Cost of Quality: Cost of Conformance & Cost of Nonconformance |

The cost of quality includes the cost of conformance and cost of non-conformance, which is a crucial factor in quality planning. 

Quality is important. It impacts all industries and is a selling point for many companies.

For example, Toyota delivers high-quality products using Jidoka (Automation with Human Touch) and Just in Time methodologies that resonate with customers’ requirements. 

Therefore, one of the basic definitions of quality is conformance to customer requirements. 

Quality should not be restricted to the inspection of deliverables; it must be built using procedures that collect stakeholders’ feedback and update the processes to improve efficiency further. 

Organizations have discovered the relationship between quality of management and management of quality. Therefore, they are adopting quality tools like Six Sigma, TQM, etc., to ensure that you integrate quality into processes from the beginning.  

Quality comes at a cost because it is a deliberate effort to improve processes, products, and services.

However, it pays in the end, as evident in the following testimonials:

STMicroelecteonics, Inc. reduced lost-day injuries from 1.01 per 100 workers to 0.65 in three years, which is 74% below the industry average, and increased employee satisfaction levels through quality implementation.1

Dana Corporation lowered the internal defect rate by more than 75%. Employee turnover went below 1%, and economic value added increased from 15 million USD to 53 million USD in two years.1

Quality affects performance and employees’ morale.

Cost of Quality

Before we start discussing the cost of quality, let’s understand the quality.

What is Quality?

Quality plays a key role in the success of many organizations. The era of seller control has vanished, and buyers drive the market now. As a result, a low-quality product can impact market leadership. 

Quality has spread from the traditional manufacturing sector to the service industry, hotels, airlines, hospitals, etc. It can be related to performance, durability, reliability, conformance, serviceability, aesthetics, etc. 

For service industries, timeliness, completeness, courtesy, responsiveness, accuracy, consistency, accessibility, and convenience are key quality parameters.

A survey asked 86 managers to define quality in the United States. 

Below are the results of the survey.

These definitions show that customer satisfaction is the essence of quality. Product quality is high when the customer’s expectations are met or exceeded. A high-quality product causes less after-sales support, low product recall, and increased sales revenue.

Quality in Project Management

Quality in project management begins with planning with a vision, and this vision guides the quality processes. 

In quality planning, quality metrics and quality management plans are developed for quality assurance and control activities. 

The goal of quality assurance (QA) is to follow a preventive approach, as prevention is better than a cure. 

Here, activities like quality audits, design of experiments, data gathering, and analysis get carried out. In addition, these activities review the processes in the planning stage to ensure they conform to the requirements.

Quality control includes inspection of deliverables. 

You must design quality into processes rather than relying on inspection. p Prevention is preferred over inspection as it keeps errors out of the process in the first place.

Now, let’s return to the topic on hand, i.e., the cost of quality.

Quality comes at a cost, which can be upfront or resultant. 

The preventive approach invests in quality upfront to keep defects from occurring, while the resultant cost is a failure. 

Cost of Quality is a concept that the project management team needs to understand. 

Since it involves deliberate investment, it must be well-planned.

Types of Cost of Quality

Types of quality include the cost of conformance and cost of non-conformance and can be of four types:

1. Preventive Cost
2. Appraisal Cost
3. Internal Failure Cost
4. External Failure Cost

The first two costs are the cost of conformance, and the last two are the cost of non-conformance.

The formula to calculate the cost of quality is as follows:

Cost of Quality = Cost of Conformance + Cost of Non-conformance

Cost of Conformance

This includes appraisal and prevention costs.

#1. Appraisal Cost

You spend appraisal costs in assessing work process elements. This includes testing, inspection, etc. 

For example, an inspection of raw materials for quality and calibrating equipment and instruments periodically for accuracy and precision.

In-process testing of deliverables ensures they comply with requirements. 

Finally, you will inspect and test the finished product.

#2. Prevention Cost

Prevention costs include keeping equipment, employees, and methods safe from failure. 

Training of personnel makes them skillful, resulting in less chance of poor performance.

Quality planning puts procedures and metrics in place, while quality audits verify the use of standard methods. 

Control processes help prevent and eliminate sources of errors.

Cost of Nonconformance

This includes internal and external failure costs.

#3. Internal Failure Costs

Rework impacts profits negatively. Therefore, getting it right the first time is necessary. 

A scrap is a defective product that you cannot repair.  

Unplanned downtime is losses of person-hours possibly resulting from system failure. 

Downgrading is undervaluing a product due to poor quality, thus incurring losses. 

#4. External Failure Costs

External failures begin with product recalls, return, or exchange of products after the manufacturer discovers defects in the product. 

General Motors recalled 30.4 million vehicles worldwide due to faulty ignition switches that could shut down engines without warning and disable power steering. The failure resulted in at least 124 deaths.

Warranty claims include repairing or replacing a product in the event of failure within a specified tenure. This is a loss to the manufacturer. 

Customer defections are costly because they could lead to a chain of lost opportunities for business. 

Poor quality increases the lifetime product cost, as customers must spend money repairing the product after its warranty period. 

Benefits of the Cost of Quality Model

• It allows organizations to find the optimal cost for a quality investment.
• It provides a path for further improvements.
• It saves costs in the long run and increases brand recognition.
• It helps boost sales.

Summary 

The Cost of Quality is the sum of the cost of conformance and cost of non-conformance. It shows how investment in quality can reduce the overall product cost and increase organizational profits. In addition, it increases brand recognition, improves processes and employee morale, and creates a healthy working environment.

References

1. Evans, J.R., and Dean, J, W. (2003), “Total Quality: Management, Organization and Strategy”, third edition, Thomson South-Western, pg 3, -5, 96
2. Juran J. M., and Godfrey, A, B. (1998), “Juran’s Quality Handbook”, fifth edition, McGraw Hill, pg. 2.1-2.5, 8.1-8.25
3. International Six Sigma Institute, “Six Sigma Revealed Training Book”, second edition, pg. 12.
4. PMBOK Guide, Project Management Institute, sixth edition, pg. 272-283
5. https://www.copc.com/about-copc-inc/our-history/
6. https://global.toyota/en/company/vision-and-philosophy/production-system/
7. https://www.kiplinger.com/slideshow/investing/t052-s000-10-biggest-product-recalls-of-all-time/index.html