The cost of quality is referred to as the total costs an organization incurs in an objective to prevent, remove and detect poor quality or defects from products. It can also be defined as costs incurred to evaluate and ensure quality objectives are met, and all other costs suffered as a result of producing poor quality. Poor quality occurs where clients needs and requirements are not met, an occurrence of non-value added activities, errors, or even waste. The cost of quality concept enables a company to determine the amount of resources used in the prevention of poor quality. Once the company has this information, it is then able to identify probable savings to be gained through implementation of improvement processes. There are four groups of costs of quality costs: internal failure costs, external failure costs, prevention costs, and appraisal costs.
Prevention costs are incurred by a company to avoid and prevent quality problems. They ensure that there are no errors at any stage of the production process or delivery to the customer. Prevention costs are associated with the development, web design, and maintenance of a quality management system. These are planned and experienced before the actual operation. They are the least expensive quality costs and are highly recommended. It is better to prevent errors or defects before they occur, rather than detecting them later in the product. Prevention costs include training and educating employees; costs associated with the improvement of the manufacturing process; statistical process control; quality assurance; market research; development of plans for quality, and quality administration.
Appraisal costs are the costs associated with monitoring and evaluating activities connected to quality. They determine the extent of conformity to the set quality requirements and standards. Companies seek to minimize these because they are non-value added: they do not change or improve the quality of the product in the evaluation. The inspection and verifications ensure that the company will not ship poor quality products customers; nevertheless, they do not prevent the production of inferior quality products. Appraisal costs are carried out during the various stages of production to identify the defective products. Companies need constant maintenance of a team of inspectors who detect and identify poor quality products. However, maintaining this team may be a very expensive venture for some companies. Appraisal costs can be lowered by spending more resources on prevention activities. Examples of these costs include inspection activities, inventory count, quality audits, testing equipment and supervision of the control staff.
Internal failure costs are the costs incurred by the company to solve defects or errors discovered before a product reaches the customer. These costs occur because the product or service failed to meet the quality requirements and standards designed but detected before transfer to the customer. The product is therefore reworked, fixed or replaced so that it meets customer’s specifications. These costs could include scrap which is a defective product that cannot be sold or repaired; correction of defective products; rejected products, and material review.
External failure costs are incurred when the customer finds the failure. These costs are the hardest costs to evaluate because they are detected later by customers. The costs occur when the company does not identify a product or service that does not reach the design quality standards until after shipment to the customer. Products with defect often dissatisfy customers thereby damaging goodwill and reducing a company’s sales and profits. These costs do not include the customer’s personal costs. Examples of external failure costs include warranties, repairs and servicing, customer complaints, replacement, and legal expenses from customer lawsuits.
The costs of quality can, therefore, be said to include costs of preventing, detecting and coming up with solutions to product quality issues. This process involves the creation and delivery of goods and services that meet customer expectations. The cost of quality constitutes a significant expense to a business. Though the costs are hidden, their discovery and mitigation lead to increased profits and enhanced customer retention. When quality costs are well managed, their long-term effect on the company’s quality will be desirable.