We learn from the American Society for Quality (ASQ) that true quality-related costs can be as high as 15-20% of an organization's sales revenue. Several issues affect productivity and profits, including scrapping defects, managing recalls and product redesign. This blog post explains what we mean by the cost of quality and explores ways to lower the costs of poor quality in your business by using quality management software (QMS).
How to calculate the cost of quality (CoQ)
When we refer to quality cost or cost of quality (CoQ), what do we mean? CoQ allows companies to examine the balance between how much they spend on prevention and good quality maintenance versus how much internal and external quality failures cost the company. In this way, we can represent CoQ with a simple formula:
CoQ = CoGC (cost of good quality) + CoPC (cost of poor quality)
The cost of good quality breaks down into two categories—prevention costs and appraisal costs. Prevention costs are any costs that aim to keep failures low, including establishing product specifications, product development, employee training and using a QMS like Octave Reliance (formerly ETQ Reliance). Companies incur appraisal costs while maintaining acceptable quality levels, like materials inspections, quality audits and supplier assessments.
The COPQ also breaks down into two separate categories—internal and external failures. Internal failures include problems occurring before the product reaches a customer–for example, excessive scrap, machine breakdown and waste because of inefficient processes. A nonconformance management system helps you capture and resolve these deviations systematically. External failures occur after a product reaches the customer, like warranty claims, shipping damage and product returns.
Need help figuring out the cost of quality (CoQ) for your business? Reach out to our quality experts for a personal consultation.
How to reduce cost of quality
The ultimate goal when you calculate the cost of quality is to find ways to reduce the costs of good quality and costs of poor quality without reducing the actual quality of your product. A QMS is beneficial for reducing both kinds of costs, as it dramatically increases workflow efficiency while also allowing you to easily keep track of any potential risk or waste during the production process. A proven QMS can ensure ROI across both prevention and failure cost categories.
How to reduce the cost of production with a QMS:
1. Solve problems faster
To reduce costs, address adverse issues before systemic issues occur. A review of the most prominent recall cases in recent years shows the costliest problems are those without effective management from the start.
How does a QMS solve problems quicker?
Corrective and Preventive Action (CAPA) process automation: From the review to root cause and actions to follow-up, a QMS keeps corrective actions moving forward to ensure problems don't go undetected.
It shows which issues you must handle first: When dealing with a laundry list of CAPAs, risk-based filtering allows you to prioritize work and prevent costly delays.
Total visibility allows you to pinpoint the source of problems: A quality management system can integrate multiple data sources across your organization, from your manufacturing execution system to your supplier management data. Increased visibility makes it easier to locate the source of a problem faster.
There's no need to put fires out constantly. Instead, a quality management system provides a methodical approach to problem-solving. Doing so reduces quality costs by preventing recurrence.
2. Change management tools
In today’s economy, keeping up with the competition, you must be able to evolve. However, the sheer cost of any proposed change can make it challenging for companies to stay agile. Ask yourself the following:
How can you determine if you're making the right choice?
What can I expect alternatives to cost?
How could these changes potentially affect other areas of the company?
A QMS reduces the uncertainty involved. With change management tools that track costs, you can analyze the risks associated with various options and plan for a smooth transition. An integrated QMS also simplifies things. It links related processes like employee training and document control.
3. Reduction of operational errors
Don't underestimate the human element when you address the cost of quality problems. For example, you could design the most sophisticated production system imaginable and still have quality problems if your people don't have adequate training. An integrated QMS limits probabilities and impacts of human error. Here are some ways how:
It improves employee training programs: A QMS ensures your employees receive appropriate training customized to their location, department and role while allowing you to track proficiency test results.
It raises visibility: An integrated QMS gives you real-time data and automated alerts, which helps you prevent problems before they occur.
It automates workflows: Automated workflows mean you can customize procedures, and a QMS helps standardize your process while it ensures important requests and objectives advance.
4. Effective risk management
To reduce quality costs, you need effective risk management. A quality management system allows you to build risk tools within any process, including bowtie analysis, decision trees and risk matrices.
Below are several examples:
Audit management: Audits generate massive amounts of data, which often leads to an extensive list of potential action items. Audit management system capabilities show which items are high-risk (and likely contributing the most regarding quality costs), helping you prioritize follow-up strategically.
Legislative and regulatory requirements: Assessing regulatory compliance may require your company to address multiple gaps. A quality management system allows you to identify high-risk gaps to fix first. Doing so ensures you spend time in the most effective way possible. That includes software validation regulations that govern life and health science industries, where up-to-date software is a requirement.
Reporting: Centralized reporting capabilities that use risk as a common yardstick allow teams to make more informed and strategic decisions and reduce quality costs.
Risk-based decision-making is central to continuous improvement. It provides an objective measure to determine whether your work has reduced risk to acceptable levels.
5. Supplier quality improvements
Increased production costs are often the direct result of poor supplier quality. An integrated quality management system includes supplier management tools that allow you to benchmark performance, increase supplier communication and help them understand your company's needs.
How supplier management tools reduce the cost of quality:
Detailed supplier ratings allow you to identify your best-performing suppliers and those that contribute the most to quality costs.
Secure cloud-based portals enable suppliers to view open corrective actions, which help them resolve problems faster.
Reporting tools provide teams with fast access to data to use in supplier negotiations.
It's best for you to first look inside your organization before you take steps toward a reduction in quality costs. Understanding your quality journey helps you look beneath the surface and identify the underlying sources of the problems. An integrated quality management system provides you with the tools to accomplish this quickly and with greater precision.
FAQ
How does a quality management system reduce the cost of quality?
A quality management system reduces COPQ by increasing workflow efficiency by solving problems fast, easing change management within your company, reducing operational errors, assisting in risk management and improving supplier quality by making it easy to rate and communicate with suppliers.
How can we reduce the cost of quality?
You can reduce the cost of quality through prevention efforts, improving worker training and using quality management software that streamlines your quality workflow.
What are the four costs of quality?
The four costs of quality include appraisal and prevention costs (the costs of good quality) and external and internal failure costs (the costs of poor quality).
How can improved quality lead to reduced costs?
When organizations implement a quality management system, they can identify and address issues earlier in the production process, which reduces the likelihood of defects and the need for rework or scrap. This can result in a decrease in the cost of poor quality (COPQ) associated with scrap, rework and returns.
Improved quality can also lead to reduced costs because a focus on quality can lead to greater efficiency in processes and systems, which reduces the time and resources required to complete tasks and minimizes the occurrence of defects.