QMS: calculating the cost of quality

The Cost of Quality (CoQ), also known as Quality Costs, is the total resources an organization uses to maintain product quality and service quality. It includes the associated costs of detecting, correcting, and preventing quality issues, quality-related costs that can appear across the organization, from prevention and appraisal to internal and external failure. For quality managers, business leaders, and other professionals responsible for quality management and cost control, measuring CoQ helps show where money is being spent to improve quality, where waste and rework are eroding margins, and how prevention can reduce costly failures. In practice, CoQ is calculated as the Cost of Good Quality (CoGQ) plus the Cost of Poor Quality (CoPQ), and understanding that breakdown makes it easier to improve profitability, protect reputation, and allocate resources more effectively.

Why Measure the Cost of Quality?

The American Society for Quality groups quality costs into prevention, appraisal, internal failure and external failure. Measure those costs within your own accounting scope rather than applying an industry percentage to your revenue.

Calculating CoQ makes quality spending and failure costs visible. Use quality data to identify recurring issues, compare prevention and appraisal spending with failure costs, and decide where to improve the process. Track the result instead of assuming that measurement alone increases profits or eliminates waste.

Prevention aims to address causes before a defect reaches the customer. Compare its cost with the failures it is intended to reduce.

How much money can be saved? We can figure that out by calculating the COQ in your organization.

Calculating Your Cost of Quality

Calculate both components for the same period and accounting scope. The Cost of Good Quality and Cost of Poor Quality together make up total CoQ:

1. Your Cost of Good Quality (CoGQ)
2. Your Cost of Poor Quality (CoPQ)

By simply adding the CoGQ and the CoPQ together you will get the total cost of Quality within an organization:

COQ = CoGQ + CoPQ

Understanding both cost sides helps organizations prioritize quality initiatives.

Of course, it helps to know what elements factor into the Cost of Good Quality as well as those that impact the Cost of Poor Quality.

Determining the Cost of Good Quality (CoGQ)

Two categories make up CoGQ, Appraisal Costs (AC) and Prevention Costs (PC). These are preventive costs intended to stop defects early, prevent poor quality, help maintain quality levels, and support maintaining product quality.

Appraisal Costs: the cost of reviewing and auditing the product and processes used. Within quality processes, this includes ongoing quality control and process controls, not just final inspection. Some of these costs are:

• Inspections
• Testing
• Quality Audits
• Calibrations - Equipment management

Prevention Costs: the cost of activities intended to prevent quality problems and reduce defects. Examples include:

• Quality Planning
• Quality Assurance
• Product development and process improvement initiatives
• Risk Management, including preventive maintenance
• Quality Training
• Investing in a Quality Management System
• Supplier quality management
• Lessons Learned analysis

The equation is:

CoGQ = AC +PC

These costs incurred up front are aimed at delivering high quality products and reducing later quality failures.

Don't get the wrong idea here - taking shortcuts to save money on CoGQ may be tempting, but you would end up paying far more in the end once you understand the true Costs of Poor Quality.

Cost of Poor Quality (CoPQ)

A defect found after delivery can require repair, replacement or recall work. Calculate the actual response cost for the products and period being assessed; no fixed multiplier applies to every defect.

While those are certainly wake-up calls, we still need to be able to calculate the Cost of Poor Quality. There are two categories that factor into the CoPQ. Those are Internal Failure Costs (IFC) and External Failure Costs (EFC).

Internal Failure Costs: These costs occur when the product fails to meet the standards or requirements and are remedied before the product or service reaches the customer. These quality failures and quality issues create scrap, rework, downtime, and other hidden associated costs. Some of these costs include:

• Scrap
• Rework
• Machinery Malfunctions
• Failure Analysis

External Failure Costs: These costs occur when remediating a defect of a product detected by the customer after it was shipped. I touched on this earlier, but these external costs include:

• Service and Repairs
• Managing customer complaints
• Returns - handling investigations or recalls on products
• Warranty Claims

As an equation, this would look like this:

CoPQ = IFC + EFC

External failures can include both recorded costs and effects on customer relationships. Keep measurable response costs separate from reputational effects that the organization cannot reliably quantify.

Generally, organizations with poor quality incur higher failure costs compared to the potential prevention and appraisal costs. Conversely, an organization with good quality will incur relatively lower total Quality Costs by their investment in prevention and appraisal activities, which can lessen the risks and reduce the costs of failure. Many teams use continuous improvement initiatives to drive quality improvements, strengthen quality, and lower failure costs over time.

Naturally, every manufacturer has different factors to consider while determining their Total Cost of Quality. It's also possible to overspend on preventive measures, so think through how rigorous you need to be with internal and external failure possibilities, as well as regulatory compliance. Determining the right mix per category will allow you to keep costs in check, mitigate the potential of internal or external failures, and ultimately increase profitability for your company.

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