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Submitted to the International Journal of Quality and Reliability Management

Cost of Quality: A Survey of Models and Best Practices


Andrea Schiffauerova, Vince Thomson
McGill University
Abstract
The objective of this article is to provide a better understanding of cost of quality (CoQ) methods
by presenting a survey of published literature with specific emphasis on CoQ models and best
practices, and by contributing four examples of company best practices in the area of quality
management. Even though the survey shows an interest by the academic community, a CoQ
approach is not utilized in most quality management programs. The outcome of a study of best
practices at four Canadian companies agrees. The companies use systematic quality initiatives;
however, a formal CoQ methodology was only used at one company. Companies that did adopt a
CoQ approach were successful in reducing CoQ and improving product quality for the customer.
Keywords: Cost of quality, CoQ models, best practices
Introduction
Many companies promote quality as the central customer value and consider it to be a critical
success factor for achieving competitiveness. Any serious attempt to improve quality must take
into account the costs associated with achieving quality since the objective of continuous
improvement programs is not only to meet customer requirements, but also to do it at the lowest
cost. This can only happen by reducing the costs needed to achieve quality, and the reduction of
these costs is only possible if they are identified and measured. Therefore, measuring and
reporting the cost of quality (CoQ) should be considered an important issue for managers.
There is no general agreement on a single broad definition of quality costs (Machowski and
Dale, 1998). However, CoQ is usually understood as the sum of conformance plus nonconformance costs. Cost of conformance is the price paid for prevention of poor quality
(inspection and quality appraisal). Cost of non-conformance is the cost of poor quality caused by
product and service failure (rework and returns). According to Dale and Plunkett (1995), it is
now widely accepted that quality costs are the cost incurred in the design, implementation,
operation and maintenance of a quality management system, the cost of resources committed to
continuous improvement, the cost of system, product and service failures, and all other necessary
costs and non-value added activities required to achieve a quality product or service.
Quality experts have different opinions on measuring CoQ. Edward Deming, perhaps the bestknown advocate of quality management, believed that the cost of non-conformance (and the
resulting loss of good will) was so high that evaluating cost of quality was unnecessary. He saw
absolutely no value in financial measures related to quality. While for Deming measuring CoQ
was a waste of time, Joseph Juran and Philip Crosby saw a need for it. They believed that as
defect prevention was increased, the cost of rework would decrease by much more than the
increase in prevention costs. The net result was lower total cost, and thus quality is free
(Crosby, 1979).
CoQ analysis links improvement actions with associated costs and customer expectations, and
this is seen as the coupling of reduced costs and increased benefits for quality improvement.

Submitted to the International Journal of Quality and Reliability Management

Expenditures on improvement and prevention activities are considered as a form of investment,


which should bring reduced failure costs. Time and money may be wasted on prevention
activities that do not bring appropriate improvement. Deming may believe that the proper
objective is to have zero defects. However, for some it may be uneconomical to have a high level
of quality; they assume that absolute quality must be sacrificed to achieve other objectives, for
example, reduced development cycle time. Therefore, a realistic estimate of CoQ and
improvement benefits, i.e., the correct tradeoff between the level of conformance and nonconformance costs, should be considered an essential element of any quality initiative, and thus,
a crucial issue for any manager.
A number of organizations are now seeking both theoretical advice and practical evidence about
quality related costs and the implementation of quality costing systems. The following review of
recent literature attempts to give a brief survey of research articles on the topic of CoQ. There is
a large volume of literature on the importance and the principles of quality costing. Research
papers were divided into three groups: CoQ models that result from various quality costing
strategies, metrics used with CoQ systems, and best practices that reflect the real achievements
of companies following CoQ methods. Finally, the last section presents a study of the quality
efforts carried out at four Canadian companies. Their quality costing systems are
described,analyzed and compared in light of CoQ models and best practices.
CoQ Models
CoQ models can be classified into four groups of generic models. These are: P-A-F (prevention,
appraisal, failure) or Crosbys model, opportunity cost models, process cost models and ABC
(activity based costing) models (Table I).
Generic
model
P-A-F models

Crosbys
model
Opportunity
or intangible
cost models

Process cost
models
ABC models

Table I: Generic CoQ models and cost categories


Cost/activity
Publications developing or dealing with the model
categories
prevention
+ appraisal
+ failure
conformance
+ non-conformance
prevention +
appraisal + failure
+ opportunity
conformance
+ non-conformance
+ opportunity
tangibles
+ intangibles
conformance
+ non-conformance
value-added
+ non-value-added

Feigenbaum 1956, Purgslove and Dale 1995, Merino 1988,


Fruin 1986, Thompson and Nakamura 1987, Denzer 1978,
Chang et al. 1996, Sorquist 1997b, Plunkett and Dale 1988,
Tatikonda and Tatikonda 1996
Suminsky 1994, Denton and Kowalski 1988
Sandoval-Chavez and Beruvides 1998, Modarres and Ansari
1987
Carr 1992, Malchi and McGurk 2001

Juran et al. 1975


Ross 1977, Marsh 1989, Goulden and Rawlins 1995,
Crossfield and Dale1990
Cooper, 1988, Cooper and Kaplan 1988, Tsai 1998,
Jorgenson and Enkerlin 1992

Submitted to the International Journal of Quality and Reliability Management

Most cost models are based on a P-A-F classification (Plunkett and Dale 1987, Machowski and
Dale 1998, Sandoval-Chvez and Beruvides 1997). It was Joseph Juran (1951) who first
discussed the cost of quality analysis and became a pioneer of quality costing, and it was
Armand Feigenbaum (1956) who identified four quality cost categories: prevention, appraisal
and failure (internal and external). Prevention costs are associated with actions taken to ensure
that a process provides quality products and services, appraisal costs are associated with
measuring the level of quality attained by the process, and failure costs are incurred to correct
quality in products and services before (internal) or after (external) delivery to the customer.
Juran later highlighted the traditional tradeoff that contrasts prevention plus appraisal costs with
failure costs (Juran, 1962). The basic suppositions of the P-A-F model are that investment in
prevention and appraisal activities will reduce failure costs, and that further investment in
prevention activities will reduce appraisal costs (Porter and Rayner 1992, Plunkett and Dale
1987). The objective of a CoQ system is to find the level of quality that minimizes total cost of
quality. Feigenbaums and Jurans P-A-F scheme has been adopted by the American Society for
Quality Control (ASQC, 1970), and the British Standard Institute (BS6143, 1990) and is
employed by most of the companies which use quality costing (Porter and Rayner, 1992).
The cost categories of Crosbys model (Crosby, 1979) are similar to the P-A-F scheme. Crosby
sees quality as conformance to requirements, and therefore, defines the cost of quality as the
sum of price of conformance and price of non-conformance (Crosby, 1979). The price of
conformance is the cost involved in making certain that things are done right the first time,
which includes actual prevention and appraisal costs, and the price of non-conformance is the
money wasted when work fails to conform to customer requirements, usually calculated by
quantifying the cost of correcting, reworking or scrapping, which corresponds to actual failure
costs. The model is used in companies that measure quality costs; however, most of the time it is
only a different terminology describing a P-A-F model (Goulden and Rawlins, 1995), and the
two costing structures are used interchangeably.
The importance of opportunity and intangible costs has been recently emphasized. Intangible
costs are costs that can be only estimated such as profits not earned because of lost customers
and reduction in revenue owing to non-conformance. Sandoval-Chavez and Beruvides (1998)
incorporate opportunity losses into traditional P-A-F quality expenses. According to them
opportunity losses may be broken down into three components: underutilization of installed
capacity, inadequate material handling and poor delivery of service. He expresses total CoQ as
revenue lost and profit not earned. Modarress and Ansari (1987) also advocate that the P-A-F
model be expanded to accommodate extra dimensions that are identified as the cost of inefficient
resource utilization and quality design cost. Carr (1992) includes opportunity cost and reports
evidence of its successful use in a quality program. Quality costs are defined in three categories:
the cost of conformance, the cost of non-conformance and the cost of lost opportunity. Other
authors address the cost of lost costumers derived from product failures that reach the market
(Tatikonda and Tatikonda 1996, Heagy 1991). Jurans model (Juran et al., 1975) also recognizes
the importance of intangibles. His CoQ scheme includes two measurable cost categories:
tangible factory costs and tangible sales costs, and he suggests the inclusion of intangible internal
benefits.
The process cost model developed by Ross (1977) and first used for quality costing by Marsch
(1989) represents quality cost systems that focus on process rather than products or services.

Submitted to the International Journal of Quality and Reliability Management

Process cost is the total cost of conformance and non-conformance for a particular process. The
cost of conformance is the actual process cost of producing products or services first time to the
required standards by a given specified process, whereas cost of non-conformance is the failure
cost associated with the process not being executed to the required standard. These costs can be
measured at any step of the process. Accordingly, it can be determined whether high nonconformance costs show the requirement for further expenditure on failure prevention activities
or whether excessive conformance costs indicate the need for a process redesign (Porter and
Rayner, 1992).
The process modeling method called IDEF (the computer-aided manufacturing integrated
program definition methodology) developed by Ross (1977) is useful for experts in system
modeling; nevertheless, for common use by managers or staff it is too complex. Simpler methods
were developed to overcome this limitation. Crossfield and Dale (1990) suggest a method for the
mapping of quality assurance procedures, information flows and quality-related responsibilities.
Goulden and Rawlins (1995) utilize a hybrid model for process quality costing where flowcharts
are used to represent the main processes.
The use of a process cost model is suggested as a preferred method for quality costing within
total quality management (TQM) as it recognizes the importance of process cost measurement
and ownership, and presents a more integrated approach to quality than a P-A-F model (Porter
and Rayner, 1992). Goulden and Rawlins (1995) also suggest that analysts place emphasis on the
cost of each process rather than on an arbitrarily defined cost of quality under a P-A-F model.
Moreover, the quality cost categorization is simpler and some researchers (Porter and Rayner,
1992) argue that it is also more relevant than the P-A-F scheme. The process model has wider
application in that it facilitates the collection and analysis of quality costs for both direct and
indirect functions. However, the process cost model is not in widespread use (Goulden and
Rawlins, 1995).
Existing accounting systems are usually considered as poorly fitted for generating reports on
quality measurements (Tatikonda and Tatikonda 1996, Sorqvist 1997a). They do not provide
appropriate quality related data and benefits resulting from improved quality are not measured
(Merino, 1988). Although most CoQ measurement methods are activity/process oriented,
traditional cost accounting establishes cost accounts by the categories of expenses instead of
activities. Thus, many CoQ elements need to be estimated or collected by other methods. There
is no consensus method on how to allocate overheads to CoQ elements and no adequate method
to trace quality costs to their sources (Tsai, 1998). An activity-based costing (ABC) model was
developed by Cooper and Kaplan (Cooper 1988, Cooper and Kaplan 1988) to solve this problem.
Under ABC accurate costs for various cost objects are achieved by tracing resource costs to their
respective activities and the cost of activities to cost objects. The ABC approach is actually not a
CoQ model. It is an alternative approach that can be used to identify, quantify and allocate
quality costs among products, and therefore, helps to manage quality costs more effectively. Tsai
(1998) proposes an integrated CoQ-ABC framework, in which ABC and CoQ systems are
merged and share a common database in order to supply various cost and non-financial
information for related management techniques. The long-term goal of ABC systems is to
eliminate non-value added activities and to continuously improve processes, activities and
quality so that no defects are produced.

Submitted to the International Journal of Quality and Reliability Management

CoQ Parameters
There are many possible parameters that can be used in CoQ models. Johnson (1995) has
published a large list of example elements, which could be included. However, since there is no
set structure and no accounting standard for quality costing, the decision on the cost structure of
the CoQ model is left to the judgment of quality managers or even quality data collectors.
Therefore, the elements included in CoQ models of various companies differ substantially. The
same elements are often placed into different cost categories or they are even defined in a
different way in order to fit the particular needs of a company (Sorqvist 1997a, Johnson 1995). In
order to identify cost of quality elements, some organizations benchmark or borrow elements
from other companies, which have established CoQ programs (Bemowski, 1991). Nevertheless,
most quality experts say that CoQ programs should be tailor-made for each organization such
that they are integrated into a companys organizational structure and accounting system rather
than just being borrowed (Campanella 1990, Johnson 1995, Salm 1991). Campanella (1990)
emphasizes that decisions regarding which cost elements should be part of CoQ and to which
cost category they should belong are not as important as consistency. According to him
companies should have a consistent set of comparisons that are made from period to period as
the CoQ program evolves; quality cost elements should be developed, deleted, modified, or
combined as seems reasonable.
CoQ Metrics
CoQ measurement systems should contain good feedback metrics. We suggest a mixture of
global and detailed metrics. The latter actually represent the elements of CoQ and how the
performance of these elements is measured. Some examples of detailed metrics are given in
Table II. Global quality metrics measure global performance. Some examples are given in Table
III. Return on quality (RoQ), defined as the increase in profit divided by the cost of the quality
improvement program, is the most frequently mentioned global metric in the context of CoQ
(Tatikonda and Tatikonda, 1996, Slaughter et al., 1998). The other metrics in Table III are
suggested by the authors of this paper. Tatikonda and Tatikonda (1996) claim that successful
companies (for instance AT&T) measure RoQ as a basis for accepting quality improvement
projects. Return on quality also serves as a tool to select a better alternative among competing
improvement programs. Slaughter et al. (1998) modify RoQ for use in the software environment
and introduce three new quality metrics: return on software quality, cost of software quality, and
software quality probability index. Otherwise, very little has been published on metrics for CoQ.
Table II: Examples of detailed metrics for CoQ
Detailed Metrics
cost of assets and materials
cost of preventive labor
cost of appraisal labor
cost of defects per 100 pieces
cost of late deliveries
% of repeat sales
time between service calls
# of non-conforming calls
# of complaints received

Submitted to the International Journal of Quality and Reliability Management

Table III: Global metrics for CoQ


Metric
RoQ =
increase in profit
cost of quality improvement program
Quality rate =
input (quality defects + startup defects + rework)
input
Process quality = available time rework time
available time
First time quality (% product with no rework)
CoQ in Practice
No matter how great the interest of the academic community in CoQ models is, and how much
theoretical information and practical advice can be found, the situation in the real world is
different. Companies rarely have a realistic idea of how much profit they are losing through poor
quality. Smaller firms most often do not even have any quality budget and do not attempt to
monitor quality costs (Porter and Rayner 1992, Plunkett and Dale 1983). Large companies
usually claim to assess quality costs (Schmahl et al., 1997); however, according to Tatikonda and
Tatikonda (1996), even though most managers claim that quality is their top priority, only a
small number of them really measure the results of quality improvement programs. Even in
companies that do measure results, quality costs are grossly understated (Porter and Rayner
1992, Schmahl et al. 1997, Tatikonda and Tatikonda 1996). Companies measure visible and
quantifiable costs such as scrap and warranty, but ignore significant costs such as lost sales due
to customer defection (Porter and Rayner 1992, Schmahl et al. 1997, Tatikonda and Tatikonda
1996). A high proportion of the costs have proven difficult to measure and have therefore
remained hidden (Sorqvist, 1997b).
Measuring return on quality is not a common practice (Tatikonda and Tatikonda, 1996).
Spending money on quality improvement programs without ever estimating expected benefits
leads to investment with little or no impact on the bottom line. Even though quality is now
widely acknowledged as a key competitive weapon, it seems that there is a lack of quality vision
and commitment among top management.
Best Practices
There is a reasonable amount of detailed advice available on CoQ, but there are only a few
published, practical examples that give specifics about the costs that are included or excluded in
quality costing, and how the costs are collected. Nevertheless, most examples confirm that
quality improvement and cost measurement processes bring about a huge reduction in a
companys cost of quality.
A brief description of some of the documented examples of successful use of CoQ models and
methods is given in Table IV.

Submitted to the International Journal of Quality and Reliability Management

Table IV: Documented examples of successful use of CoQ models and methods
Company
(reference)

UTC. Essex Group.


(Fruin, 1986)
AT&T
Bell Lab.
(Thompson and
Nakamura, 1987)

Method, model

Gains

P-A-F model
CoQ = P+A+F
CoQ is calculated as a % of total
manufacturing cost

CoQ reduced from 23% to


17%.

CoQ = P + A + F (I+E)

Hydro Coatings
(Purgslove and
Dale, 1995)

CoQ = P + A + F (I+E)
CoQ is calculated as a % of annual sales
turnover. CoQ is also expressed as a % of
raw material usage.

electronic
manufacturer
(Denzer, 1978)

CoQ = P + A + F (I+E)

Solid State Circuits


(Denton and
Kowalski, 1988)
BDM International
(Slaughter et
al.,1998)
Xerox
(Carr, 1992)
pharmaceutical
company
(Malchi and
McGurk, 2001)

Crosbys model
CoQ = COC + CONC
CoQ is expressed as a % of the revenue.

CoQ reduced from 4.1% to


2.5% in 4 years.
Investment in quality paid
back in the first year.

CoQ reduced from 37% to


17%.

CoQ = COC + CONC


Opportunity and alternative costs models
CoQ reduced by $53 million
CoQ = COC + CONC + OC
in first year.

11%
reduction in CoQ
CoQ = Operating Cost + CONC +
Alternative Cost
Process model

GEC Alsthom
Engineering
Systems
(Goulden and
Rawlins, 1995)

Hewlett Packard
(Jorgenson and
Enkerlin, 1992)

CoQ
P
A
F (I+E)

CoQ = COC + CONC

ABC model
ABC (activity-based costing)
CoQ = Process Quality + Board Test +
Repair + Bench Test + Defect analysis

cost of quality
prevention cost
appraisal cost
failure cost (internal and external failures)

COC cost of conformance


CONC cost of non-conformance
OC opportunity cost

Submitted to the International Journal of Quality and Reliability Management

Table IV shows that the companies whose best practices are documented in this paper most often
implement their CoQ programs in accordance with the universally accepted Feigenbaums
costing structure (Feigenbaum, 1956). United Technologies Corporation, Essex
Telecommunication Products Division, established CoQ measurement based on a P-A-F model
and five years of implementation have yielded an improvement of 26% in CoQ measured against
cost of goods produced. Specific accomplishments as well as elements of the cost of quality
calculation and their relationship to financial performance are examined in detail by Fruin
(1986). Thompson and Nakamura (1987) also follow P-A-F quality costing structure and propose
a plan, which is currently being used to collect and report CoQ data from several development
projects at AT&T Bell Laboratories, Transmission Systems Division. They suggest that
managing CoQ in the R&D process is an effective way to improve product development. The
work of Purgslove and Dale (1995) discusses the development and operation of a system of
quality costing at a manufacturer of coatings for industrial applications. Their CoQ measurement
system implementation is based on the P-A-F model as well. They report that the investment
made in quality improvement was paid back within the first year. Denzer (1978) presents a
description of a P-A-F cost of quality system used in an electronics manufacturing facility and
indicates significant quality cost reduction. Moreover, he shows that the collection and use of
quality costs are an aid to management and are accompanied by improvement of quality.
As indicated earlier, Crosbys model (Crosby, 1979), in which CoQ is expressed as the\ sum of
cost of conformance and cost of non-conformance, is considered technically the same as
Feigenbaums, and the terminology of both is often used together in one model. Crosbys model
is documented to have been successfully used for quality improvement programs at several
companies. Solid State Circuits, a manufacturer of printed circuits boards, has designed new
methods of measuring conforming and non-conforming costs and the use of such methods has
led to the identification of causes of error and the devising of means of correcting them. Denton
and Kowalski (1988) describe this quality improvement and measurement process and report a
drop from 37% to 17% in the companys cost of quality. Slaughter et al. (1998) have carried out
a detailed study on the economics of software quality at BDM International, a major information
technology company. They use marginal analysis of non-conformance costs to identify the
greatest cost impacts of defect reduction during their quality initiatives and present their
successful results. The paper includes a number of important insights for software managers who
are interested in improving their decisions on software quality expenditures.
Use of opportunity or intangible costs for CoQ improvement programs has already provided
sound results in industry. Xerox was the first company to use opportunity cost in order to
determine the CoQ. Carr (1992) describes a program adopted by Xerox, which consists of a
system of quality cost measures and cost of quality concepts adapted to service. The cost of lost
opportunities category is defined as profit not earned owing to lost customers and reduction in
revenue because of non-conformance. CoQ was reduced by $53 million in the first year of the
program implemented at Xerox. Malchi and McGurk (2001) discuss the methodology of
measuring the CoQ, which includes so-called alternative costs in the total CoQ. Alternative costs
are hidden costs, and examples are lost sales, extra inventory, delays and unidentified scrap.
They present a case study of implementation of this CoQ program in a pharmaceutical
manufacturing facility, where implementing this methodology resulted in an 11% reduction in
the cost of quality.

Submitted to the International Journal of Quality and Reliability Management

A quality costing system using the process approach has been successfully designed and
implemented within the power systems division of GEC Alsthom Engineering Systems. Goulden
and Rawlins (1995) describe this hybrid process model, which uses flowcharts. These were
found to be most effective process modeling tools as they facilitated understanding and better
interdepartmental communication.
Since activity-based costing (ABC) is considered more compatible with quality cost
measurement systems than traditional accounting, its use for a CoQ determination is an
appealing alternative. Jorgenson and Enkerlin (1992) describe how a Hewlett-Packard
manufacturing operation utilized its ABC system to identify, quantify and allocate quality costs
among its products. Having this information allowed product teams to simulate and reduce
quality costs earlier in the product design phase.
These documented examples of CoQ improvement programs were successful. They brought
about sufficient savings to justify CoQ measurement expenses, and they yielded a good
productivity gain and reduction in quality costs. More importantly, they identified target areas
for cost reduction and quality improvement.
Four Examples of Best Practice
Since organizations are now seeking practical advice and evidence about quality related costs
and developing quality costing systems, further investigation into best practices is needed. Four
companies realizing the importance of quality in achieving a competitive edge agreed with
McGill University to arrange a benchmarking session on cost of quality. The following
summarizes the information on quality activities presented by the four companies during the
workshop.
Table V shows a comparison of the four companies. The business environment, i.e., the industry
sector and product line, dictates somewhat the amount of effort that is put into a continuous
quality program. From the workshop it was seen that companies A, B and C all work in
industries that require very high levels of quality, and therefore, they all have quite elaborate
quality and productivity improvement systems. Additionally, they manage to obtain satisfying
results from these programs. Company D does not follow a zero defect strategy, but uses a fixed
rate of return through its warranty policy as its quality limit. The company does have a
continuous improvement program and is looking to improve it by implementing a CoQ strategy.
Table V: Comparison of four companies
Company

Industry

Quality costs

CoQ model

Quality efforts

Program
satisfaction

telecom

CONC + COC

P-A-F + ABC

intensive

high

electronics

CONC

no

intensive

high

aerospace

CONC

no

intensive

high

home products

CONC

no

moderate

moderate

COC cost of conformance


CONC cost of non-conformance
P-A-F traditional model including: prevention + appraisal + failure costsABC activity-based costing

Submitted to the International Journal of Quality and Reliability Management

Company A
Company A is a telecommunication company. It has very complex products, and therefore, the
number of opportunities for defects per unit is very high (45,000 defect opportunities per
assembly). However, Company As customers expect near zero defects. Quality initiatives hence
play an important role in the companys product management.
Company As model for cost of quality measurement and calculation follow the P-A-F model,
where CoQ = (P + A + F (internal + external) + other costs)/cost of goods sold. Company A is
well aware of formal cost of quality methods and it has clearly determined its CoQ definitions. It
knows exactly what are its conformance and non-conformance costs; however, it struggles to
find out the shape of its CoQ curves, and hence, an optimum CoQ tactic. The search for an
optimum CoQ is difficult because the business cycle changes often (every 2 years or less);
product lines are released in phases and component obsolescence and multiple engineering
changes are quite common. Every change causes a new search for an optimum CoQ; moreover,
different product lines require separate review, and variable volumes reduce optimization
opportunities.
Company A uses an activity based management approach, which means that it uses ABC to
determine cost categories. It maps financial categories into activity costs, and activities
performed at cost centers are rolled up to aggregate quality costs and percentages. In this way,
the company obtains exact information about every category: prevention costs, appraisal costs, as
well as internal and external failure costs. An example of activity costs is given in Tables VI and
the resulting CoQ chart is shown in Figure 1.
Table VI: Example of activity costs in Company A
Cost of quality
Activity - primary
Activity %
category
OPD
Failure - Internal
8%
Change Management
Prevention
12%
Internal Quality Issues
Failure - Internal
17%
External Quality Issues
Failure - External
9%
DFX, NPI support
Prevention
4%
Proto Support
Prevention
6%
PLC Deliverables
Appraisal
22%
Mfg Tools
Prevention
6%
Quality Reporting
Appraisal
10%
Other
Cost of Business
6%
Totals
100%

Cost categories
Salaries
Depreciation
Suppliers
Others

Company A uses other metrics for performance comparisons, such as new versus mature
product or part number based CoQ ratio. CoQ is measured at individual test stages, which
allows trend analysis and comparison using mature product as the benchmark for new product.
Figure 2 shows the decreasing trend of CoQ for manufacturing operations. The graph shows a
decrease for all CoQ components; however, it is failure costs which show the biggest reduction,
about 40 % over 18 months. The breakdown of CoQ and its cost values are measured quarterly.

Submitted to the International Journal of Quality and Reliability Management

Company A has been using their CoQ methodology successfully. The company declares savings
in quality costs, has quality improvement in every part of their process and achieves very
aggressive improvement targets. Moreover, the end customer directly benefits from the in-house
quality initiative. As a result, customer satisfaction is increasing.

Figure 1. CoQ chart for Company A

Figure 2: Manufacturing operations CoQ for Company A shown on a relative cost scale.
Company B
Company B is a multinational microelectronics company, which dedicates a lot of effort to
quality improvement. Their far-reaching and successful quality improvement program is the
main axis of their quality initiatives. The program includes continuous improvement focused on
process as well as extensive education and training on quality for all employees.
Despite the fact that there is a great interest in reducing non-conformance cost, Company B does
not measure, report or chart CoQ. It does not use any formal CoQ model and does not try to
optimize cost of quality. Nevertheless, it does reduce cost due to poor quality through its

Submitted to the International Journal of Quality and Reliability Management

continuous improvement activities. The company has a strong operations and process focus,
where emphasis is put on process yield and cycle time improvement. It believes that a continuous
quality improvement program focused on process will provide the opportunities for quality
improvement and thus reduction in cost of quality.
Company C
Company C is in the aerospace industry and emphasizes products with near zero defects.
Company C describes its cost of poor quality model as an iceberg philosophy, where just a few
categories for poor quality cost are measured and monitored. This is, however, just the tip of the
iceberg, since most of the cost factors leading to poor quality are non-visible or completely
hidden (and non-quantifiable).
Company C has implemented a process that allows tracking of all non-quality events and
associated root causes as well as corrective actions and lessons learned. It puts full attention into
measuring the cost of poor quality. It has 4 main quality ratings, which measure nonconformities (scrap, rework, etc.), poor adherence to specifications (internal, external,
customers, suppliers), number of defective parts in parts per million, and on-time delivery.
Their cost of non-quality is systematically reduced through a corporate-wide initiative based on
continuous improvement. It also uses a sophisticated IT system for tracking quality. Although
company C has had success in improving the value of non-conforming quality costs, it does not
use any CoQ model, and it does not include the cost of quality among its calculation elements.
Company D
Company D is a manufacturer of home products. It has set its quality level at a fixed warranty
rate, and it attempts to optimize its quality effort to achieve this target. At the time of the
workshop, the company did not measure CoQ; however, it was planning to do so and was
building a CoQ model. The envisioned CoQ program was based on a P-A-F model. The strategy
of Company D was to directly attack failure costs in an attempt to drive them down, to invest in
the right prevention activities to bring about improvements, to reduce appraisal costs according
to achieved results, and to continuously evaluate and redirect prevention efforts to gain further
improvements.
Conclusion
The four companies that participated in the McGill workshop on cost of quality all have
systematic quality initiatives, and have been successful in improving quality and reducing the
cost of non-conformance. The only company that measures cost of quality and uses a formalized
CoQ model is Company A. Company D is at the point of starting to use this quality measurement
tool as well; however, it is at the beginning of this path. On the other hand, Company B and
Company C focus their quality efforts solely on continuous quality improvement. They measure,
monitor and work mostly with cost of non-conformance, not formally including cost of
conformance. They do manage to reduce the cost of poor quality; however, they cannot reach an
optimum level of costs spent on quality.
Many research papers on CoQ propose quality cost models, methods and techniques, and provide
abundant information on the topic. Literature reviewing the practical use of CoQ suggests that
even though quality is considered to be an important issue, the CoQ approach is not fully
appreciated by organizations and only a minority of them use formal quality costing methods.
The four companies that participated in the McGill workshop are large, multinational companies

Submitted to the International Journal of Quality and Reliability Management

with comprehensive quality programs, and of these, only one had a formal CoQ program and one
was planning to start.
CoQ programs should be part of any quality management program. The methodology is not
complex and is well documented. The published examples of best practices indicate that
companies that use CoQ programs have been quite successful in reducing CoQ and in improving
quality for the customer. CoQ programs provide a good method for identification and
measurement of quality costs, and thus allow targeted action for reducing CoQ. Further
education on the practical level is needed for managers to understand better the CoQ concept in
order to appreciate fully the benefits of the approach, to increase their ability to implement a
CoQ measurement system and to save money.
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Autobiographical Note
Andrea Schiffauerova, PhD student
For her PhD, Ms. Schiffauerova is studying methods that consider how scope, technology, cost,
risk, etc. impact product development projects. She has also participated in projects in cost of
quality, risk management and engineering change.
McGill University, Department of Mechanical Engineering
817 Sherbrooke Street West
Montreal, QC, Canada, H3A 2K6
tel: 1-450-462-5778
email: andrea.schiffauerova@polymtl.ca
Vince Thomson, Werner Graupe Professor of Manufacturing Automation
Dr. Thomson has been involved in manufacturing and information technology related research
for the past 25 years at McGill University and the National Research Council (Canada). His
research has ranged from shop floor control and production scheduling to the present interest in
real-time control and process management in manufacturing. His process management research
has focused on new product introduction, concurrent engineering and manufacturing support in
terms of coordination, metrics, and process principles.
McGill University, Department of Mechanical Engineering
817 Sherbrooke Street West
Montreal, QC, Canada, H3A 2K6
tel: 1-514-398-2597
fax: 1-514-398-7365
email: vince.thomson@mcgill.ca
http://www.mcgill.ca/mecheng/staff/academic