Is an internal failure cost that eventually is invoiced and paid for by the customer still considered a cost of quality (to the supplier)?
Example: An item is sent in to us for repair by a customer; they have requested a repair to only a portion of that item, which is completed; but during its mandatory post-repair testing, it fails due to an issue outside of the agreed work scope. Labour and material costs for attempting to troubleshoot the item during test are what make up the internal failure costs. In the end, the customer agrees to pay for those unplanned troubleshooting costs (and the part is returned to them as-is, or perhaps they pay for an additional repair to make it functional before return).
Would those troubleshooting costs still be reported as a cost of quality (I guess it would be in principle vs. actual)? If so, under what category? Thanks…
– Bruce, Quality Manager
It has been our experience that there are plenty of definitions for “Cost of Quality” and almost as many different formulas used to calculate it. You cite a great example which illustrates that there are many unique cases and there is almost always some interpretation required. Our December issue of the Quality Review has an article on this very subject, and we also have a couple of related resources that offer some more background and detail.
Here are some thoughts in specific regard to your example. We typically refer to the “Cost of Quality” as the costs that are associated with NOT producing a quality product. That is, how much money could you have saved if every single product were of perfect quality? It would seem to me at first read, that the cost of troubleshooting the item during test is definitely a cost of quality. From there, the issue of how to treat that expense is an accounting question that depends on internal policies for tracking these costs.
Internal Quality Costs are often defined as costs relating to scrap, re-work of material, re-inspection, re-testing and other activities that typically take place before a product is delivered.
External Quality Costs are often defined as costs relating to processing customer complaints, returned product, warranty service, product recalls and other activities that take place after a product is delivered.
So the true answer might depend on details. Was the initial defect covered under warranty or was it a “wear and tear” kind of repair that the customer would have expected to have to deal with and pay for? What about the secondary defect that was found in testing and had to be troubleshooted?
If the costs were covered by the customer, was it really ever a cost? Most likely, as far as Accounting goes, it is a cost that then has the revenue of the customer’s reimbursement applied against it. If the customer pays for the work and there is no real cost incurred then should it be calculated as a “Cost of Quality”? Probably not, but again there is the assumption that they agreed to cover the costs because they acknowledge that the defect was not or should not have been covered by the manufacturer. Depending on all of the answers here, you would want to make sure that this cost does not get lumped into an Accounting line item that is then automatically used to calculate cost of quality later. You would want to be able to show that the customer covered the cost, not just now but 5 years from now when someone presses a button to run an accounting report.
What about the cost of processing the customer’s complaint and or providing them service throughout the repair process? This is much harder to define, but from the point of view of a formula these are costs that would never be incurred if all products were perfect.
And finally, if it is an unexpected defect, then there is likely some kind of cost associated with the customer not being entirely satisfied. This is much harder to quantify, and the exact formula you use is not as important as the fact that you are at least measuring this variable so that performance can be evaluated over time.
I hope that this, along with the articles and resources, is at least somewhat helpful and doesn’t confuse the issue. Please do let me know if it triggers other questions for you. Best regards…
– Ted Annis, Director, The Business Resource Centre