How to Measure Cost of Quality (COQ)
The methods for calculating Cost of Quality vary from company to company. In many cases, organizations like the one described in the previous example, determine the Cost of Quality by calculating total warranty dollars as a percentage of sales. Unfortunately this method is only looking externally at the Cost of Quality and not looking internally. In order to gain a better understanding, a more comprehensive look at all quality costs is required.
The Cost of Quality can be divided into four categories. They include Prevention, Appraisal, Internal Failure and External Failure. Within each of the four categories there are numerous possible sources of cost related to good or poor quality. Some examples of typical sources of Cost of Quality are listed below.
The Cost of Good Quality (CoGQ)
- Prevention Costs – costs incurred from activities intended to keep failures to a minimum. These can include, but are not limited to, the following:
- Establishing Product Specifications
- Quality Planning
- New Product Development and Testing
- Development of a Quality Management System (QMS)
- Proper Employee Training
- Appraisal Costs – costs incurred to maintain acceptable product quality levels. Appraisal costs can include, but are not limited to, the following:
- Incoming Material Inspections
- Process Controls
- Check Fixtures
- Quality Audits
- Supplier Assessments
The Cost of Poor Quality (CoPQ)
- Internal Failures – costs associated with defects found before the product or service reaches the customer. Internal Failures may include, but are not limited to, the following examples:
- Excessive Scrap
- Product Re-work
- Waste due to poorly designed processes
- Machine breakdown due to improper maintenance
- Costs associated with failure analysis
- External Failures – costs associated with defects found after the customer receives the product or service. External Failures may include, but are not limited to, the following examples:
- Service and Repair Costs
- Warranty Claims
- Customer Complaints
- Product or Material Returns
- Incorrect Sales Orders
- Incomplete BOMs
- Shipping Damage due to Inadequate Packaging
These four categories can now be applied to the original Cost of Quality equation. Our original equation stated that the Cost of Quality is the sum of Cost of Good Quality and Cost of Poor Quality. This is still true however the basic equation can be expanded by applying the categories within both the Cost of Good Quality and the Cost of Poor Quality.
- The Cost of Good Quality is the sum of Prevention Cost and Appraisal Cost (CoGQ = PC + AC)
- The Cost of Poor Quality is the sum of Internal and External Failure Costs (CoPQ = IFC + EFC)
By combining the equations, Cost of Quality can be more accurately defined, as shown in the equation below:
COQ = (PC + AC) + (IFC + EFC)
One important factor to note is that the Cost of Quality equation is nonlinear. Investing in the Cost of Good Quality does not necessarily mean that the overall Cost of Quality will increase. In fact, when the resources are invested in the right areas, the Cost of Quality should decrease. When failures are prevented / detected prior to leaving the facility and reaching the customer, Cost of Poor Quality will be reduced.
