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Origin of Quality Cost Measurements

In 1950s and 1960s, some enlightened companies began to evaluate and report quality costs for the following reasons:

  • Products became increasingly more complex

  • The customer expectations of products became more sophisticated

  • Customers demanded service after the sale and expected failure remedy

  • Both supplier and customer costs expanded due to labor and maintenance

  • Technical specialists were added to make improvements

  • The management alternatives needed to be in monetary terms

What resulted was a method of defining and measuring quality costs and reporting them on a regular basis (monthly or quarterly), the status of cost control efforts and, identifying opportunities for reducing costs by systematic improvements, since the cost of poor quality are high (some authorities say 15% to 25% of the total cost of sales). The opportunity for improvement should easily capture the attention of management and six sigma improvement teams. The costs of poor quality (COPQ) are those costs associated with providing poor quality products or services.

There are four categories of costs:

Internal :

(Costs associated with defects found before the customer receives the product or service),

Failure costs :

(Costs associated with defects found after the customer receives the product or service)

Appraisal costs :

(Costs incurred to determine the degree of conformance to quality requirements)

Prevention costs :

(Costs incurred to keep failure and appraisal costs to a minimum)

The failure costs contribute major expenses whereas, appraisal cost is the second level. When compared for expenses, Prevention costs have least expenses. The cost of activities specifically designed to prevent poor quality in products or services.

Appraisal costs:

The costs, associated with measuring, evaluating, or auditing products or services to ensure quality standards and performance requirements.

Failure costs:

The costs resulting from products or services not conforming to requirements or customer/user needs i.e, the costs resulting from poor quality. Failure costs are divided into internal and external failure cost categories.

Internal failure costs:

Failure costs which occur prior to delivery or shipment of the product, or the furnishing of a service, to the customer.

External failure costs:

Failure costs which occur after shipment of the product, or during or after furnishing a service, to the customer. Initially, managers discover that the prevention costs are too low and both internal and external failure costs are too high. Often, failure costs will exceed the appraisal costs as well. Even the relationship between internal and external failure costs may point to changes in planning or product design. The interrelationship of quality cost categories varies widely depending upon the nature of product lines and processes utilized by a company.

Quality Cost Improvement Sequence

  • Define the company quality goals and objectives

  • The relative position desired among competitors

  • The type of long-term quality reputation desired

  • Translate the quality goals into quality requirements

  • Outgoing quality levels required

  • Specific types of controls required

  • Special tests required