Does your organization track quality costs? Find out about hidden prevention and appraisal costs you may have been forgetting.
Many organizations are familiar with Cost of Quality (CoQ), a metric that can be used to prioritize improvement efforts by tracking the various contributions to quality-related work. CoQ has four components: prevention costs, appraisal costs, and costs of internal and customer-facing failures. Typically, the components of CoQ are tracked over time to identify patterns and changes in the distribution of costs, which can help leaders reallocate resources more effectively.
Together, prevention and appraisal costs are referred to as costs of conformance, because these activities are required to make sure your organization reaches its quality goals. (Figure 1) Prevention and appraisal costs reflect the time and money required to prevent problems and issues, while failure costs reflect the time and money to recover from them. Since recovery can take months or years, especially when the reputation of the company is affected.
Figure 1: Cost of quality (CoQ), from Radziwill (2006)
Prevention costs come from activities that are intended to prevent poor quality -- or the perception of poor quality -- in products and services. This includes setting quality standards, planning and managing product reviews, evaluating process capability, and education and training. Appraisal costs, which also contribute to the cost of conformance, are associated with measuring or evaluating the degree to which an organization is able to meet its quality and performance goals. This can include internal and third party audits, inspections, calibrations, preventive maintenance, and supplier quality management. In Wood (2006), some additional items are added to these lists that you may not have considered yet:
- Market research. Even if your products meet specifications, if you are not targeting the right customers and markets, you will fail to satisfy customers and generate revenue.
- Customer surveys. Identifying the standards by which your customers will judge you, even though it is often done in advance of design and production, is still part of prevention.
- Contract and document review. Many companies spend long hours reviewing legal documents, a process which is expensive to begin with. Finding automated or more streamlined ways to review documents will also reduce prevention costs.
- Source inspection. Do you perform supplier reviews? All company-incurred costs, including travel, should be included in appraisal costs.
- Lab support. Do you use an external lab to help you evaluate products, services, or measurements? If so, these should be part of appraisal costs.
- Depreciation allowances. Because measurement is part of appraisal, contributions from capitalized equipment should also be considered in routine quality cost assessment.
These additional items reveal an important lesson: quality is not just about meeting requirements, but about making a difference for those who can benefit from your organization’s products and services. By thinking holistically about quality costs, you may be able to identify areas for improvement beyond the production line.
Radziwill, N. M. (2006, June). Cost of Quality (CoQ) metrics for telescope operations and project management. In Modeling, Systems Engineering, and Project Management for Astronomy II (Vol. 6271, p. 627104). International Society for Optics and Photonics.
Radziwill, N. M. (2018, October 16). Getting Started with Cost of Quality (CoQ). Intelex Community. Available from https://community.intelex.com/explore/posts/getting-started-cost-quality-coq
Wood, D. C. (Ed.). (2012). Principles of quality costs: Financial Measures for strategic implementation of quality management. Milwaukee, WI: ASQ Quality Press.
About the Author: Nicole Radziwill is the Vice President, Global Practice Leader, Quality & Supply Chain at Intelex Technologies. Before Intelex, she was an Associate Professor of Data Science and Production Systems, Assistant Director (VP) End-to-End Operations at the National Radio Astronomy Observatory (NRAO), and manager and consultant for several other organizations since the late 1990's bringing quality management to technologically-oriented operations. She is a Fellow of the American Society for Quality (ASQ) with a Ph.D. in Quality Systems from Indiana State University. Nicole serves as Editor of Software Quality Professional (SQP) journal and is a former Chair of the ASQ Software Division. She is an ASQ Certified Manager of Quality and Organizational Excellence (CMQ/OE) and Certified Six Sigma Black Belt (CSSBB).
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