Six Sigma–Calculating the Cost of Quality

The cost of quality equation has two seeming simple quantities:   the cost of nonconformance, i.e., the cost to the company of having defects in the product, and the cost of conformance, i.e., the cost to the company of reducing the number of defects in the product.   Simply put, if the cost of conformance is less than the cost of nonconformance, then it is worthwhile to perform quality control measures.    Cost of quality = cost of conformance – cost of nonconformance.   If the value is negative, that means it is not costing, but saving the company money by implementing the quality control measures.

How does this relate to Six Sigma?   Well, the common wisdom is that for each level of Sigma, the cost of implementing quality controls that produce that level of Sigma goes up, and not just in a linear way.   This means that it should cost more to go from 4 Sigma to 5 Sigma then it does to go from 3 Sigma to 4 Sigma.   However, at each level of Sigma, the cost of nonconformance, that is, the cost to the company of having defects in the product also goes down, because the number of defects goes down with each increase in Sigma level.   That is why it is important to look to look at the calculating of the cost of quality in detail.

Cost of Conformance

  • Appraisal Costs (inspection, testing, test equipment, quality audit)
  • Prevention (quality planning, process planning, Six Sigma projects, training)

Cost of Nonconformance

  • Internal Failure (scrap, rework, additional inventory costs)
  • External Failures (warranty claims, service and repair costs, product liability claims/lawsuits, cost to company reputation)

One of the key aspects of Six Sigma is its initial emphasis on improving existing processes, and then, once the quality improvements have been gleaned from this stage, it can shift to essentially recreating processes which prevent the defects from occurring.   Although this may seem more costly than just improving existing processes, think of the result:   a reduction in the necessity for inspection and repair, one of the costs of nonconformance.

That’s why Six Sigma ultimately leads one from the manufacturing process to the design process, where the highest-level gains in Sigma are to be made.

That is the subject of the next post…


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