Quality

Defect Reduction ROI

Test whether a defect-reduction program pays back within its evaluation period from the resulting annual quality-cost savings.

Current annual quality cost$ / year, current scrap or defect cost this program aims to reduce, can carry over from Scrap Cost DecisionDefect reductionfraction the defect rate is expected to drop, e.g. 0.4 for a 40% reductionImprovement program cost$, one-time cost to run the improvement program

Go$240,000 / year savings

Annual savings$240,000

Payback period0.42 yr

ROI over evaluation period380%

Savings per $ invested2.4x

Continue Analysis

Based on your results, these related decisions are available.

Cost per Unit Decision Model apply quality improvement to unit cost

Resources

Visual The Cost of Poor Quality Nobody Puts on the P&L A 3% defect rate on 100,000 units a year does not show up as a line item anywhere. Priced out with the standard prevention-appraisal-failure framework, it is $99,000 a year, and $46,000 of it goes away by cutting the rate to 1%.

How this works

A defect-rate reduction is justified the same way as any other capital improvement, annual savings against the cost of the program, checked for payback within a set evaluation period. This mirrors Reliability Improvement ROI's go/no-go logic, applied to quality cost instead of downtime and maintenance cost. Positive annual savings alone is not enough, the payback period against the evaluation period is what actually decides the verdict.

Key terms

Current annual quality cost: the standing annual scrap or defect cost the program aims to reduce, often carried over from Scrap Cost Decision.
Defect reduction: the fraction the defect rate is expected to drop, applied directly to the current quality cost.
Payback period: how many years of savings it takes to recover the improvement program's cost.
Evaluation period: the number of years the payback and ROI are measured against, default one year.

Assumptions

The defect-rate reduction is achieved in full and holds steady across the evaluation period
Improvement program cost is a one-time cost, not an ongoing annual expense
Savings scale linearly with the entered reduction fraction against current quality cost

Limitations

Does not model a partially achieved or degrading improvement over time
Does not handle an ongoing annual program cost, only a one-time investment
Does not compute the current quality cost itself, that belongs to Scrap Cost Decision or Cost of Poor Quality

Sources

Standard payback and ROI capital-screening treatment, Blank and Tarquin, "Engineering Economy" (8th ed.), the same source and go/no-go structure as Reliability Improvement ROI.

Worked example

At $600,000/year in current quality cost, a program expected to cut the defect rate by 40% saves $240,000/year. Against a $100,000 one-time program cost, payback arrives in about five months, well inside a two-year evaluation period, a clear go. A second program cutting only 30% off a smaller $60,000/year base saves just $18,000/year, positive but slow, taking over 11 years to pay back a $200,000 cost, so the same two-year evaluation period returns a no-go even though annual savings alone still look positive.

Common use cases

Screening a proposed quality-improvement program before committing the budget
Checking whether positive annual savings still clear a realistic payback bar
Continuing a Scrap Cost Decision or Cost of Poor Quality figure into an investment decision