What is the financial impact of quality to an organization? Is it money well spent? How should a business be spending money regarding quality?
What if, with relative minimal investment, your company was able to save between 20 and 30 cents of every dollar it earns or increase revenues or market share by like proportions? This isn’t a rhetorical question; rather what is attainable if a business improves the quality of the product or service they deliver. By eliminating the costs associated with poor quality and investing in good quality - companies save money and improve their bottom line.
How much could you save if you did everything “right the first time”? If you knew that everything was done right, you would not need to spend time (and money) on: inspecting, re-inspecting, design changes, bug fixes, testing, re-testing, reworking, scrap, trouble-shooting problems. You also would not need dedicated staff that deals with billing issues, irate customers, complaints about poor service, product issues, or incur all the costs associated with returned products or service calls.
It is not unusual for companies that do not measure their Cost of Poor Quality (COPQ), to be spending as much as 30% of sales on Poor Quality activities. That means that one & one-half days per week, you are re-doing work that was not done right the first time. How much could you save if you cut that down to 1 day per week? How about 4 hours per week? Or, 1 hour per week?
Cost of Quality (CoQ) is a financial model of the costs incurred to operate and maintain a level of quality within a business. The CoQ model considers all the activities that any typical company would perform toward the intent of providing good products or services to their customers. There are three major categories of cost in the CoQ model: Prevention, Appraisal, and Failure. The failure costs are further broken down into internal and external failure costs.
The first two categories of cost are associated with putting systems and processes in place to reduce the likelihood of a failure or customer issue.
Prevention is the category for those costs associated with preventing a quality problem from occurring in the first place. Typical costs that are included in this category are training, procedure writing, and process or equipment automation.
Appraisal is the next category. Appraisal is where we capture our assurance costs. This would include any activity that inspects or verifies the quality of a product or service. Typical costs included here are calibration, instrumentation, audits. inspection and test.
Internal Failure is the first of two categories associated with poor quality. Internal Failure are those costs associated with recognizing a poor-quality characteristic exists before the product or service is delivered to a customer. The common costs in this category include scrap, rework, failure analysis, redesign, reinspection, and retesting.
External Failure is the worst of all possible situations. External failure costs are attributed to the failure of a product or service at the delivery point or usage point of the customer. External failures are damaging for two key reasons. First, a delivered product or service is fully burdened, including labor, transportation, and storage costs. Second, the company’s reputation is impacted. Once a customer has a bad experience, damage to reputation may hinder or lose future sales. The cost of lost opportunity can dwarf all other costs.
A real-world example may help. A company had recently introduced their new product. They initially rolled it out to some large customers that were anxious to give it a try. Within a few weeks of shipping the new product to these key customers, the complaints started rolling in. Significant time was spent on investigating the issue, designing, and testing a fix, shipping updated versions of the product and returns of the previous version. However, the new version did not perform much better. Customers lost confidence and cancelled planned orders that were substantial. After documenting the quality costs for this one specific issue, we found:
Man-hours spent: $336,179
Rework & logistics costs: $198,968
Lost opportunity costs: $10,500,000
Cost of Poor Quality: $11,035,147
The goal with CoQ is that over time, you shift your investment into prevention methods (preventative activities) and reduce the costs associated with failures (reactive activities) – which are typically much higher. Too many companies end up focusing on correction instead of prevention. Ultimately, doing things right the first time is always faster and cheaper than doing things over.