producing defective products or rendering poor-quality services in the first place.

Examples include quality improvement programs, employee training and education, investment in equipment and facilities, operator inspection costs, supplier ratings, supplier reviews, supplier certification, product design reviews, pilot projects, prototype tests, vendor surveys, quality-related design costs, purchase-order technical data reviews, and quality department review costs.

2) Appraisal Costs 

Appraisal costs are associated with evaluating products, processes, parts, or services.

Examples include material testing, product testing, production line inspection, quality checks, purchasing appraisal costs, qualifications of supplier product, equipment calibration, receiving and shipping inspection costs, production tests, and product quality audits.

3) Internal Failure Costs 

Internal failure costs are associated with producing defective products or rendering poor-quality services before delivering them to customers.

Examples include repair, redesign, reinspection, rework, retesting, sorting, Scrap, waste, machine downtime, employee fatigue, and employee carelessness.

4) External Failure Costs 

External failure costs are associated with correcting defective products or poor-quality services after delivering them to customers.

Examples include product returns, product warranty charges, product recalls, liability suits resulting from damage to customers, field service staff training costs, lost customer goodwill, and poor reputation to a firm.

A small investment in a prevention category will reduce many dollars of internal and external failure costs, which in turn will improve overall product or service quality many times over.

Quality costs can be reported as an index—the ratio of the current value to a base period value—and expressed as a percentage or as a fraction. The quality cost index increases the understanding of the underlying cost data. Some common measurement bases include direct labor cost, manufacturing cost, sales dollars, and units of production.

[Optional] Cost of Quality 
Jim Rohn Sứ mệnh khởi nghiệp