What poor quality costs — and why the figure never appears in your accounts

The figure nobody owns

Ask a finance director what poor quality costs the organisation and you will usually get one of two answers: a precise figure covering scrap and warranty, or an honest admission that nobody has calculated it.

Both are the same answer. The cost is real and it is being paid. It is simply distributed across departments that each record it as something else — overtime, expedited freight, an additional headcount, a customer credit, a manager's afternoon.

The four categories

Cost of quality resolves into four categories. Two are chosen. Two are consequences.

• Prevention — designing the work so the error cannot occur. Capability, process design, supplier development.
• Appraisal — checking whether it occurred. Inspection, testing, review.
• Internal failure — the error was caught before the customer saw it. Scrap, rework, re-inspection, downtime, investigation.
• External failure — the error reached the customer. Returns, credits, complaint handling, recovery — and the cost that appears nowhere, which is the customer who quietly goes elsewhere.

The ratio between the chosen two and the consequential two is the most honest measure of operational maturity an organisation holds.

A caution about benchmarks

Ranges are widely quoted in the quality literature — a strong organisation at a low single-digit percentage of revenue, a weak one many times that. The lineage runs back to Crosby and Juran, and the figures have been repeated so often that they are now cited without attribution or evidence.

Treat them as orientation, not as a target. The only number that matters is your own, calculated on your own definitions, and repeated on the same definitions a year later. A comparison against yourself is evidence. A comparison against a quoted benchmark is decoration.

Calculating it

1. Define the categories in your own terms, and write the definitions down. The definitions matter more than the arithmetic, because they are what makes next year's figure comparable.
2. Identify where each category is currently recorded. Most will be inside other cost lines.
3. Count the labour honestly, including management time spent in recovery meetings.
4. Express the total as a percentage of revenue or of operating cost — one or the other, consistently.
5. Repeat annually, without adjusting the definitions to flatter the trend.

Why do this before improving anything

An improvement programme without this figure has no denominator. It can report activity — reviews held, actions closed, people trained — but it cannot report whether the organisation is materially better off.

With the figure, the business case makes itself, and it makes itself in the language the board already uses. Without it, quality remains the one function expected to justify itself in a currency nobody else in the organisation speaks.