Key Points

• CONC is one of two components that comprise COQ.
• Your COC should not exceed your CONC.
• CONC can lead to unsafe and subpar production.

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 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 period.

By adopting Six Sigma principles 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 its 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 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, it can then optimize its 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. Takata felt, at the time, that the costs of conformance (reporting accurate test data, and 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.

Other Useful Tools and Concepts

Looking for other resources to reshape your organization? Why not consider implementing the standard operating sheet? This handy document helps to keep all of your employees on the same page while ensuring quality throughout production.

Additionally, you might need something like Paynter Charts. These comprehensive charts act as an exhaustive overview of milestones and defects and readily can be used for root-cause analysis.

Non-Conformance Costs and Creating Sustainable Business Success

Calculating the costs of non-conformance helps us measure the risks of a non-compliant 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.