What is Cost of Quality (CoQ) and How it Works

POST on Process Improvement by Sonia Pearson

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In a way, Cost of Quality (CoQ) is a confusing term. To anyone new to it, it sounds like a term that refers to the cost you incur to produce a quality item. However, the simplest definition of the term would be “The cost of failing to produce quality.”

Any manager or supervisor will identify with this – and it covers both internal and external products and services. If your accountant fails to get the books right – he or she has to go back to look for errors. If your production staff fails to adhere to standards, the products must either be trashed or reworked. If your service business fails to deliver according to expectation, it will have to make it up to the client – and possibly face damage to its reputation.

Expensive? You bet! It applies to ALL businesses and business functions, be they large or small. Correcting quality deficiencies means redoing, reworking, retesting, or correcting. You’re doing twice the work for the same result: quality.

How our Perception of Cost of Quality Has Evolved

The common perception is that producing better quality will increase costs. But thinkers like Joseph Juran and Armand Feigenbaum questioned this notion. Juran was an engineer, and Feigenbaum is the father of Total Quality Management (TQM). Despite their differing backgrounds, they came to the same conclusion: the benefits of quality exceed the costs of quality.

Feigenbaum put forward the idea that producing quality is the responsibility of every single person in an organization.  This expanded the concept of quality to include more than just products and services that a company delivers to outside parties. Entrepreneurs quickly realized the validity of the notion that every single activity a business engages in should be of a high standard.

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In 1979, businessman and author Phillip Crosby published his seminal work “Quality is Free,” forever changing the way we look at quality. So, how should we perceive the cost of quality? As with so many questions, the answer is: “That depends on the situation.”

There are Three Ways of Perceiving Cost of Quality

It should be noted that quality isn’t an objective, defined measurement. Rather, it’s completely subjective – everyone has their own view of what counts towards a product’s quality.

The following are 3 popular ways of perceiving quality – while the three can be contradictory towards each other, they can still all be right at the same time.

“Quality Costs More”

There certainly are instances where this is true. If you were to buy solid wood furniture, it would cost more than furniture made of chipboard with a wood veneer finish. The former is durable and would be handed down through generations. The latter may look almost as good, but will only last a few years. But the makers of solid wood furniture must compete with the makers of chipboard items, so although their product is better, they may be making less profit than their counterparts who produce cheaply and sell cheaply.

“You Save More Than You Spent When You Spend on Improved Quality”

This is a very widely held belief, and although it seems to contradict the first point of view we cited, it can be perfectly true. Let’s return to our furniture manufacture example.

No matter whether you are producing solid wood or chipboard furniture, there are certain standards that are non-negotiable. Wonky tables and chairs just aren’t up to standard, and if your firm were to produce them, three expensive scenarios might ensue:

  • You supply the product, but your clients are not satisfied. They return it and demand credits or replacements, and your reputation suffers.
  • You scrap the product and start from scratch. All the materials that went into the first attempt are utterly wasted.
  • You re-work the product to make it acceptable to your clients. It costs less than scrapping, but extra hours are needed to fix the problem.

“Quality Only Costs More If You Don’t Get It Right the First Time”

This view of Cost of Quality is also true – at least, under the right circumstances. For example, although both our furniture manufacturers use different materials, they have a quality standard in common: a functional piece of furniture. If either of them were to make errors during production, the furniture they produced would no longer be functional.

This brings us back to the three scenarios previously outlined: supply the product and risk your reputation, scrap it and lose the materials, or rework it and spend time. All of these options have costs.

How are Quality Costs Categorized?

At this point, we’ll depart from our example. Let’s ignore the difference between using good, high-quality materials versus lower-quality materials. We’ll assume that both our companies are trying hard to produce an acceptable product. What are the costs they incur if they fail to do so?

  1. External Failure Costs

The client receives a faulty product. Now, the manufacturers must spend time handling complaints, and time is money. They may find that its necessary to replace the faulty item. That’s an additional cost. Then there are warranty claims and, in a worst-case scenario, lawsuits and product recalls.

Unquantifiable costs are also part of the package. You may have replaced a faulty product, but what will the initial failure cost you in terms of new business and referrals?

  1. Internal Failure Costs

Internal failure costs are those that are picked up before the product goes to the consumer. Bear in mind that this covers services and functions where the end customer is another person or department who works in the business.

Before the person or department responsible for the product can hand it over to end users, it must scramble to rework, remake, or correct.

  1. Inspection Costs

Because quality isn’t always quite what it should be, the business incurs extra costs to check, test, inspect, or audit. You may need to recalibrate equipment, and again, that means additional costs that eat into the bottom line. The better the finished task, the lower inspection costs will be. Just think about it: finding a fault is easy enough, but tracking it all the way back to the source and correcting it takes much more effort.

  1. Prevention Costs

You’ve found a fault! The next steps are to find out how it happened and prevent it from happening it again. Sounds easy? In practice, it could mean a full review of a product and how it is produced. You might have to re-evaluate your suppliers. You may need to retrain your staff. Or perhaps the process is at fault and should be unpacked and revisited.

The Bottom Line: Quality-Related Workflows Matter to You!

All a business’ outputs are the product of workflows. And with a TQM approach, every task and every workflow must contribute to quality. Any hitch, hang up, or bottleneck could prove costly in terms of quality – and if everything seems to run smoothly until you hit a quality issue, the workflows may need to be revisited and redesigned.

Analysing and improving workflows is part of an ongoing journey towards improved quality and efficiency that ultimately contributes to profit. It’s a process of continuous improvement, and there is no business that doesn’t have room for at least some improvement.

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