Quality Management: Total Quality Management and Cost of Quality
Quality is the extent to which a product or service meets customer expectations and specifications, consistently and without defects. Total Quality Management (TQM) is a philosophy in which every employee, not only a separate quality-control department, takes responsibility for quality at every stage of the process, aiming to prevent defects before they happen rather than catch them afterwards. The cost of quality has four parts: prevention costs, spent stopping defects occurring (staff training, better equipment); appraisal costs, spent checking for defects (inspection, testing); internal failure costs, incurred when a defect is caught before the product reaches the customer (scrapped or reworked output); and external failure costs, incurred when a defect reaches the customer (returns, refunds, warranty claims and reputational damage). TQM aims to shift spending towards prevention, since prevention costs are far smaller than the external failure costs a defect can cause once it reaches a customer.
Before you start
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Method
- Define quality as meeting customer expectations consistently, then distinguish TQM (a whole-business culture where every employee owns quality) from older quality control, where a separate inspection team checks output after it is made and defects are found late.
- Learn the four categories of the cost of quality and place a given cost into the correct category: prevention (before production, e.g. staff training), appraisal (during production, e.g. inspection), internal failure (defect caught in-house, e.g. reworking), external failure (defect reaches the customer, e.g. refunds, brand damage).
- Learn the central argument for TQM: spending more on prevention reduces appraisal, internal failure and, most importantly, external failure costs, since a defect is cheapest to fix the earlier it is caught, and external failure additionally risks losing future customers, which is not fully captured in the direct refund cost alone.
- When a case gives cost-of-quality figures, calculate the total cost of quality by summing the four categories, and compare the balance between them (e.g. a high external failure cost relative to prevention spend signals a reactive rather than a preventive approach).
- Link quality to competitive advantage: strong, consistent quality can support premium pricing, brand reputation and customer loyalty, while poor quality can undermine a differentiation strategy even if the underlying product design is strong.
- For an evaluate question, weigh the upfront cost and disruption of introducing TQM (training time, culture change, possible short-term output loss) against the longer-term saving in failure costs and the strategic benefit of an improved reputation.
Worked example
A manufacturer's cost of quality report shows: prevention costs 8,000 pounds, appraisal costs 15,000 pounds, internal failure costs 22,000 pounds, external failure costs 55,000 pounds. Calculate the total cost of quality, and use the figures to explain why the business should consider adopting TQM.
- Calculate the total cost of quality: sum all four categories, 8,000 + 15,000 + 22,000 + 55,000 = 100,000 pounds.
- Calculate what share of the total is external failure: 55,000 / 100,000 x 100 = 55%.
- Compare prevention spend to external failure spend: prevention is only 8,000 pounds, compared with 55,000 pounds spent on external failure, a ratio of roughly 1:7.
- Interpret the imbalance: more than half of all quality-related cost is being spent after a defect has already reached the customer, which is the most expensive and most reputationally damaging stage to catch a problem.
- Conclude: adopting TQM would raise prevention spending (training, better process design), which should reduce both internal and external failure costs by a larger amount than the extra prevention spend, cutting the 100,000-pound total cost of quality overall.
Practice questions
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Q1Define Total Quality Management (TQM).Show answer
Answer: A business-wide philosophy in which every employee, at every stage of the process, takes responsibility for preventing defects and meeting quality standards, rather than quality being checked only by a separate inspection team.
Q2State which category of the cost of quality staff training on defect prevention falls into.Show answer
Answer: Prevention cost.
Q3State which category of the cost of quality a customer refund for a faulty product falls into.Show answer
Answer: External failure cost.
Q4Give one example of an internal failure cost.Show answer
Answer: The cost of reworking or scrapping a defective product that is caught before it reaches the customer, for example, the cost of the wasted materials and labour.
Q5A business has prevention costs of 5,000 pounds, appraisal costs of 9,000 pounds, internal failure costs of 6,000 pounds and external failure costs of 40,000 pounds. Calculate the total cost of quality.Show answer
Answer: 5,000 + 9,000 + 6,000 + 40,000 = 60,000 pounds.
Q6Explain why external failure costs are usually considered the most damaging category of the cost of quality.Show answer
Answer: Because they occur after a faulty product has already reached the customer, so on top of direct costs like refunds and returns, they can damage the business's reputation and cause the loss of future repeat custom, which is much harder to recover from than an in-house defect.
Q7State one way a business can reduce its appraisal costs without increasing its risk of undetected defects.Show answer
Answer: By investing more in prevention (e.g. better staff training or equipment) so fewer defects occur in the first place, reducing the amount of inspection and testing needed.
Exam-style questions
Written in the style of a A Level Business exam paper, with a full mark scheme.
Explain two reasons why a business might introduce Total Quality Management (TQM).
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A kitchenware manufacturer's cost of quality report shows: prevention 10,000 pounds, appraisal 20,000 pounds, internal failure 18,000 pounds, external failure 72,000 pounds, a total of 120,000 pounds. The operations director proposes investing 25,000 pounds a year in TQM training and process redesign, forecasting this will cut internal failure costs by 40% and external failure costs by 60%, while appraisal costs stay roughly the same. Analyse the likely financial impact of the operations director's proposal.
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