Page 156 - The Handbook for Quality Management a Complete Guide to Operational Excellence

142 I n t e g r a t e d P l a n n i n g O r g a n i z a t i o n a l A s s e s s m e n t 143

Prevention Costs
The costs of all activities specifically designed to prevent poor quality in products or
services. Examples are the costs of new product review, quality planning, supplier
capability surveys, process capability evaluations, quality improvement team meet-
ings, quality improvement projects, and quality education and training.

Appraisal Costs
The costs associated with measuring, evaluating, or auditing products or services to
assure conformance to quality standards and performance requirements. These include
the costs of incoming and source inspection/test of purchased material; in process and
final inspection/test; product, process, or service audits; calibration of measuring and
test equipment; and the costs of associated supplies and materials.
Failure Costs
The costs resulting from products or services not conforming to requirements or cus-
tomer/user needs. Failure costs are divided into internal and external failure cost
categories.

Internal Failure Costs
Failure costs occurring prior to delivery or shipment of the product, or the furnishing of
a service, to the customer. Examples are the costs of scrap, rework, re-inspection, retest-
ing, material review, and down grading.

External Failure Costs
Failure costs occurring after delivery or shipment of the product, and during or after
furnishing of a service, to the customer. Examples are the costs of processing customer
complaints, customer returns, warranty claims, and product recalls.
Total Quality Costs
The sum of the above costs. It represents the difference between the actual cost of a
product or service, and what the reduced cost would be if there were no possibility of
substandard service, failure of products, or defects in their manufacture.

Figure 8.1 Quality costs—general description (Campanella, 1990, by permission).

For most organizations, quality costs are hidden costs. Unless specific
quality cost identification efforts have been undertaken, few accounting
systems include provision for identifying quality costs. Because of this,
unmeasured quality costs tend to increase. Poor quality impacts compa­
nies in two ways: higher cost and lower customer satisfaction. The lower
satisfaction creates price pressure and lost sales, which results in lower
revenues. The combination of higher cost and lower revenues eventually
brings a crisis that may threaten the very existence of the company. Rigor­
ous cost of quality measurement is one technique for preventing such a
crisis from occurring. Figure 8.2 illustrates the hidden cost concept.
The goal of any quality cost system is to reduce quality costs to the
lowest practical level. Juran and Gryna (1988) present these costs graphi­
cally as shown in Fig. 8.3. In the figure it can be seen that the cost of failure
declines as conformance quality levels improve toward perfection, while
the cost of appraisal plus prevention increases. There is some “optimum”
target quality level where the sum of prevention, appraisal, and failure

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