God, grant me the serenity to accept the things I cannot change, The courage to change the things I can, And the wisdom to know the difference. (Serenity Prayer, Reinhold Niebuhr)

Total Cost of Quality

The concept of quality costs is a means to quantify the total cost of quality-related efforts and deficiencies (Wikipedia). The cost of poor quality is the annual monetary loss of products and processes that are not achieving their quality objectives. The cost of poor quality is important in reducing costs and customer dissatisfaction. It can also be referred to as the cost of poorly performing processes (COP) (Wikipedia, Gryna 2007).

Categories of Quality Costs

External Failure Costs

External failure costs are associated with deficiencies that are found after the customer receives the product. Also included are lost opportunities for sales revenue.

Failure to meet customer requirements and needs
Lost opportunities for sales revenue

Internal Failure Costs

Internal failure costs are the cost of deficiencies discovered before delivery that are associated with the failure to meet explicit requirements or implicit needs of customers. Also included are avoidable processes losses and inefficiencies that occur even when requirements and needs are met. Internal failure costs consist of: (1) the cost of failure to meet customer requirements and needs and (2) the cost of inefficient processes.

Failure to meet customer requirements and needs
Cost of inefficient processes

Appraisal Costs

Appraisal costs are incurred to determine the degree of conformance to quality requirements.

Prevention Costs

Prevention costs are incurred to keep failure and appraisal costs to a minimum.

The compilation of prevention costs is initially important because it highlights the small investment currently made (usually) in prevention activities and suggests the potential for an increase in prevention costs to reduce failure costs. One of the issues in calculating the cost of poor quality is how to handle overhead costs. Three approaches are common: include total overhead using direct labor or some other base, include variable overhead only (the usual approach), or do not include overhead at all.

Hidden Quality Costs

The cost of poor quality may be understated because of costs that are difficult to estimate. “Hidden” costs occur in both manufacturing and service industries and include the following:

For manufacturing organizations the annual cost of poor quality is about 15% of sales income, varying from about 5 to 35% depending on product complexity. For service organizations the average is about 30% of operating expenses, varying from 25 to 40% depending on service complexity.