as you know Quality is free, if you are producing a product with zero defect then cost of quality will be very low.

1. Cost of
quality
Presented by:-
Varun Kumar Rao
Mpharm ( 2nd
Sem)
Dept. of Quality Assurence

2. Contents:-
 Definition
 Basic classification
 Cost of poor Quality
 Advantages of COQ management
 Categories of Quality cost
 Impact of TQM on cost
Cost of Poor Quality 2 .PPT

3. Definition
cost of quality is a methodology that allows an organization to
determine the extent to which its resources are used for activities
that prevent poor quality, that appraise the quality of
organization’s products or survices, and that result from internal
and external failures.

4. •Scrap
•Rework
•Warranty costs
Hidden Costs
Visible costs
• Excessive use of material
• High inventory
• Inadequate resource utilization
• Cost of redesign and re-inspection
• Cost of resolving customer problems
• Lost customers / Goodwill
Visible and hidden costs
• Conversion efficiency of materials

5. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 5 .PPT
COPQ Overview
Definitions
 All activities and processes that do not meet agreed
performance and/or expected outcomes
 Costs that would disappear if every task were always
performed without deficiency
 Actual Cost - Minimum Cost = COPQ

6. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 6 .PPT
Traditional Cost of Poor Quality
(4-5% of Sales)
When quality costs are initially determined, the categories
included are the visible ones as depicted in the iceberg below.
Waste
Testing Costs
Rework
Customer Returns
Inspection Costs
Rejects
Recalls

7. COQ as motivatorCOQ as motivator

Companies under TQM do not focus on
quality cost minimization.

Quality improvement projects tend to
focus on zero defects or defect reduction
to the six-sigma level.

8. Cost of Quality
Quality costs increase overQuality costs increase over
timetimeFailureCosts
Time when failure found
Prevention Costs
Failure found during design phase
Failure found at onset of manufacture
Failure found at final inspection
Failure found at installation
Field repair costs
Failure found by customer
Liability costs

9. Focus of COPQ Efforts
Cost of Poor Quality 9 .PPT
 Identify and Quantify Quality Costs
 Expose the “Hidden Factory”
 Ongoing Measurement System
 Breakthrough Improvement

10. Advantages of Using Quality
Costs for Management
 Advantages
 Reducing the cost of poor quality is one of the best ways to increase a
company's profit.
 Provides manageable entity and a single overview of quality.
 Aligns quality and goals.
 Prioritizes problems and provides a means to measure
change/improvement.
 Provides a means to correctly distribute controllable quality cost for
maximum profits.
 Promotes the effective use of resources.
 Provides incentives for doing the job right every time.Cost of Poor Quality 10 .PPT

11. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 11 .PPT
Components
Non-Conformance
$
Conformance
$
$
Quality Costs

12. Categories of Quality Costs
Conformance Non-Conformance
Quality Costs
AppraisalPrevention External failureInternal failure

13. Total Quality Cost
Cost of Poor Quality 13 .PPT
I want my
money back!
I want my
money back!
Cost of Quality (COQ)Cost of Quality (COQ)
PreventionPrevention AppraisalAppraisal
Internal
Failure
Internal
Failure
External
Failure
External
Failure
$$

14. Cost of quality
Cost of quality = Cost of conformance + Cost of non-conformance
 Cost of conformance is the cost of providing products or services as
per the required standards. This can be termed as good amount
spent. (Prevention & Appraisal costs)
 Cost of non-conformance is the failure cost associated with a process
not being operated to the requirements. This can be termed as
unnecessary amount spent.( Internal & External failure costs)

15. Prevention Costs
Prevention costs are associated with design, implementation ,
maintenance, and planning prior to actual operation, in order to avoid
defects from happening.
The emphasis is on the prevention of defects in order to reduce the
probability of producing defective products. Prevention activities lead
to reduction of appraisal costs and both type of failures ( internal and
external ).The motto is “Prevention rather than appraisal” .

16. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 16 .PPT
Examples of Prevention Expense
 Quality Planning
 Training and Education
 Process Definition
 Customer Surveys
 Preproduction Reviews
 Technical Manuals
 Detailed Product
Engineering
 Early Approval of Product
 Specifications
 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Housekeeping
 Zero-Defect Program

17. Appraisal costs
Appraisal costs are spent to detect defects to
assure conformance to quality standards.
Appraisal cost activities sums up to the “cost
of checking if things are correct”.The
appraisal costs are focused on the discovery
of defects rather than prevention of defects

18. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 18 .PPT
 Supplier Certification
 Employee Surveys
 Security Checks
 Safety Checks
 Reviews:
– Operating Expenditures
– Product Costs
– Financial Reports
Examples of Appraisal Expense
 Test
 Inspection
 Process Controls
 Train QA Personnel
 Product Audits
 Quality Systems Audits
 Customer Satisfaction
 Surveys and Audits

19. Internal failure costs
Internal failure costs occurs when results of work fail to reach
designated quality standards , and are detected before transfer to
the customer takes place.

20. Examples
Internal failure costs
Design changes/ corrective action
Scrap due to design changes
Excess inventory
Rectification / reject disposition of
purchased material
Rework/rejection in manufacturing
Downtime of plant & machinery
Trouble-shooting & investigation of
defects

21. External failure costs
External failure costs occur when the product or service from a
process fails to reach designated quality standards , and is not
detected until after transfer to the customer.

22. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 22 .PPT
Examples of External Failure Costs
 Product Recall
 Handling Complaints
 Customer Service
Caused by Errors
 Products Returned
 Analysis of Returns
 Evaluation of Field Stock
 Late Payments and
Bad Debts
Reports
– Sales and service
– Returns and allowances
– Failure
Lost Sales Because of Customer Dissatisfaction!

23. All Rights Reserved, Juran Institute, Inc.Cost of Poor Quality 23 .PPT
The ratio of the individual category costs to total costs
varies widely. Many companies exhibit ratios which look
like the following:
Quality Cost Category Percent of Total
Internal Failure 25 to 40
External Failure 25 to 40
Appraisal 10 to 50
Prevention .05 to 5
What's Wrong With This Picture?
What Does Reality Look Like?

24. Size of four categories of quality costs.
The organizations which do not follow TQM,there is less emphasis on
prevention and their main quality efforts are on appraisal with very little
control on internal and external failure costs.
Various studies have shown that quality cost in manufacturing
companies the world over range from 20 % to 30 % of turnover and in
the case of service companies it can go up to 40 % as illustrated in
graph on the next slide.

25. Size of various quality cost elements
Preventive
1%
Appraisal
4-6%
Internal
Failure
10-12%
External
Failure
10-15%
The total quality
costs 25-35 %
of turnover.
Qualitycostsin%ofsales

26. Impact of TQM on costs.
TQM is primarily aimed to improve the quality of the product , higher
customer satisfaction and better working environment for the
employees. The most dramatic impact of TQM is on reduction of
quality costs which directly effect the profitability .
This is demonstrated by the results of TQM program in pharma industry .
The change in various elements of quality cost before and after
launching TQM by pharma industry is shown on the next slide.

27. Impact of TQM on costs.
prevention
Appraisal
Internal
Failure
Prevention
Appraisal
Internal
Failure
0
5
10
15
20
25
30
35
%ofsales
An example from pharma industry.
Before TQM After TQM

28. 1-10-100 Rule
1
10
100
Rs
Rs
R
s
Rs
Rs
Rs
Rs
Rs
Rs
Rs
Prevention
Correction
Failure
Costofrectifyingdefect
Stages

29. cost of quality
Traditionally recorded quality cost generally account for only
4 to 5 percent of sales which mainly comprise of cost of
scrap, re-work and warranty.

30. Hidden costs of quality
There are additional costs of quality which are hidden and do not
appear in the account books of the company, as they are
intangible and difficult to measure. These additional costs could be
as high as 20-25% of sales.

31. THANK YOU!