mbd COST OF QUALITY
Cost of Quality (CoQ) is a powerful tool for managing a business's failure costs and control costs; a powerful companion to Six Sigma. Failure costs are dollars lost because of waste, mistakes and other undesirable, non-value adding activities. On the other hand, control costs are dollars invested to make sure things go right. Once failures are identified, investments can be made in improved control to reduce failure costs. Return on these types of investments typically exceeds ten to one.
What makes CoQ such a powerful tool is that it puts information into a common framework and provides an accurate a picture of where the best business improvement opportunities are. CoQ is also an effective, proven way of measuring the business results of quality improvement and prioritizing among potential improvement projects. While not all CoQ savings translate directly into bottom line dollars, a good rule of thumb is that at least fifty cents of every dollar of CoQ reduction lands on the bottom line.
CoQ is usually expressed as a percentage of overall revenue and the expectation is that revenues will rise significantly as CoQ falls as a percentage of revenue. This is because:
- variable costs and operating expenses will shrink as areas of failure costs are identified and eliminated;
- management can invest the extra margin into product and service improvements or increased marketing or reduced price; and
- customers perceive greater value as defective processes, products and services are eliminated.
management
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