Cost of Quality

Cost of quality is a measure to draw attention of top Management,who has a constant eye on the bottom line and understand the language of money better than indices,percentages,volumes of rework and rejections.Once this cost is brought to the notice of top Management,this will ensure how money is wasted on avoidable operations because of non conformance to quality.Hence they get interested in reducing the cost of improving Quality.Cost of quality includes compilation of all expenses,a company is forced to incur, as a result of failure to meet quality requirements.There are two types of expenses. One type of expense the company incurs willing to achieve Quality.This is not undesirable.In fact it is essential for achieving Quality.The other type is not desirable. The company does not incur the expenses willingly but is forced to spend when something goes wrong.This is the type of expenses that can be and should be saved.

Cost of Quality is a measure of quality. the importance of measurement cannot be overemphasized.Measurement is also useful and essential.Without measurement one cannot even know if there is improvement or not.Measurement creates an awareness of the problem.Measurement leads to analysis and analysis can lead to problem elimination.In fact measurement is the starting point for any improvement.

Components of cost of quality:Cost of quality can be categories into:
1.Cost of Prevention
2.Cost of Appraisal
3.Cost of internal Failures.
4.Cost of External Failures.
The first two are incurred for achieving Quality.The other two are incurred because of failure on part of someone or other.
Cost of Prevention:
1.Market Research
2.Product qualification
3.Process validation
4.System development
5.GMP
6.Quality Education
7.Any other preventive action.
Each of the above can help an organization in preventing problems of quality>hence these form part of Cost of Prevention.

Cost of Appraisal-These include the following:
1.Incoming material Testing
2.In-process Quality control
3.Product testing and Inspection.
4.Quality audits
5.Field Testing.

The above operations help an organization in finding out if its products and services meet the predetermined requirements.

Cost of Internal Failures:
When a product or services fails to conform to requirements,an organization has to spend on correcting the situation.All costs incurred due to such failures,if detected internally,fall under this category.This item includes:
1.Rejection.
2.Rework or reprocessing
3.Re-inspection
4.Scrap.
5. machine downtime.
6.Breakdown maintenance
7.Problem Solving.
8. Expediting.
9.Overdue accounts receivables.
10.Excess inventory.
11.Overtime.
All these are avoidable expenses.If there are no failures,there would be no expenses on any of these counts.

Cost of External failures:When internal failures are not addressed,the organizations has to incur much expenditure to take care of the consequences. All these fall under the category of cost of external failures.prominent under these categories are:
1.Complaint handling
2.product liability cost.
3.Return products
4.Unplanned field service.
5.Recall costs.
In addition to these tangible costs,several intangible costs,difficult to quantify fall under this cateogy.These are all the same very important:
1.Loss of customer goodwill.
2.Bad Publicity
3.Fall in Market share
4.Low employee Morale.

Interrelation of these components:
External failures result from failure to detect errors or defects internally.High cost of external failures would indicate inadequate testing. Thus if cost of appraisal is increased,part of external failures can be brought into category of internal failures.This reduces the expenses as a failure detected in house costs much less to correct than failure detected by customer.Appraisal cannot reduce percentage failure rate,it can only assess If one has reduce failure rate,one has to analyse the problem,arrive at root cause and eliminate the same..In short prevent defects from recurring.Prevention should be emphasized at all stages of operation.
To make interrelationship between components more clear,let us assume cost of Quality of the company at the start of Quality improvement process to be as follows:

Cost of Prevention:        2%
Cost of appraisal  :        4%
Cost of internal Failure:  4%
Cost of External failures:10%
Total Cost of Quality:     20%
When the management sees that the cost of external failures is too high,it increases testing to catch failures in house.If it increases inspection by 50%,result is external failures are now detected internally.So the figures now stands at:

Cost of Prevention:        2%
Cost of appraisal  :        6%
Cost of internal Failure:  5%
Cost of External failures: 5%
Total Cost of Quality:     18%.

But this can be only temporary measure,so the emphasis is now on prevention.Once these preventive measures are in place,the cost of Quality picture can be transformed to something like this:

Cost of Prevention:        3%
Cost of appraisal  :        6%
Cost of internal Failure:  2%
Cost of External failures: 1%
Total Cost of Quality:     12%.

Once the processes become stabilize, the cost of appraisal can also be reduced and picture looks like this;

Cost of Prevention:        3%
Cost of appraisal  :        3%
Cost of internal Failure:  2%
Cost of External failures: 1%
Total Cost of Quality:     9%.

For company  with sale of over 50 cr, these savings will mean an additional of over Rs.5 cr to the profit before tax with very little investment on prevention efforts.

Investment in Quality Improvement yields better returns than any other investment.