Costs of Quality (COQ)
As part of TQM, many companies prepare costs of quality reports. Costs of quality
reports categorize and list the costs incurred by the company related to quality. Once
managers know the extent
...
Costs of Quality (COQ)
As part of TQM, many companies prepare costs of quality reports. Costs of quality
reports categorize and list the costs incurred by the company related to quality. Once
managers know the extent of their costs of quality, they can start to identify ways for the
company to improve quality while at the same time controlling costs.
Quality-related costs generally fall into four different categories: prevention costs,
appraisal costs, internal failure costs, and external failure costs. These categories form
the framework for a costs of quality report. We’ll briefly describe each next.
Prevention Costs
Prevention costs are costs incurred to avoid producing poor-quality goods or services.
Often, poor quality is caused by the variability of the production process or the
complexity of the product design. To reduce the variability of the production process,
companies often automate as much of the process as possible. Employee training can
help decrease variability in nonautomated processes. In addition, reducing the
complexity of the product design or manufacturing process can prevent the potential for
error: The fewer parts or processes, the fewer things that can go wrong. Frequently,
companies need to literally “go back to the drawing board” (the R&D and design stages
of the value chain) to make a significant difference in preventing production problems.
Appraisal Costs
Appraisal costs are costs incurred to detect poor-quality goods or services. Intel incurs
appraisal costs when it tests its products. One procedure, called burn-in, heats circuits
to a high temperature. A circuit that fails the burn-in test is also likely to fail in customer
use. Nissan tests 100% of the vehicles that roll off the assembly lines at its plant in
Canton, Mississippi. Each vehicle is put through the paces on Nissan’s all-terrain test
track. Any problems are identified before the vehicle leaves the plant.
Internal Failure Costs
Internal failure costs are costs incurred on defective units before delivery to
customers.
For example, if Nissan does identify a problem, the vehicle is reworked to eliminate the
defect before it is allowed to leave the plant. In the worst-case scenario, a product may
be so defective that it cannot be reworked and must be completely scrapped. In this
case, the entire cost of manufacturing the defective unit, plus any disposal cost, would
be an internal failure cost.
External Failure Costs
External failure costs are costs incurred because the defective goods or services are
not detected until after delivery is made to customers. For example, Maytag had to
recall 250,000 washing machines because water was leaking on the electrical
connections, which had the potential to cause an electrical short and ignite the circuit
boards.9 Along with incurring substantial cost for repairing or replacing these recalled
washers, the publicity of a defect such as this could cause significant damage to the
company’s reputation. Damage to a company’s reputation from selling defective units to
end customers can considerably harm the company’s future sales. Unsatisfied
customers will avoid buying from the company in the future. Even worse, unsatisfied
customers tend to tell their neighbors, family, and friends about any poor experiences
with products or services. As a result, a company’s reputation for poor quality can
increase at an exponential rate. To capture the extent of this problem, external failure
costs should include an estimate of how much profit the company is losing due to
having a bad reputation for poor quality.
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