Cost of poor quality relates to a range of costs incurred by an organization as a result of managing internal and external quality-related tasks and issues.

These costs can vary between organizations and industries depending on a range of factors.

Organizations that fail to capture and understand these costs lack an important indicator that describes not only the cost of quality but also potential savings to be gained through continuous improvement.

In today’s article, we’ll be looking at the cost of poor quality. We’ll be covering:

What is the cost of poor quality
What are the types of costs associated with poor quality
How do you calculate the cost of poor quality
Cost of Poor Quality Examples
Issues associated with Cost of poor quality

What is the cost of poor quality?

Businesses can incur a range of costs relating to poor-quality products, services, and processes.

These costs, when captured, can be used to calculate the total cost of poor quality expended by a business.

While the causes may be both many in frequency and varied in type, we can use the Cost of Poor Quality to help group and describe costs into a value that the business can use.

The result can be used not only as a metric (which can be used to track internal performance and benchmark across industry) but as a means of communicating challenges that it faces to its employees and stakeholders.

What are the types of costs associated with poor quality?

Costs associated with poor quality can be broadly categorized as follows:

1/ Cost of compliance

This can be defined as the costs associated with assessing the organization and its outputs to quality requirements and specifications.

Types of costs may include:

Verification costs
Audit costs
Vendor Assessment costs

2/ Internal Cost of poor quality

These costs relate to issues where defects have been identified before goods are dispatched to the customer.

As an example, consider a production run of 1000 parts; we find that a key dimension has been programmed incorrectly and all 1000 parts are now scrap. This would be an internal cost.

The costs associated with inhibiting issues such as these is also seen as a cost of poor quality (this might include maintenance & a level of internal assessment)

Internal Failure costs could include:

Scrap costs as a result of scrapping defect laden product
Rework costs
Analysis

3/ External Cost of Quality

These costs occur after the customer has received the product and defects have been identified. An example can be seen where a customer receives a product that is faulty and needs to return the item for a replacement. Not only is there likely to be scrap costs for the faulty item there is also costs incurred for shipping, processing and of course the potential for the organization’s brand to be impacted due to the customer receiving an inferior product.

External Failure costs may include:

Warranty
Repairs
Servicing
Logistics
Customer/impact to brand
Internal Training and rework

As you can see, all three categories above drive cost into the business, and all three require different approaches in order to rectify the situation.

How to calculate cost of poor quality

Cost of Quality is an often used as a business metric. As such, an organization will often have its own preferred method of calculating it.

There are two common methods.

1/ Total % of expenditure on Quality vs Total Sales Revenue

2/ Total % of expenditure on Quality vs Total organizational costs.

Metrics are not only useful to track activity within the business but also as a comparison within the industry. As a result, it’s important to choose the method of calculating that is common within your industry.

Of course, stating the obvious, the metric relies on accurate data; for many organizations, this requires data capture from a number of different sources, and those processes must be mature enough to be providing accurate and appropriate information to allow the metric to be calculated.

Accuracy is required for a number of reasons:

Cost of poor quality allows us to assess the effectiveness of quality management within the organization; poor data may lead to incorrect conclusions being made and inappropriate actions taken
Accurate data helps identify key problem areas within a business, highlighting opportunities for savings through investing in Quality
It helps communicate and improve the awareness of quality within an organization (i.e., the cost of non-conformance).

Cost of Quality Examples

When considering the cost of quality, one way of visualizing it is to consider the image of an iceberg to portray two primary types of costs.

Visible costs
Hidden costs

As you can see, there are a small number of visible costs (which are represented by those above the waterline) these include:

Defects
Inspection cost
Customer returns
Rework

As the diagram illustrates the challenge with Quality is the hidden costs that may not be effectively managed or captured (those examples below the line). These include:

Impact to customer
Impact to brand
Overtime
Inventory
Lost Sales
Setup costs
Complaint handling
Additional processing
Time lost

Issues with Cost of Poor Quality

As with any process, you are likely to encounter some issues along the way; common challenges include:

• Lack of awareness by the organization on what costs to track leading to inaccurate metrics and incorrect recovery actions taken

• Access to accurate cost data proves challenging

• Generating interest within the business on the importance of the metric

• Aligning potential savings to costs.

Summary

The cost of poor quality is a valuable method that can be used by a business to understand how expenditure is related to quality.

An organization that fails to track this metric (or its underlying data) loses influence in the ability to control it.

What’s your experience of monitoring the cost of poor quality in your organization? Have you some tips and tricks you’d like to share? What challenges have you faced? As ever, we’d love your feedback. You can reach us on Twitter or via the comments section below.