Project Quality Management: Cost of Quality
Cost of quality is an important concept in the project quality management knowledge area. However, it is also misunderstood by a lot of exam-takers for the PMP®certification exam. A concrete understanding of this concept can help in increasing a candidate’s score as there are quite a few questions on the exam that are based on this concept.
Let us take a look at this concept to understand it better:
If a product meets or exceeds its design specifications and is free of defects, it is said to have a high quality of conformance. For instance, if a steel watch is free of defects it can have a quality of conformance that is just as high as a defect-free diamond-studded watch. The steel watch may not be as expensive or attractive as a diamond-studded watch, but we can definitely expect it to be free of defects.
The prevention, detection, and dealing with defects incur costs that are called quality costs or costs of quality. The term "cost of quality” is confusing for a lot of people. It does not refer to costs such as using the highest grade steel to make a watch or using the best quality mahogany to build furniture, instead of fir or redwood.
Instead the term “cost of quality” refers to all of the costs that are incurred to prevent defects in products, or costs that are a result of defects in products.
This concept isn’t limited to the duration of a specific project. Quality costs do not just relate to manufacturing; rather, they relate to all the activities from initial research and development (R & D) all the way to customer service. So the complete product life-cycle (and not just the project life-cycle) is included while deriving the Cost of Quality.
The overall cost of quality is reviewed as a part of project management to make decisions on how much will be invested in quality.
There are 2 main categories within the definition of Cost of quality. They are Cost of Conformance and Cost of Non Conformance.
Cost of Conformance
These costs are incurred in an effort to keep defective products from falling into the hands of customers. The Cost of Conformance is made up of Preventions costs and Appraisal costs.
Prevention costs includes all those costs which are incurred for activities that are specifically designed to prevent poor product quality from happening in the first place. It is much less expensive to prevent a problem from happening than it is to find and correct the problem after it has occurred.
Prevention costs are incurred for activities whose purpose is to reduce the number of defects. Organizations employ many techniques to prevent defects, including statistical process control, quality engineering, and training.
Appraisal costs, which are also called inspection costs, are those costs which are incurred to identify defective products before they are shipped to customers. However, performing appraisal activities does not prevent defects from occurring. Most managers now realize that maintaining a team of inspectors is not an effective approach to quality control.
A better approach is asking employees to be responsible for their own quality control, along with creating designs for how to manufacture a defect-free product. This approach allows quality to be built into the product, rather than relying on inspections to identify any defects.
Cost of Non Conformance
These costs are incurred because defects are produced despite efforts by the organization to prevent them. Therefore these costs are also known as costs of poor quality. These failure costs are incurred when a product fails to conform to its design specifications .The cost of non conformance is made up of internal failure costs and external failure costs.
Internal Failure Costs
Internal failure costs result from identification of defects before they are shipped to customers. They are identified within the scope of the project. These costs include rejected products, reworking of defective units, and downtime caused by quality problems.
It also includes any costs involved if the company has to reject and throw parts of their project work, which is also called “scrap”. If an organization’s appraisal activities are effective, it has a better chance of detecting defects internally. This increases the level of internal failure costs.
External Failure Costs
External failure costs are costs that are a result of delivering a defective product to the customer. These costs include warranty, repairs and replacements, product recalls, liabilities arising from legal action against a company, and lost sales arising from a reputation for poor quality. Such costs can even decimate a business’s profits.
External failure costs also give rise to intangible costs. For instance, an organization may lose its future business with its existing customer for delivering a product of poor quality. These kinds of costs are not there on the balance sheet, but they can definitely have an adverse impact on the income statement.
The best approach an organization can follow in these situations is to ensure that defective products do not reach the customer.
By reducing our internal failures we can ensure that they don’t slip through to become external failures. Even if we have an external failure, we should act fast and resolve the issue with the customer .This is the hallmark of good customer service.
Thus Cost of Quality includes Costs of Conformance (prevention costs and appraisal costs) and Cost of Non Conformance (internal failure costs and external failure costs) .This technique helps us calibrate the amount we spend to spending to assure quality. It also involves looking at what will be the costs of conformance and costs of non conformance on the project and creating an appropriate balance.
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