COST OF QUALITY

The old saying “When the going gets tough, the tough get going” is probably most apt to describe the current situation that many organizations are facing. Rather, it is the smart that get going. Among the many ways in which Covid-19 has affected the economy the one that affected each and every organization, is the huge pressure on consistency of revenue coupled with uncertainties. The prices of raw materials are on the rise, the overall sentiment of the economy is mixed, and the prospects for interest rates going up is matter of time, all of which are clear pointers that the profit margins are under enormous pressure.

All the products these days, are available with a wide variety of choice to the customers with many companies on the play field and any increase in the prices might lead to loss of customer base. The companies must maintain their margins and hold on to their customers at the same time. In this situation, it becomes imperative that the companies find out and reduce all the costs that do not add value to its products.
Here comes, Cost of Quality, the tool that will help companies achieve the above objective.

Cost of Quality (CoQ) is a methodology used to define and measure where and what amount of an organization’s resources are consumed due to “Lack of Quality”.

CoQ can be broadly classified into 4 categories

Internal Failure Cost - The cost for medicating the defects found in the product before delivering it to the customer.

External Failure Cost - The cost incurred for addressing the defects found by the customer.

Appraisal Cost - All costs associated with inspecting the goods and services to ensure they meet the specifications and the quality norms.

Prevention Cost - The costs incurred with establishing good systems and the cost incurred to prevent the occurrence of damages.

In other words, CoQ is the cost of failing to produce quality. Other than prevention costs which are incurred to prevent bad quality, the other three costs are results of failing to produce good quality products. Appraisal costs, primarily in the nature of inspection costs, are incurred to identify the deficiencies in the process and is a non-value-added activity. The failure costs are purely costs of poor quality.

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