Cost of Quality (COQ)

Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer. They could include:

• Waste: Performance of unnecessary work or holding of stock as a result of errors, poor organization, or communication
• Scrap: Defective product or material that cannot be repaired, used, or sold
• Rework or rectification: Correction of defective material or errors
• Failure analysis: Activity required to establish the causes of internal product or service failure

External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include:

• Repairs and servicing: Of both returned products and those in the field
• Warranty claims: Failed products that are replaced or services that are re-performed under a guarantee
• Complaints: All work and costs associated with handling and servicing customers’ complaints
• Returns: Handling and investigation of rejected or recalled products, including transport costs

Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and incurred before actual operation, and they could include:

• Product or service requirements: Establishment of specifications for incoming materials, processes, finished products, and services
• Quality planning: Creation of plans for quality, reliability, operations, production, and inspection
• Quality assurance: Creation and maintenance of the quality system
• Training: Development, preparation, and maintenance of programs

The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one.

These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities.

Cost of quality is also an important communication tool. Philip Crosby demonstrated what a powerful tool it could be to raise awareness of the importance of quality. He referred to the measure as the “price of nonconformance” and argued that organizations choose to pay for poor quality.

Many organizations will have true quality-related costs as high as 15-20% of sales revenue, some going as high as 40% of total operations. A general rule of thumb is that costs of poor quality in a thriving company will be about 10-15% of operations. Effective quality improvement programs can reduce this substantially, thus making a direct contribution to profits.

The quality cost system, once established, should become dynamic and have a positive impact on the achievement of the organization’s mission, goals, and objectives.

Cost of Quality Example

You can also search articles, case studies, and publications for cost of quality resources.

Using Cost of Quality to Improve Business Results (PDF) Since centering improvement efforts on cost of quality, CRC Industries has reduced failure dollars as a percentage of sales and saved hundreds of thousands of dollars. 

Cost of Quality: Why More Organizations Do Not Use It Effectively (World Conference on Quality and Improvement) Quality managers in organizations that do not track cost of quality cite as reasons a lack of management support for quality control, time and cost of COQ tracking, lack of knowledge of how to track data, and lack of basic cost data.

The Tip of the Iceberg (Quality Progress) A Six Sigma initiative focused on reducing the costs of poor quality enables management to reap increased customer satisfaction and bottom-line results.

Cost of Quality (COQ): Which Collection System Should Be Used? (World Conference on Quality and Improvement) This article identifies the various COQ systems available and the benefits and disadvantages of using each system.

Adapted from The ASQ Quality Improvement Pocket Guide: Basic History, Concepts, Tools, and Relationships, ASQ Quality Press.