You can broadly categorize the cost of quality as the cost of poor quality (COPQ) and the Cost of good Quality. The cost of poor quality covers internal as well as external costs that are a result of the defects in the products. The cost of good quality covers those costs incurred on the deterrence of non-conformance as well as for the assessment of these products for conformance.
The cost of poor quality would include internal and external failure costs. When the defects are found before delivery of the product to the customer, these costs are called internal failure costs. Costs for rework, re-designing, shortages and downtimes come under this category.
When the costs are incurred after delivery to customers and lead to customer dissatisfaction, they are external failure costs. For example, costs such as customer complaints, repairs, warranty issues or even sales reductions are external failure costs.
Costs of good quality are used for prevention and appraisal. Costs incurred for quality planning, error proofing, quality education, training and so on would fall under the category of prevention costs.
Costs for testing, audits and standardizing measuring and testing equipment are appraisal costs.
Quality Processes
Most quality initiatives fail to correlate quality level with companies' bottom lines - but Six Sigma has a solution to that. Six Sigma provides the way by building the quality as part of the processes. It aims at doing things correctly in the beginning. The philosophy is that of a determined effort to achieve zero defects, which is possible if the process is a smooth one.
If processes are improved, the appraisal and prevention costs will be reduced. They can never be taken to zero - but the reduction will have a positive effect on performance.
Poor quality leads to higher costs as well as customer dissatisfaction. The sales that are lost means loss of revenue, which may become critical if not handled carefully and on time. Thorough measurement of quality can help prevent such situations. The biggest amount of loss is from non-conformance detected by customers.
Along with the cost of repair or replacement, companies lose out on goodwill and reputation, which worsens when the customer informs other customers about the same. Further costs may have to be incurred if there is any litigation. Additionally, if the detection of errors in done in the early stages when they happen, the causes can be determined easily. A time lag in detection leads to further delay in removal, unless the exact reason is located.
Timely collection of quality cost data supports performance improvement. To be effective, the cost of quality has to be combined with other quality information systems to ensure that root causes are handled properly.
When you achieve a sigma level of six, you will find that the cost of quality is less 1% or less, which means improved performance; while when sigma level is 2 or 3 the cost of quality as a percentage is just as bad as 40%.
