COQ What? COQ is a financial measure of the quality performance of an organization.

It is essentially a measure of lack of quality & can also be termed as cost of bad quality Why? Understanding cost of quality helps organizations to develop quality conformance as a useful strategic business tool that improves their product services & brand image. This is vital in achieving the objectives of a successful organization When? It is primarily used to understand, analyze & improve the quality performance. COQ can be used by shop floor personnel as well as a management measure. it can also be used as a standard measure to study an organization's performance with another. How? The costs associated with quality are divided into two categories: cost due to poor quality cost associated with improving quality Prevention costs and appraisal cost are costs associated with improving quality, while failure costs result from poor quality.

1. Prevention Cost The cost associated with planning, training and writing procedures associated with doing it first time right Prevention cost is achieved by examining closely the total of the lessons learnt or the experience gained Developing and integrating activities into the management systems making it difficult for Page

the same errors to occur again

Marketing/Customer/User Dept Focus is put on continuous need for evaluating the customer and user quality requirements and perceptions Costs are incurred in: marketing research, customer & user perception surveys, focus groups, contracts and document reviews Product/Service/Design Development Costs are incurred to transform the customer and user needs into reliable quality standards Sub-elements of these costs are: design quality progress reviews, design support activities, product design qualification tests, and product or service redesign. PURCHASING DEPARTMENT Money spent to assure conformance to requirements of supplier parts, materials or processes Sub-elements of these are: supplier reviews, supplier rating and supplier quality planning OPERATIONS DEPT (MANUFACTURING/SERVICE) Include those costs that are incurred in assuring the capability and readiness of operations to meet quality standards and requirements Sub-elements include: operation process validation, operations quality planning, design and development of quality measurement and control requirement and collecting quality costs QUALITY ADMINISTRATION Costs that are incurred in the overall administration of the quality management function. Sub-elements include: o o o o o Administrative salaries & expenses Quality program planning Quality education, Quality improvement, Quality audits for the whole program

2. Appraisal Cost The cost associated with checking and testing to find out whether it has been done first time right. The appraisal costs of poor quality have been defined to include all costs incurred in the planned conduct of product or service appraisals to determine compliance to requirements

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Purchasing appraisal costs Cost incurred in the inspection and /test of purchased suppliers or service to determine acceptability for use Sub-elements are receiving or incoming inspections and tests, measurement equipment, qualification of supplier product OPERATIONS DEPT (MANUFACTURING/SERVICE) The cost incurred for the inspection, test or audits required to determine and ensure the acceptability of product or service to continue into each discrete step in the operation plan from start of production to delivery Include costs linked to machines break-downs, destructive testing and the other costs of losses External appraisal cost Expenses made when there is need for field setup or installation and check-out prior to official acceptance by the customer Sub-elements include: evaluations of field performance special product evaluations evaluations of field stock REVIEW OF TEST AND INSPECTION DATA Cost that are incurred due to regular reviewing and inspection and test data prior to release the product for shipment to determine whether product requirements have been met. MISCELLANEOUS QUALITY EVALUATIONS Costs of all support area quality evaluations For e.g: Mail rooms, storerooms and packaging and shipping. 3. Failure cost The cost incurred due to failure in work. It can be either internal cost or external cost Internal Failure Cost refers to those costs associated with defects that are found prior to transfer of the product to the customer (Krishnan 2006). For ex: Scrap; Rework; Material review; Trouble shooting and retest; Customer service Product or service design failure costs Design failure costs are due to the design inadequacies that exist in released documentation for production operations Sub-elements are: design corrective action, rework due to design changes, scrap due to design changes, and production liaison costs PURCHASING FAILURE COST Purchased items are not conformant to the requirements due to degradation or depreciation of the item Sub-elements are purchased material reject disposition costs, supplier corrective actions, rework of the supplier rejects, etc OPERATIONS FAILURE COST A significant portion of overall quality costs

Sub-elements are: material review, corrective action costs, operations rework, internal failure labour losses, equipment repair, etc External costs are the Costs associated with defects that are found after product is shipped to the customer. common examples of the external failure costs are: Customer incurred cost; Customer dissatisfaction cost; Loss of reputation; and Lost opportunity cost According to Besterfield et al., (2006), external failure cost is divided into eight elements: Complaint investigations of customer or user service Returned goods Retrofit and recall costs Warranty claims Liability Costs Penalties Customer or User Goodwill Lost sales Minimizing the Costs of Quality

QUALITY COST MODEL Crosbys Model

Crosby (1979) sees quality as conformance to requirements The price of conformance:

o o Page Actual Prevention and Appraisal Cost Price of non-conformance: Failure Costs

Opportunity Cost or Intangible costs models Emphasizes the role of intangible cost within the overall quality cost scheme Intangible or opportunity losses cost is incorporated into a typical P-A-F model. Process cost model Recognizes the importance of process cost measurement and ownership Total of the cost of conformance and the cost of nonconformance The use of a process cost model is suggested as a preferred method for quality costing within TQM The model pursues a continuous improvement policy on key processes ABC Model Uses the two-stage procedure to achieve the accurate costs of various cost objects Early ABC systems focus on the accurate assignment of overhead costs to products A two-dimensional model of ABC was proposed by Tsai (1998)

QUALITY COST ANALYSIS Quality Cost Analysis is the process that consists in comparing and examining the individual quality cost item to each other and to the total so that appropriate action could be taken Main Analysis Technique Trend Analysis Pareto Analysis Trend analysis can be made from cost categories and subcategories, on products, on the measurement scale, by plants within a corporation, departments, and work-centres By Cost Category

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By Index

By Product

Within a Category

Short Run Trend Analysis Graph

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Pareto analysis is a classical technique for ranking the problems or activities after their importance A small number of problems or activities usually have caused larger proportion of the troubles or consequences and also called 80-20% principle By Category

By Element

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