Picture a plant that requires inspectors, a team of rework staff, and a large area devoted to parts that need rework.

Then consider how differently the plant would operate if there hadn’t been a defect in six months. 

Tech Tips

Paul Keller explains the three main cost of quality categories:

  • prevention costs such as the quality improvement efforts, process capability studies and supplier surveys;
  • appraisal costs such as inspection of incoming, in-process or finished goods, as well as calibration and maintenance of inspection equipment; and,
  • failure costs, which include both non-conforming materials that are detected and/or corrected in-house as well as the external failures that are detected by the customer and require customer service processing of complaints, returns and so forth.

* Source: Paul Keller

Tom Pyzdek saw this happen at one defense manufacturer. The company was making circuit boards and required four full-time inspectors, some twenty rework staff, and a large storage area for parts that needed to be fixed. Over time, the company managed to overhaul their processes so completely that defects became an event rather than the norm. People would call others over to show them the defect, as it was a rare and interesting occurrence. 

In another high quality operation, he worked with a toy manufacturer that made millions of toys but had four defects in one year. This was enough to prompt a summit among staff and consultants to solve the issue of the defects. It led to an extensive packaging redesign. 

The cost of quality is often misunderstood. It can be thought of as the cost of doing something wrong the first time. It’s underestimated and not fully factored into the business costs. If companies actually knew how much money was spent on the cost of quality, they would be quick to take action, says Pyzdek, president of Pyzdek Institute LLC and author of many books related to quality, including “The Handbook for Quality Management” written with Paul Keller. 

But in many cases, the business just has these costs built in as the cost of doing business. They may continue this way, with the many inspectors and rework and wasted floor space, until customers demand a change. Customers, in essence, are saying: we are not willing to pay for those costs anymore. This leads to crisis mode, as companies take action once it’s been proven necessary for survival. 

It’s hard to measure all of the costs, particularly the cost of customers not buying your product. If they aren’t willing to pay for the added costs of rework, it can mean the end of the business. Waste is another way to look at it. It’s the extra cost incurred that wouldn’t have happened if things were done with optimum quality. “You don’t need inspectors when everything you made in the last six months is perfect,” Pyzdek says.

Pyzdek once worked with a company that went from five defects per 100 parts to five defects per million. This took time but it was possible. It changed everything. They brought in a partner organization to show them the success, but the other company was in denial that they could do the same thing, saying it wasn’t possible at their site. This reaction makes sense, and perfection doesn’t happen in a week, but it is possible to improve, in stages and over time. 

“The concept is supposed to be: put the money into the prevention side and your overall costs should come down,” says Rod Munro, Lloyd’s LRQA QMS lead assessor and a quality author, who notes that the cost of quality concept has been around since the 1940s and ‘50s. 


Improvement always sounds like a good idea, but sometimes it can be difficult to know where to begin. Douglas C. Wood, president of DC Wood Consulting LLC, says, “One of the most common elements I run up against is: ‘We can’t measure some of these costs, we don’t know what our waste is.’ When you talk to them about different techniques for measuring cost, there are ways to measure things without putting a meter on it and measuring it every time.” 

And sometimes describing the problem differently can help. In some cases, “language has to be different for people to understand,” Wood says. Instead of using the traditional terms for cost of quality: prevention, appraisal, internal and external failure, he suggests: investment, monitoring, waste and downstream consequences. 

The important thing is to think about improvement—not categories. “Practitioners can get bogged down with too much emphasis on categories, or thinking they need to have precise estimates,” says Paul Keller, president and COO of Quality America. “Rather, the cost of quality (COQ) estimates should be used to provide broad direction for an organization’s improvement opportunities. The bigger issue, however, is an exclusive focus on COQ; we need to remember that COQ only helps with half of quality equation: COQ focuses only on ‘not doing the wrong things,’ but the bigger picture focus of a quality effort should be ‘doing the right things to design products and services to exceed customer expectations.’ These types of efforts are not usually measured in COQ systems.”

Keller, who has written extensively on quality, said sometimes people follow software religiously to track costs, while “Others just throw up their arms. That’s a bit of a shame, really, because it’s a very promising way to track your opportunities for improvement.” 

“You can talk until you’re blue in the face about productivity and defect rates, but until you put a dollar amount on it,” it can be difficult to get attention, Keller says. He notes that a legitimate cost of quality system will “raise eyebrows and get management’s attention.”

“Initially, some of these costs are hidden within seemingly value-added activities,” Keller says, “but when you pull back the blinds you can see that a portion of the production activities, for example, are associated with defects of some sort, and are thus quality costs.”

“Yet, in addition, there are also external costs that cannot be easily captured in an accounting system, since the costs are not actually incurred,” he continues. “When service suffers because of quality issues, for example, then sales might be lost because you can’t meet the customer demand, or the customer decides to try a supplier that seems better. Or perhaps customer services failed to follow through in a timely fashion with a sales inquiry, which provided an opportunity for your competitor to step in. These lost sales, and loss of goodwill, are indirect results of poor quality. These can be, at times, significant, so should not be ignored.”


So once you understand the cost of quality issues, what can be done? According to Keller, “When you’ve identified these systemic issues with your cost of quality, and have determined a significant opportunity for improvement, the best approach is to apply the Six Sigma approach to improvement: that is, management-sponsored cross-functional projects using the DMAIC methodology focused on a specific process issue that is significantly impacting the COQ.”

One way to fix a broken system is value stream mapping, according to Pyzdek. Companies can systematically go through the business, looking at what is done, and by whom, and consider if it adds value to the company. If not, it can be considered waste. Pyzdek suggests Design for Six Sigma so that companies design processes with less waste in the first place. 

But no matter which method you choose, know that something can be done. One of the misconceptions is that you can’t really address the cost of quality because it’s too big. “There is some truth to that,” says T.M. Kubiak, president and owner of Performance Improvement Solutions. He said the goal should be to identify and then track areas for improvement, which should be done at a basic level so action can take place and the defects can be improved. 

Often scrap and rework is one of the highest areas of cost of quality. In his work on cost of quality, Kubiak focused mostly on the scrap and rework because it was the most significant. He implemented this at companies that would then call executive meetings to discuss the quality issues regarding scrap and rework and how to fix them. This brought accountability and visibility to the problem. 

One company he worked with was able to reduce scrap and rework by several million dollars. Previously—and this seems common—the concept was built into the budget at the company. The mentality, Kubiak says, was “We’re allowed to generate this much scrap because it’s in our budget.” 

He says any initial cost of quality projects will pay for themselves in the long run. Kubiak notes, “The implementation of cost of quality more than offsets the cost of allowing unresolved issues.” Q