Operations Management 101: Quality Management - Cost of Quality, Prevention Appraisal Internal Failure External Failure

What This Is

The Cost of Quality (COQ) is a measure of the costs associated with producing products or services that do not meet customer requirements. It includes costs related to prevention, appraisal, internal failure, and external failure. For example, a manufacturing company produces 100,000 units of a product per month with a defect rate of 2%. The cost of quality for this product would be the cost of inspecting and testing the product (appraisal cost), the cost of reworking or replacing defective products (internal failure cost), and the cost of returning or replacing products that do not meet customer requirements (external failure cost).

Key Formulas & Frameworks

• Cost of Quality (COQ) = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs
• Prevention Costs: costs of activities that prevent defects, such as training and quality planning
• Appraisal Costs: costs of activities that measure the quality of products or services, such as inspection and testing
• Internal Failure Costs: costs of reworking or replacing defective products
• External Failure Costs: costs of returning or replacing products that do not meet customer requirements
• Prevention Cost Ratio = Prevention Costs / Total Quality Costs
• Appraisal Cost Ratio = Appraisal Costs / Total Quality Costs
• Internal Failure Cost Ratio = Internal Failure Costs / Total Quality Costs
• External Failure Cost Ratio = External Failure Costs / Total Quality Costs
• Total Quality Costs = COQ = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs
• Quality Cost Index (QCI) = (Prevention Costs + Appraisal Costs) / (Internal Failure Costs + External Failure Costs)
• Defect Rate = Number of Defects / Total Units Produced
• Defect Density = Number of Defects / Total Units Produced × 100,000

Step-by-Step Application

1. Calculate the Cost of Quality: Determine the prevention, appraisal, internal failure, and external failure costs for a product or service.
2. Determine the Prevention Cost Ratio: Calculate the prevention cost ratio by dividing the prevention costs by the total quality costs.
3. Determine the Appraisal Cost Ratio: Calculate the appraisal cost ratio by dividing the appraisal costs by the total quality costs.
4. Determine the Internal Failure Cost Ratio: Calculate the internal failure cost ratio by dividing the internal failure costs by the total quality costs.
5. Determine the External Failure Cost Ratio: Calculate the external failure cost ratio by dividing the external failure costs by the total quality costs.
6. Calculate the Quality Cost Index (QCI): Calculate the QCI by dividing the sum of prevention and appraisal costs by the sum of internal and external failure costs.

Common Mistakes

• Mistake: Confusing prevention costs with appraisal costs.
• Correction: Prevention costs are costs of activities that prevent defects, while appraisal costs are costs of activities that measure the quality of products or services.
• Mistake: Not including all costs in the calculation of the cost of quality.
• Correction: The cost of quality includes prevention, appraisal, internal failure, and external failure costs.
• Mistake: Not using a quality cost index to evaluate the effectiveness of quality improvement efforts.
• Correction: A quality cost index can help evaluate the effectiveness of quality improvement efforts by comparing the costs of prevention and appraisal with the costs of internal and external failure.

Exam / Certification Tips

• Be able to calculate the cost of quality: Make sure to include all costs in the calculation.
• Understand the difference between prevention and appraisal costs: Prevention costs are costs of activities that prevent defects, while appraisal costs are costs of activities that measure the quality of products or services.
• Be able to calculate the quality cost index: The quality cost index can help evaluate the effectiveness of quality improvement efforts.

Quick Practice Problem

A company produces 100 units per day with a defect rate of 5%. What is the defect density?

Answer: 50 units per 100,000 units produced Explanation: Defect density = (5 units / 100 units) × 100,000 units per 100 units = 50 units per 100,000 units produced

Last-Minute Cram Sheet

• Cost of Quality (COQ) = Prevention Costs + Appraisal Costs + Internal Failure Costs + External Failure Costs
• Prevention Cost Ratio = Prevention Costs / Total Quality Costs
• Appraisal Cost Ratio = Appraisal Costs / Total Quality Costs
• Internal Failure Cost Ratio = Internal Failure Costs / Total Quality Costs
• External Failure Cost Ratio = External Failure Costs / Total Quality Costs
• Quality Cost Index (QCI) = (Prevention Costs + Appraisal Costs) / (Internal Failure Costs + External Failure Costs)
• Defect Rate = Number of Defects / Total Units Produced
• Defect Density = Number of Defects / Total Units Produced × 100,000
• Prevention costs are not the same as appraisal costs
• The cost of quality includes all costs, not just internal failure costs
• The quality cost index can help evaluate the effectiveness of quality improvement efforts