QHT1 Task 1 Cost of Quality Memo Example

Memorandum

To: Dana Kowalski, Vice President of Operations, Cascade Bootworks

From: Quality Analyst, Work Boot Division

Date: September 29, 2026

Re: Cost of quality in the work boot division and a recommendation to shift spending to prevention

Purpose and Recommendation

You asked me to analyze what quality problems are costing the work boot division and where we should invest. Using last year's financial and warranty records, I classified our quality-related spending into the four standard categories of quality cost. The main finding is that we spend about $2.94 million a year on quality, and roughly 86% of it goes to finding and fixing defects rather than preventing them. I recommend reallocating about $380,000 a year toward prevention, which I estimate would reduce failure costs by more than $1 million within two years.

The Four Categories of Quality Cost

Quality costs are commonly grouped into prevention costs, spent to stop defects from occurring, such as training, supplier qualification and process design; appraisal costs, spent to find defects, such as inspection and testing; internal failure costs, incurred when defects are found before the product ships, such as scrap and rework; and external failure costs, incurred when defects reach the customer, such as warranty claims, returns and lost business. A review of research on cost of quality models found that the prevention, appraisal and failure model remains the most widely used, and that organizations generally reduce their total quality costs by investing more in prevention and appraisal to lower failure costs (Schiffauerova & Thomson, 2006). The idea that prevention pays for itself was popularized in the argument that quality is free because the cost of doing things wrong exceeds the cost of doing them right (Crosby, 1979).

Our Costs Last Year

The division's quality costs, by category, were as follows.

Failure costs total $2.52 million, about six times what we spend on prevention and appraisal combined, and fourteen times what we spend on prevention alone. External failure is the largest category, driven by sole separation on our steel-toe line, which accounts for 62% of warranty claims. These costs also understate the damage, because they do not include lost future sales from contractors who switch brands after a boot fails on a job site.

Costs the Figures Do Not Capture

The table includes only costs that appear in our accounting records. Quality management texts distinguish these visible costs from the larger hidden costs of poor quality, such as lost customer goodwill, management time spent handling complaints, expedited shipping to replace failed boots and the opportunity cost of production capacity used for rework instead of new orders (Juran & De Feo, 2010). For us, the most important hidden cost is lost repeat business. Our sales team reports that two regional construction firms, which together bought about 4,000 pairs a year, moved to a competitor after sole failures last winter. That lost revenue, roughly $600,000 a year at our wholesale prices, does not appear in the quality cost table but is a direct result of external failures. Including it would make the case for prevention even stronger, and I have left it out of the return estimate below to keep the estimate conservative.

What the Pattern Shows

Our quality system relies on catching defects at the end of the line and paying for those we miss. End-of-line inspection finds many problems, which is why internal failure costs are high, but it cannot catch a weak sole bond that looks fine at inspection and fails after months of wear. Those failures become warranty claims. The root causes are upstream: inconsistent adhesive application on the sole-bonding line, temperature variation in the curing oven and leather from one supplier with variable thickness.

Recommended Investments

I recommend shifting about $380,000 a year into prevention and targeted appraisal. First, $140,000 for automated adhesive dispensing and oven temperature monitoring on the sole-bonding line, which addresses the leading cause of warranty claims. Second, $90,000 for operator training and standardized work instructions on bonding and stitching. Third, $60,000 for a supplier quality program that sets thickness specifications and audits our leather suppliers. Fourth, $90,000 for in-process bond strength testing, a form of appraisal that catches weak bonds before boots are finished rather than after customers wear them.

If these investments cut sole separation claims by 60% and bonding rework by 40%, failure costs would fall by about $1.1 million a year, a return of nearly three dollars for each dollar spent, and our reputation with contractors would improve.

Next Steps

With your approval, I will prepare a detailed budget and timeline with the plant manager, begin with the adhesive and oven controls, where the payoff is largest, and report monthly on the four cost categories so that we can see whether spending is shifting toward prevention and failure costs are falling.

References

Crosby, P. B. (1979). Quality is free: The art of making quality certain. McGraw-Hill.

Juran, J. M., & De Feo, J. A. (2010). Juran's quality handbook: The complete guide to performance excellence (6th ed.). McGraw-Hill.

Schiffauerova, A., & Thomson, V. (2006). A review of research on cost of quality models and best practices. International Journal of Quality & Reliability Management, 23(6), 647-669. https://doi.org/10.1108/02656710610672470