Which of the four major categories of quality costs would the costs associated with scrap and rework belong?

An important basis for justifying TQM practice is understanding its impact on total quality costs. TQM is rooted in the belief that preventing defects is cheaper than dealing with the costs of quality failures. In other words, total quality costs are minimized when managers strive to reach zero defects in the organization. The four major types of quality costs are prevention, appraisal, internal failure, and external failure.

Prevention costs are the costs created from the effort to reduce poor quality. Examples are designing the products so that they will be durable, training employees so they do a good job, certifying suppliers to ensure that suppliers provide quality in products and services, conducting preventive maintenance on equipment, and documenting quality procedures and improvements.

In a traditional organization that does not practice TQM, prevention costs typically comprise the smallest percentage of total quality costs.

Appraisal costs are a second major type of quality cost. Appraisal costs include the inspection and testing of raw materials, work-in-process, and finished goods.  In addition, quality audits, sampling, and statistical process control also fall under the umbrella of appraisal costs.  Inspection and testing of raw materials is very important, since substandard raw materials lead to substandard products. Raw materials used for a bridge determine the strength of the bridge.  For example, soft steel will erode away faster than hardened steel. Moreover, the concrete bridge decking needs to be solid, as concrete with air pockets will erode and crumble faster creating an unsafe bridge.

Internal failure costs are a third category of quality costs. This cost occurs when quality defects are discovered before they reach the customer. Examples of internal failure costs include scrapping a product, reworking the product, and lost productivity due to machine breakdowns or labor errors.  Internal failure costs are typically more expensive than both prevention and appraisal costs because a great deal of material and labor often has been invested prior to the discovery of the defect.

External failure costs are the fourth major cost of quality. External failure costs when the defect is discovered after it has reached the customer. This is the most expensive category of quality costs.  Examples include product returns, repairs, warranty claims, lost reputation, and lost business.

One spectacular example of external failure cost was when the Hubble telescope was launched into space with mirrors that were ground improperly. When the telescope was turned on, instead of a magnificent view of stars, planets, and galaxies, the scientists could see only blurred images. The price of correcting the problem was over USD 1 billion.

Determinants of Product Quality – Successful management of quality requires that managers have insights on various aspects of quality. These include defining quality in operational terms, understanding the costs and benefits of quality, recognizing the consequences of poor quality and recognizing the need for ethical behavior.
Understanding dimensions that customers use to judge the quality of a product or service helps organizations meet customer expectations

Determinants of Service Quality (Servqual) – Service quality is a business administration term used to describe achievement in service.  It reflects at each service encounter.  Customers form service expectations from past experiences, word of mouth and advertisement.

In general Customers compare perceived service with expected service in which if the former falls short of the latter the customers are disappointed.

Consequences of Poor Quality (Cost of poor Quality) – There are numerous consequences with poor quality products which can affect a business and a customer in many different ways. Whether it is a small or large problem, the magnitude of the problem always affects someone at some point.

When a product is designed poorly or lacks in quality, customers recognize that very quickly, and it can quickly lead to a problem for the business. It does not matter whether the company is a product or a service oriented company because poor quality will always, most likely, create negative affects for the firm.

Eventually, the low cost input in the R&D department and the using cheaper materials will lead to loss of business . Therefore, due to the cost associated with satisfying the customer, it is best to fix problems in the design phase rather than dealing with it after it’s in the hands of a customer. The sooner the problem with a product or service is identified and remedied, the better!

Quality Costs

Quality Costs - Costs incurred to ensure that a product / service is defect free and conforming to customer specifications. Following are its components.

1. Prevention Cost - The costs incurred to avoid or minimize the number of defects at first place. E.g. - improvement of manufacturing processes, workers training, quality engineering, statistical process control etc.

2. Appraisal Cost - Costs that are incurred to identify defective products before they are shipped to customers. These are also called 'Inspection Costs'. E.g. - QA cost, QC cost.

3. Cost of Poor Quality - is defined as the cost of 'not doing it right the first time' or it is the cost incurred to correct the defects in a product/service. It can be of two types.

a. Internal Failure Cost - cost of rework / corrections before the product or service is delivered to client.
b. External Failure Cost - cost of rework / replacement / warranty cost after the product or service is delivered to client. This will also include costs related to loss of trust, reputation and clientele (though these are not always easy to quantify).

An application oriented question on the topic along with responses can be seen below. The best answer was provided by Raghavendra Rao on 15th November 2017. 

In which of the four major categories of quality costs would the costs associated with scrap and rework belong?

What are the four major categories of quality costs?

Which of the four major categories of quality costs is the highest and most difficult to estimate?

Which of the below are four costs associated with cost of quality?