Cost of Quality :: Overview Click here to go to the homepage
What is it?
The concept of quality costs was first mentioned by Juran (Quality Control Handbook published in 1951) and this concept was primarily applied in the manufacturing industry. The price of nonconformance (Philip Crosby) or the cost of poor quality (Joseph Juran), the term 'Cost of Quality', referred to the costs associated with providing poor quality product or service.
Why is it important?
Juran advocated the measurement of costs on a periodic basis as a management control tool. Quality processes cannot be justified simply because "everyone else is doing them" - but return on quality (ROQ) has dramatic impacts as companies mature. Research shows that the costs of poor quality can range from 15%-40% of business costs (e.g., rework, returns or complaints, reduced service levels, lost revenue). Most businesses do not know what their quality costs are because they do not keep reliable statistics. Finding and correcting mistakes consumes an inordinately large portion resources. Typically, the cost to eliminate a failure in the customer phase is five times greater than it is at the development or manufacturing phase. Effective quality management decreases production costs because the sooner an error is found and corrected, the less costly it will be. 
When to use it?
Cost of quality comprises of four elements:
1 External Failure Cost
cost associated with defects found after the customer receives the product or service ex: processing customer complaints, customer returns, warranty claims, product recalls.
2 Internal Failure Cost
cost associated with defects found before the customer receives the product or service ex: scrap, rework, re-inspection, re-testing, material review, material downgrades.
3 Inspection (appraisal) Cost
cost incurred to determine the degree of conformance to quality requirements (measuring, evaluating or auditing) ex: inspection, testing, process or service audits, calibration of measuring and test equipment.
4 Prevention Cost
cost incurred to prevent (keep failure and appraisal cost to a minimum) poor quality ex: new product review, quality planning, supplier surveys, process reviews, quality improvement teams, education and training.
How to use it?
The most widely accepted method for measuring and classifying quality costs is the prevention, appraisal, and failure (PAF) model. Follow this five step process.
1 gather some basic information about the number of failures in the system
2 apply some assumptions to that data in order to quantify the data
3 chart the data based on the four elements listed above and study it
4 allocate resources to combat the weak-spots
5 do this study on a regular basis and evaluate your performance
cost vs quality level — Brown & Kane, Quality Cost and Profit Performance
Food for Thought !
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