The cost of quality: defects, prevention and inspection
Why a defect costs more the later it is found, the four kinds of quality cost, and why preventing defects usually beats inspecting for them. A worked example from an appliance maker in the United States.
Key takeaways
- A defect is cheapest to fix where it is made and most expensive when a customer finds it.
- Common mistakes: Counting only scrap and rework, and leaving out warranty costs and lost customers.
- Prevention: money spent so defects are not made at all, such as better tools, training and designs that cannot be assembled wrongly.
- Appraisal: money spent finding defects, such as inspectors, tests and audits.
- Internal failure: defects caught before shipping, which must be scrapped or reworked (fixed and checked again).
Key idea
A defect is cheapest to fix where it is made and most expensive when a customer finds it. Spending money to stop defects being made usually saves more than spending money to catch them afterwards.
Four kinds of quality cost (common vocabulary in quality management)
- Prevention: money spent so defects are not made at all, such as better tools, training and designs that cannot be assembled wrongly.
- Appraisal: money spent finding defects, such as inspectors, tests and audits.
- Internal failure: defects caught before shipping, which must be scrapped or reworked (fixed and checked again).
- External failure: defects that reach customers: repairs under warranty, returns, replacements, complaints, and customers who never buy again.
Inspection does not make a single good product. It only sorts good from bad after the money has been spent. So when defects are high, adding inspectors moves cost from external failure to internal failure. Prevention removes the cost. The last kind, external failure, is the most dangerous because part of it never shows in the accounts: the customer who quietly switches brand.
Worked case
An appliance maker in Ohio: more inspectors, or fewer defects?
The prompt
A maker of kitchen appliances in Ohio, United States, builds 200,000 units a year. 4 percent are defective. Its 6 inspectors (USD 50,000 a year each) catch 75 percent of defects, which cost USD 30 each to rework. The rest reach customers and cost USD 250 each in warranty repairs, shipping and replacements. The cost breakdown is in the table with this case. Option A: hire 3 more inspectors to catch 90 percent. Option B: spend USD 400,000 once on better moulds and fixtures that cannot be assembled wrongly, plus USD 100,000 a year on training, which cuts defects to 1 percent. Which is better? (Fictional company, illustrative figures.)
The structure
- Cost of quality = prevention + appraisal + internal failure + external failure
- Today: how many defects, how many caught, what each costs
- Option A: same defects, more caught
- Key: Option B: fewer defects made
- Compare yearly cost, then payback on the one-off spend
The exhibit
| Kind of cost | What it is here | Cost a year |
|---|---|---|
| Prevention | Nothing spent today | 0 |
| Appraisal | 6 inspectors | 300 |
| Internal failure | 6,000 units reworked at USD 30 | 180 |
| External failure | 2,000 units at USD 250 | 500 |
| Total cost of quality | 980 |
Working it through
1. Defects today
4 percent of 200,000 units.
Defective units a year:200,000 × 0.04 = 8,0002. Cost today
Inspectors 300, rework of 6,000 caught units, and 2,000 units reaching customers, in USD thousands.
Cost of quality today (USD thousands):6 × 50 + 8,000 × 0.75 × 30 ÷ 1,000 + 8,000 × 0.25 × 250 ÷ 1,000 = 9803. Option A
9 inspectors; 7,200 caught and reworked; 800 reach customers.
Cost with more inspection (USD thousands):9 × 50 + 8,000 × 0.9 × 30 ÷ 1,000 + 8,000 × 0.1 × 250 ÷ 1,000 = 8664. Option B
2,000 defects; the same 6 inspectors catch 1,500; 500 reach customers; plus USD 100 thousand a year of prevention.
Cost with prevention (USD thousands):100 + 6 × 50 + 2,000 × 0.75 × 30 ÷ 1,000 + 2,000 × 0.25 × 250 ÷ 1,000 = 5705. Saving from A
Today minus option A.
Yearly saving, option A (USD thousands):980 - 866 = 1146. Saving from B
Today minus option B.
Yearly saving, option B (USD thousands):980 - 570 = 4107. Payback on B
The one-off USD 400 thousand divided by the yearly saving.
Payback, option B (years):400 ÷ 410 = 0.9756
What the exhibit shows
Half the cost of quality comes from defects that reach customers, and nothing is spent on prevention.
The recommendation
Choose prevention. It saves about USD 410,000 a year against USD 114,000 for more inspection, and its USD 400,000 one-off cost pays back in about one year. It also cuts the defects customers see from 2,000 a year to 500, which protects the brand in a way these numbers do not even count. The risk is that the 1 percent defect rate is an estimate: run the new moulds on one line first and measure before changing them all.
A software team in Bengaluru, India, finds that fixing a bug costs INR 20,000 if it is caught in testing and INR 2,00,000 (2 lakh) if customers find it after release. Better testing would catch 30 more bugs a year before release. How much does that save a year, in INR lakh?
Counting only scrap and rework, and leaving out warranty costs and lost customers. Treating more inspection as the cure: it catches defects but does not stop them being made. Cutting inspection to save money while defects are still high, which sends them straight to customers. Ignoring that a defect at the bottleneck also wastes the bottleneck's time, which is the most expensive time in the plant.
Which of these is an external failure cost?
Why does extra inspection rarely fix a quality problem on its own?
Where is a defect usually most expensive to find?
Carmakers buy most parts from tiers of suppliers, so one supplier's defect can stop a whole assembly line or lead to a recall. The automotive brief shows how that chain works.
Read the automotive and EV briefSources for this lesson (1)
- Recognized public explanations of case-interview concepts and terms
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