How Quality Costs Impact Business Performance

Understanding Quality Costs in Business

Quality costs can be divided into various categories, including hidden, direct, indirect, prevention, and evaluation costs.

Hidden Costs

Hidden costs are those that are not easily recognized. Examples include:

• Leaving your phone unattended
• A poor working environment

Types of Costs

Direct Costs

Direct costs are those that can be assessed and have their economic value computed.

• Controllable costs: Those arising from all actions that the company takes in order to prevent possible defects, specifically prevention and evaluation costs.
• Costs arising from faulty production: These are costs occurring because of faulty production. Depending on when errors are detected, they can be considered internal or external.

Indirect or Hidden Costs

Indirect or hidden costs are those that cannot be easily calculated and are sometimes not seen, but they still exist. Sometimes they can be higher than direct costs.

• Cost of services: The costs of compensation or replacement of defective products or poorly provided services.
• Cost of customer dissatisfaction: When the client receives a level of quality they did not expect, or that does not correspond to what they paid, it creates a lack of trust. As a result, the client may stop buying or switch to other suppliers.
• Cost of loss of reputation: The effects of poor quality pass rapidly to the market and lead customers to perceive the company's offerings as disadvantages.

Cost of Prevention

These are all the costs incurred from wanting to work properly.

• Training costs: Costs that occur during the first days when the company contracts someone, up to the point where the person is trained to work in that specific position.
• Definition of strategy: Defining how the company should work and the kinds of necessary tools that will be used.
• Implementation of ISO 9000: This could form part of the definition of the company's quality strategy and quality policy, but due to its importance, it deserves a separate mention.
• Further costs of prevention:
  • Creating maintenance plans
  • Guaranteeing the quality of providers
  • Reviewing design and prototyping
  • Taking derivative actions to deal with customer satisfaction

Cost Assessment and Evaluation

These are caused by trying to ensure that an activity is done correctly.

• Costs for quality control and production.
• Costs of materials delivered by suppliers.
• Other costs of evaluation:
  • Reviewing the operation of the equipment (calibration)
  • Certifications and approvals of new products
  • Reviewing part measurements

Internal Error Costs

These are costs that arise because of poor quality and are detected before the product reaches the customer.

• Defective spare parts recovered
• Hidden costs

External Error Costs

These are derived from the fact that defective parts have been delivered to the client.

• Guarantee: Returning the material without charge.
• Rejected products: Products and paid services that are rejected.
• Line stops: Stopping production.
• Court trials: Legal actions and trials.