Wednesday, October 31, 2012
Importance of Cost of Quality
Importance of Containing Quality Cost
I wanted to provide a blog that is a quick overview explaining the cost of quality’s importance in small businesses. Also, I found that small businesses have to look at more than the standard four categories that bigger companies focus on:
Cost of Quality is an important business practice. By knowing your Quality Costs it can help business’s find and correct problems and the costs to attain quality. Quality is nearly 20-40 percent of a company’s sale. The basic model of quality costs are divided into four categories, but it is equally important to include hidden costs that may affect quality. A small business should frequently revisit and restructure their quality control process to uncover opportunities for improvement.
Internal Failure Costs are associated with product failures and defects discovered before the product leaves the company floor. These defects in products occur when the process does not meet a certain specification or requirement.
External Failure Costs are incurred during customer use and can include defective products, warranty charges, customer complaints, replacement products, recalls, and repairs. External costs are the most apparent. It is important for small businesses to quantify their external costs.
Appraisal Costs are those associated with actions designed to find quality problems with measuring, evaluating, inspecting, testing and auditing products and product materials to ensure they adhere to the quality standards and performance requirements of a business.
Prevention Costs are the most important quality cost investment. Prevention costs keep product failure costs to a minimum. Eliminating defects before production begins reduces the costs of quality and can help companies increase profits.
Hidden Costs account for the cost of quality in small businesses. It is imperative for small businesses to understand the hidden quality costs such as loss of sales and customer service. Many businesses include warranties in their quality costs, but they often underestimate the full financial impact if the product fails after the warranty expires. Many times the customer incurs the cost of replacing a failed product, the experience may discourage the customer from purchasing from that company again, resulting in loss of sales.