Cost of Quality is the sum of the costs related to providing a quality product and the costs related to not providing a quality product. While being an effective measure to identify cash drains, it can also be used to balance the price and quality relationship of your products.

1. WHAT IS COST OF QUALITY AND
HOW TO CALCULATE IT?

2. Cost of Quality is the sum of the costs related to providing a quality product and
the costs related to not providing a quality product. While being an effective
measure to identify cash drains, it can also be used to balance the price and
quality relationship of your products.

3. As a consumer, you probably know that when comparing two similar products,
the more expensive one usually comes out as the winner in terms of quality and
durability.
This rule also applies to the manufacturing process: to build a product that is
better than its rivals, often you will have to be willing to invest more in its
production.
At the same time, businesses need to stay competitive in their prices – great
quality does not mean anything if a product is not affordable to its price-
sensitive target market.

4. Therefore, it is necessary to find a balance between a product’s quality and its
manufacturing costs.
When companies with similar products and comparable marketing strength are
competing for customers, the one that tracks their Cost of Quality and uses it in
order to fine-tune the quality and price of their product is likely to get ahead.

5. The Cost of Quality (CoQ, also referred to as quality costs) is a method that is used to
measure a) the amount of resources used to maintain the quality of products, and b) the
amount of costs incurred due to failures, both internal and external.
These two factors are referred to as
a) Cost of Good Quality (CoGQ)
b) Cost of Poor Quality (CoPQ)
The total Cost of Quality can be found by simply adding the CoGQ and the CoPQ:
What is Cost of Quality (CoQ)?

6. While the Cost of Quality formula may look extremely basic, it gets a little more complex as
you delve into it.
Let us take a look at what the two parts consist of.

7. The cost of good quality accounts for investments made to retain the good quality of your products.
It comprises two smaller categories of costs:
1) Prevention costs signify resources used to prevent failures and poor quality. These include (but are not
limited to) costs from:
– Establishment of product specifications and standards
– Product development
– Quality planning
– Quality assurance
– Risk management
– Training
– Supplier qualification
– Etc.
Cost of Good Quality (CoGQ)

8. 2) Appraisal costs are incurred by reviewing and auditing products and production processes to
ensure their conformance to quality standards. These may include:
– Inspections of received goods
– Inspections of finished goods
– Testing
– Equipment monitoring
– Audits
– Process monitoring
– Supplier performance management
– Etc.
Therefore, the Cost of Good Quality is the sum of Prevention Costs and Appraisal Costs:

10. The cost of poor quality comprises costs incurred due to bad practices, failures, and low
product quality.
It is sub-categorized as:
1) Internal failure costs, which are costs related to the low quality of a product detected
before it was shipped. These include:
– Unforeseen waste and scrap
– Re-work
– Machinery breakdowns attributable to substandard maintenance
– Failure analysis costs
– Etc.
Cost of Poor Quality (CoPQ)

11. 2) External failure costs, which are costs related to the low quality of a product detected by
the customer after it was shipped. These include:
– Returns
– Complaints
– Product recalls
– Service and repairs
– Warranty claims
– Shipping damages
– Etc.
Therefore, the Cost of Poor Quality is the sum of Internal Failure Costs and External Failure
Costs:

12. Of all the types of CoQ, external failure costs are the most expensive: the American Society
for Quality estimates that the average thriving company’s cost of poor quality is about
10-15% of all operating expenses.
In worse cases, these costs can make up even 40% of the total expenses of a business.
The general idea of CoQ is that failure costs rise in a much steeper curve than prevention
costs and that by investing in preventive measures you can minimize failure costs.

13. Thus, using the Cost of Quality method could prove to be a valuable addition to your cost-
cutting arsenal.
You can use this graph to determine the type of a cost at hand:

14. Implementing the Cost of Quality method will allow you to find a measured balance
between the price of your product and its quality.
It provides you with the necessary insight to identify problem areas regarding the quality of
your products and the costs related to it.
As a consequence, you can analyze the root causes of product non-conformance and
determine where resources could be better allocated to in order to improve your production
processes as well as product quality.
Benefits of using Cost of Quality

15. This way, you can minimize failure costs and appraisal costs by investing more in prevention.
By minimizing external failures, you will keep your customers much happier, lowering the
rate of returns and repairs, and increasing revenues.
In the end, measuring your Cost of Quality can have a major impact on the bottom line of
your business.

16. Although an MRP system will not calculate the total cost of quality on its own, it can be very
helpful both in tracking different quality costs and in implementing preventive measures
that would improve your production processes – provided that accurate data is fed into the
system.
Among the functionalities that lend a hand in determining the cost of quality are:
• Inspection
The inspection functionality allows you to track the results of the quality reviews of both
your received goods (appraisal costs) and your finished goods (internal failure).
Using Cost of Quality with an MRP system

17. • Return Merchandise Authorization (RMA)
The RMA functionality helps you manage and keep track of returns, repairs, and
replacements (external failures) your customers have demanded.
• Write-offs
The write-off functionality allows you to track goods that have been written off from stock
due to poor quality (internal failures).
Even though these functionalities could prove to be very useful in determining CoQ, the real
strength of an MRP system lies in its capabilities to organize and standardize data and
processes, and to support the implementation of proper procedures that would prevent
failures.
That makes using an MRP system a cost of good quality.

18. Considering that a large portion of a company’s spend is related to the Cost of Quality, it is
wise to measure it to make informed business decisions.
CoQ can help determine problem areas and, consequently, reduce returns and complaints,
and increase sales and profits thanks to the improved quality of your products.
If done right, using it in conjunction with an MRP software could contribute a lot to the
amelioration and standardization of your manufacturing processes and, by way of that, to
the long-term growth of your company.
Conclusion

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