Memo
To: President of Quality Assurance
CC: Chief Operating Officer
From: Vice President of Quality Assurance
Date: [ 5/12/2014 ]
Re: Costs of quality; trade-offs
As you know, when dealing with quality issues, we must consider the costs associated with quality. According to Stevenson (2008), there are three categories of these costs: appraisal, prevention, and failure.
Appraisal costs may be defined as "Costs of activities designed to ensure quality or uncover defects" (Stevenson, 2008, p. 421). We incur appraisal costs when we inspect or test products, or conduct other activities to reveal defects in our products or to assure that they are free of defects. These costs include the costs of the inspectors, quality audits, tests, test equipment, and field testing.
Each time someone takes a mechanical pencil off the conveyor belt and tests its functionality, he or she is inspecting, or appraising, our products. Each such occurrence causes appraisal costs.
Prevention costs are the costs "of preventing defects from occurring" (Stevenson, 2008, p. 421). We pay prevention costs when we plan ways to prevent defects: planning and administration systems, training, quality control, working with vendors, and attempting to decrease defects by paying extra attention to design and production.
Every hour that designers spend working on ways to improve our mechanical pencils we pay prevention costs. The same is true when our procurement people attempt to get better materials and when we pay for pay more for better materials.
Failure costs are "caused by defective parts or products or by faulty services" (Stevenson, 2008, p. 421). There are two kinds of failures: internal, discovered during production, and external, discovered after delivery to customers.
There are many reasons for internal failures: defective materials, incorrect equipment settings, equipment failures, incorrect methods or processes, poor material handling, and carelessness. There are many ways the costs add up: loss of production time, scrap, materials, energy, labor hours for rework, inspecting reworked units, equipment repairs, employee injuries, disrupted schedules, added inventory, and paperwork.
External failures occur after efforts to find defects (appraisals) have failed. When these defective units are delivered to consumers, the costs include: handling complaints, warranty work, replacements, payments or discounts to make up for the inferior units, liability or litigation, and loss of sales.
We pay for internal failures when our inspections find defective pencils that must be repaired or disposedof. We pay for external failures when customers return defective pencils or when defects in our pencils cause them to buy our competitors' pencils.
Failures, both internal and external, represent the costs of poor quality; prevention and appraisal costs represent investment in the effort to achieve good quality.
According to Stevenson (2008), there are trade-offs.
Savings in appraisal and failure costs may outweigh prevention costs. As the costs of prevention increase, the costs of appraisal and failure may decrease by more. If this is true, then lower total costs will be the result, meaning quality is free. However, it may be possible to go too far: expenditures on quality may reduce funds for other objectives, such as speeding up development time or upgrading technology.
So, extra planning (in designing products, maintaining tools, and securing quality materials) may mean fewer inspections are necessary, or that inspections reveal fewer defective units; or, we may have fewer returns, and fewer lost customers – or, high quality may lead to a good reputation that will win us more customers. On the other hand, maybe extra planning and better materials would cost us opportunities: to maintain our tools, or invest in better ones, or speed up development times.
Which approach is best? The research is not clear. However, I believe that a stitch in time saves nine, an ounce of prevention is worth a pound of cure, and a good name is worth more than gold. Investing in the prevention of defects can, indeed, make quality free. And earning a good name can lead to increases in our gold.

Stevenson, W. (2008). Operations management (10th ed.). New York: McGraw-Hill ISBN- 13: 978-0-07-337784-1