Joseph Juran revealed an important link between money and quality through his book Quality Control Handbook (1951) where he introduced the concept of the Cost of Quality.

The concept was further expanded by Armand Feigenbaum in his HBR essay on Total Quality Control (1956) where he referred Cost of Quality as-
1. Failure cost (Internal and External Failure Cost),
2. Appraisal cost and
3. Prevention cost.

Since then, the cost of quality concept has been continuously improved into a fully developed financial model that has many strategic benefits.

👉 Let’s discuss each type of cost

✅ The Cost of Good Quality (CoGQ):

Prevention Costs:

Costs incurred from activities intended to keep failures to a minimum.

These can include, but are not limited to, the following:

– Establishing Product Specifications
– Quality Planning
– New Product Development and Testing
– Development of a Quality Management System (QMS)
– Proper Employee Training

Appraisal Costs:

Costs incurred to maintain acceptable product quality levels.

Appraisal costs can include, but are not limited to, the following:

– Incoming Material Inspections
– Process Controls
– Check Fixtures
– Quality Audits
– Supplier Assessments

❎ The Cost of Poor Quality (CoPQ)

Internal Failure Costs:

Costs associated with defects found before the product or service reaches the customer.

Internal Failures may include, but are not limited to, the following examples:

– Excessive Scrap
– Product Re-work
– Waste due to poorly designed processes
– Machine breakdown due to improper maintenance
– Costs associated with failure analysis

External Failure Cost:

Costs associated with defects found after the customer receives the product or service.

External Failures may include, but are not limited to, the following examples:

– Service and Repair Costs
– Warranty Claims
– Customer Complaints
– Product or Material Returns
– Incorrect Sales Orders
– Incomplete BOMs
– Shipping Damage due to Inadequate Packaging

👉 Equation:

The Cost of Good Quality is the sum of Prevention Cost and Appraisal Cost.
CoGQ = PC + AC

The Cost of Poor Quality is the sum of Internal and External Failure Costs.
CoPQ = IFC + EFC

By combining the equations, Cost of Quality can be more accurately defined, as shown in the equation below:
COQ = (PC + AC) + (IFC + EFC)

👉 In 1999, Juran published the 5th edition of Juran’s Quality Handbook. In the book, it’s said that Total Cost of Quality is the lowest, when conformance is 100%.
At the point, the Total Cost of Quality simply equals the Cost of Prevention and Appraisal.

👉 Most importantly External Failure Cost may incur loss of business and reputation in the market which cannot be measured in terms of money!