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Is quality free? Or does quality have a cost? What about the cost of poor quality?  How much does that cost? Can you think of a time when you bought a product and it was defective?  What did you do?  How did it make you feel about the firm who made the product?  Think about your actions in that scenario and the costs the company had to incur to “make it right.”

Cost of quality (COQ) analysis was developed in the 50s to help clarify the cost impacts of poor conformance quality. COQ identifies and assesses four major cost categories, which are prevention, appraisal, internal, and external costs.

  • Prevention costs are incurred due to efforts used to prevent poor quality from occurring in the first place. 
  • Appraisal costs are basically the costs associated with incoming material inspections, product and process inspections, inspection staff salaries, test equipment, and development of test procedures. 
  • Internal failure costs result when a defect is detected before the product is shipped.  These costs include the cost of salvage and rework.
  • Finally, if a defect does occur, and it happens to be discovered by the customer, the firm incurs external failure costs due to complaint settlements, loss of customer goodwill and future sales, returned materials, warranty work, and field service or repairs.

Understanding the Cost of Quality:

The new Quality Manager for XcelForce Inc. has put together a proposal for implementing a TQM Program for their business units in Canada, Mexico, the United States, and the English-speaking Caribbean. She has provided the following expected cost information to the senior management team in charge of approving the proposal:

Cost item                                                                               Total for the year

Quality assurance programs                                                      $4,500,000

Equipment maintenance (regular/scheduled)                             $2,050,000

Product design improvements (redesign/reengineering)             $3,100,000

Estimated (after-sales) product warranty service and repairs      $5,500,000

Product testing and inspection (at the manufacturing facility)      $3,720,000

Employee training programs                                                         $2,500,000

Process improvement/Kaizen projects                                          $1,200,000

Material scrap (associated with defective process output)            $2,300,000

Rework labor (to correct defective process output)                       $4,260,000

Raw materials inspection                                                              $3,230,000

After-sales customer support                                                         $1,500,000

Travel to suppliers to conduct process certification                           $750,000

Travel to customers to solve problems                                              $800,000

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