Invitation to Collaborate – Facilitating Growth and Expansion

RSVP – Yes or No: Maximizing Profits Through Cost of Quality (COQ) in Safety-Critical Industries

By Trevor J. Morones, CQA

Quality enables progression and growth because quality is the facilitator, catalyst, and fundamental foundation.  Quality inspires change, which is the only constant.  When each person sees that they are responsible for quality, it brings out the best in others.  The lack of quality creates costs that may not be immediately evident, so the Cost of Quality framework is a great way to make these costs clear and pronounced.

The Cost of Quality (COQ) framework categorizes costs into four categories:

1. Prevention,
2. Appraisal,
3. External Failures, and
4. Internal Failures.

It’s vital in safety-critical industries due to the connection to innovation, where quality is the primary driver.  People need to see that quality is critical and that everyone has a role that contributes to a positive impact.  One cannot impose a concern for quality – people have to see the value and make the connections.

The Cost of Quality Formula is: COQ = Internal Failure Costs + External Failure Costs + Appraisal Costs + Prevention Costs.

Internal failure costs occur before the product or service is delivered to the customer, encompassing rework and repair, reinspection of the product or service, material downgrading, unscheduled downtime, and internal miscommunications that result in delays.  Consider the consumer package goods (CPGs) brands that rely on co-packers and require rework products with different labels due to undeclared allergens, the number one recall in the United States.  A co-packer or a fully vertical operation with missing equipment and inadequate preventive maintenance performance ultimately leads to equipment downtime, such as cooking equipment not supporting lethal temperatures at a critical control point, thereby requiring critical corrective action.

External failure costs arise after the delivery of a product or service or during the provision of service to a customer.  These costs include those related to handling customer complaints, providing field service, managing customer returns, processing warranty claims, executing recalls, and addressing liability lawsuits.  Further costs are damage to the product and corporate reputation – which can be an extinction-level event.  News travels fast.

Appraisal costs arise from measuring, evaluating, or auditing products or services to ensure compliance with quality standards and ² performance requirements.  This includes the costs of incoming and source inspection / test of purchased materials, validation, verification, and checking activities; in-process and final inspection / test; product or service, or process audits; and the calibration of measuring and testing equipment, as well as associated suppliers, materials, and external services.

Prevention costs are incurred to minimize failure and appraisal costs throughout the entire organization’s processes, including new product or service design reviews, quality planning, supplier quality surveys, process validation, quality improvement team meetings, and quality education and training.¹ 

The commitment to facilitate growth and expansion is most effective when focused on creating a culture of continuous improvement.  Constant improvement eliminates risk and maximizes profits, creating sustained growth and decreased risk.

Understanding the True Cost of Quality in Safety-Critical Industries

• Cost of poor quality (COPQ) isn’t merely a buzz phrase – it has severe implications for top and bottom-line financial results
• COPQ is the cost associated with providing poor-quality goods or services
• According to the American Society for Quality (ASQ), the cost of quality typically totals 15 to 40% of an organization’s revenue – a number that can easily erase a company’s profit margin
• Industry-specific COPQ implications for food, pharmaceuticals, and nutraceuticals

Breaking Down the Cost of Quality Formula

Prevention Costs

• Prevention costs are those that protect against poor quality, including process control, employee training, and design reviews
• Special considerations for product safety (HACCP – Hazard Analysis Critical Control Point, HARPC – Hazard Analysis Risk Preventive Controls, Validation processes)
• Investing in quality reduces errors, rework, and defects, ultimately saving resources and lowering operational costs.

Appraisal Costs

• Appraisal costs are associated with quality control during or after product manufacturing, including inspection and testing, equipment monitoring, and audits
• The Total Quality Management approach describes this relationship with the 1-10-100 Rule, which says that every $1 spent on prevention and early detection saves $10 on appraisal and $100 in failure costs.

Internal Failure Costs

Internal failure costs refer to the expenses incurred ³ to rectify an issue identified before the product reaches the customer, including scrap and rework, productivity issues, defect costs, and material replacement.

External Failure Costs

• External failure costs are incurred after a faulty or poor-quality product reaches the customer.  They typically cost five times more to fix than internal failures and include customer complaint handling, warranty claims, return costs, and regulatory fines and penalties stemming from FDA 483 warning letters, Notice of Intended Enforcement (NOIE), or subsequent Notice of Suspension (NOS)
• The average cost of a significant recall is increasing up to $50 million, with larger events costing far more.

The Hidden Costs of Poor Quality (COPQ)

Below the surface, the dangers are not always immediately identified.  Are you paying attention to resources you have?  If not, it might cost you your reputation and business.  As one quality expert noted, ‘Perception of what is so is different until one learns the art of seeing.’ This is precisely why many organizations miss critical quality costs.

• Less tangible costs that impact businesses include brand damage and customer loss.
• Effects of COPQ include poor data quality, increased scrap/rework, increased complaints, higher warranty costs, recall exposure, poor brand reputation, and customer retention issues
• Understanding COPQ is essential to strategic planning; quality touches every part of a business.

Calculating Your COPQ

• The formula for calculating COPQ: COPQ = (Waste (materials) + defects (variation occurrence)) × inefficiencies (time spent fixing)
• The American Society for Quality states that COPQ can account for anywhere from 10% to 20% of ⁴ a company’s revenue.  This means that a company with $100 million in annual revenue could be spending $20 million on the costs of poor-quality
• Practical examples are specific to food, pharmaceutical, and nutraceutical companies.

Quality Management Systems as COPQ Tactical Tools

• The cost of poor quality (COPQ) is a critical factor for any organization aiming to cut costs.  Being proactive steps to avoid these costs can reduce the overall cost of quality while maintaining the integrity of the final product.
• A QMS aids in swift problem resolution and seamless change management while minimizing operational errors
• Problem resolution through systematized Corrective and Preventive Action (CAPA) processes, intelligent issue prioritization, and total visibility across operations

Quality Management Systems are pathways to endless opportunities for improvement.  Identifying problematic areas before systemic challenges surface starts transforming the cost of poor quality into the cost of good quality.

Innovation and Quality – Making the Connection

• Link to insights from “Driving Results Through Quality and Innovation”
• Despite clear advantages, quality and innovation are often deprioritized due to short-term focus, fear of change, lack of awareness, resource constraints, and cultural resistance
• Action requirements: setting clear standards, encouraging experimentation, embedding quality in culture, measuring and rewarding quality efforts, and investing in training

Real-World Case Studies

Kimberly Clark and Ritz-Carlton Quality Excellence

Kimberly Clark’s innovative approach to supplier collaboration delivered extraordinary results, achieving a 3,200% return on investment by eliminating unnecessary software, manual work, and business risk.  This case illustrates how preventive costs in supplier quality management can yield exceptional returns, particularly for food manufacturers that heavily rely on ingredient suppliers.  Similarly, The Ritz-Carlton developed a systematic four-step innovation process: Inspire Vision, Foster Environment, Stimulate Ideas, and Test Ideas, which became integral to their organizational culture.  This structured approach to quality and innovation led to industry-leading customer satisfaction scores, a 25% reduction in employee turnover, a 40% decrease in service recovery incidents, and the ability to maintain premium pricing despite market competition.

Agricultural and Food Production Success Stories

A major produce distributor serving grocery chains invested $200,000 in blockchain-based traceability and quality monitoring systems.  This investment resulted in a 30% decrease in product spoilage, reduced recall response time from 48 hours to 4 hours, and maintained a 98% customer retention rate, while achieving a 12% increase in premium product sales.  An organic food manufacturer integrated HACCP principles with sustainable practices through a $120,000 investment in organic certification and quality systems, enabling them to sustain a 35% price premium over conventional products and achieve 95% yield efficiency.  These prevention-focused investments allowed the organic manufacturer to maintain zero non-compliance issues over five years of operations while expanding into three new geographic markets.  Both cases illustrate how proactive quality management in agriculture and food production creates competitive advantages through enhanced traceability, reduced waste, and premium market positioning.

Implementation Strategy

• Steps to build a culture of continuous improvement: ⁵ Foster open communication, empower teams, implement incremental changes, and celebrate milestones
• Improving quality and bringing down costs begins by looking within the organization.  The ultimate goal should be to reduce the cost of quality while enhancing the overall quality of the product.

Conclusion

Safety is not transactional; it is the transformation and foundation for mastering quality, catalyzing innovation, and driving profitability—the relationship between quality, safety, innovation, and profitability.  An ounce of prevention is worth a pound of cure.

Do or do not, the invitation stands for organizations to assess tactical tools that look beneath the surface and to develop action plans that foster growth and expansion in competitive markets such as hospitality, food service, manufacturing, or other areas.  Safety is fundamental.

Perception of what is so is different until one learns the art of seeing.

Regardless of the industry you’re in, you can adapt these principles to enhance innovation, engagement, capacity and capability.

When you’d like help navigating, contact Control Point at info@controlpoint.consulting.