Glossary

Cost of Quality 

Refers to the methodology a company uses to determine the cost it incurs to ensure all its products meet the quality standards. Cost of Quality also includes the losses the company suffers due to poor quality products. One of the primary goals for determining the cost of quality is to ensure the company’s operations are geared toward improving quality without significantly increasing expenses. 

The cost of quality is comprised of two major components; the cost of good quality and the cost of poor quality. So, when computing the cost of quality, both of these costs have to be considered, including the expenses incurred in ensuring the product doesn’t fail, the cost of process controls to maintain quality levels, and the costs related to internal and external failures. The formula for calculating the cost of quality is as follows; 

Cost of Quality (CoQ) = Cost of Good Quality (CoGQ) + Cost of Poor Quality (CoPQ)

Cost of Good Quality

These are all the costs incurred in ensuring the products meet the predetermined quality standards. All expenses that a company incurs in implementing practices geared towards improving the quality of its products fall under this category. Some examples of the costs of good quality include the following; 

  • Quality planning costs: These include all expenses incurred in creating plans and strategies geared toward improving or maintaining the quality of the products. 
  • Product or service requirements: This includes all the costs incurred when establishing the specifications of materials, processes, finished products, and services. 
  • Quality Assurance: This includes all expenses incurred in creating and implementing a set of procedures that ensure every product leaving the production line meets the predetermined quality standards.
  • Market research: Expenses incurred when doing market research to determine the acceptable quality standard of the product you are selling. 

Cost of Poor Quality 

This refers to all the costs involved with providing poor-quality goods or services to the customers. So, all the expenses the company incurs for the goods or services that meet the minimum quality standards fall under this category. The two main components of Costs of Poor Quality include internal failures and external failures. Let’s explain each of these. 

  • Internal failures: These costs result from the identification of defects in the product or service before it is delivered to the customers. Some of the common internal failure costs include Rework, repair, internal scrap, re-testing, all efforts spent on failure analysis, raw material rejection, and in-process rejection. 
  • External failures: These costs arise when a customer rejects the product or service after delivery due to quality concerns. The common examples of these costs include warranty claims, customer visits, penalties, replacements or repairs, investigations, loss of goodwill, loss of brand loyalty, bad online reviews, and more. 

As you might have noticed, the price of external failures is way higher than internal failures. That is why it is important to build mechanisms that make it easy to detect any quality issues before the product or service gets into the hands of the customers.

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