John D. Mitch, Department Supervisor
FROM: John Smith, Quality Assurance
Costs of Quality
COPQ or Cost of poor quality are costs related to providing poor quality services or products. There are four categories for COPQ.
Internal failure costs: Costs related to defect found prior to customer receipt of service or product.
External failure costs: Costs related to defects located after customer receipt of service or product.
Appraisal costs: Costs sustained to decide the level of conformance to quality guidelines.
Prevention costs: Costs sustained to maintain appraisal and failure costs to a desired minimum.
The costs are part of cost of quality which is a: “methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures” (ASQ, 2016). Cost of quality allows businesses to assess and prevent actions that reduce quality or assess and maintain actions that promote quality. With the data collected from cost of quality analysis, a business/organization can properly assess and decide the potential savings to be garnered via implementation of process improvements. “Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal and external failure costs” (ASQ, 2016).
To begin, the first cost are prevention costs. Businesses and organizations incur prevention costs in order to avoid or prevent quality problems. These costs are related with the “the design, implementation, and maintenance of the quality management system” (ASQ, 2016). Businesses/organizations plan and incur prior to actual operations possibly including:
1. Service or product requirements- establishment of conditions for any incoming materials.
1. Quality planning-formation of plans for reliability, quality, production, operations, as well as inspection.
2. Quality assurance-formation and maintenance of quality systems.
3. Training-Preparation, development, plus maintenance of programs.
The next are appraisal costs. These costs are related to the monitoring and measuring of activities associated with quality. Appraisal costs are “associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications” (ASQ, 2016). Possible inclusions are:
1. Verification-meaning checking any incoming products, material, process set up against agreed conditions.
2. Quality audits- confirmation of quality systems working properly.
3. Supplier rating- evaluation and approval of suppliers services and products.
The next are internal failure costs. Business/organizations incur these costs in order to remedy any defects discovered prior to delivery or service or product to the consumer. Such costs happen as the result of failure of workers to reach design quality standards and are only detected when transferred to customers. They could include:
1. Waste-performance of superfluous work or holding of stock as consequence of poor organization, communication, or errors.
2. Scrap-Any defective material or product that cannot be sold, used, or repaired.
3. Rectification/rework-correction of errors or defective materials.
4. Failure analysis-activity necessary to establish causes of service failure or internal product.
External failure costs are “incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer” (ASQ, 2016). Some included are:
1. Servicing and repairs-of both in the field and returned products.
2. Warranty claims- any products or services replaced due to failure that are re-performed (re-sent to customer) under a guarantee.
3. Complaints- all expenses and work related to the servicing and handling of customer complaints.
4. Returns- investigation and handling of recalled or rejected products. These also include transport costs like shipping.
Real-world example of all three kinds of costs are:
1. Prevention costs- Marketing research so business can know what customers want and discard ideas customers are not interested in purchasing.
2. Appraisal costs- Measurement equipment, checking labor, setting up tests and inspections.
3. Internal failure costs- Design corrective action, supplier and operations corrective action
4. External failure costs- Penalties, warranty claims, retrofit costs, and returned goods
It is always important to understand concepts within examples. These examples often require thinking of a story that could include all the related concepts. If for example, a business produced mattresses, preventative costs would be used to make sure customers want the mattress, what area in the country/state/city there is a need for this kind of mattress, and what kind of mattress to make. Appraisal costs would include quality assurance, making sure the mattresses are up to par with the standards set by the business.
Attempting to supervise or evaluate workers that may not be doing their jobs and need to be disciplined or fired, or getting the mattress certified as high quality by an outside company/organization. Internal failure costs would be determined through evaluation of product, supplier, and employees, removing any that create failure within the product line and supply chain. External costs like warrantees and recalls, may be executed to ensure customers get their money back or get a replacement.
While the tradeoffs are several It is important to see where some costs are not as necessary as others. The first would be preventative costs. These are essential because they prevent the business/organization from spending resources needlessly without any idea of what customers want or need. Although it costs more in the beginning and the short-term, in the long run, customers are happier with a higher quality product and getting exactly what they needed, waste is limited.
Appraisal costs are not always needed. If the product or service is good, there is no need to try to fix it and often leads to other problems like tension and lack of communication in the work place. Internal failure costs are also costly and do not achieve as much as preventative costs. External failure costs however, are crucial because recalls and warranty claims are a vital aspect of customer service. Without adequate customer service, customers will leave, decreasing the chance of achieving a high profit margin.
ASQ,. (2016). Cost of Quality (COQ) – ASQ. Asq.org. Retrieved 10 May 2016, from http://asq.org/learn-about-quality/cost-of-quality/overview/overview.html
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