Quality is a huge factor for companies across all industries and is important to consumers. When a product or service fails to meet quality standards, there are costs associated called Costs of Non-Conformance, or CONC. This term can also be referred to as “failure cost.”
What are the Costs of Non-Conformance?
A non-conformance occurs whenever a product or process fails to meet a pre-set standard of quality requirement. CONC is one of two factors adding up to a product’s total Cost of Quality (COQ), the other being the Cost of Conformance (COC).
While COC refers to all expenses incurred to meet a target quality level for a product or service, CONC refers to any costs incurred when that level of quality is not met and corrective actions must be taken. Non-conformance can happen at any time of the product lifecycle, including during the manufacturing process or during poor quality audits. This leads to both Internal Failure Costs and External Failure Costs. Internal Failure Costs are costs identified during the development process and before a product is released. These may include:
- Downtime: The cost of losing labor hours from a system failure or poor organization.
- Scrap: The cost of a defective product that cannot be replaced or repaired.
External Failure Costs are those identified by the customer after receiving the product. These may include:
- Recall: The cost of returning or exchanging a product when the manufacturer discovers a defect
- Warranty Claims: The cost of repair or replacement when a product fails within a specific time period.
By adopting Six Sigma principals and ensuring the right quality processes and practices are in place, both non-conformance occurrence rates and the costs of non-conformance can go down, in turn creating increased productivity and ultimate customer satisfaction.
3 Drawbacks of the Cost of Non-Conformance
1. Increased Costs
When a company doesn’t integrate quality-monitoring activities into their business processes from the start, costs can potentially increase on the back-end, leading to profit loss.
2. Worsened Quality
Non-conformance leads to products of poor quality that may not meet FDA regulations, ISO standards or customer satisfaction rates. Significant quality failures can have disastrous and long-lasting effects on a company, including irreparable reputation damage.
3. Poor Company Compliance
When a company doesn’t agree to or meet the required specifications of a standards-body, it means its products fall short of consumer and stakeholder quality expectations. Poor conformance can lead to unsafe and hazardous products, as well as low employee morale and productivity.
Why is the Cost of Non-Conformance important to understand?
The overall COQ model tells us that an initial investment in quality can reduce spending and increase profits for the business down the line. Improved processes boost employee morale, increase brand credibility and create a healthy working environment. When a company understands what non-conformances are and how to measure these costs, they can then optimize their quality systems and performance standards.
Project managers should aim to find the right balance between conformance costs and acceptable costs of failure.
An Industry example of the Cost of Non-Conformance
On May 27, 2017, Japanese Air-bag manufacturer Takata was ordered to recall millions of airbags and pay $1 billion in penalties due to its defective airbags being linked to at least 16 deaths and more than 180 injuries. It is evident that Takata felt, at the time, the costs of conformance (reporting accurate test data, automating how they filled the airbags with propellent) didn’t outweigh the potential costs of non-conformance. Takata’s downfall and ultimate bankruptcy is a good case study in understanding that ignoring compliance can lead to disastrous consequences.
3 Best practices when thinking about the Cost of Non-Conformance
1. Measuring non-conformance differs in every organization
How organizations choose to measure non-conformance determines appraisal and prevention costs, which make up COC. There should always be a budget in place to ensure that products and services meet quality targets.
2. External failure costs can be hard to predict
External failure costs, or costs incurred by the company when a customer identifies a quality failure, can sometimes be difficult to predict, especially when budget pressures and short-term goals are incentivized over long-term non-conformance costs.
3. COC should always be less than CONC
If costs of conformance are greater than costs of non-conformance, it means the amount of money a business is spending to avoid quality failure is more than the losses incurred due to failures associated with poor quality. This makes quality spending irrational.
Frequently Asked Questions (FAQs) about the Cost of Non-Conformance
What are non-conformance costs?
Non-conformance costs, or “failure costs,” are costs associated with fixing product and process failures and taking corrective actions. Costs of non-conformance can include things such as payments made out on warranties, re-work or scrap, and reputation damage.
How can you measure non-conformance?
Non-conformance can be measured in several ways and depends on the type and size of an organization. Some project managers calculate non-conformance with Unit Pricing, or identifying non-conforming units and assigning a price for each one. Others measure how far a defective unit deviates from the ideal result.
How do costs of conformance and non-conformance work together?
Successful project managers find a balance between both types of quality costs, as it equally possible to overspend on attempting to achieve amazing quality as it is paying for poor quality.
Non-Conformance Costs and Creating Sustainable Business Success
Calculating the costs of non-conformance helps us measure the risks of a noncompliant product or service by a dollar amount. With a real number in hand, project managers can find the root causes of a quality issue, adjust their processes, and improve company profitability and organizational compliance.