Chapter 26: Costs of Quality

To classify quality costs and prepare a cost of quality report, we can use the four types of quality costs: prevention costs, appraisal costs, internal failure costs, and external failure costs. Each category aims to either ensure product quality before reaching the customer or address issues related to poor quality. Classification of Quality Costs 1. Prevention Costs (Good Quality) o Definition: These are proactive costs incurred to prevent defects and ensure quality standards are met from the start. o Examples:  Quality training and development programs  Equipment maintenance to avoid breakdowns  Supplier quality evaluations and certifications 2. Appraisal Costs (Good Quality) o Definition: These costs are associated with evaluating products and processes to detect defects before they reach the customer. o Examples:  Inspection of raw materials and finished products  Testing of products to ensure they meet specifications  Quality audits and monitoring 3. Internal Failure Costs (Poor Quality) o Definition: These costs arise from defects found before the product is delivered to the customer, requiring rework or disposal. o Examples:  Costs of reworking defective products  Costs of reinspecting reworked items  Scrap and wasted materials 4. External Failure Costs (Poor Quality) o Definition: These costs occur after a defective product or service has reached the customer, often resulting in customer dissatisfaction and financial loss. o Examples:  Warranty repair costs  Product recalls and returns  Lost sales and customer dissatisfaction due to poor quality Cost of Quality Report A Cost of Quality Report provides a breakdown of these costs and allows companies to analyze the percentage spent on good versus poor quality activities. Here’s an example layout for such a report, based on a hypothetical company with $200,000 in total quality-related costs: Quality Cost Category Amount ($) Percentage of Total Costs (%) Good Quality Costs Prevention Costs Appraisal Costs Total Good Quality Costs Poor Quality Costs Internal Failure Costs External Failure Costs Total Poor Quality Costs Total Quality Costs 40,000 60,000 100,000 20% 30% 50% 50,000 50,000 100,000 200,000 25% 25% 50% 100% Analysis of the Cost of Quality Report In this example, the company spends 50% of its quality costs on good quality activities (prevention and appraisal) and 50% on poor quality costs (internal and external failures). This suggests potential for improvement by investing more in prevention and appraisal activities. Such a shift could reduce internal and external failure costs, improving product quality and customer satisfaction while reducing overall costs. Importance of Quality Cost Classification and Reporting Classifying and reporting quality costs allow lean businesses to: • • • • Identify Waste: By tracking poor quality costs, businesses can pinpoint areas where resources are wasted due to defective products. Improve Customer Satisfaction: Reducing external failure costs by improving product quality can enhance customer loyalty and market reputation. Optimize Resource Allocation: Focusing more on prevention and appraisal helps businesses allocate resources efficiently, reducing the need for costly rework or warranty claims. Align with Corporate Responsibility: Investing in quality supports sustainability and corporate responsibility goals by minimizing waste and promoting resource efficiency, which are critical components of the lean model and the triple bottom line (people, planet, profit). By regularly preparing and analyzing a cost of quality report, lean businesses can make informed decisions to balance quality and cost efficiency, ultimately driving profitability and customer satisfaction.