Qual
AI Based Quality Monitoring System
The term ‘Cost of Quality’ is widely misunderstood. The Cost of Quality is not the price of creating quality product or service. But, instead it is Cost of NOT creating quality product or service.
Cost of Quality is generally determined as percentage of production costs.
Traditionally, quality costs focussed on visible things like returns, scrap and rework. And it was assumed to be around 4-5% of the sales of the organization.
Actually, Quality costs do not just relate to manufacturing; rather, they relate to all the activities from initial research and development (R & D) all the way to customer service.
Quality Guru Dr. Juran popularized the term ‘Cost of Quality’. He formally introduced the term in his Quality Handbook (in 1951) to include three cost categories :
1) Failure Cost - Cost incurred when defective product is produced or delivered. It includes Internal failure costs such as rework and downtime. And External failure costs such as customer dissatisfaction and product recalls.
2) Prevention Cost - Cost of the activities designed to prevent poor quality products.Example- Training & Education, Market Surveys etc.
3) Appraisal Costs - Cost associated with measuring, evaluating or auditing a product or service to assure conformance to standard product or service. Eg - Internal Audits, Lab testing, Automated Testing tools.
Cost of Quality = Failure Cost + Prevention Cost + Appraisal Cost
Though, Total Cost of Quality is the sum of these costs. But, still this equation is non-linear i.e. increase in Appraisal Costs does not necessarily mean that overall cost of quality will increase. In fact, Cost of Quality decreases with that.
Cost of Quality comes to about 15-20% of the sales of organization.
A COQ of zero is not the goal, because you need to spend some money on prevention and appraisal. Goal of COQ should be to reduce the cost of lowest practical value..
Dr. Juran presented the costs as shown in the graph below.
Graph depicts that as failure costs decline, quality level improves, and the cost of prevention plus appraisal increases. An optimum quality level is reached where COQ(Failure Cost + prevention cost + appraisal cost) is minimum.
So, the goal is to eliminate failure costs,decrease prevention costs and invest in appraisal costs.
Why do we need to know about Cost of Quality?
There exists an inverse relationship between Quality and Cost of Quality.
Most of the quality costs are hidden. Hence, it becomes very hard for the organizations to keep it minimal. And Increase in COQ leads to decrease in quality. Further, this negatively impacts the revenue. This combination of higher COQ and lower revenue is daunting to the existence of the organization.
Thus, rigorous Cost of Quality Measurement is formidable to prevent such crisis.
Once, Cost of Quality is determined,organizations can take actions to reduce them.