Cost of Quality
Operational Excellence has quality at its heart...
It also has efficiency, effectiveness and economic viability - which is why reducing the the Cost of Quality should be a goal in any organisation.
But what does this mean? Surely we don't want to compromise quality for the sake of short term speed or profitability? Well no, or course not, that's a route to disaster, so let's define what we mean by Cost of Quality and what we are actually trying to achieve.
Cost of quality is the total cost of efforts to assure good quality, prevent and detect poor quality and efforts to rectify failures.
Cost of Quality (CoQ) is the total cost of an organisation’s efforts to assure good quality of its products and services plus the costs that are incurred to rectify faults and problems that occur due to the poor quality of its products, services and operations.
The Total Quality Cost comprises four Quality cost categories; Prevention, Appraisal, Internal Failure, External Failure
External failure costs are often seriously under-estimated or ignored when addressing investments in quality and RoI. In addition many of the internal failure costs (particularly inefficiencies) are ‘hidden’ and not considered. Where true costs are taken into account it is overwhelmingly obvious that prevention is better than cure. (Juran)
As a general rule, quality costs increase as the detection point moves further along the value chain. If non-conformances occur, it is least expensive to detect them early on AND immediately after occurrence. Progressively later non-conformances lead to losses incurred from additional work. The highest quality costs occur when non-conformances are detected by customers. As a result the scale of costs in an organisation before an Operational Excellence program are heavily weighted towards dealing with external and internal failure costs.
Cost of Quality Model
The model shows that whilst the costs of Appraisal and Prevention increases to drive conformance, this is more than off-set by the reduction in both Internal and External failure costs. CoQ is lowest when conformance is 100%. At this point, the CoQ equals the Cost of Appraisal and Prevention. Prevention costs should therefore be viewed as an investment in cost-avoidance.
COPQ costs (Internal & External failures) occur whenever there are activities or processes that do not meet agreed performance and/or expected outcomes.
If all tasks were performed without deficiency and the processes operated perfectly, these costs would almost completely disappear.
Shifting the balance
As part of Operational Excellence, the organisation must understand its current Cost of Quality. Any organisation should then drive efforts to shift the relative cost of quality across the four cost categories so that over long-term the costs are overwhelmingly related to Prevention. This is done sequentially – addressing causes of the highest impact failures as a priority:
Understand the root causes of External Failures
Identify (make visible) the ‘Hidden Factory’ of wastes and Internal Failures
Identify preventive activities to correct and solve these issues
Re-evaluate the level of appraisal required
Focus on Prevention; Assurance and Mistake-proofing
How can INCIGHT help ?
We offer the following services to help you;
Cost of Quality assessment
Recommendations and Guidance
Improvement Project Management
Reducing the Cost of Quality is one of the best ways to increase profit
Prioritise reduction of Internal and External failure costs
Prevention costs should be viewed as an investment in cost-avoidance