Generating Value by Reducing Quality Costs

It is well known – or is it? – that most quality costs are hidden “below the surface.” Studies have shown that as much as 30 percent of revenues may go to cost of quality. Referring to the iceberg image, you will notice that the majority of the iceberg is below the waterline. Equating this to business, it translates into approximately five percent of quality cost is visible.

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It’s just the tip of the iceberg. Most organizations, if tracking cost of quality at all, track the obvious – like these listed below:

  • Scrap, rework, repair, rejects
  • Warranty, recalls, customer returns
  • Inspection and testing costs

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Your organization’s list may vary. Yet while the costs listed above are important and must be tracked and addressed, there are many more costs of quality to consider. Cost of quality is typically measured in four categories, as described below, with a few examples to consider for each category. Please note that this is not an exhaustive list; it is a sample intended to help you start to examine where you may focus your efforts.

  • Appraisal Costs are activities associated with assuring a product or service conforms to performance requirements and standards
  • Prevention Costs are activities intended to prevent poor quality in products or services
  • Internal Failure Costs are activities associated with a product or service not meeting standards or customer requirements prior to delivery to the customer
  • External Failure Costs are activities associated with a product or service not meeting standards or customer requirements at delivery or after delivery to the customer

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In the examples listed below, you will notice that not all quality costs are bad. The goal is to balance the good quality costs of appraisal and prevention with the wasteful quality costs of internal and external failures, while reducing your overall quality costs. Typically, as you work to decrease internal and external failure costs, you will begin to spend more on appraisal and prevention.

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Carefully selecting your initiatives and projects will allow you to focus on costs that prevent direct negative impact to your customers. I believe it is paramount that you set your goal to execute initiatives that move the majority of your quality costs into the category of prevention, and reduce or eliminate your external failure quality costs – where your customer is directly and negatively impacted.

Organizations operating at optimal quality levels may spend less than five percent of their revenues fixing problems, while those operating at average quality levels may spend up to 30 percent of their revenues fixing problems.

Value Generation Partners wishes you much success in your pursuit of understanding and managing your quality costs, thereby generating greater value in your organization!

Reducing quality costs is useful in combination with other LinkedIn Pulse posts found at this link.

Generating Value by Reducing Quality Costs

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