Cost of quality is
a methodology that allows an organization to determine the extent to which its
resources are used for activities that prevent poor quality products/ services. The
term refers to the costs that are incurred to prevent, detect and remove
defects from products.
Quality
costs are categorized into four main types. These are:
1.
Prevention
costs
2.
Appraisal
costs
3.
Internal
failure costs and
4.
External
failure costs
In today’s
environment, many industries/laboratories are challenged to maintain or
increase their quality but by lowering their overall costs. It is considered to
be a critical success factor for achieving competitiveness. The reduction
of quality costs is only possible if they are identified and measured.
However, Cost of
Quality (COQ) = conformance costs + non-conformance costs.
Cost of conformance-
is the price paid for prevention of poor quality.
Example- inspection
and quality appraisal
Cost of non-conformance-
is the cost of poor quality caused by product and service failure
Example- rework and
returns
Limitations
associated with COQ-
There are a few
limitations associated with a COQ concept.
1. COQ Data is only a
finance-board for the current performance and not a improvement by itself.
Hence in terms to improve, it still need to be analyzed for root cause of a
problem and then take action to fix those problem.
2. It is difficult to
identify and quantify ‘hidden’ failure costs associated with poor quality such
as customer complaint, equipment incidents, adverse events resulting from
inaccurate laboratory results, loss in customer confidence, deterioration in
reputation.
Cost
of quality –
Do it right at first
time! Conformance must be achieved the first time at each step in the value
stream or else costs of quality begin to accrue. In order to correct or subside
a single mistake/unacceptable result, much of rework is involved. It leads to
waste of consumable, time and energy. At the end, a failure to meet an
expectation of the physician or patient is a failure to conform to their
requirements.
Crosby defines
quality as ‘conformance to requirements’ and says this definition is necessary
to allow us to measure quality.
Types
of cost
|
Description
|
Elements
|
Prevention
cost
|
Result from activities that keep
defects from ever occurring
|
• Planning for quality
• Quality improvement team
meetings
• Quality education and training
|
Appraisal
cost
|
Result of activities that are
designed to identify deficiencies at any point along the value stream and
maintain high quality levels
|
• Auditing products, processes, or
services
• Calibrating measuring and test
equipment
• Validating instruments
|
Failure
cost
|
||
Internal failure
costs
|
Accumulated as defects are found
and corrected before results are delivered to physicians and patients
|
• Repeat testing
• Lost specimens
• High inventory due over ordering
of supplies
• Data entry error
|
External failure costs
|
Accumulate as corrections are made
to defects found after delivery of testing results to physicians and
patients
|
• Unacceptable turnaround time for
test results
• Revised reports
• Recalled results
|
Typical
size of various cost element-
Prevention costs
|
1%
|
Appraisal costs
|
4-6%
|
Internal failure
costs
|
10-12%
|
External failure
costs
|
10-15%
|
The total quality
costs 25-35 % of turnover
|
|
Visible
and Hidden costs-
Failure costs are
like an iceberg. Some costs are easy to see and recognize, and some are hard to
see and identify (like the hidden part of an iceberg). Some of these hidden
costs are found in functions that support the value stream such as failures
associated with billing, resource planning, supply chain, information
technology, etc. It is important that these functions are recognized for
their contributions to the value stream and to the costs of quality.
Example of COQ in laboratory-
Let's try
to calculate COQ in a clinical laboratory of healthcare center. The cost
price quoted here are just an imaginative and approximate prices and the data
does not belong to any laboratory as such. So let's have an example-
Cost
of good quality
|
Cost in AED
|
|
Prevention costs of quality (COQP)
|
||
Preventive
maintenance and calibration of laboratory equipment and instruments
|
37,885.51
|
83,810..12
|
Office supply costs
for quality related preventive activities
|
40,382.81
|
|
Total quality
assurance and competence training and continuing education for laboratory
staff
|
5,541.80
|
|
Appraisal costs of quality (COQA)
|
||
Cost of quality
control and calibration reagents
|
42,593.66
|
85,400.32
|
Annual
accreditation and inspection costs
|
26, 871.68
|
|
External quality
assurance proficiency testing
|
11,289.27
|
|
Other process
improvements and quality activities
|
4,645.71
|
|
Cost of poor quality
|
||
Internal costs of poor quality (COQI)
|
||
Costs of poor
inventory management (wasted reagents)
|
11329.66
|
21, 131.57
|
Costs of quality
control/ calibration failures/ repeats of all analyses
|
8509.18
|
|
Estimated data
entry errors and rework cost
|
1,112.77
|
|
Processing and
accessioning errors and rework costs
|
179.952
|
|
External costs of poor quality (COQE)
|
||
Estimated costs of
pre-analytical errors
|
6,731.69
|
12,905.16
|
Estimated costs
of analytical errors
|
2,141.07
|
|
Estimated costs of
post-analytical errors
|
4,032.40
|
|
For the
purpose of this analysis, we limited external failure costs to the cost of
identifying and correcting errors based on customers services concern forms
received from clients.
So we can
conclude that approximately,
Total COQ
was spent on costs of good quality= 83% (41% prevention costs and 42% appraisal
costs), and
COQ was
spent on costs of poor quality= 17% (11% internal failure costs and 6% external
failure costs).
Benefits of COQ
1. This
speaks language of management- Finance management !😄
2.
We can prioritize quality improvement projects
3.
It helps identify waste in the system
4.
Help identify cost reduction target
An illustrative example-
Quality
cost data of a medium sized company in India, had the following figures-
Sales :
Rs. 51.00 (lakhs)
Returns:
Rs. 2.00 (lakhs)
Hence net
income of the company is : Rs. 51.00 – Rs. 2.00 Lakhs
: Rs. 49.00 Lakhs.
Manufacturing
and distribution costs are as follows-
Raw
material and consumables :
Rs. 13.15 L
Other
expenses like Calibration : Rs.
15.00 L
Labour
expenses
: Rs.
10.05 L
Hence, Total Expenses
:
Rs. 38.20 L
COPQ
elements are as follows-
Prevention
costs
: Rs. 1.20 L
Appraisal
Costs
: Rs. 3.75 L
Total Cost of
conformance
: Rs. 4.95 L
Internal
Failure costs
: Rs. 5.05 L
External
Failure costs
: Rs. 4.30 L
Total cost of
non-conformance : Rs. 9.35 L
Hence, COPQ or
TCOQ = COC +
CONC
= Rs. 14.30 L
Ø To find relative
contribution of various cost elements against overall COPQ-
Preventive
cost : (1.20/14.30) X 100
= 8.4%
Appraisal
cost :
(3.75/14.30) X 100 =26.22%
Internal
Failure : (5.05/14.30) X 100
=35.31%
External
Failure : (4.30/14.30) X 100
=30.07%
COC or
COQ
: (4.95/14.30) X 100 =34.62%
CONC
: (9.35/14.30) X 100 =65.38%
COPQ= COC
+ CONQ = 100 %
Ø To find
COC, CONC and COPQ % over sales.
COC % over
sales : (4.95/51.0) X 100 = 9.71%
CONC %
over sales : (9.35/51.0) X 100 =18.33%
Therefore,
COPQ = COC + CONC = (14.3/51.0) X 100 = 28.04%
Ø To find
ratio of COC, CONC and COPQ to profit
Now
profit = Net Income – All Expenses
= (Sales-Return) – Expenses
= (51.0 – 2.0) – 38.20 Lakhs
= 10.8 Lakhs
Ratio of
COC to profit = (4.95/10.8) = 0.46
Ratio of
CONC to profit =(9.35/10.8) = 0.87
COPQ= COC
+ CONC to profit
= (14.3/10.8) = 1.32
Advantages of using quality- cost for management-
1. Reducing
COPQ is one of the best ways to increase a company profit.
2.
Provides manageable entity and a single overview of quality
3.
Priorities problems and provides a means to measure
change/improvement.
4.
Provides a means to correctly distribute controlled quality
costs for maximum profits.
5.
Promotes the effective use of resources
6.
Provides incentives for doing the job right at first time
and every time.
Hope you
enjoy this article and will help you all in your organization to calculate cost
of quality.
Enjoy
reading and if helpful please implement it!
Reference-
