Every defect, rework, warranty claim and returned shipment carries a price — one that rarely shows up in a single line of your accounts. Cost of Quality makes that hidden cost visible, so you can invest in prevention where it pays back the most.
Cost of Quality (COQ) is a methodology that allows an organisation to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of its products or services, and that result from internal and external failures. Having this information lets you determine the potential savings to be gained by implementing process improvements.
Put simply, COQ is the cost your business bears to keep the outputs it delivers to its customers up to standard. If you do not employ your resources to adhere to quality metrics, you lose out on your competitive advantage. COQ has two main components: the cost of good quality (the cost of conformance) and the cost of poor quality (the cost of non-conformance).
Two buckets are money spent to get quality right. Two are money lost when quality goes wrong. Measuring all four is the first step to controlling them.
| Bucket | Category | When Incurred |
|---|---|---|
| Prevention Costs | Cost of Good Quality (Conformance) | Before production — planning, specifications, training, QMS design reviews. |
| Appraisal Costs | Cost of Good Quality (Conformance) | During production — inspections, process controls, audits, supplier assessments. |
| Internal Failures | Cost of Poor Quality (Non-conformance) | Before the customer receives the product — scrap, rework, breakdowns, failure analysis. |
| External Failures | Cost of Poor Quality (Non-conformance) | After the customer receives the product — warranty claims, returns, complaints, shipping damage. |
Costs incurred from activities intended to keep failures to a minimum:
Costs incurred to maintain acceptable product quality levels:
Costs associated with defects found before the product or service reaches the customer:
Costs associated with defects found after the customer receives the product or service:
Increased spend on prevention and appraisal is likely to produce a substantial reduction in internal and external failure costs. Spend too little on prevention and appraisal, and you pay far more on failures. Because of this trade-off, there is an optimum operating level where the combined costs are at a minimum.
As you invest more in prevention and appraisal, failure costs fall away. The total-cost curve dips to a minimum at the optimum level — spend beyond that and the extra conformance cost outweighs the failure savings. Our job is to find your optimum, not chase perfection at any price.
Worked hypothetical example (illustrative only, not a real client's figures): suppose a manufacturer spends the equivalent of 1% of revenue on prevention and appraisal, and loses 9% of revenue to internal and external failure costs — a 10% total cost of quality. Raising prevention and appraisal spend to 3% of revenue might pull failure costs down to 4%, for a lower 7% total. Push conformance spend further, to 6% of revenue, and failure costs may only fall to 3% — a 9% total, because the extra conformance spend now costs more than the failures it prevents. The 3%/4% combination is this hypothetical business's optimum operating level.
We turn quality from a gut feeling into a measured, trackable number — and then help you act on it, quarter after quarter.
Cost of Quality works hand in hand with our Virtual Process Assessor and our Process Improvement & ZED engagements — natural companions for turning quality insight into operating results.
Cost of Quality is a methodology that measures the extent to which an organisation's resources are used for activities that prevent poor quality, appraise the quality of its products or services, and result from internal and external failures. It has two main components — the cost of good quality (conformance) and the cost of poor quality (non-conformance).
The cost of conformance (good quality) is what you spend to prevent and appraise quality — prevention costs and appraisal costs. The cost of non-conformance (poor quality) is what failures cost you — internal failures found before the customer receives the product, and external failures found after delivery.
No. Increased spend on prevention and appraisal substantially reduces internal and external failure costs, while spending too little on prevention and appraisal drives failure costs up. Because of this trade-off there is an optimum operating level where the combined cost of conformance and non-conformance is at its minimum — that is the level we help you find.
Let Virtual Advisor measure your cost of quality, build your dashboard and pinpoint your optimum operating level. Start the conversation today.