This document provides an overview of cost of quality concepts. It discusses the different types of quality costs including prevention costs, appraisal costs, internal failure costs, and external failure costs. Prevention costs include activities like quality training, process control planning, and supplier quality assurance. Appraisal costs include activities like auditing, inspection, and testing. Internal failure costs capture scrap, rework, and engineering changes. External failure costs include warranty costs, customer returns, and liability suits. The document emphasizes tracking quality costs over time to understand their impact and drive improvement in quality programs.

1. Prepared by : Peter Zhou
Date: January 2011
[Date Month 20XX, Name, Department, etc.]
Some Fundamental Concepts on
COST OF QUALITY

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Poor Quality…Poor Business !
It is a time bomb waiting to
Explode!
IF COQ high,

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4~5% of Sales
Wastes
Testing costs
Rework
Customer return
Line RejectsDefect
Recall
Traditional Cost of Poor Quality (COPQ)

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Additional Costs of Poor Quality
(COPQ)

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The highest quality producer is the lowest cost producer
Balance in Quality Cost

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Taguchi Quality Loss Function (QLF)
Quality cost are usually quantified in terms of tangible cost
such as rework and scrap cost, and customer warranty. These
losses constitute only the tip of the iceberg.
What about the intangible costs such as
management/engineering time, inventory, customer
dissatisfaction, and loss market share?
QLF is a method used to approximate these hidden and long
term losses.
(1) Trial-and-error approach
(2) Design of experiments
(3) TAGUCHI Method
Dr. Genichi Taguchi

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Taguchi Quality Loss Function (QLF)
Value of quality characteristics
Loss$
y
L = k ( y - T )²
L = Loss in $’s
k = Cost coefficient
y = Value of quality characteristics.
T = Target value.
LSL USL

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Why Examine the Cost of Quality?
1. Get management attention
2. Change the way employee think about errors
3. Provide better return on the quality improvement program
4. Provide a tool to measure impact of corrective actions
5. Provide a tool to measure the impact of poor-quality on profits
Prevention Scrap
Elements of Cost of Quality (COQ)

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Resultant Cost = Failure Cost, Defect Cost.
Controllable Cost = Prevention and Appraisal Cost.
Prevention vs. Scrap Cost
0
10
20
30
40
50
60
Controllable Effort
Cost
Total Cost
Controllable
Cost
Resultant Cost
A
Low
High

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1. Prevention Cost
- Cost of all activities specifically designed to prevent poor quality in products.
2. Appraisal Costs.
- Cost associated with measuring, evaluating or auditing products to ensure
conformance to quality standards .
3. Internal Failure Costs.
- Failure costs occurring prior to delivery or shipment of the product.
4. External Failure Costs.
- Failure costs occurring after delivery or shipment of the product.
Elements of COQ

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Cost of Conformance
• Prevention-Cost associated with design,
implementation and maintaining a quality
system
• Appraisal-Cost associated with
measuring conformance

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Examples of Prevention Costs
• Developing the quality / process control plan
• Quality education and training.
• Vendor surveys (Supplier Quality Assurance )
• Design reviews.
• Quality Improvement Team projects.

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Supplier Quality Cost
Supplier Quality Cost can be categorized as part of Prevention Cost
as it involves Quality Assurance of Incoming materials.
Apparent Supplier Quality Cost
Cost of Supplier Quality Surveys.
Cost of Receiving and Source Inspection.
Cost of dispositioning nonconformance purchased materials.
Cost of scrap and rework of supplier caused nonconformance.
Cost of site visit to correct supplier service problems.
Hidden Supplier Costs
Cost incurred by supplier at the supplier’s facility
Cost incurred by buyer in solving problems at the supplier’s facility

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1. Cost of processing incoming rejection (documentation, return expenses) :
Study show that each rejected lot would require $100 to process
Two rejected lots = 2 Lots X $100/Lot = $200
2. Cost of complaint investigation ( BUQE)
Man hours required to investigate the root cause. Study show cost per man hour is $20
10 Man hours required = 10 man hrs X $20/man hr = $200
3. Cost of receiving Inspection (IQA)
Use IQA inspector labor standard and average hourly wages to process the problematic lots.
Inspector require 1.2 hours to process one lot, and their hourly wage is $15.
1.2 labor hrs/Lot X $15/labor hour X 2 Lots = $36
4. Total purchased from supplier = $10,000.
($36 + $200 +$200 ) + $10,000
$10,000
QCPI =
FAIR= 1.044
Example
Supplier having two rejected lot for month of June:

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Prevention Cost - 1
Category Description Example
Quality Education
and Training.
到 量要求或改 品为达 质 进产 质
量的目的，提高 工的 量意员 质
和 量管理的 水平 行识 质 业务 进
培 所支付的 用。包含授训 费 课
人 的 用， 料 ，及培员 费 资 费 训
人 的 用等。员 费
Developing the
Quality / Process
Control Plan
推行 量管理、提高 工的为 质 职
量意 等一系列活 所支付质 识 动
的 用。包含 量 励 、活费 质 奖 费
、 地 、差旅 等。动经费 场 费 费
Quality
Management Cost
从事 量管理人 的工 。质 员 资

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Prevention Cost - 2
Category Description Example
Apparent Supplier
Quality Assurance
-Supplier Quality Surveys
-Receiving and Source
Inspection.
-Dispositioning nonconformance
purchased materials.
-scrap and rework of supplier
caused nonconformance.
-site visit to correct supplier
service problems.
Hidden Supplier
Quality Assurance
-Cost incurred by supplier at the
supplier’s facility
-Cost incurred by buyer in
solving problems at the
supplier’s facility
Quality
Improvement
Projects
-PBU and SBU product or
process continuous
improvement project (e.g. Tool
life management, Blade etc)

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Examples of Appraisal Costs
 Quality audits of the process.
 Inspection and testing of products.
 Inspection of purchased materials.
 Calibration of test equipment.
 Quality data processing.
 Field performance testing.

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Appraisal Cost-1
Category Description Example
Quality System Audit
企 的 量体系、 境体系对 业 质 环
和 健康安全体系 行 核职业 进 审
所 生的 用。包含人工 用产 费 费
和差旅 等。费
Calibration of Test
Equipment, Tools, Jig
& Fixture
工具和 PPE 的校准所 生的产
用。包含校准 用，人费 设备费
工 用等费 。
Customer Satisfaction
Survey
了了解 客为 顾 对 Vestas 提供
的 品或服 的反 而 行的产 务 馈 进
所 生的 用。包含人工调查 产 费
用、差旅 和礼品 等费 费 费 。

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Appraisal Cost-2
Category Description Example
Quality Data
Processing
The organization needs to
regularly collect and analyze
the product /service quality
performance (e.g. Cost of
Poor Quality, First Time Yield,
and Customer Complaint, etc)
Field Performance
Testing
Regular product performance
test and evaluation after
installation in the field to
properly evaluate or justify the
operation satisfaction (e.g.
SCADA)
Inspection and
Testing of products
0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Prevention
1.00%
2.00%
3.00%
4.00%
5.00%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Internal scrap% Internal Goal
Internal&Scrap% -
Crystal
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
External
External% - Crystal
0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Appraisal
Prevention% - Crystal Appraisal% - Crystal
COQ % Trend---Example
0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Prevention
1.00%
2.00%
3.00%
4.00%
5.00%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Internal scrap% Internal Goal
Internal&Scrap% -
Crystal
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
External
External% - Crystal
0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Appraisal
Prevention% - Crystal Appraisal% - Crystal
COQ % Trend---Example

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Cost of Non-conformance:
•Internal Failure- Cost associated with internal
non-conformance (detected prior to delivery of a
product or service)
•Appraisal- Cost associated with external non-
conformance (detected after delivery of a product
or service)

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Examples of Internal Failure Costs
 In Process scrap and rework
 Engineering changes (ECN)
 Re-inspection after rework
 Downgrading
 Expediting (Freight)
 Terminated projects

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Internal Failure - 1
Category Description Example
(In Process)
Rework
品 量不良在堆 返修 用产 质 场 费 /
在 返修 用风场 费 / 在安装 机上风
返修 用费 / 服 期 在 机上面务 间 风
的返修 用费
例子： V52 散 系 不良在热 统 现
返修 用；塔筒内 件安装场 费 饰 错
在 返修 用；误 现场 费 CIM 在堆
和 机上的返修 用场 风 费
(In Process)
Scrap
被 坏的 品 生的运输损 产 产 报废费
用； 品 量不良的 用；产 质 报废费
不良品的 用；调试时 报废费
服 期 品可靠性 量务 间产 质 问题导
致的 用报废费
例子：叶片 坏 ；运输损 报废 轮毂
坏 ；螺栓 量不良的运输损 报废 质
用；偏航 感器 量报废费 传 质 问题
； 箱担波 量齿轮 质 问题
(In Process)
Scrap
批次性 品 量不良；重大 品产 质 产
量不良；重 性 品 量质 复 产 质 问题
例子：威海螺栓 量不良 行三质 进
方 用；如 服 期 叶片测试费 东 务 间
表面脱 修；石城服 期 叶离维 务 间
片由于缺 致破裂；胶导 V52 机舱
灯管脱落 ；天窗破裂 量问题 质 问

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Category Description Example
Engineering
Changes Request
(ECR)
Launched existing product that
needs to be further modified to
meet China market industry
standard requirement (e.g.
Safety emergency button)
Transportation &
Expediting
(Freight)
Product damager due to the
transportation quality incident.
Sometime we can’t fix the
damage part by repairing and will
have to express-ship backup
from factory or warehouse
Stall or Delay On
Job Sites
品不良影响 的 用；产 发货 压车费
返修 品 致吊 等待 用产 导 车 费 ;
Main crane is waiting for Project
start ; And sometimes it takes
some time if many people have
not the solution but different
idea’s
Internal Failure - 2

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Examples of External Failure Costs
 Warranty administration
 Field repair stock
 Product recall and field updates
 Customer rejects and returns
 Canceling suppliers
 Product liability suit

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External Failure - 1
Category Description Example
Warranty
Administration
保期 的相 用质 间 关费
例子： 和保 中 及的人工维护 养 涉
费 / 材料费 / 公办 费 / 运输费 /
基 施 用等础设 费
Product Recall
and
Field Updates
品不良 致客 不收 的 用产 导 户 货 费
例子：
中海油工厂出 量货检查发现质 问
拒 ， 生的题 绝发货 产 压车费 / 存
储费 / 修维 费 / 人工费 / 物料
等；蓬莱 收到的叶片费 现场发现
外 不良拒 收 ， 生的观 绝 货 产 换货
品成本产 / 用运输费 / 吊 用车费
/ 人工 等费
Customer Rejects
and Returns
由于 品 量 ，客 拒产 质 问题 户 绝签
署 PAC 或者索 失 量；客赔损 电
投 所 生的 用。包含 修户 诉 产 费 维
用，退 用，更 用，差费 货费 换费
旅 等。费
例子：拒绝 PAC 致 保期延导 质
， 加工具租迟 增 赁费 / 人工费 /

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Category Description Example
Product
Liability Suit
Wind turbine fire accident due to
product design natured failure or
product reliability
Canceling
Suppliers
The lifting supplier company
does not follow Vestas WI to
potentially damage the Nacell
with a decision to cancel this
supplier
External Failure - 2

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Tracking on Monthly Basis
Measure
BU Name:
COQ Details: Plan Plan Plan Plan Plan Plan
Dollars % % Dollars % % Dollars % % Dollars% % Dollars % % Dollars % %
Quality administration
Quality training
Quality assurance system
Product and process qualification
Quality requirement planning
Supplier evaluation & certification
TTL Preventive cost
Incoming inspection
Test equipment calibration & repair
In-process inspection
Final inspection
Process evaluation
In-process testing
Quality assurance testing
Utilities, supplies, products, etc
Quality audits
TTL Appraisal cost
Scrap
Rework
Sorting
Incoming material disposition
Reject disposition
Corrective action evaluation
Re-inspection
TTL internal failure cost
Customer complaint evaluation
Returned goods rework & sorting
Returned goods replacement
Returned good processing
Legal/settlement cost
TTL external cost
TTL Quality Cost
May Jun
ActualActual Actual Actual Actual Actual
Jan Feb Mar Apr

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Crystal COQ Matrix Trend
Scrap $ rate - Crystal
0.131
0.070
0.159
0.200
0.127
0.175
0.000
0.030
0.060
0.090
0.120
0.150
0.180
0.210
0.240
M
ar
Apr
M
ay
Jun
Jul
Aug
Sept
O
ct
N
ov
D
ec
Scrap $ rate Goal
$
40%
50%
60%
70%
80%
90%
100%
Jan
Feb
M
ar
Apr
M
ay
Jun
Jul
Aug
Sept
O
ct
N
ov
D
ec
Total Yield Goal
Yield - Crystal
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Mar Apr May Jun Jul AugSeptOct Nov Dec
0
200000
400000
600000
800000
1000000
1200000
Scrap $ Total COQ % COQ% Goal
Total COQ %&Scrap - Crystal

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0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Prevention
1.00%
2.00%
3.00%
4.00%
5.00%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Internal scrap% Internal Goal
Internal&Scrap% -
Crystal
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
External
External% - Crystal
0.00%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Appraisal
Prevention% - Crystal Appraisal% - Crystal
COQ % Trend---Crystal

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Pareto of Broken/Dead Failure Analysis
0%
10%
20%
30%
40%
50%
60%
Broken Freq. Out
Range
Scratch Less
adhesive
Short BP low Mix Mis-
alignment
Rotation
Broken and Dead
0.0130
0.0140
0.0150
0.0160
0.0170
0%
10%
20%
30%
40%
50%
60%
B/P M/C F/P Weld F/T
0%
10%
20%
30%
40%
50%
Broken
at
Conner
Broken
at
m
iddle Handling
Broken
Dead

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Dead/Broken Fish Bone Diagram
Dead/
Broken
MachineManpower
Drop to the ground
Transportation Shock
Material
Chipped Blank
Wrong Handling
Hardness of Base Tabs
Poor Slot roughness of base
Lead Cutter Shock
Ultrasonic Level
of Blank WasherHandling broken
Large Welding
Pressure
Stamping Shock
Method
Unsafe Package
Cement Volume
Mount Rotation
Low viscosity of Adhesive
Product mix
Pattern alignment
insufficient
epoxy amount
Adhesive
contamination
Bubble in epoxy
Slut knife of lead
cutter/former
B/P plate dead
Large spot size
for some model
UM5 shield
with poor edge
Not optimized BP mask
design for MS model

32. Appendix
[Date Month 20XX, Name, Department, etc.]

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Quality Assurance-COPQ

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