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What is the Return On Investment (ROI) on Quality ?

Small and medium scale industries in the Singapore market usually split the quality costs into four areas:

  • Prevention Costs: The money spent on preventing issues from occurring such as training, creation of standards, quality plans, etc.
  • Appraisal Costs: The money spent on physically checking and auditing products, and systems.
  • Internal Failure Costs: Costs incurred when a failure of product / rejections occur in ; scrap, rework, time spent replacing product, etc.
  • External Failure Costs: These usually cover everything from warranty costs to lost business

It is generally accepted that spending money on prevention is going to be a lot less expensive than dealing with an issue once it hits your customer. In most models, it is suggested that costs increase by an order of magnitude for each step as you move from prevention through to external failure costs. Therefore, it will cost your business 10 times as much to deal with an issue once it has reached the customer than if you had caught it in-house, and would cost you a tenth as much to prevent the same  issue.

Every business is very different and the ROI that you can achieve in one industry is going to be very different to that achieved in another. A recent study undertaken through the American Society for Quality (ASQ) showed that for every $1 spent on your QMS, you could expect to see an additional $6 in revenue, a $16 reduction in costs, and  $3 increase in profits. On average, they saw that quality management reduced costs by 4.8%.

Another study undertaken by the Harvard Business School showed that companies that adopted ISO 9001 had the following benefits:

  • Higher rates of survival
  • Increased Sales
  • Growth in employment
  • Increased wages
  • Less waste
  • Improved worker productivity

So, while it may not be easy to predict your ROI, you can be pretty sure that investing money up front on your Quality Management System is going to be an effective investment.