1. Cost of Quality

2. Visible and hidden
costs Visible costs
•Scrap
•Rework
•Warranty costs
Hidden Costs
• Conversion efficiency of materials
• Inadequate resource utilization
• Excessive use of material
• Cost of redesign and re-inspection
• Cost of resolving customer problems
• Lost customers / Goodwill
• High inventory

3. Categories of Quality Costs
Quality Costs
Conformance Non-Conformance
Prevention Appraisal Internal failure External failure

4. Cost of quality
Cost of quality = Cost of conformance + Cost of non-
conformance
• Cost of conformance is the cost of providing products or
services as per the required standards. This can be termed as
good amount spent. (Prevention & Appraisal costs)
• Cost of non-conformance is the failure cost associated with a
process not being operated to the requirements. This can be
termed as unnecessary amount spent.( Internal & External
failure costs)

5. Prevention Costs
Prevention costs are associated with design, implementation ,
maintenance, and planning prior to actual operation, in order to avoid
defects from happening.
The emphasis is on the prevention of defects in order to reduce the
probability of producing defective products. Prevention activities lead
to reduction of appraisal costs and both type of failures ( internal and
external ).The motto is “Prevention rather than appraisal” .

6. Activities associated with
Prevention costs
Market research
Quality training programs.
Contract review
Design review
Field trials
Supplier evaluation
Process plan review
Process capability review
Design and manufacture of jigs and fixtures
Preventive checks & maintenance

7. Appraisal costs
Appraisal costs are spent to detect defects
to assure conformance to quality standards.
Appraisal cost activities sums up to the “cost
of checking if things are correct”.The
appraisal costs are focused on the discovery
of defects rather than prevention of defects

8. Activities associated with Appraisal
costs
Proto type testing
Vendor surveillance
Incoming material inspection
Process inspection/control
Final inspection
Laboratory testing / measurement
Depreciation cost for measuring
Quality audits.

9. Internal failure costs
Internal failure costs occurs when results of work fail to reach
designated quality standards , and are detected before transfer to
the customer takes place.

10. Examples
Internal failure costs
Design changes/ corrective action
Scrap due to design changes
Excess inventory
Rectification / reject disposition of
purchased material
Rework/rejection in manufacturing
Downgrading of end product
Downtime of plant & machinery
Trouble-shooting & investigation of
defects

11. External failure
costs
External failure costs occur when the product or service from a
process fails to reach designated quality standards , and is not
detected until after transfer to the customer.

12. Activities associated with
External failure costs
Processing / investigation of customer complaint
Repair/replacement of sold goods
Warranty claims
Product liability & litigation costs
Interest charges on delayed payment due to quality
problems
Loss of customer goodwill & sales.

13. Size of four categories of quality
costs.
The organizations which do not follow TQM,there is less emphasis on
prevention and their main quality efforts are on appraisal with very
little control on internal and external failure costs.
Various studies have shown that quality cost in manufacturing
companies the world over range from 20 % to 30 % of turnover and in
the case of service companies it can go up to 40 % as illustrated in
graph on the next slide.

14. Size of various quality cost elements
10-15%
Quality costs in % of sales
10-12% The total quality
costs 25-35 %
of turnover.
4-6%
1%
Preventive Appraisal Internal External
Failure Failure

15. Impact of TQM on
costs.
TQM is primarily aimed to improve the quality of the product , higher
customer satisfaction and better working environment for the
employees. The most dramatic impact of TQM is on reduction of
quality costs which directly effect the profitability .
This is demonstrated by the results of TQM program in Xerox Corp .
The change in various elements of quality cost before and after
launching TQM by Xerox Corp is shown on the next slide.

16. Impact of TQM on costs.
An example from Xerox Corp.
35
30
25 Internal
% of sales
Failure
20
15 Internal
Failure
10 Appraisal
Appraisal
5
Prevention
prevention
0
Before TQM After TQM

17. 1-10-100 Rule
Cost of rectifying defect
1
Prevention Rs
Rs
Stages
10
Correction Rs
Rs
R
Rs s 100
Failure
Rs
Rs
Rs
Rs

18. cost of quality
Traditionally recorded quality cost generally account for only
4 to 5 percent of sales which mainly comprise of cost of
scrap, re-work and warranty.

19. Hidden costs of quality
There are additional costs of quality which are hidden and do not
appear in the account books of the company, as they are intangible
and difficult to measure. These additional costs could be as high as
20-25% of sales.

20. Visible and hidden
costs Visible costs
•Scrap
•Rework
•Warranty costs
Hidden Costs
• Conversion efficiency of materials
• Inadequate resource utilization
• Excessive use of material
• Cost of redesign and re-inspection
• Cost of resolving customer problems
• Lost customers / Goodwill
• High inventory