SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

Cost of Quality (COQ) implementaion

Methodology:A case study in Medium Sized
Manufacturing Enterprise
Sanjay G. Mantri1, Santosh B. Jaju2
#1 *2
Research Scholar, Professor, Department of Mechanical Engineering, G.H. Raisoni College of Engineering,
Nagpur, India .

Abstract Indian industries. In the research undertaken [1],

Presently, the greatest challenges faced by which was empirical in nature, the focus was on the
the Indian manufacturing enterprises are global study of quality management practices in Indian
competition, higher focus on quality from customer manufacturing organizations to find the relationship
side and increasing cost of manufacturing due to between main quality management practice
inflationary pressures from economy in that order. dimensions and superior product quality outcomes.
These challenges are partially overcome by adopting The results of this study show that the majority of the
advanced technology and following latest trends in Indian companies are well aware of the modern
manufacturing management. To overcome the cost quality management concepts and philosophies.
pressure industries try to tap different cost reducing
avenues. In search of these, one of the options, which In the present scenario of manufacturing
was not popular till recently, is being considered enterprises, it is vital to measure their quality efforts
now. The option is to identify measure, analyze and as everybody involved in manufacturing enterprise
reduce the “Cost of quality “(COQ). knows the impact quality has on customer satisfaction
Evolution of cost of quality studies and COQ and therefore affects the benefits. But many of them
practices started nearly six decades ago. Today may not have true reflection of effect of lack of
quality costing is essential part of every modern quality to the inefficiency and ineffectiveness of
enterprise’s quality plan. The present study focuses quality management. On the other hand, management
on suitable methodology for implementation of COQ. acts only if a proposal is brought with presentation
The motivation of study is to enable development of a linking cause and effect in term of money. This is
sound quality cost management system (QCMS) for evident from the migration of all the manufacturing
varied sizes and types of enterprises working in enterprises: small, medium and large from
continuously advancing manufacturing environment. conventional technology to induction of advanced
The intended QCMS refers to the practices, policies technology. In general, advancement of technology is
and procedures followed by an enterprise that relates adopted first in vital functions of enterprise such as
to collecting, measuring and classifying quality costs design followed by manufacturing processes. Slowly
data. In addition it should work in tandem with it percolates to all the functions and departments
accounting system employed by organization for across the organization including quality. To this end,
selecting, using and maintaining the quality related “Cost of Quality” (COQ) concept comes in handy for
financial matrices.Paper reviews the present state of co-relating the investments required to the returns on
art of COQ practices reported in literature and investment for suitably enhanced quality function to
industry with more emphasis on manufacturing cope up with advanced manufacturing environment
industry in India. Based on the information obtained from conventional.
a methodology for COQ implementation is devised
and illustrated using a case study. This paper attempt to summarize an
overview of the COQ practices in Indian
Keywords — Cost of quality (COQ), methodology manufacturing enterprises through discussion on the
for coq implementations, medium sized research and case studies reported in literature. With
manufacturing enterprise a motive to develop a generic framework for COQ
measurement in present era, as a first step, a case
I. INTRODUCTION study is done in a rapidly growing medium sized
This Owing to liberalization of the Indian manufacturing enterprise where different quality
economy, Indian industry is also experiencing an management systems are in place but formal COQ
increasing pressure for improvement in quality of its system is not implemented. The paper describes
products and services, for which it is adopting tools basics of COQ practices, methodology adopted for
and techniques of quality improvement. In general, implementation, details of steps followed and
there has been an appreciable improvement in conclusions drawn.
adoption of quality concepts in recent years in the

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 SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

- Expand the accounting system and

II. BASICS OF COST OF QUALITY (COQ) continuously present the cost as a scoreboard
A. Need of COQ Practices and make this drive the starting of
It is clear that the goals of achieving quality, improvement projects.
implementing continual improvements, and cutting Each of the below categories should be
operational costs are common to modern industry. It identified as a cost driver and quantified. The sum of
is also clear that the approach industry takes to all these (and any others needed) would be the Cost
achieve these goals is often limited to the of Quality [3].
implementation of Quality Systems and the 1. Prevention Costs: The costs of all activities
application of Lean manufacturing principles. The specifically designed to prevent poor quality in
unfortunate reality is that, another program that products or services. Examples include:
shares these lofty goals, quality costing (a program - Quality planning and programs
dedicated to understanding, measuring, and - Training
controlling the total COQ), seems to be less widely - Designing in quality and reliability
practiced. The absence of quality costing programs is - Process controls
a function of the difference between systems to track - Quality audits
costs of quality activities, as opposed to those - Qualifying suppliers
traditionally developed to track the expenses of - Preventive maintenance
production. The increased importance of COQ can be 2. Appraisal Costs: The cost associated with
explained by the changed customer behaviour from evaluating or auditing products or services to
buying whatever is offered into buying only products assure conformance to quality standards and
that matches their functional requirements and performance requirements. Examples are:
desired price, caused by the global competition. This - Incoming inspection
has made the customer orientation much more - In-process testing
important for companies and therefore also increased - Diagnostic tests, including the cost of testers
the importance of reduction and financial and test development
measurement of non-conformance. - Final testing
- Internal quality audits
B. Definitions and Categories of COQ - Field quality audits
The definition of quality costs is as - Corrective actions on all of above
important as that of quality. Unfortunately, the - Equipment test and calibration
definitions of quality costs and the constituent 3. Internal Failure Costs: All costs resulting from
elements differ from author to author. After products or services not conforming to
comparing different definitions of quality costs it can requirements or customer/user needs which
be found that most of them are similar. Mainly two occur before delivery/shipment of product, or
different groups of terms exist: the furnishing of a service. Examples include:
1. Cost of Quality – either abbreviated COQ or CoQ - Rework
2. Cost of Poor Quality – abbreviated COPQ. This - Diagnostics (the cost of discovering what is
term also include Poor-Quality Costs – PQC wrong)
- Re-inspection of rework
The both terms Cost of Quality and Cost of - Scrap is the value up to that point of
Poor Quality are essentially synonymous and both whatever cannot be reworked
can be used to describe quality. In this subject, - Value of replacement materials and parts
literature points out that, many writers imply their - Purchasing actions to procure replacements
own definitions of quality related costs and much of materials/parts
the literature on the subject is on how to interpret or - Analysis of quality problems
define quality costs. - Cost of planning and corrective actions
Critical issues for effective COQ implementations are: - Supplier corrective actions and change-
- To categorize various quality costs and make induced quality costs
sure that all costs are capture
- To collect and analyze data and quantify all
4. External Failure Costs: Cost incurred when
quality costs accurately
customer finds failure. These can be:
- To identify areas of poor performance on basis of
- Dealing with customer complaints
the data analysis
- Refund/compensation/allowance costs
- To allocate responsibility for the overall cost
- Returned goods
Two different objectives with quality costing as
- Warranty costs
stated in [2] are:
- Recall, retrofit, and dispatch costs
- Estimate the Quality costs as a one-shot
- Penalties
study and use the result from the study to
- Liability costs
start projects of improvement.

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 SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

- Goodwill, reputation degradation organizations, there are case specific findings for the
target area for improvement in quality performance
5. Many researchers have proposed various and reduction in total COQ. The study reported in [9]
approaches to measuring COQ. In agreement was focused on a manufacturing company with ISO
with the majority of previous researchers COQ 9000 certification, making a proprietary foundry sand
models can be classified into five discrete additive, from a total quality cost perspective. The
generic groups which are: P-A-F or Crosby’s study concentrated on the quality cost aspects of the
model, opportunity cost models, process cost TQM initiative and outcomes. In addition to
models and ABC models. These models are proposing basic steps for implementation of COQ
summarized in Table I. system, they have extended the exercise to quantify
by regression analysis, the effect that changes in one
TABLE I : GENERIC COQ MODELS AND COST CATEGORIES cost category have on other categories and on the
Generic model Cost/activity categories total quality costs (TQC). The work reported is a
P-A-F models (Prevention + appraisal + failure ) step forward towards using the COQ analysis for
Crosby’s model (Prevention + appraisal + failure + achieving the organizational goal of quality
opportunity ) enhancement and improved customer satisfaction
Opportunity or intangible (Conformance + non-conformance) through a well designed framework for COQ
cost models (Conformance + non-conformance
+ opportunity practices. An integrated simple model of COQ
Tangibles + intangibles) implementation for small scale industry was
(P-A-F (failure cost includes proposed and implemented in [10]. It can be
opportunity cost)) concluded that, the methodology suggested is simple
Process cost models (Conformance + non-conformance )
and suitable for implementation in micro, small or
ABC models (Value-added + non-value-added )
medium sized organization.

III. COST OF QUALITY PRACTICES IN INDIA However there are few studies which adopt
The literature published in last decade is models other than conventional P-A-F model. It will
reviewed to get insight of the COQ practices followed be interesting to note the factors which made
in India. A survey of north Indian industries was researchers to go for other models or modify the
conducted to find out various costs of quality models. Process cost modeling is used for quality
practices followed by them [4]. The study reflects the costing for a paper industry in the study cited in
true state of COQ practices followed by the industries reference [8]. The work used the five steps, as
in north India. Those can be summarized as: the mentioned in the BS6143: Part2, 1992, for process
awareness of employees about COQ and level of cost modeling. It is claimed that, after successful
support of top management about COQ implementation of Quality Costing System, it can be
implementations are not consistent within all used for: Performance indication; as a planning and
responding industry groups; No proper data collection control tool; and a budgeting tool. In the work
reported in [9], a slightly unstructured approach was
methods were followed while collecting /estimating
used to account for cost of poor quality in a
data of COQ related activities; The industries were continuous casting steel plant. Among the various
not analysing the costs of quality data properly and factors contributing to COQ, hidden costs such as
employees of industries were not fully aware about opportunity costs are difficult to quantify. In this
benefits of COQ programs. paper, an approach for quantifying the opportunity
costs is presented.
In the work [5], author claims the study as
first to publish COQ implementation in Indian SME
sector. This case study shows the steps needed for the The overview of the COQ practices followed
implementation of COQ practices in an organization. by Indian industries as reflected in published
The author also proposed two indices for COQ which literature is given by [10]. This study gives a feeling
are ratios of external failure costs to total quality that, there is a need for proper mechanism to educate,
costs and ratio of current year’s total quality cost to facilitate and implement the COQ practices in target
that of previous years. These matrices were found to industries. It can be thought over to make some
be useful for tracing the progress and sustenance of regulations to report COQ to stakeholders of the
the program. enterprises for an improved adoption of COQ
practices in addition to regular financial reporting
In the similar types of studies [6], [7], it was which is mandatory. It is equally important to know
found that P-A-F methodology for COQ study were the reasons of non implementation of the COQ
proposed and implemented. It is important to note practices by so many industries. There is a case for
developing a proper model of COQ implementation
that, these studies were conducted in different types
and usage for those industries in gradual manner. And
of organizations, working in different locations.
for the enterprises, where COQ practices are already
Because of difference in nature of business and implemented, there should be a continuous
quality systems and policies in place in these refinement to get the desired benefits and sustenance

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 SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

of the system. Efforts should be directed towards the end of assembly and painting stage respectively.
utilization of available information technology This data is input to ERP system through quality
infrastructure for implementation and sustenance of department at the end of every shift. Process and
COQ practices. Quality policies and practices followed include:
Process Flow Analysis, Potential Failure Mode and
IV. METHODOLOGY FOR CASE STUDY Effect Analysis(FMEA) , Process Control Plan,
A. About the Enterprise Under Study Gauge Repeatability & Reproducibility Study,
The company identified for implementation Analysis of Measurement Study, Statistical Process
of Cost of Quality Practices was Clad Metals India Capability, Tool Inspection Report, C.M.R. (Counter
Pvt. Ltd., Waluj, Aurangabad a part of Kale Group of Measure Report)(For failure at customer end), N.C.R.
Industries, Aurangabad, for flagship product “Roll (Non Conformity Report)(Internal Failure), Deviation
bond panel”. The Kale group consists of four Request note, F.P.A. (First Piece Approval: Before
manufacturing companies with facilities located at six start of Production Line and Change of Model),
plants. The combined turnover of the group was Rs Improvement Initiatives by 4M study (Man ,
150 plus crores in 2013-14. The group achieved a Machine , Material ,Method ) and New Product
growth from Rs 30 crores turnover to present state in development. The Organization structure of the
a matter of five years .The group is tier one supplier Quality Department consists of: Manager central
of roll bond panels and other pressed components to quality, Manager Quality shop floor and team of
companies viz. Samsung, LG, Haier, Videocon, engineers, technicians and inspectors. Activities
Godrej etc. Group employs a workforce of 500 plus Carried out routinely by department were:
including technicians and engineers. The company
has a strong business and quality culture responsible - Date wise, stage wise inspection data
for a rapid growth. The company was selected for the recording (Rejection Data)
study because it was not using Cost of Quality - Rejection Analysis: Model wise, Month wise
practices but the management was open to undertake , Cumulative defect wise
new concepts for improvement and was willing to - Defects data collection at customer end
cooperate for the study. (ppm) and analysis
- Improvement initiatives
B. Steps followed for Study The activity missing was, Absence of formal
1) Explanation of Study Background:: Cost of Quality Practices, for which reason quoted
As the concept of COQ was not known was, not aware about the details as well as benefits.
fully, a combined meeting with M.D. and all But open to adopt if feasible and useful. Hence were
concerned department personnel was taken. The actively involved in the case study and co-operated.
focus of meeting was to elaborate on: What is COQ 3) Data collection for case study:
and methods available, Why it is essential, what It was decided to collect data required for P-
others are doing, How to go about it and tentative A-F: Conventional COQ system with following
roles of different departments. This meeting was components
followed by discussion with each department head
during the course of study as and when needed.  Appraisal Cost
 Prevention Cost
2) Obtained Detailed Information of the Plant :  Internal failure Cost
 Organization structure  External Failure Cost
 Functional workgroups The data sources identified were:
 Product groups - ERP system
 Manufacturing steps - Departments: Quality, Stores, Production,
 Process flow for conduct of business HR, Sales and Marketing, purchase
 Quality policies and practices followed The data collection formats were: Spread
 Information available in existing ERP sheets from ERP system, Information from
system different departments in Excel, word and
 Identified other data sources other formats, Notes taken during meetings
with different persons.
Although group is involved in large number The details of information/data
of product manufacturing, there main product is roll collected from various sources are:
bond panel assemblies for different customers which Information available in existing ERP
account for 90% of Clad Metals turnover and system:
approximately 65% of group turnover. Hence the - Date wise finished goods production(Model
study was focused on the roll bond panel assembly , Quantity and rate)
manufacturing. The manufacturing steps for the roll - Date wise semi finished (TIG Welding)
bond panel can be summarized as panel making, production (Model , Quantity and rate)
panel assembly and powder coating. The inspection - Date wise rejection data ( Model, Quantity,
data is generated at five steps in panel making and at Reason)

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 SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

- Date wise sales data (model, Quantity, Gross and deliberations with quality in-charge, production
amount) head and managing director. In his approach the
Quality department: trade- off was completeness over accuracy. Being
- Model wise rejection data ( Date, Stage, pilot study, without consuming resources for the
Defect type , Quantity ) exercise, it was felt that coverage of all possible cost
- Counter measure reports (Customer , was more important over accuracy of calculation of
Complaint description, root cause, action few cost heads.
taken )  Prevention Cost:
Other Departments: 60% of Salary of Engineers in
- HR and Accounts department: Employee quality department
details, salary and other expenses such as  Appraisal Cost:
training etc. 30% of Salary of Engineers in
- Purchase and Marketing: cost of time, quality department
resources incurred on quality issues with 100% Salary of quality dept. staff
supplier and customers (technicians and inspectors)
- MD office: External resources deployed for 5% salary of purchase dept staff
quality issues and vital inputs on resource  Internal Failure Cost:
sharing between functions, departments and 10% of Salary of Engineers in
manufacturing facilities. quality department
4) Cost of Quality Calculations: Cost of rejection (Rejection
quantity X Cost)
Although, large numbers of heads are
Cost of rework (Rework quantity X
available under each cost category, major expenses
cost of rework)
are considered for pilot study in line with standard
 External Failure Cost:
industry practice. The percentage of salary for the
Cost of rejection at customer end
different quality cost categories was decided after
(Rejection quantity X Cost)
detailed discussions and inputs from all concerned
Cost of attending customer complaints
department heads, direct observation and referring the
(Includes, time resources, actual traveling and
documents available.
other incidental expenses)
From the data collected, it was found that Data shared by different departments was for
number of data elements can be directly attributed to different period. For this study data from April 2014
different costs as per P-A-F classification, e.g. to December 2014 was considered for cost
internal failure cost calculation requires the number calculations. As per the request from organization
of rejections and cost of rejection, which was actual data is not disclosed but the final outcome of
available at two different sources in ERP system on the complete exercise is given in table 2 in percentage
real time basis, hence direct calculation could be done. form which is sufficient to draw conclusions. All the
However 10% salary of engineers is also considered components of quality costs shown are in terms of
percentage of TCOQ.
in internal failure cost. This allocation is the most
typical part of the exercise. The problem was to V. OBSERVATIONS AND CONCLUSIONS
appropriately allocate the pay roll cost incurred on Following conclusions can be drawn from
quality department staff (Inspectors, workers etc.), the cost of quality (COQ) calculated:
engineers and managers looking after quality  Average TCOQ is 3.48 % of gross sales
functions in different capacities and sections. Being a which is higher than reported by other
midsized enterprise, multitasking was found to be industries surveyed by author but less than
very common. For example the quality manager was reported in literature
supposed to look after preventive measures as well as
online quality checking and have to give input to new  Major component of Quality costs is IFC
where lot of scope is there for improvement.
product development team on quality aspects
simultaneously. These functions cater to different  PC and AC are much less than the usual
cost classification and reflected in the following proportions mentioned in literature.
values. The approach used was a simplified one,
In conclusion although the case industry is
wherein, by observation and discussion with
developing with rapid pace and adopting automation
concerned engineers and managers over a period of in processes (Paint Shop) still there can be number
two weeks, approximate time spent in different opportunities where cost cutting can be done with the
quality activities was noted. These figures are help of COQ analysis.
bifurcated in different heads after due explanation
In addition to the conclusion related with  Almost all the data required for COQ is
COQ data following important available; but in different formats and places.
observations/conclusion about adopting the COQ
practices in case industry are worth noting:

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 SSRG International Journal of Industrial Engineering ( SSRG – IJIE ) – Volume 3 Issue 2 – May to Aug 2016

 Nearly 80% information is available in ERP Due to product diversity, fluctuations in the
system day wise. It is possible to calculate production as the demand is seasonal, new product
COQ weekly or even daily if proper interface development on continuous basis it is difficult to get
to existing ERP is designed and maintained true picture and exact pinpointing of causes of higher
 For improving accuracy of the whole exercise, TCOQ using conventional PAF model, which may be
the allocation of payroll costs of engineers, just sufficient to get an overall idea.
managers and other overheads should be done
ACKNOWLEDGMENT
dynamically instead of average figures as
S.G.M. thanks Mr. Ashok Kale, M.D., Kale
taken in this study. This may require design of
Group of Industries, for granting permission to
elaborate system which may need additional
undertake the case study in Clad Metals Pvt. Ltd.,
resources.
Waluj, Aurangabad. Thanks are also due to his
 Allocation of overheads is difficult presently complete team who have whole heartedly supported
as few resources are shared by other plants by providing vital data and information. The authors
also. would like to extend special thanks to reviewers of
the paper.
Table 2 : Cost Of Quality Staticstics
Tcoq: Total Cost Of Quality (Percentage Of Gross Sales)
Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Average
TCOQ % of
3.48 3.02 2.83 2.28 3.37 4.92 2.36 2.95 4.51 3.48
Sales
PC 1.69 2.28 3.26 7.81 7.17 2.95 4.76 10.82 5.96 1.69
AC 2.51 4.00 5.94 9.82 8.59 4.62 8.01 11.37 9.28 2.51
IFC 67.24 88.70 82.03 72.97 23.02 56.97 79.59 66.87 62.10 67.24
EFC 28.56 5.01 8.77 9.40 61.23 35.45 7.64 10.94 22.66 28.56

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