The Cost of Quality

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-

https://asq.org/quality-resources/cost-of-quality

https://www.emeraldinsight.com/doi/abs/10.1108/BEPAM-09-2013-0034?mbSc=1&fullSc=1&journalCode=bepam