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Cost of Quality and Six Sigma

For background information on COQ, see COQ (Cost of Quality)
How can one correlate the quality level with a company's bottom-line?

Most of the quality initiatives can not answer this question, but Six Sigma can. Six Sigma is a process of asking questions that lead to tangible and quantifiable answers that ultimately produce profitable results.
There are four groups of quality costs:

  • External failure cost: warranty claims, service cost
  • Internal failure cost: the costs of labor, material associated with scrapped parts and rework
  • Cost of appraisal and inspection: these are materials for samples, test equipment, inspection labor cost, quality audits, etc..
  • Cost related to improving poor quality: quality planning, process planning, process control, and training.


Typical North American companies' average Sigma level is around 3 Sigma. In other words, 25-40% of most company's annual revenue gets chewed up by their cost of quality. Thus, if a company can improve its quality by 1 sigma level, its net income will increase hugely, approximately 10 percent net income improvement (see Table 3.1).

Table 3.1: Sigma Quality Level and Related Cost of Quality
Sigma Level
% Good
PPM/DPMO
Cost of Quality as % of Sales
2
95.45
45500
Over 40%
3
99.73
2700
25 - 40%
4
99.9937
63
15 - 25%
5
99.999943
0.57
5 - 15%
6
99.9999998
0.002
Less than 1%

Furthermore, when the level of process complexity increases (eg. output of one sub-process feeds the input of another sub-process), the rolled throughput yield of the process will decrease, then the final outgoing quality level will decline, and the cost of quality will increase. For example, if a company satisfies its single process yield with 93.32% of good, 3 sigma level, it may end up with an unacceptable final yield which represents a very high cost of quality.

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