Cost of quality

What it means

The cost of quality covers all costs of ensuring quality and of failing to achieve it. The classic model divides them into four groups: prevention, appraisal, internal failures before delivery to the customer and external failures after delivery, such as complaints or lost customers.

Prevention includes training, process design, risk analysis and maintenance. Appraisal covers inspections, tests and audits. Internal failures are rework, repairs and scrap; external failures are warranty repairs, complaints, discounts, penalties and reputational damage. The last group is usually the most expensive.

The central idea is that preventing errors is cheaper than correcting them. Every euro invested in prevention and sound processes can save several times as much on repairs and complaints. The concept is part of approaches such as TQM and systems based on ISO 9001.

How it works in practice

Tracking starts by assigning costs to the groups. Many costs are hidden in the accounts, such as staff time spent fixing errors or discounts given to dissatisfied customers. A separate cost centre or analytical codes for complaints and rework help.

In an accounting firm, an internal failure is correcting wrongly posted documents before a return is filed; an external failure is a penalty for late filing, amended returns and a client leaving. Prevention means checklists, four-eyes review and staff training.

For products, external failures are also linked to the warranty provision, which is based on complaints experience. Systematic root cause analysis and tools such as FMEA help shift spending from costly failures to cheaper prevention.

What to watch out for

The largest part of the cost of poor quality is often invisible: lost orders, negative reviews and management time spent firefighting. If a company tracks only the direct cost of repairs, it underestimates the real impact and underfunds prevention.

Excessive inspection at the end of a process is expensive and only catches errors without removing their cause. The goal is not to add more checks but to change the process so that errors do not arise. Otherwise the company pays for both appraisal and failure at the same time.