The Cost of Quality

THE COST OF QUALITY June 19, 2016
Student’s ID: 15422747 Page 0
THE COST
OF
QUALITY
Managing Operations and
the Supply Chain
Ho Chi Minh City, 2016
Submitted to:
Dr. Andrew Gough
MBA Program Cohort 4
Submitted by:
Nguyen Ngoc Huyen Tran
Student ID: 15422747
Words count: 2749
University of Northampton’s
MBA Student

Table of contents
1. Introduction............................................................................................................. 1
2. Literature review..................................................................................................... 2
2.1. Total Quality Management............................................................................... 2
2.2. Cost of Quality.................................................................................................. 4
2.2.1. Fundamentals concept.............................................................................. 4
2.2.2. Opportunity cost........................................................................................ 5
2.2.3. Models of quality costs............................................................................. 6
3. Critical Review ........................................................................................................ 9
3.1. Failures in quality management: .................................................................... 9
3.2. Discussion...................................................................................................... 11
4. Conclusion ............................................................................................................ 13
References................................................................................................................... 15

1. Introduction
The economy is developing very fast and it is becoming more competitive with each
passing day as customers also become more difficult (Weckenmann and Akkasoglu,
2012). The organization has to face more fierce competitions and challenges every day.
Many companies provide the same products or services for the same customers
(Weckenmann, Akkasoglu and Werner, 2015). To survive on this conjuncture, they must
build up their reputation based on great product quality.
Many foundational principles of quality were introduced and developed by Deming in
1986 (Wicks. A and Roethlein. C, 2009). They had quickly become essential factors in
many companies’ operation. Consequently, quality management must be given more
attention like an important strategy (Khaled Omar and Murgan, 2014). Many authors
think that quality of products or services has a close relationship with customer
satisfaction. In order to help companies control their product quality more efficiently, the
concept of cost of quality (CoQ) was formed and developed continuously.
Quality cost philosophy was first described by Armand V. Feigenbaum (1956) in his
book, “Total quality management”. After that, many modified definitions of CoQ had
appeared. Chiadamrong (2003) said, “The cost of quality is a comprehensive system,
not a piecemeal tool.” According to Chopra and Garg (2012), quality cost is the gap
between actual cost and perfect cost of products or service. In general, quality cost is a
useful methodology that helps companies to build trust with customers, ensure
sustainable development and increase their profit.

Crandall and Julien (2010) said that The American Society of Quality (ASQ) define
cost of quality as follows: “Quality costs are the total of the cost incurred by investing in
the prevention of nonconformance to requirements, appraising a product or service for
conformance to requirements, and failing to meet requirements. The sum of these costs
represents the difference between the actual cost of a product or service and what the
reduced cost would be if there were no possibility of substandard service, failure of
products or defects in their manufacturing.”
This paper will provide general and in-depth information about costs of quality and
its development up to the present day with two main parts. The first part will concentrate
on concepts, definitions, and models of quality costs as well as how it was formed. The
second part will contain real example, discussion and analysis about how CoQ concept
is as relevant today as it has ever been.
2. Literature review
2.1. Total Quality Management
For the last 100 years, the concept of quality management in organization has
changed significantly (Weckenmann, Akkasoglu and Werner, 2015). Nowadays,
companies have a more comprehensive view about quality management and realize
how it is crucial for their development. Figure 1 summarizes the development history of
quality concept when it has appeared until now. The most recent concept, which is Total
Quality Management (TQM), is very popular in the last ten years. Weckenmann,
Akkasoglu and Werner (2015) pointed out that TQM can be used in any type of

industries with or without competition like public service, public education, etc.
Figure 1: Overview of concepts in quality management
Sources: (Weckenmann, Akkasoglu and Werner, 2015)
They also believed that every employees of the organization would face many
changes in their responsibility as well as tasks in order to contribute to quality
management when their company chooses to apply TQM. Besides that, many
researchers agree that better quality cost control will lead to an improvement in total
quality as well as company’s business (Khaled Omar and Murgan, 2014).

2.2. Cost of Quality
2.2.1. Fundamentals concept
Many definitions of cost of quality have appeared in various of studies (Setijono and
Dahlgaard, 2008; Crandall and Julien, 2010; Bangert, 2012; Guinot, Evans and Badar,
2016) since Dr. Joseph Juran first introduce it in 1950. In general, cost of quality is
calculated by this formula below:
Total quality costs = Prevention costs + Appraisal costs + Internal failure costs +
External failure costs = Costs of good quality + Costs of poor quality
Prevention costs are costs that are needed to prevent or avoid product defects and
non-conformance. Appraisal costs are costs that are used to ensure high-quality level in
all steps of the production process. It helps companies to achieve high quality standards
and performance requirements. These costs help to reduce the possibilities of failures
and are called costs of good quality.
Internal failure costs are costs of bad consequences if products or services do not
meet quality requirements. These costs appear before the delivery of products or
services to consumers. External failure costs, happen after the product delivery, are
costs of dealing with problems caused by bad quality products (customer complaint,
recall, etc.). This external failure costs, which are known as cost of poor quality, can
result in loss of customers, loss of trust, customer dissatisfaction, etc. The table below
helps readers to have a clearer overview about different categories of quality costs.

Table 1: Examples of Categories of Quality Costs
Costs of good
quality
Prevention costs Appraisal costs
• Quality planning
• Supplier evaluation
• New product review
• Error proofing
• Capability evaluations
• Quality improvement team meetings
• Quality improvement projects
• Quality education and training
…
• Checking and testing purchased
goods and services
• In-process and final inspection/test
• Field testing
• Product, process or service audits
• Calibration of measuring and test
equipment
…
Costs of poor
quality
Internal failure costs External failure costs
• Rework
• Delays
• Re-designing
• Shortages
• Failure analysis
• Re-testing
• Downtime
• Material review
…
• Complaints
• Repairing goods and redoing services
• Warranties
• Customers return
• Environmental costs
• Products recall
…
Sources: Adopted from Chopra and Garg (2011); Isixsigma.com (2016)
2.2.2. Opportunity cost
The concept of opportunity costs (hidden cost), which w presented in 1998 by
Sandoval - Chavez and Beruvides, had added a new aspect to cost of quality concept.
According to Sailaja, C Basak and G Viswanadhan (2015), opportunity costs are the
losses incurred if the opportunity of doing things right the first time is missed out.
According to Dobrin and Stanciuc (2013), hidden costs are the main contributor to
failure cost. These hidden costs are very difficult to measure (Gary Cockins, 2006).
According to Cheah, Shah and Fauziah (2011), traditional accounting systems cannot
satisfy the demand of finding quality cost, especially hidden costs.

There are three elements included in this concept - hidden cost: not fully utilizing
available capacity, insufficient handling of materials and substandard provision of
services (Sandoval-Chavez, 1998). The first two components are related to inadequacy
process. They consist of costs of new set-up, extra waiting and idle time, and extra
inventory expenses that are need to respond to bad quality (Omar and Murgan, 2014).
These costs contribute for 40 percent of total opportunity costs while substandard
provision of services is account for the rest 60 percent.
2.2.3. Models of quality costs
There are five generic models of cost of quality: P-A-F model, Crosby model,
Opportunity cost model, Process cost model and ABC model (Khaled Omar and
Murgan, 2014). Table 2 is a summarization about publication history of quality costs
model.

Table 2: Generic cost models and cost categories
Generic
model
Cost/activity categories
Examples of publications describing,
analyzing or developing the model
P-A-F models Prevention + Appraisal + Failure
Feigenbaum (1956), Purgslove and Dale (1995),
Merino (1988), Chang et al. (1996), Sorqvist
(1997b),
Plunkett and Dale (1988b), Tatikonda and
Tatikonda
(1996), Bottorff (1997), Israeli and Fisher (1991),
Gupta and Campbell (1995), Burgess (1996),
Dawes
(1989), Sumanth and Arora (1992), Morse (1983),
etc.
Crosby’s
model
Conformance + Non-conformance Suminsky (1994) and Denton and Kowalski (1988)
Conformance + Non-
conformance + Opportunity
Tangibles + Intangibles
P-A-F (failure cost includes
opportunity cost)
Carr (1992) and Malchi and McGurk (2001)
Juran et al. (1975)
Heagy (1991)
Process cost
models
Conformance + Non-conformance
Ross (1977), Marsh (1989), Goulden and Rawlins
(1995) and Crossfield and Dale (1990)
ABC models Value-added + Non - value-added
Cooper (1988), Cooper and Kaplan (1988), Tsai
(1998),
Jorgenson and Enkerlin (1992), Dawes and Siff
(1993)
and Hester (1993)
Sources: Adopted from Schiffauerova and Thomson (2006)
Schiffauerova and Thomson (2006) pointed out that most analysis about cost of
quality use the P-A-F model. Besides that, this model also has been chosen to apply
quality cost model by many companies (Schiffauerova and Thomson, 2006). The P-A-F
model invests resources in appraisal and prevention costs to reduce failure costs; and
after that, it will invest with prevention costs to reduce appraisal costs.

However, many quality experts often challenge the PAF model. They state their
point that there is no economic level of quality and the optimum quality level is zero
failure (Plunkett and Dale, 1988ab; Fox, 1989). Juran (1998) suggested that in many
cases, the traditional optimal quality level concept is flawed. It supported the idea that
zero defects were not financial effective. The new concept of optimal quality cost
support the option of total perfection in quality. Figure below show the difference
between the classic and the new model of optimal quality cost.
Figure 2: The difference between classic model and modern model of P-A-F
model
Sources: (Schiffauerova and Thomson, 2006)
Crosby’s model was defined by Crosby in 1979. He pointed out the total quality cost
is the sum of conformance costs and non-conformance costs. The cost of conformance
includes actual prevention and appraisal costs, while the cost of non-conformance
corresponds to actual failure costs. Nonetheless, this model is very similar to the P-A-F

model; the only different is in their names (Goulden and Rawlins, 1995).
As for the new model of process cost, it was introduced by Ross (1977). It focuses
on the quality of the process instead of the quality of final services or goods. This model
was first applied by Marsh (1989) in identifying the cost of quality. This process cost
concept is similar to the model developed by Crosby. It consists of two kinds of costs:
conformance and non-conformance costs. These costs can be calculated at any time
during the production process.
The latest model is Activities Based Costing model (ABC model). Cooper and
Kaplan introduced it in 1988. This model tracks down the costs of all resources and their
corresponding activities and vice versa. After that, it attributes these costs to the final
cost of the products or services. ABC model is in fact not a model of quality cost,
however, but it is a very useful tool in identifying and manage quality costs.
3. Critical Review
3.1. Failures in quality management
Nowadays, the demand of customer is more and more difficult to satisfy. In order to
maintain the development of business, companies must try to produce high quality
products and services. This makes cost of quality becomes extremely important for any
organizations. Because the fact that investing in quality management requires lots of
efforts and resources, many companies still do not want to implement it or implement it
but not very strictly. Nevertheless, in the end, these companies have to pay more to

deal with their failures.
The failures of several popular companies, showed in the table below, are great
examples of companies that use their quality costs management inefficiently.
Table 2: Example of Inefficient Quality Costs Management
Time Company Events Damage
2006 Dell
Recalls 4 million laptops due to faulty over heating
batteries
$400 million
2007 Mattel Recalls 19 million toys supplied from China $30 million
2010 Toyota
Recalls 9 million cars due to a faulty accelerator
pedal
$5.5 billion
52 deaths
38 injuries
2011 UK banks
Required to pay compensation for mis-selling of
Payment Protection Insurance
£40 billion +
2014 Corona Beer
Recalls 1% products on the market that that may
contain small pieces of glass
~ $37 million
2015 Alton Tower
Rollercoaster crash results in compensation claims
and less customer visits
£40 million +
16 injuries
Sources: (International Business Times, 2016; YouTube, 2016)
If companies do not concentrate on quality management, damages will be serious. It
is not only about money, but also about environment and human life. There are many
reasons lead to failure such as: underestimate the importance of quality control, poor
leadership and management, lack of employees’ involvement, employees resistance to
change, etc.

When the companies do not manage their quality effectively, the cost of dealing with
consequences is enormous. Besides paying the cost in cash, companies will face to
intangible cost and other challenges such as loss of customers’ loyalty, bad business
reputation, and higher turnover rate due to employees do not feel proud about their
company, etc.
Nowadays, there are more and more companies that choose to apply costs of
quality management, especially large companies. Many companies such as General
Electric, Hewllet – Packard, Coca – Cola, 3M, Ikea… have their own quality
management system as well as quality cost control program. Although the investment in
prevention and appraisal costs is quite expensive, the benefits and positive effects of it
are far greater than that.
3.2. Discussion
In the increasingly competitive market, many companies try to increase their profits
by cutting down costs (Douglas, 2009; Young, 2009). Nonetheless, cost cutting is a
tricky problem that might affect the company’s sustainable development (Warren, 2009).
Beside other quality control methods, cost of quality model is an appropriate solution
that helps companies to improve their overall quality by controlling cost factors (Malik et
al., 2016).
The objective of quality costs is not only to reduce the costs but also to find the
optimal level of quality and cost factor that maximize profits. As Schiffauerova and

Thomson (2006) said: “The objective of a Cost of Quality system is to find the level of
quality that minimizes total Cost of Quality.”
Nevertheless, costs of quality concept are not as popular as some would believe;
only a small number of companies use it (Sower et al., 2007). In reality, measuring
quality costs is a big challenge (Academia.edu, 2016); therefore, companies have a
tendency to choose another methodology to control the quality of their products or
services. Besides, identifying quality costs and using the information provided by it
effectively are two different things. It depends on ability of planning and management of
companies’ top managers.
In facts, there are some special circumstances that a company should not (or
cannot) apply costs of quality method. According to Mike Collins (2015), there are at
least four types of manufacturer based on their sizes: micro size, small size, midsize,
and giant size. As for CoQ concept, he believes that: “One solution will not fit for all.” In
the author’s opinion, quality costs system will have maximum effect if applied in giant
size companies. Other types of companies can still apply this method. However, the
costs of implementing CoQ can be bigger than the benefits those companies get in
return. Besides, there are still many success stories of companies that do not use CoQ
concept but other quality management method (Schiffauerova and Thomson, 2006).
Costs of quality appear in every step of the company’s process; therefore, each
employee is responsible to ensure quality of products or services. However, if the

concept of this methodology just has spreading inside management team, other
employees will be lack of knowledge and management support to apply it into their job.
It also depends on a culture and different internal systems of organizations as Philip
Crosby once said: “Quality is the result of a carefully constructed cultural environment.”
4. Conclusion
According to Sedevich Fons (2012), quality management is most effective when
being applied in manufacturing firm since it was built in that environment. However, after
many years, many companies have begun to pay attention to solve quality problems
and improve the production process. Nowadays, during the second half of the twenty-
first century, CoQ concept as well as other quality management program is not only
used in manufacturing but also other industries like services, public sectors, etc.
The development of TQM brings lots of innovates and evolutions to the traditional
CoQ concept. In the past, quality cost look into prevention and appraisal cost for short-
term production; but now it has a tendency to concentrate on sustainable development
of companies in long-term. The use of a quality cost system is suggested as a preferred
method with the goal is to reduce quality costs and to achieve the lowest practical level.
Nonetheless, quality cost is not the only quality method that are able to bring
success to the company. The users of this tool are required to consider many
alternative elements such as the size of companies, cultural change or different internal
system, etc. Finally, since quality is a habit not a single act, companies, and its leaders

should start to look into this quality management concept and started to implement it.

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