What is the cost of poor quality?
The cost of poor quality is the money you lose because things were not made right the first time. It includes scrap, rework, sorting, returns, replacement, extra freight and lost orders. It is found in two places: inside your plant before dispatch, and at the customer after dispatch.
Ask an owner "how many pieces were rejected last month?" and he can often tell you. Ask "how many rupees did that cost?" and the room goes quiet.
Counting pieces is the first step. Counting rupees is the second. Until the number is in rupees, quality will always lose the argument against production targets and other spending.
What are the four kinds of quality cost?
Quality cost has four parts. Two are money you choose to spend. Two are money you lose.
| Kind | What it means | Examples |
|---|---|---|
| Prevention | Spent to stop defects being made | First-piece approval, training, mistake-proofing, supplier development |
| Appraisal | Spent to find defects | Inspection, gauges, calibration, testing |
| Internal failure | Lost when a defect is found before dispatch | Scrap, rework, sorting, machine stopped for a quality problem |
| External failure | Lost when the customer finds the defect | Returns, replacement, freight, credit notes, penalties, lost orders |
The cost of poor quality is the last two rows added together. The cost of quality is all four rows.
Note the difference between the first two. Appraisal finds defects. Only prevention stops them. A plant that answers every complaint with more inspection pays more every month and still makes the same defects.
Why is the real number bigger than we think?
The accounts show only the tip. Scrap sold, credit notes and penalties are easy to see. The larger part sits under the water, spread across salaries, overtime and freight.
Look for these hidden costs:
- Time spent sorting and re-inspecting.
- Machine time lost, and overtime to catch up.
- Express freight to make up for a late delivery.
- Extra stock kept "just in case".
- Management time on phone calls and meetings about complaints.
- Orders lost, and trust lost.
Trust never appears in any account. It is still a real loss.
The later a defect is found, the more it costs. A defect caught at the machine costs a few minutes. The same defect found in final inspection costs the whole job. Found at the customer, it costs the job, the freight, the replacement and the relationship. Catch it at the machine, not at the customer.
A worked example, month by month
This is an example for a small machine shop. The figures are made up to show the method.
Sales for the month are Rs. 12,50,000.
| Item | Rs. |
|---|---|
| Scrap (internal failure) | 18,900 |
| Rework (internal failure) | 7,200 |
| Sorting a lot (internal failure) | 3,600 |
| Returns and freight (external failure) | 6,000 |
| Replacement parts (external failure) | 1,800 |
| Inspection and gauges (appraisal) | 25,500 |
| Training and first-piece approval (prevention) | 2,000 |
Now add them:
- Internal failure: Rs. 29,700.
- External failure: Rs. 7,800.
- Cost of poor quality: Rs. 37,500, which is 3.0% of sales.
- Total cost of quality: Rs. 65,000, which is 5.2% of sales.
- Prevention is only about 3% of the total.
Two things stand out. Scrap alone is half of the loss. And the plant spends more on finding defects than on stopping them.
You cannot manage a loss you have not put a rupee value on.
How do we make the number every month?
- List the cost items. Use the four kinds above. Twenty or so items are enough for a machine shop.
- Give every item a source. Scrap comes from the rejection report. Returns come from the complaint register. Overtime comes from the salary sheet. Anyone should be able to check the number.
- Ask accounts to join. Numbers are believed when accounts has helped to make them.
- Use estimates where needed. A rough rework cost is time spent multiplied by the machine rate per hour.
- Show it as a percentage of sales. This lets you compare month with month.
- Pick the biggest item first. Use a Pareto chart, which puts the largest loss on the left. Work on that one before the others.
- Move money toward prevention. If first-piece approval costs little and removes a scrap item, it pays for itself fast.
Never use this number to blame a department or a person. The aim is to see where the system loses money.
How to start in your plant
Take last month. Write the ten biggest quality costs, in rupees, with the source of each. Rank the top three. Name one cost that nobody counts today. Then choose one prevention action for the biggest item.
This takes about one hour with your quality head and your accountant. The first list will be rough. That is fine. Fix the input not the output, and the numbers get better each month.
Key points
- Cost of poor quality is internal failure plus external failure, counted in rupees.
- The visible cost is only the tip. Sorting, overtime, freight and lost trust sit below.
- Appraisal finds defects. Only prevention stops them.
- Start with estimates and with the help of the accounts team.
- Review the number every month and attack the biggest item first.
