Learning objective of this article:
- Identify the four types of quality
costs and explain how they interact.
Explanation of Quality
A product that meets or exceeds
its design specifications and is free of defects that mar its appearance or
degrade its performance is said to have high quality of conformance.
Note that if an economy car is free of defects, it can have a quality of
conformance that is just as high as defect-free luxury car. The purchasers
of economy cars cannot expect their cars to be as opulently as luxury cars,
but they can and do expect to be free of defects.
Preventing, detecting and dealing with defects cause costs that are
called quality costs or costs of quality. The use of the term "quality cost"
is confusing to some people. It does not refer to costs such as using a
higher grade leather to make a wallet or using 14K gold instead of gold
plating in jewelry. Instead the term quality cost refers to all of the costs
that are incurred to prevent defects or that result from defects in
Quality costs can be broken down into four broad groups.
These four groups are also termed as four (4) types of quality costs. Two of these
groups are known as
prevention costs and
appraisal costs. These are incurred in
an effort to keep defective products from falling into the hands of
customers. The other two groups of costs are known as
internal failure costs
and external failure costs. Internal and external failure costs are incurred because defects are produced despite efforts to prevent them
therefore these costs are also known as costs of poor quality.
The quality costs do not
just relate to just manufacturing; rather, they relate to all the
activities in a company from initial research and development (R & D)
through customer service. Total quality cost can be quite high unless
management gives this area special attention.
Four types of quality
cost are briefly explained below:
Generally the most effective way to manage quality costs is to avoid having
defects in the first place. It is much less costly to prevent a problem from
ever happening than it is to find and correct the problem after it has occurred.
Prevention costs support activities whose purpose is to reduce the number of
defects. Companies employ many techniques to prevent defects for example
statistical process control, quality engineering, training, and a variety of
tools from total quality management (TQM).
Prevention costs include activities
relating to quality circles and statistical process control. Quality circles
consist of small groups of employees that meet on a regular basis to discuss
ways to improve quality. Both management and workers are included in these
Statistical process control
is a technique that is used to detect whether a process is in or out of control.
An out of control process results in defective units and may be caused by a
miscalibrated machine or some other factor. In statistical process control,
workers use charts to monitor the quality of units that pass through their
workstations. With these charts, workers can quickly spot processes that are out
of control and that are creating defects. Problems can be immediately corrected
and further defects prevented rather than waiting for an inspector to catch the
Some companies provide technical
support to their suppliers as a way of preventing defects. Particularly in
just in time (JIT) systems, such support to suppliers is vital. In a JIT
system, parts are delivered from suppliers just in time and in just the correct
quantity to fill customer orders. There are no stockpiles of parts. If a
defective part is received from a supplier, the part cannot be used and the
order for the ultimate customer cannot be filled in time. Hence every part
received from suppliers must be free from defects. Consequently, companies that
just in time (JIT) often require that their supplier use sophisticated
quality control programs such as statistical process control and that their
suppliers certify that they will deliver parts and materials that are free of
Any defective parts and products should be caught as early as possible
in the production process. Appraisal costs, which are sometimes called
inspection costs, are incurred to
identify defective products before the products are shipped to customers. Unfortunately performing appraisal activates doesn't keep
defects from happening again and most managers realize now that maintaining an
army of inspectors is a costly and ineffective approach to quality control.
Employees are increasingly being asked to be responsible for their own
quality control. This approach along with designing products to be easy to
manufacture properly, allows quality to be built into products rather than
relying on inspections to get the defects out.
Failure costs are incurred when a product fails to conform to its design
specifications. Failure costs can be either internal or external.
Internal failure costs result from identification of defects before they are
shipped to customers. These costs include scrap, rejected products, reworking of
defective units, and downtime caused by quality problem. The more effective a
company's appraisal activities the greater the chance of catching defects
internally and the greater the level of internal failure costs. This is the
price that is paid to avoid incurring external failure costs, which can be
When a defective product is delivered to customer, external failure
cost is the result. External failure costs include warranty, repairs and
replacements, product recalls, liability arising from legal actions against a
company, and lost sales arising from a reputation for poor quality. Such costs
can decimate profits.
In the past, some managers have
taken the attitude, "Let's go ahead and ship everything to customers, and we'll
take care of any problems under the warranty." This attitude generally results
in high external failure costs, customer ill will, and declining market share
External failure costs usually give rise to
another intangible cost. These intangible costs are hidden costs that involve
the company's image. They can be three or four times greater than tangible
costs. Missing a deadline or other quality problems can be intangible costs of
Internal failure costs, external failure costs
and intangible costs that impair the goodwill of the company occur due to a poor quality
so these costs are also known as costs of poor quality by some persons.
Examples of four
types of quality cost are given below:
Internal Failure Costs
statistical process control
Supervision of prevention activities
Quality data gathering, analysis, and reporting
Quality improvement projects
Technical support provided to suppliers
Audits of the effectiveness of the quality system
Net cost of scrap
Net cost of spoilage
Rework labor and overhead
Re-inspection of reworked products
Retesting of reworked products
Downtime caused by quality problems
Disposal of defective products
Analysis of the cause of defects in production
Re-entering data because of keying errors
Debugging software errors
External Failure Costs
Test and inspection of
Test and inspection of in-process goods
Final product testing and inspection
Supplies used in testing and inspection
Supervision of testing and inspection activities
Depreciation of test equipment
Maintenance of test equipment
Plant utilities in the inspection area
Field testing and appraisal at customer site
Cost of field servicing and
Warranty repairs and replacements
Repairs and replacements beyond the warranty period
Liability arising from defective products
Returns and allowances arising from quality problems
Lost sales arising from a reputation for poor quality.
Very simple and
inexpensive procedures can be followed to prevent defects.
Electric Company had a persistent problem assembling a simple
push button switch. The switch has two buttons, an on button and an off
button, with a small spring under each button. Assembly is very simple.
A worker inserts the small spring in the device and then installs the
buttons. However the workers some time forget to put in one of the
springs. When the customers discover such a defective switch in a
shipment from Yamada, an inspector has to be sent to the customer's plan
to check every switch in the shipment. After each such incident, workers
are urged to be more careful, and for a while quality improves. But
eventually, someone forgets to put in a spring, and Yamada gets into
trouble with the customers again. This chronic problem was very
embarrassing to Yamada.
Shingo, an expert on quality control, suggested a very simple solution.
A small dish was placed next to the assembly station. At the beginning
of each operation, two of the small springs are taken out of a parts box
containing hundreds of springs and placed in the dish. The worker then
assembles the switch. If a spring remains on the dish after assembling
the switch, the worker immediately realizes a spring has been left out,
and the switch is reassembled. This simple change in procedures
completely eliminated the problem.
Source: Shigeo Shingo and Dr. Alan Robinson, editor-in-chief, Modern
Approaches to Manufacturing Improvement: The Shingo System, (Cambridge,
MA: Productivity Press, 1990), pp. 214-216.
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