Cost of Quality: The Secret Ingredient for Competitive Advantage

Quality is a core customer value and the cornerstone for any industry to stay competitive. It is the bedrock upon which reputation, customer satisfaction, and long-term success are built. However, ensuring top-notch quality isn’t without its price. This is where the concept of cost of quality comes into the limelight.

It simply delves into the expenses linked to maintaining product quality standards and producing goods that deviate from these standards. It encompasses both the visible and hidden costs associated with maintaining quality, rework, failures, and the overall quality management process. This insight helps identify potential savings that are achievable through process enhancements.

Defining Cost of Quality (CoQ)

Cost of quality refers to a methodology enabling an organization to gauge the resources dedicated to preventing, assessing, and addressing poor quality in its products or services, both internally and externally.

Cost of Conformance: These are the expenses linked to ensuring quality. It involves investment in prevention (e.g., training, quality control processes) and appraisal (e.g., inspections, testing) activities. The goal is to prevent defects and errors from occurring in the first place.

Cost of Non-Conformance: This involves the expenses incurred due to poor quality, such as rework, scrap, warranty claims, customer complaints, and potential loss of customers or market share. Non-conformance costs can be internal (e.g., reworking a faulty product) or external (e.g., dealing with customer returns).

Analyzing the cost of quality empowers manufacturers to enhance their quality processes. This strategy divides quality into two facets: ‘control’ representing good quality and ‘failure of control’ depicting poor quality.

Types of Cost of Quality

1. Prevention Costs

Prevention costs refer to the expenses linked to initiatives aimed at averting defects. These include:

• Formulating a quality management system and relevant planning documents.
• Setting product specifications, conducting new product development aligned with those specifications, and performing testing.
• Ensuring employee awareness and training in quality standards, along with supplier evaluation.
• Conducting quality audits and carrying out programs for continuous quality improvement.

2. Appraisal Costs

Appraisal costs are incurred from conducting thorough examinations and assessments to ascertain compliance with specific requirements. These costs might involve:

• Inspecting and testing incoming materials and finished products, along with accepting finished products.
• Purchasing and maintaining test equipment, as well as documenting inspections and tests, including employee wages related to these activities.
• Analyzing the results of inspections and tests.
• Evaluating suppliers.

3. Internal Failure Costs

These are the expenses accumulated in addressing any nonconformities discovered prior to delivering the product to the recipient, such as:

• Disposing of large amounts of scrap materials.
• Expenses related to reprocessing and repeating tests.
• Conducting product remedies, reworks, and repair operations.
• Costs incurred from downgrading products and conducting failure analysis.
• Machine breakdowns caused by improper maintenance and waste resulting from poorly designed processes.

4. External Failure Costs

These costs illustrate the expenses involved in rectifying all nonconformities discovered after the product has been delivered to the recipient. These involve:

• Addressing customer complaints and handling product or material returns.
• Dealing with damages caused by inadequate packaging and penalties resulting from delayed deliveries.
• Covering costs related to providing services and conducting repairs.
• Managing incorrect sales orders and incomplete Bills of Materials (BOMs).
• Handling warranty claims.

Process of Quantifying CoQ

Measuring the CoQ involves diverse methodologies across different companies. Frequently, organizations assess the CoQ by calculating total warranty expenses as a fraction of sales. Yet, this approach primarily examines the external factors of the CoQ, neglecting its internal dimensions. A broader spectrum of comprehension demands an examination, including all quality costs.

The cost of quality is a combination of two components, the cost of good quality (CoGQ) and the cost of poor quality (CoPQ), and can be expressed by the fundamental equation:

CoQ = CoGQ + CoPQ

While this equation appears straightforward, it embodies complexity. It involves various expenses related to a product’s quality, entailing preventive measures (PC) to avert failures (AC), expenses for process controls ensuring consistent quality, and costs arising from both internal (IFC) and external failures (EFC).

CoQ = (PC + AC) + (IFC + EFC)

How Digitalization Can Evolve Each Aspect of CoQ?

Digital transformation is a phenomenon that has the prospect of redefining every facet of managing CoQ, catalyzing a productivity and performance shift in manufacturing operations. By integrating quality into every operational layer, digitalization can contribute to and magnify returns on investment (ROI) through a quality-centric approach.

Employ Quality Data Management

Harnessing robust data collection, analytical capabilities, automated alerts, and historical data accessibility ensures unparalleled product consistency. This commitment to meeting customer expectations positions your brand as a premier industry leader, distinguishing it through superior quality and reliability.

Minimize Waste Expenditure

Relying solely on final inspections proves futile, often discovering defects too late in the production line, leading to discarded products and surging expenses in rework and material losses. Real-time monitoring of product and process quality at pivotal stages empowers operators to swiftly rectify deviations and efficiently curtail waste, scrap, and rework costs.

Enhance Quality Cost Reduction

Identifying and rectifying product or process anomalies before the final inspection through  tech-enabled mechanisms such as statistical control tools, integration technologies, and RCA software, coupled with responsive customer communication channels, ensures rapid issue resolution. This simply fosters stronger customer relationships, amplifies repeat orders, and solidifies customer satisfaction.

Smart Food Safe strives to be a pioneering agent in bringing digital transformation to the quality management paradigm in global industries. Let us see how.

Smart Food Safe’s Quality Management Software Solution to Keep CoQ in Control

Smart Food Safe’s end-to-end digital quality management system ensures quality compliance and streamlines quality requirements at each stage of the product life cycle. By controlling the Cost of Quality with Smart Food Safe’s suite of quality management modules, businesses can not only uphold the highest standards but also enhance total efficiency and profitability.

Smart CAPA: Effectively manage and track customer complaints through a centralized platform where complaints can be logged, categorized, and tracked to ensure timely resolution.

Smart Audit: This audit management system involves tools to plan, conduct, and report on audits efficiently by automating audit scheduling, assigning tasks, generating checklists, and streamlining the audit process.

Smart Doc: Quality program documents, standard operating procedures (SOPs), certifications, and compliance records can be well-organized, accessible, and up-to-date in a digital format with features such as version control, document storage, retrieval, and sharing.

Smart Supplier: Qualify and manage suppliers based on quality risk-driven assessment and monitoring processes with this module through vendor evaluation, performance tracking, and communication. This digital solution could also facilitate collaboration, streamline procurement processes, and ensure that vendors meet quality and compliance standards.

Smart Specification: Manage product specifications throughout the life cycle by enabling their creation, storage, and modification, ensuring compliance with industry standards, and communicating specifications across departments or stakeholders.

Invest in Smart Food Safe’s Quality Management Software today and elevate your quality control processes while keeping your costs in check.