Cost of quality

Six sigma methodology demands quantification of improvement. In order for that quantification to materialize there must exist in the organization a system for identifying the cost associated with problems, inefficiencies and, in general, customer dissatisfaction. As it turns out, the system most often responsible for such tracking is called cost of quality (COQ). With COQ in any organization (manufacturing and non-manufacturing alike) quality and improvement may be measured at the same time. However, within the COQ, there are two categories that define the structure and reporting of that cost. They are:

• Avoidance costs.

• Total failure costs.

These two categories comprise the two operating curves used for achieving the break-even point of the quality costs break-even chart. Avoidance costs and total failure costs are broken down further into two categories:

• Avoidance costs:

  • Appraisal costs. These are the expenditures that an organization makes to examine the levels of quality at which products are being produced. If the product quality levels are satisfactory, production is allowed to continue. If the quality levels are unsatisfactory, production is suspended until effective corrective action has been implemented to return levels to satisfactory product quality levels. Examples are: all inspection and associated expenses; inspector's wages and fringe benefits; laboratory test technicians' wages, salaries and fringe benefits; test samples for destructive testing; laboratory materials consumed in the process testing; laboratory tooling expenses; the portion of direct labor wages devoted to performing statistical process control (SPC); inspections and tests within the process; and process capability studies.

  • Prevention costs. These are the expenditures a company makes to keep from producing defective or unacceptable product. Examples are all training; quality assurance wages, salaries and fringe benefits; cost of design changes incurred prior to releases for production; the portion of product design engineering devoted to quality assurance; and cost of processing changes incurred prior to releases for production.

These avoidance cost categories are, in the case of appraisal costs, expected to discover and correct problems after the problems surface. On the other hand, prevention costs are intended to be applied before the fact of producing defective product, to prevent the defective product from being produced.

• Total failure costs:

  • Internal failure costs. These are the costs incurred by an organization while it still has ownership of the product. Examples are: scrap; waste in process; rework charges; and repair charges.

  • External failure costs. These are the costs incurred by an organization after it has transferred ownership of the product to its customer, the customer has received and originally accepted the product. Examples are: warranty costs; returned goods; design error; and marketing error.

It is beyond the scope of this book to address the details for constructing a quality cost reporting system. However, a simple and practical approach is to start with a review of the company's "Chart of Accounts" to determine which of those accounts should be selected and to which quality cost category those selected accounts should be assigned. Table 4.10 gives a cursory view of the most standard form based on a typical chart of accounts. By identifying each of the accounts, the reader of the report can see the influence of these costs to the total cost of the organization and, as a result, an appropriate management decision will be made to reduce the out-of-line cost. What is important about the form is the fact that it has two time periods for comparison purposes. The reason for the two periods is to evaluate progress. It is the performance difference (variance, in the language of cost of quality) of the two periods that establishes the improvement trend.

Table 4.10: A typical cost of quality report

	Time period A	Time period B	Difference
Appraisal costs
Account 1
Account 2
Account 3
Account n
Prevention costs
Account 1
Account 2
Account 3
Account n
Internal failure costs
Account 1
Account 2
Account 3
Account n
External failure costs
Account 1
Account 2
Account 3
Account n