How to calculate cost of quality services to customers ?

Quality CostsThe importance of Quality Costs is steadily being understood by many corporates as a way to ensure good quality and at the same time - Customer Satisfaction and Profitability under today's competitive scenario.However considerable misunder standings do exist as these costs are seen as expenses of the Quality Function.Fundamentally each time a work needs to be redone, cost of quality is increased. the obvious reasons are:1. Reworking of a manufactured item2. Retesting of an assembly.3. Rebuilding of a tool.So what are Quality Costs?---Measure of all Costs associated with making a defective products or services.The FOUR Elements are:-1. Prevention Costs:- Costs that are incurred to avoid any defects arising in design, purchased material and deliverable products. These include activities prior to Designing, purchasing materials and manufacturing to ensure that good produced are of acceptable quality.2. Appraisal Costs:- Costs incurred in appraisal (Inspecting / Tests) of materials purchased,designand manufactured Productivity check compliance withestablished requirements such as Industry Standards,Engineering,Drawing,Company Procedures, Professional standards, Operating Instructions etc.3. Internal Failure Costs:-Costs due to manufacturing anomalies resulting in not able to achieve the desired/set quality.4. External failure Costs:- Costs arising outside the manufacturing organization of failure to achieve the set quality (After Transfer of Ownership.)

In addition to what is answered here I believe with time the cost of quality will be built in the price,high quality service will be worth more and valued by customers,that is why when buying a Mercedes Benz we accept higher cost and vise versa.

A product  is worth what customers are willing to pay for. 

My approach to this question is by looking at it from the other side 

"What is the cost of no or low quality ?"  

Can you figure out the $$$ value in the following things

1. Loss of sales revenues of your products/services because of low/no quality ?
2. Loss of reputation/image in the marketplace and how does this translate into $$$ ?
3. Loss of marketshare (declining marketshare over time) due to no or low quality ?
4. Amount of rework and how much this involves your staff and workers and its $$$ value ?
5. Amount of waste in materials in such rework due to defects and problems with your products/services ?
6. The value of customer frustration and dissatisfaction due to such no/low quality situations ?
7. The value of frustration within your own staff dealing with the consequences of no/low quality ?
8. Waste time and effort in dealing with the aftermath of no/low quality ?
9. Loss of productivity/profitability in your operations due to no/low quality ?
10. Possible liabilities and litigation against the firm and its executives due to no/low quality ?

When you figure all of this ... it would be fair after that to talk about the cost of quality and quality measures/actions necessary to take care of the above issues !!

It is tough and complicated to actually calculate cost of Quality. Leave aside calculate, it is difficult to reach an organizational consensus on what is actually to be considered cost of quality... Will give an example : There is a field issue reported. Now what should be considered cost of quality?

1) Rework labour cost

2) Rework part cost

3) Customer Good will loss

4) Time and efforts to analyze and come to a corretive action.

5) Time and efforts to analyze and come to a preventive action.

6) Cost of decision taking (i.e manhours lost in meetings etc to discuss and decide)

7) Training cost of employees to train them on to techniques to avoid those failures and motivational training of the employees to keep up spirits despite failures.

8) Opportunity loss cost and many more.....

The entire system needs adequate time at the planning and the devlopment stage which most of the organizations fail to invest. and end up capturing just the customer repair and return cost as the Cost of quality.

Looking it from other side can only give you the correct answer, which Mr. Thaib has already mentioned in the his detailed but still specific answer

I would reword your question to ask "Value of quality service to customers". As soon as we being in the term "value", we are no longer looking at the cost alone - We are really performing a cost-benefit analysis so as to meet a business' ultimate goal of providing high quality service to its customers.

In order to calculate the true value, you would need to derive the proposed cost of providing those services and offset this by the expected quantitative and qualitative benefit to the customers.

Costs would include elements like:

- Cost of adding features to your product / service

- Cost of personnel (if you were to hire more people)

- Process Cost (if this impacts existing processes, or if new processes need to be developed to support this)

- Technology cost (if new systems need to be developed, or existing systems need to adapt to the change)

- Change Management Cost (to ensure a smooth change transition process within the company)

- Retraining

- Rebranding (if applicable)

- Launches (especially in case you add features to your product / service)

- Any other communication cost (brochures. advertisements, building surveys, etc.)

- Increase in manufacturing expenses

- Overall increase in cost of sales

Benefits

- Expected increase in revenue due to better quality product / service

- More satisfied customers (which irectly translates into higher sales and viral publicity)

- Better market share

The aim is to get more than a dollar for each dollar spent - That is where the true value of providing great quality service can be evaluated and implemented !!