In this chapter, we are going to cover the categories of cost of poor quality. Every organization is unique when it comes to the cost of poor quality, and it’s manifested in many different ways. There are three basic general classifications of quality costs that are pretty consistent across most organizations. First of all, we have prevention costs. These include all of the effort and the work to prevent defects from happening. These can include audits, training, following processes, and maintaining equipment properly, and of the activities to get it right the first time. From there we have appraisal costs. This is typically where we are going to conduct measurements, inspect our deliverable, and perhaps conduct destructive testing. And then we have failure costs. These are the costs that we incur when there’s an actual failure or defect, like scrapping parts in-house, which would be an internal failure. And then there’s external failure costs. When the deliverable’s in the hands of the customer and they experience the defect, they become dissatisfied. And we must ask for warranty, repair, or replacing the deliverable. There are many examples to consider with respect to the cost of poor quality. Again, the categories are prevention, appraisal, and failure. Prevention activities may include planning, preproduction reviews, engineering the product, housekeeping programs, or a zero-defect program. The point of prevention is to take all of the necessary action to do things right and prevent defects from happening. Appraisal includes testing and inspection, audits, security checks, safety reviews, and many other kinds of costs when we’re trying to identify issues with quality.
We’re basically making sure that all of the efforts we have made in prevention are actually working. Then, of course, we have the actual failure costs themselves. The most expensive internal failure costs includes scrap and rework. Thankfully, the defects were found before they got into the hands of the customer. But it is still expensive and time consuming for us to address it after we have produced the deliverable. Quality issues can be caused by, or can cause, issues with morale, absenteeism, and more. External failure costs can include product recalls, customer service problems caused by errors, and late payments from dissatisfied customers. As we move along the scale from prevention to external failure, the cost of poor quality increases, as well as the customer exposure. There are hidden costs of poor quality. Unhappy customers can take their business elsewhere. The cost to replace a customer can be three to five times the cost of maintaining a customer. Unhappy employees can result in poor morale and high employee turnover. High employee turnover is a vicious cycle. Not only can we spend 100% of the cost of the employee just to replace them and train a new one, it creates a vicious cycle. Because new people are not as experienced or well-trained. We may then experience internal process problems. While these costs tend to be hidden, they are certainly expensive to an organization.