How much does quality cost your company?
Without a uniform way to measure the variables that make up the cost of quality (CoQ), there is no way to express those costs in dollars.
The cost of quality consists of prevention costs, appraisal costs, and non-conformance costs. Of these three factors, non-conformance costs tend to cause the most confusion. That’s because the cost of non-conformances can be measured in several ways. The choice of metric dictates how appraisal and prevention costs are measured.
When you know what nonconformances are and how to measure their costs, everything else falls into place.
What Is a Nonconformance?
A nonconformance is a product or process that fails to meet specifications or requirements.
For example, in the pharmaceutical industry, a nonconformance would be a development process parameter or a characteristic that renders the drug product's quality unacceptable.
In the medical device industry, when a component received from the vendor fails to meet required specifications (e.g. length is 7 inches instead of 8.5 inches), it's classified as a nonconforming product.
Specific FDA regulations and ISO standards help organizations set up procedures for avoiding, preventing, and rectifying nonconformities. With the right processes and procedures in place, nonconformance occurrence rates go down, and the cost of nonconformances goes down.
What is the Cost of Nonconformance?
The cost of nonconformance is the money spent by the company when it fails to ensure the required quality of its products and services. These costs are incurred as a result of:
- Failures in the manufacturing process
- Poor quality audits
- Partnerships with unreliable vendors
Some examples of costs of nonconformances include:
- Waste — performing unnecessary work because of internal errors, communication problems, and poor organization
- Scrap — the cost of a defective product that can't be sold or reused
- Rework — correcting problems that were discovered during the quality audit or when they were delivered to the end-user
- Re-inspection and re-testing — re-inspecting and re-testing the product after rectifying the quality problem
Overall, any cost associated with failure to comply with quality standards is a cost of nonconformance.
What Are the Costs of Quality?
The cost of quality is the financial impact of quality activities and issues. The formula is simple:
COQ = PREVENTION COSTS + APPRAISAL COSTS + NONCONFORMANCE COSTS
“Nonconformance costs” can be further broken down into “internal failure costs” and “external failure costs.”
The most easily calculated variable is prevention costs.
1. Prevention Costs
Prevention costs are the costs incurred by the company when trying to reduce the impact of quality issues in advance. Preventive measures don't just help maintain high-quality levels, they reduce labor costs, manufacturing costs, and costs of nonconformances.
An example of a prevention cost is the money spent on creating and maintaining a quality management system.
Failing to allocate a sufficient budget for prevention costs could lead to substantial unplanned expenses for defect remediation.
2. Appraisal Costs
Appraisal costs are the costs incurred by the company when trying to identify quality issues with its products or services. Appraisal costs are a part of the quality control procedure. They determine the degree of conformance.
For example, product inspections are part of the appraisal costs.
3. External Failure Costs
External failure costs are the costs incurred by the company when trying to rectify nonconformities identified by the customer.
These costs occur when the quality control procedure fails to identify defects. Instead, the end-user uncovers these problems. An example of an external failure cost in the medical device industry is the cost of a product recall.
4. Internal Failure Costs
Internal failure costs are the costs incurred by the company when fixing nonconformances identified before the product is shipped to the customer. They occur when the organization fails to follow quality standards and requirements.
An example of an internal failure cost is the cost of remaking a product to correct quality issues with an existing product.
How Can You Measure the Cost of Nonconformances?
To optimize quality systems and evaluate performance, it's important to measure the cost of nonconformances. The metric you choose depends on the type and size of your organization.
1. Whole Person
If your organization has personnel or departments that focus solely on dealing with nonconformance issues, then you can measure the costs of nonconformances by counting salaries and other costs associated with supporting this person (or group of people).
2. Whole Account
A full set of costs related to a specific nonconformance. For example, if nonconformance costs come from a warranty claim, you can measure the incurred costs by checking all expenses related to a particular claim. You can find these expenses in the accounting records.
3. Labor Claiming
This involves tracking specific labor and resources dedicated to a particular activity related to a nonconformance.
You would need to ask the employee to highlight the time spent specifically on the nonconformance issue (as opposed to regular activities). To make labor claiming easier and more precise, an organization can consider setting up a tracking system like a timesheet.
4. Unit Pricing
In some cases, it could be easier to calculate the cost of nonconformance by identifying the nonconforming units or quantities and setting a price for each one of them. This metric is generally applicable in situations when multiple nonconformities occur.
For example, if a process leads to defective products, the cost of quality can be calculated by adding up the value of the defective units.
5. Deviation from the Ideal
This is a broad way to calculate the cost of nonconformances. It involves comparing results to the expectations (perfection).
For example, during the product development stage, the company was planning to achieve a certain market share. However, when the product hit the market, the results were worse than expected due to waste, errors, recalls, etc. The difference between the perfect result and the real result has a price associated with it.
By measuring your nonconformance costs, you can calculate the costs of quality. This information can help you identify the root causes of quality issues, adjust your quality systems, and improve the profitability of your company.
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