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In previous posts, I discussed the different costs of quality (CoQ). To summarize, prevention and appraisal costs are those related to conformance of the product or service. On the other hand, internal and external failure costs result form experiencing non-conformance, where “external” means that this experience is told by the customer.  At the ASQ-Columbus Spring Conference held at Columbus State on April 14, someone asked me if the concept of “Quality Costs” applies to sectors outside manufacturing. To prove that it does, many people from different service industries such as healthcare, education, finance, government, and information technology, among others, shared their examples during the presentation. If you would like to view / download the presentation, please go to our website.

Another question was related to the reason that while analyzing quality in terms of costs seems to be an eye-opener, why isn’t the concept used more often? One of the most challenging implementation issues for a Quality Costs program is separating such costs from other costs of doing business. Traditional accounting systems are not designed with such concept in mind. Therefore, your options are to either:

• Change the cost structure of the accounting system (must get the accounting department on board!)
• Build a separate system for capturing CoQ

It may not be simple to do either but it is well-worth the efforts.

The Toyota case of sticking accelerator is a good example of how External Failure costs can add up very quickly. As mentioned in the previous post, external failure costs (the worst type of quality costs) are those related to a failure after the product has reached the customer. In addition to the impact on Toyota’s near-perfect reputation, and the loss customer confidence in the brand name, other immediate costs are incurred by the company and include, but not limited to, the following:

• Recall costs
• Warranty (of unaffected cars)
• Replacement / repair of sold and unsold cars
• Training service staff on special repair
• Liability / lawsuits
• Downtime at factories
• Wages during downtime
• Scrap and disposition of questionable parts
• Troubleshooting / Corrective actions
• Trips made by executives / engineers / designers
• Public relations
• Working with suppliers
• Dealership support
• Overtime for suppliers (for making good replacement parts)
• Additional freight and premium freight for replacement parts
• Additional legal council (in many countries)
• Discounts for future sales

It is estimated that, with the lawsuits associated with the recall, this will cost Toyota over $2 Billion. The question is could this have been prevented? or at least taken seriously after the very first few complaints? was failure mode and effects analysis (FMEA) or equivalent done for the break subsystem?

In many cases, we know exactly what we want to work on. We have a chronic problem that generates scrap, or we may have many customers complaints resulting in returns or recalls. In such cases, we get our team of Lean Six Sigma experts to start working…

But what if we don’t have one specific BIG problem? Should we relax and forget about it? Not really! A report on costs of quality (CoQ), especially those concerning non-conformance, will be worth our efforts.   

It is estimated that between 20% to 40%  of sales are quality-related costs. One third of CoQ is related to conformance (Prevention and Appraisal). The rest, or 67%, is related to non-conformance (failure). Failure costs are divided into two types: (1) Internal Failure: Failure cost incurred before release of the product to the customer or providing the service, and (2) External Failure: Any quality-related cost incurred after the product gets to the customer. Examples of internal failure include scrap, rework, re-testing, etc. As for external failure, warranty charges, returns, recalls, remedial upgrade of software are some of many examples.

There is a lot that can be done if we are able to separate our failure costs from the overall costs of goods sold, don’t you think?