Due to today's rapid evolution of food trends and a social media spotlight on all manufacturing brands, quality management is critical to attracting and retaining customers. Not even well-known, longstanding businesses have the reputation insulation they may have had several years ago. But how much does it cost to ensure quality, and what can businesses do to minimize those costs?
How Significant is the Cost of Quality (CoQ)?
"Money is really the only language executives understand. By taking quality problems and concepts and expressing them using a scale of dollars, you get them to listen.”
- Denis Devos | Devos Associates, American Society of Quality Fellow
Indirect manufacturing costs, including quality management, can impact 8 to 12 percent of total operations costs. Developing a holistic understanding of an organization’s cost of quality is no simple task.
For example, companies often mistakenly assume that the scrap value of a product is simply the value of the material lost or the cost of making that material. In reality, this is a complex calculation that requires companies to take into consideration both direct and indirect manufacturing costs in order to have an accurate perspective of their company’s unique CoQ. Without thoroughly understanding their cost of quality, companies can’t accurately understand or budget for the benefits of quality improvements
The Cost of Quality Defined
The cost of quality refers to the total cost incurred by a company to ensure the quality of its products or services. These costs can be divided into four categories, crucial for plant management to understand to remain competitive in the market.
Cost of good quality
Prevention costs are costs incurred to prevent defects from occurring in the first place. Examples include employee training, equipment maintenance, and quality planning.
Appraisal costs are costs incurred to evaluate the quality of products or services. Examples include quality inspections, testing, and audits.
Cost of poor quality
Internal failure costs are a result of defects that are caught before the product is shipped to the customer. Examples include rework, scrap, and machine downtime.
External failure costs are a result of defects that are not caught before the product is shipped to the customer. Examples include warranty claims, customer returns, and lost sales.
Underestimating the Cost of Poor Quality (CoPQ)
Unfortunately, companies often underestimate the actual cost of poor quality. This mistake might be best represented by an example of a reasonable, yet costly example of overlooking certain costs.
A plastic extrusion company determined their cost of poor quality (CoPQ) to be $300 per month or $3,600 per year based on the rate of customer rejections and internal re-runs. According to their math, the rework of molding and paint defects amounted to 2.5% of their sales.
However, the company failed to factor in essential details, such as the cost of rework, machine charge time, setup time, operator pay, additional inspection and packaging costs, and opportunity cost. When these factors were added up, the average cost of a re-run was $4,870, significantly higher than their initial CoPQ estimation. The company's annual CoPQ turned out to be $233,000 per year, not including the costs of customer annoyance and staff time spent on return merchandise authorizations and other administrative work.
Relevant Factors When Calculating CoPQ
In the webinar Measuring the Real Cost of Quality: Methods, Models & Tips, Denis Devos, an American Society for Quality Fellow and automotive industry expert, takes a deep dive into the real cost of quality. The webinar teaches industry leaders how to develop a model to quantify their CoQ, including the true costs of poor quality and opportunity costs. It also covers why failures erode production capacities and — most importantly — tips for how to reduce your cost of quality.