A key philosophical question that manufacturers are often faced with.

Does higher quality cost more, or does it cost less?

In order to design an effective quality system, manufacturers need to consider the Cost of Quality (COQ).

While we can all agree on the importance of quality in driving a business’ bottom line and determining its success, we are often guilty of underestimating the underlying costs that can undergo a snowball effect when quality is not maintained in a manufacturing process.

This is where COQ comes in, which is essentially a sum of:

Cost of Good Quality (or the cost of conformance), and
Cost of Poor Quality (or the cost of non-conformance)

Cost of Good Quality

This is the more intuitive component of the cost associated with quality – the cost you would incur to produce a quality item. This type of cost generally increases with an increase in quality and includes two components:

Appraisal Cost: Appraisal, or inspection, costs are associated with measuring and monitoring activities related to quality. Appraisal costs are incurred because of the need to control products and services to ensure high quality in each stage of production – it is the cost of finding a defect. For example:
1. Procurement and Parts Inspection
2. In-process Inspections and Tests
3. Field Testing
4. Quality Audits
5. Equipment maintenance and calibration

Note that some quality management knowledge bodies, such as ASQ, categorize appraisal cost as a Cost of Poor Quality instead.

Prevention Cost: Now that you have found a defect through appraisal/inspection, the next steps are to find out how and why it happened and implement a robust corrective recurrence control action plan to prevent it from happening again, or at least keep it under control. Prevention costs include all activities that are designed to prevent or minimize poor quality in products or services. They are typically associated with the design, implementation, and maintenance of the quality management system. For example:
1. Quality Planning
2. Quality Assurance and Quality Management System
3. Training and Development
4. Supplier Oversight and Evaluation
5. New Product Development/Review

Cost of Poor Quality:

An inherently more challenging concept to grasp, the Cost of Poor Quality, is the downstream cost incurred as a result of producing poor quality products and services. It is the cost of NOT producing a quality product or service, and generally decreases with increasing quality. It includes:

Internal Failure Costs: These are incurred to rectify defects discovered before the product or service is delivered to the end-user/customer, and would have otherwise led to the customer not being satisfied. These costs occur when the final product fails to reach design quality standards. The deficiencies can be caused by either defects in products or inefficiencies in processes, or both. For example:
1. Re-work (including re-manufacture, re-inspection, re-design, and re-testing)
2. Downtime
3. Material Downgrading or Scraping
4. Failure/Root Cause Analysis
External Failure Costs: They are incurred when products or services that fail to reach quality standards are not detected until after being delivered to the customer, and in most cases result in customer dissatisfaction. In today’s world of instant connectivity and power of social outreach, a larger portion of the external failure costs materialize as intangible, or latent, costs. For example:
- Tangible:
  1. Processing Customer Complaints
  2. Customer Returns
  3. Warranty Claims
  4. Product Recalls
- Intangible:
  1. Loss of Brand Image
  2. Loss of Online Reputation

The 3 Perceptions of COQ

Quality isn’t an objective, defined measurement, but rather, completely subjective. Each manufacturer has their own view towards what counts and what doesn’t count towards quality. The following are 3 of the more popular perceptions of COQ:

Higher Quality = Higher Costs
This is a one-dimensional viewpoint on the relationship between cost and quality, and only considers the Cost of Good Quality, and not the Cost of Poor Quality. This is rather a huge misconception that is still borne by a large proportion of manufacturers, and only ends up hurting their own ability to compete.
Savings From Improved Quality is Higher Than the Costs Spent
This, too, is a partially one-dimensional viewpoint and largely only considers the Cost of Poor Quality, with little weightage given to the Cost of Good Quality. This perception is widely accepted in Japan in the form of Kaizen and is what coined the continuous process improvement methodology in Japanese manufacturing methods. This perception also believes in the fact that Cost of Poor Quality reaches virtual zero at the same time Cost of Good Quality plateaus as you increase quality.
Quality Only Costs More if You Don’t Get it Right The First Time

This perception approaches COQ with the viewpoint that quality costs are those that are incurred in excess of which would have been incurred if the product(s) were manufactured or service(s) provided exactly right the first time. This is also the viewpoint from the Total Quality Management (TQM) philosophy where quality costs include both Cost of Good Quality and Cost of Poor Quality.

While the three perceptions can be fairly contradictory, and professional opinions are divided as to which one is (more) “correct”, the right approach towards the true COQ is likely a combination of the three, where the optimal quality level is at the intersection of Cost of Good Quality and Cost of Poor Quality.

Measuring the Cost of Quality with this approach helps:

Identify Hidden Costs and Improvement Areas
Understand Pareto of Failure Costs
Address Root Cause of Defects and Not Symptoms

Now the path towards optimizing COQ could vary greatly depending on industry specifics such as manufacturing philosophy. Let’s consider a couple of approaches:

The Six Sigma Methodology

The traditional outlook involves one that if an organization wants to reduce defects and, subsequently, the Cost of Poor Quality, the Cost of Good Quality would need to increase in the form of investments in testing, inspection, and training programs, among others. However, following the Six Sigma and TQM philosophy of building quality into the process and doing things right the first time, the increase in Cost of Good Quality, while striving for a zero defect performance, can be smoothed if tighter process control can be achieved.

Business processes with a better process control i.e. sigma, will have substantially lower appraisal and prevention costs. Although you practically cannot eliminate the Cost of Poor Quality in its entirety, their reduction through better process performance will be a significant contributor to optimizing your COQ.

Traditional Management vs Six Sigma [Source]

Manufacturing (Machining Process)

In parts manufacturing, using advanced precision CNC machining technologies can make a huge difference. Here’s a starter list of preventive measures you can implement to manage Cost of Quality:

Tool Monitoring: Technologies are now available that can continuously monitor the health of your machining tools and can stop the tool(s), or warn the operator, before it reaches a condition that could damage a workpiece or yield an unacceptable specification, such as finish or tolerance. Through AI implementations such as machine learning, as more data is gathered on the tool’s performance, the prediction model becomes more accurate. The same technology also helps to proactively identify tools at risk of failure and replace them without unplanned downtime.

In-Process Probing: Inspection probes can be installed that work with the control system to create a closed loop inspection process that continuously monitor part quality based on a pre-defined set of criteria, and makes adjustments to the tool offsets as necessary as it iterates through the process until adequate quality is retained.

Thermal Imaging: Imaging technologies can help maintain precision machining accuracy over long periods on complex parts by automatically measuring and compensating for thermal changes and stresses in the workpiece.

Final Thoughts

COQ is also considered an important communication tool. Philip Crosby, one of the pioneers of quality management, demonstrated that it can be a powerful tool in raising awareness on the importance of quality. He referred to COQ as the "price of nonconformance" and argued that if organizations were not looking towards optimizing COQ, then they were consciously choosing to pay for poor quality.

Armand Feigenbaum, the father of Total Quality Management (TQM), put forward the idea that delivering quality is the responsibility of every member within an organization, expanding the concept of quality to include more than just products and services that an organization delivers to its end-users.