Quality-related Costs

Failing to satisfy customers' needs and expectations, or failing to do so first time, costs the average company between 15 and 30 per cent of sale revenue. It is thus vital to understand the diffferent costs associated with quality in order to control them.

Quality related costs

A quality-related cost is the 'cost of ensuring and assuring quality' as well as loss incurred when quality is not achieved.

Quality costs are classified as prevention costs, appraisal cost, internal failure cost and external failure cost.

Prevention cost

Prevention costs represent the cost of any action taken to prevent or reduce defects and failures.

Examples include:

Appraisal costs

Appraisal costs are the costs incurred, such as inspection and testing, in initially ascertaining the conformance of the product to quality requirements.

Examples might be:

• the capital cost of measurement equipment
• inspection and testing
• product quality audits
• process control monitoring
• test equipment expense.

Internal failure cost

Internal failure costs are the costs arising from inadequate quality where the problem is discovered before the transfer of ownership from supplier to purchaser.

Examples include:

• rework or rectification costs
• net cost of scrap
• disposal of defective products
• downtime or idle time due to quality problems.

External failure cost

The cost arising from inadequate quality discovered after the transfer of ownership from supplier to purchaser.

Examples include:

• complaint investigation and processing
• warranty claims
• cost of lost sales
• product recalls.

Conformance costs and non-conformance costs

Appraisal and prevention costs may also be referred to as conformance costs, whilst internal and external failure costs may be referred to as non-conformance costs.

This means that everyone in the value chain is involved in the process, including employees, customer and suppliers

• Quality products and services must meet the customers' requirements
• Management  - quality is actively managed rather than controlled so that problems are prevented from occurring.

Total quality management (TQM)

Total quality management (TQM) is a philosophy of quality management and cost management that considers that the costs of prevention are less than the costs of correction. One of the main aims of TQM is thus to achieve zero rejects and 100% quality.

A quality management programme is a relatively modern approach to quality. It will require a significant investment in prevention costs but should minimise or eliminate appraisal, internal failure and external failure costs.

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