Cost of Poor Quality (COQ) Explained
I have seen a lot of organizations focus so much on reducing cost at the expense of so many things, including quality. Reducing operational cost is not bad in itself since the essence of a business enterprise lies in its ability to profitably generate revenues, usually at as much as possible reduced cost.
While reducing cost to ensure business profitability and continuity may not be a bad idea, doing so at the expense of quality surely is. Sure, cost may arguably be more important than quality but quality is the best way to reduce cost.
When organizations adopt 'right first time' approach which involves getting things right the first time (i.e. manufacturing defect-free products at first attempt) there wouldn't be any need for rework associated with defective products. When rework is eliminated, the cost of rework which includes labour cost, cost of raw materials for rework, time taken to rework, reduced customer confidence & employee morale will automatically be eliminated.
Note that rework is just 'ONE' among the very many side effects of focusing so much on cutting costs at the expense of QUALITY. The others are listed in this article.
The question now is, how do you build in quality into your processes to drastically reduce operational costs? The answer depends on your thorough understanding of the concept of the 'Cost of Quality (COQ)'.
What is the Cost of Quality (COQ)?
Costs of Quality are costs that are generated in the process of managing the quality of a product, which include cost incurred due to product defect prevention and/or as a result of producing defective material that either gets to the customer or captured internally.
The goal of an effective quality system is to do things right, the first time. The cost of doing things right the first time is far less than the potential cost of re-working a defective part.
There are four primary cost categories:
- Appraisal Cost
- Prevention Cost
- Internal Failure Cost
- External Failure Cost
Appraisal Costs
This cost covers inspection and testing throughout the cycle of production from inspection of raw materials received from the supplier ensuring that they meet specifications to in-process inspection (i.e ensuring that products are acceptable at each stage of production), and finished products inspection ensuring that finished products are acceptable.
Appraisal costs are costs incurred to determine the degree of conformance to quality requirements. They are costs that are associated with the suppliers’ and customers’ evaluation of incoming materials, processes, products, and services to ensure that they conform to standard specifications. Techniques used in assessing appraisal costs include:
- Inspection: This requires checking of raw materials, in-process setup, and products against agreed specifications or reference standards.
- Quality Audits: This requires confirming that the quality system is functioning correctly.
- Supplier Rating: This is simply evaluating suppliers based on the results of the assessment and approval of their products and/or services.
Prevention Costs
Prevention costs are costs incurred as a result of proper training, planning, setting up of work areas for efficiency and safety. This cost also includes conducting periodic reviews to ensure optimal efficiencies. It is encouraged that prevention-related activities receive the tangible allocation of a company’s monetary resources.
Prevention costs are incurred from preventing or avoiding quality problems. These costs are associated with the design, evaluation, implementation, and maintenance of the quality management system.
These costs are planned and incurred before actual operation. Example of prevention costs include:
- Product or service requirements: Establishment of specifications for incoming raw materials, processes, finished products, and services.
- Quality Planning: Creation of plans for quality, reliability, operations, production, and inspection.
- Quality Assurance: This is the creation and maintenance of the quality system.
- Training: Development, preparation, and maintenance of programs.
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Internal Failure Costs
Internal failures are the costs of solving an issue regarding a product before reaching the customers. Internal failure costs are incurred to correct defects discovered before the product or service gets to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are delivered to the customer. They could include:
- Waste: Performance of unnecessary work or holding of stock as a result of errors, poor materials, faulty machines which could cause delay and downtime, poor communication.
- Scrap: Defective product or material that cannot be repaired, used, or sold. E.g. crapped product runs.
- Rework or rectification: They are correction of defective material or errors. These are designs that require rework.
- Failure analysis: These are activities that requires the establishment of the causes of internal product or service failure.
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External Failure Costs
This category concerns the cost of issues resulting from the release of a defective product into the market. These may include warranty issues, product recalls, returns, and repairs. External failure costs are incurred to correct defects that have been discovered by customers as a result of the products or services failing to reach design quality standards not detected until after transfer to the customer.
These could include:
- Repairs and Servicing: These apply to both returned products and those in the field.
- Warranty Claims: These apply to products that failed products and are replaced or services that are re-performed under a guarantee.
- Complaints: These are work and costs related with handling and servicing customers’ complaints.
- Returns: This involves handling and investigating rejected or recalled products, including transport costs.
About the Author
Olanrewaju, Adebayo Bamidele is a Lead Auditor of ISO 9001, FSSC 22000 / ISO 22000, 14001 & 45001 Management Systems, Certified Six Sigma Master Black Belt (CSSMBB), process engineer, and quality management professional with strong working experience and proven skills in manufacturing excellence, ISO management systems implementation, lean / digital manufacturing, and project management.
Adebayo is a Corporate Member of American Institute of Chemical Engineers (AIChE), Associate Member, the Institution of Chemical Engineers (IChemE), Corporate Member, Nigerian Society of Engineers (NSE), Corporate Member, Nigerian Society of Chemical Engineers (NSChE), Associate Member, Nigerian Institute of Management (NIM), and Associate Member, Institute of Strategic Management of Nigeria (ISMN).
He is an author of over 15 books and has published over 45 online courses on various e-learning platforms including Udemy, Alison, Learnformula & Study Plex.
You can reach him, here.
