In the first yellow belt course, we introduced the idea of the cost of quality. We will review that here, and add some additional ideas. We identified four traditional areas of cost. External failures, internal failures, appraisal and prevention. We also identified the optimal level of quality in regard to costs as 100% good quality. The cost of quality for an organization without a well developed quality system may look like this. The biggest cost is external failures followed by internal failures. Not that much is spent on appraisal or prevention. As an organization addresses the problem of external failures, they will increase inspection. So the cost of appraisal will increase and because errors are caught before they get to the customer, internal failures will also increase. As the organization continues to mature in its quality efforts, they will start to spend more on prevention. A robust system of prevention and appraisal will drive down the costs of both internal and external failures. As an organization continues to mature, they might focus more on prevention. With better prevention methods in place, it may even be possible to reduce the scope or frequency of inspection and reduce appraisal costs. Remember also that some of the prevention costs like error proofing, are one-time costs. The costs of quality are not the same as the costs of the quality function or the quality organization. To get total quality costs, you would need to add up all of the costs associated with internal failures, external failures, appraisal, and prevention, plus any of the hidden costs of quality that can be quantified. Any product or service that is not perfectly executed carries a cost. As we saw in a previous presentation, cost benefit analysis is a commonly used management tool, but applying it to cost of quality systems may cause problems. It may lead you to focus only on internal benefits or benefits that are easily measured. For example, a product line has customer returns that cost $5,000 a month or $60,000 per year. A solution would cost $100,000. A cost benefit analysis might conclude that the investment is not justified. However, many benefits of solving this problem might be ignored. What about the cost to replace the returned items? The cost of expedites? Loss of customers? The disruption to the schedule and to replace the returned items, or higher inventory levels that are necessary to buffer against the problem. A program that actively monitors and manages the cost of quality can provide real benefits. It can help to identify opportunities for improvement. Failure costs can be prioritized by using Pareto analysis. It can also help the organization address the root cause of problems, rather than symptoms. Many organizations understand and acknowledge the costs of poor quality, but very few have programs that actively monitor and manage these costs. The most expensive scenario is when a customer discovers a quality issue. It's cheaper if you discover the issue, but best when the system prevents the issue. As a quality systems grows more sophisticated and matures, issues caught by the customer and the related costs will become increasingly rare. The system will prevent more quality issues, and the cost will be minimized.