A Simplified Guide to Total Cost of Quality

Today we live in an extremely competitive business climate. The consumer has more access to multiple options for almost any type of product the market can offer. A company has to stay price competitive, listen to its customers, and provide them with what they need – all this while ensuring that the quality of their products and services stay top-grade and dependable.

The Concept of Cost of Quality

The concept of quality was first applied in the manufacturing industry and referred to the costs that were associated with providing poor quality products and/or services.

Measurement of costs should be used regularly as a management control tool. Quality processes should not be justified as being done because everyone else is doing it, but because the Return on Quality (ROQ) has a dramatic impact on companies as they mature.

According to research, the cost of poor quality can range from anywhere between 15% and 40% of business’s costs (Returns, Complaints, Reduced Service Levels, Loss of Revenue, or Rework). Sadly, most businesses do not know what their COQ (Cost of Quality) is because they do not have reliable statistics.

Large amounts of resources in terms of money, time, and employees are required to find and correct mistakes. Costs associated with failure at the customer stage are around five times greater than they are at the development or manufacturing stages.

Effective quality management decreases production costs because as soon as an error is found, it can be corrected. When mistakes are caught in this stage the incurred costs are drastically less.

What is Total Cost of Quality

Cost of quality is a methodology used by organizations to measure the extent to which its resources are being used to prevent poor quality and maintain/appraise the quality of those products/services that result from internal and external failures.

In other words, Total Cost of Quality represents the difference between the actual cost of a product and what the reduced cost would be if there were no manufacturing defects or product failures.

The Total Cost of Quality always take two major categories into consideration. These two categories are:

  • Cost of Poor Quality (CoPQ)
  • Cost of Good Quality (CoGQ)

 

Add the CoPQ and the CoGQ of your product and what you get is the Total Cost of Quality (TCOQ). When represented as a mathematical formula, TCoQ = CoPQ + CoGQ.

The end-goal of implementing Cost of Quality analysis is to maximize the quality of your product while at the same time, minimize costs. This analysis provides all the detailed information required to accurately evaluate the effectiveness of the organization’s quality systems, identify problem areas, and find opportunities for improvement.

What is Cost of Poor Quality?

Cost of Poor Quality (CoPQ) is the cost associated with providing inferior quality products/services. There are two main categories included under CoPQ:

Internal Failure

Costs associated with defects found before the customer receives the product or service.

External Failure

Costs associated with defects found after the customer received the product or service.

Minimize the Cost of Poor Quality

Internal failure costs are sustained to remedy defects in products that are found before the product reached the customer. These could include Waste, Scrap, Rework and Failure Analysis.

External product costs are sustained to remedy defects in products that are found after the product reaches the customer. They might include Service and Repair Costs, Warranty Claims, Customer Complaints, Material Returns, and Shipping Damages.

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Cost of Good Quality

Cost of Good Quality or CoGQ is the cost associated with providing good quality products and/or services. There are two main categories included under CoGQ:

Appraisal Costs

Costs incurred to determine the exact degree of conformance a product/service to quality requirements.

Prevention Costs

Costs incurred to prevent/avoid quality problems and are associated with the design, implementation, and maintenance of a Quality Management System (QMS)

Appraisal Costs

Appraisal costs include costs associated with the evaluation of processes, products, services, and purchased material.

These costs might be incurred by the supplier or the customer and include: Incoming material inspection, process control, quality audits and supplier assessment.

Prevention Costs

Prevention costs consider costs associated with the identification of risks that might have an impact on the product’s quality.

Prevention costs include: product service requirements, establishing product specifications, quality planning, quality assurance, employee training and materials, and QMS Software.

Putting Everything Together

With an understanding of CoPQ and CoGQ we can expand the original equation for calculating the Total Cost of Quality.

The Cost of Good Quality is the sum of Prevention Costs and Appraisal Costs. (CoGQ=PC + AC) The Cost of Poor Quality is the sum of Internal and External Failure Costs. (CoPQ=IFC+EFC).

Cost Prevention and the 1-10-100 Rule

The 1-10-100 Rule is a rule that is closely related to the cost of quality. According to the rule, prevention is less costly than correction; and correction, in turn, is less costly than failure.

Applying the 1-10-100 rule, this means, it is more feasible to invest $1 to prevent than to spend $10 on a correction. A $10 correction, in turn, is 10x less expensive than a $100 failure.

Investing in prevention is necessary to get things right at the frontend. This could include spending time designing good processes, investing in Quality Management Software and providing employees the required skills via training.

Corrective costs (the cost of corrections) are the costs associated with fixing the problem once it has been detected. A poorly designed product might lead to a high defect rate. It’s the same with poorly trained employees who end up making more-than-permitted errors. Significant costs arise from the corrections and fixings of problems.

The biggest cost is the cost associated with failure. When a defective product reaches a customer, the consequences can lead to the product’s failure. The customer might never buy that product again, or they might simply stop buying from that brand. Worse still, if the unsatisfied customer decided to comment on social media or a specialized forum about the failure of the product. Not only will you lose that one customer, but several more.

While there are costs associated with prevention such as investing time, money, and effort to ensure nothing goes wrong with the product or service in the future, prevention is the best cure.

Total Cost of Quality and ISO

Organizations that use a functional QMS and are certified against the ISO 9001:2015 standard, probably have several KPIs that help them understand how they perform with respect to quality. However, while specific to the organization of the industry, these KPIs might not truly reflect the actual financial cost to the organization.

To truly understand the financial cost to the organization, a business needs to have a complete understanding of the lifecycle of its products – right from the design and development stages to the end of cycle disposal stage of that product. Next, it’s necessary to understand the budget to produce that product and the time and cost that are assigned by the business to support these processes. With this understanding, you can begin to research all the costs associated with the product.

Very specific knowledge is needed, with respect to processes, people, and products associated with the business, to truly understand and measure the cost of quality. The ISO 10014 quality management standard provides guidance for businesses concerning both Quality improvement and controlling all associated costs.

Total Cost of Quality and the PDCA Cycle

The Plan, Do, Check, Act Cycle – PDCA Cycle or Deming Cycle, is a quality improvement model that consists of a logical sequence of four steps that are repeated continuously to ensure continuous improvement.

The PDCA Cycle instills a commitment within the organization toward continuous improvement – no matter how small the improvement. It can also be used to improve efficiency and productivity in a controlled manner, without having to risk making large scale, untested changes to existing processes. Here is a look at how the PDCA cycle can be used for Total Cost of Quality Calculations.

Plan

The first goal of the PDCA cycle is to plan ahead – to understand what you want to achieve. This includes both practical and theoretical steps. The steps are the same, whether yours is an operational concern or a product concern.

During this stage:

  • Understand your definition of quality
  • How will you know if a particular change is an improvement?
  • Can you predict the outcomes?

You will also need to test and analyze what is currently wrong with the product and how it can be improved. You will also need to try to understand what changes you can make to tackle the problem or how to make the product better.  Map our operationally how this improvement can be achieved. Finally, try to predict the outcome of your process improvement method.

Do

This is the stage of executing your plan. Instead of making any random change and overhauling all operations, it is important to bring about change slowly and iteratively while testing hypotheses. During this stage, it is a good idea to use studies that can be measured agains the control group.

This will help you better understand the data you receive and allow you to not simply improve your output, but also be able to understand why your output worked by the changes you made.

Some points to keep in mind are:

  • Start with testing on a small scale
  • Implement iterative changes to your experiment to test variables.
  • Document every step.

 

Check

During this stage, the outcome of the planning and implementation stages are revealed. However, the outcomes are not simply a way of knowing whether the process was improved. It is also a way of knowing whether the process improved for the reasons you thought they would improve. It is at this stage when you know whether you were able to predict the outcomes of the planning and implementation stages in advance.

Some questions that need to be answered during this stage:

  • Did your outcomes match your predictions?
  • In what way did the outcomes differ, and why.
  • How can you test variables that were previously accounted for.

Act

This is the final stage of the process. During this stage, successful changes that were implemented are put into action on a larger scale.

During this stage:

  • Recommended changes are implemented
  • Data and performance are tracked over a period of time
  • All documentation is provided to the company to improve the internal theory.

Quality Management Software and TCOQ

Using an automated Quality Management System (QMS) can impact the Cost of Good Quality (Based on the Investment). More importantly, it will also show efficiency savings that will continuously reduce the Cost of Good Quality over time.

QMS Software and Savings

What is the Impact of a QMS on TCOQ?

In a study by LNS Research, it showed that organizations that implemented an automated, integrated, closed-loop enterprise-wide quality management system (EQMS) improved their quality performance and added value to impact four Cost of Quality categories, compared to companies that had not yet implemented an EQMS.

The savings were as follows:

Cost of Poor Quality

Internal Costs – lower by 27%
External Costs – lower by 10%

Cost of Good Quality

Appraisal Costs – lower by 7%
Prevention Costs – lower by 10%

Calculate the Cost of Quality in Your Organization

The objective of a continuous improvement program is not only to meet customer requirements but also to do it at the lowest possible cost. This helps to improve the perceived value of your service while remaining cost-competitive.

There are several proven strategies that can be put in place in your organization to help drive down the cost of quality and have a direct positive impact on your organization’s profitability.

Improve supplier relationships for both product and process

Collaborate with suppliers during the design process. Engage suppliers in the corrective action processes from incoming, manufacturing, or customer-reported problems.

Develop supplier scorecards that make suppliers aware of how their supplies are rated. Audit suppliers based on product/process risk levels.

Focus product development and prevention

Define the Critical Quality attributes that are pertinent to your organization from the very beginning. Learn from past mistakes, pull in lessons learned from defect information from similar products’ risk files and quality system information.

Make your quality and compliance metrics visible

Collect real-time quality data to notice trends in problems and production system issues. The following data will be useful:

  • Statistical Process Control
  • Defects / Dispositions
  • Inspection Results
  • Downtime

Evaluate the organization’s quality and compliance risks from the results of audits conducted both internally and externally, complaints and other reportable events. Use statistical analysis to monitor real-time quality data.

Leverage Technology

Deploy a quality and compliance management platform to support operational efficiency to help increase accountability, productivity, and reliability.

Implement an Enterprise Quality Management Solution (EQMS). An EQMS provides enhanced traceability and creates a common language across the organization to deliver a single source of truth when used across systems – departments and locations.

Knowledge Management Software

Training and Total Cost of Quality

By increasing the training programs that employees attend, as well as the quality of these materials, your organization can prevent initial failures, and reduce the number of incidences. All this, in turn, reduces the total cost of quality.

Maintaining and nurturing the knowledge base of both suppliers and employees is one of the most critical elements of reducing the Cost of Poor Quality within your organization.
All employees and suppliers must be kept informed of SOPs, policies, and regulations, as well as all other relevant quality metrics. This will go a long way in preventing violations within the organization. By providing regular training programs, tests, and awareness programs for employees and suppliers, you can ensure all the components of your business ecosystem move toward a unified objective.

Employees and suppliers must be immediately notified of any new policy or guideline that is introduced in the organization. Stakeholders must be notified of any training courses they must complete that are relevant to these new policies and guidelines. Training guides are also useful to ensure employees and suppliers stay compliant. A streamlined training process will help reduce non-compliance gaps and risks. Regular tests must be conducted to check the effectiveness of your training program. Gaps must be bridged with additional training courses.

Non Conformance Management and Cost of Quality

Non-conformance management is the process by which an organization promptly manages all non-conformance issues. All non-conformances are identified, documented, investigated, evaluated, segregated, and the dispositioned as per the applicable standards and regulations.

CAPA Management COQ

Corrective Action Preventive Action is a US FDA Requirement. Failing to implement an effective CAPA is an FDA Violation. CAPA Management is a process that investigates problems and then solves them by identifying their causes and taking corrective actions to prevent a recurrence of the root cause. The aim of CAPA is to ensure the problem is never experienced again. CAPAs can be applied to several disciplines like manufacturing, product design, testing verification and validation, use-applications, and also in the area of distribution, shipping and transport and packaging.

CAPA is made up of two functions – corrective action and preventive action. During the corrective action phase, the root cause, error, or base event of the problem is traced. During the preventive action phase, the organization is informed of the causes of the problem and measures are put in place to prevent the problem from recurring in other facilities, lines, or products.

Identifying the root cause of a problem or failure is the key tenent of an effective QMS. While a problem can be rectified, finding out the real reason for the problem and going down to the root cause of the problem is the main purporse for implementing a CAPA.

Quality Events and TCOQ

A substandard quality event can trigger a series of costly events that lead to hidden costs that go unnoticed by an organization. Since the impact of hidden costs in not tracked, their impact is not fully understood. All these hidden costs, in turn, lead to an increase in the Total Cost of Quality. Hidden cost inputs include:

  • Investigation in cuases of defects
  • Disruptions to schedules
  • Emergency procurement of supplies
  • Disposal costs
  • Expedited shipping
  • Extra Operations