Many types of quality costs are traceable through the organization’s accounting systems. Any cost that is incurred because the quality of product or service is not perfect would be categorized and reported as a cost of quality. There are three main types:
Initially, some of these costs are hidden within seemingly value-added activities, but when you pull back the blinds you can see that a portion of the production activities, for example, are associated with defects of some sort, and are thus quality costs. These internal costs can be tracked through an organization’s accounting system, so long as employees are trained to recognize when quality costs are incurred and diligent about using the appropriate cost codes for each activity, and material is strictly accounted for in production.
Yet, in addition, there are also external costs that cannot be easily captured in an accounting system, since the costs are not actually incurred. When service suffers because of quality issues, for example, then sales might be lost because you can’t meet the customer demand, or the customer decides to try a supplier that seems better. Or perhaps customer services failed to follow through in a timely fashion with a sales inquiry, which provided an opportunity for your competitor to step in. These lost sales, and loss of goodwill, are indirect results of poor quality. We want to capture these, and the only realistic approach to do that is through some basic estimates. For example, for a given category of product over a specific time period, considering the market demand and market share of the company, you would estimate a percentage of lost sales. These can be, at times, significant, so should not be ignored. See also: Quality Cost Overview, Benefits of Quality Cost Reduction, and Goal of Quality Cost System
Practitioners can get bogged down with too much emphasis on categories, or thinking they need to have precise estimates. Rather, the COQ estimates should be used to provide broad direction for an organization’s improvement opportunities.
The bigger issue, however, is an exclusive focus on COQ; We need to remember that COQ only helps with half of quality equation: COQ focuses only on not doing the wrong things, but the bigger picture focus of a quality effort should be doing the right things to design products and services to exceed customer expectations. These types of efforts are not usually measured in COQ systems. See also: Strategy for Reducing Quality Costs
It’s important to use a suitable base, depending on the category and some meaningful unit of measure for that category. For example, internal failure costs might be tracked as a percent of total production costs; external failure costs as percent of net sales; appraisal costs for supplied materials as a percent of total purchased material costs, and so on. See also: Use of Quality Costs and Cost of Quality Examples
As with any process data, track these metrics using statistical control charts so you can differentiate special cause (real changes to the system) from common cause (systematic) issues. As Deming so often said, your response to each must be quite different. See also: Management of Quality Costs and Importance of SPC to Quality Management System Performance
When you’ve identified these systemic issues with your cost of quality, and have determined a significant opportunity for improvement, the best approach is to apply the six sigma approach to improvement: that is, management-sponsored cross-functional projects using the DMAIC methodology focused on a specific process issue that is significantly impacting the COQ.
Learn more about the Quality Management tools for process excellence in The Handbook for Quality Management (2013, McGraw-Hill) by Paul Keller and Thomas Pyzdek or their online Quality Management Study Guide.