Quality

Costs
Many think that quality costs money and
adversely affects profits. But these costs
are the costs of doing it wrong first time .
Quality in the long run results in increased
profitability.
For example if we design the product right
first time, build it right first time - we save
all the costs of redesign, rework, scrap,
resetting, repair, warranty work etc.

Quality is Free
 Quality and Profit

If the organization does

not offer high quality
product or service, it will High
soon go out of business. Quality
But just having high
quality will not be enough,
because your competitors
will also have the high
Lower
quality. To win, companies price
will need to offer high
quality for a lower price
than their competitors.
This requires organizations
to identify and reduce
 Quality Costs
Quality costs are all those costs that
arise from not performing a task the
right way the first time.

1. Prevention Costs
2. Appraisal Costs
3. Internal Failure
Costs
4. External Failure
Costs
 Prevention Costs

➣ Prevention costs are associated with

design, implementation, maintenance
and planning prior to actual operation
in order to avoid defects from
happening.
➣ The emphasis is on the prevention of
defects in order to reduce the
probability of producing defective
products. Prevention activities lead to
reduction of appraisal costs and both
type of failures (internal and
external). The motto is “Prevention
Activities associated with Prevention
costs
➣ Market research
➣ Quality training programmes
➣ Contract review
➣ Design review
➣ Field trials
➣ Supplier evaluation,Supplier Q
programs
➣ Process plan review
➣ Process capability review
➣ Design and manufacture of jigs and
fixtures
➣ Preventive maintenance
➣ Engineering changes for easy
Producibility
Make Certain programs –data
reqments,Q measurements
 Appraisal costs

Appraisal costs are spent to

detect defects to assure
conformance to quality
standards. Appraisal cost
activities sums up to the “cost
of checking whether things are
correct”. The appraisal costs
are focused on the discovery of
defects rather than prevention
of defects
Activities associated with Appraisal
costs
➣ Proto type testing
➣ Vendor surveillance
➣ Incoming material inspection
➣ Process inspection/control
➣ Final inspection- product, package
➣ Laboratory testing/measurement
➣ Field testing
➣ Depreciation cost for measuring
➣ Quality audits
 Internal failure costs

Internal failure costs occurs

when results of work fail to
reach designated quality
standards, and are detected
before transfer to the
customer takes place.
Activities associated with Internal failure
costs
➣ Design changes/ corrective action
➣ Scrap due to design changes
➣ Excess inventory
➣ Rectification / reject disposition of
purchased material
➣ Rework/rejection in manufacturing
➣ Downgrading of end product
➣ Downtime of plant & machinery
➣ Trouble-shooting & investigation of
defects
 External failure costs

External failure costs occur

when the product or service
from a process fails to reach
designated quality standards,
and is not detected until or
after transfer to the customer.
Activities associated with External failure
costs

➣ Processing/investigation of customer
complaints
➣ Repair/replacement of sold goods
➣ Warranty claims
➣ Product liability & litigation costs
➣ Interest charges on delayed payment
due to quality problems
➣ Loss of customer goodwill & sales.
Size of four categories of quality
costs

➣The organizations which do not

follow TQM, there is less
emphasis on prevention and their
main quality efforts are on
appraisal with very little control
on internal and external failure
costs.
➣Various studies have shown that
quality cost in manufacturing
companies world over range from
20% to 30% of turnover and in
the case of service companies it
can go up to 40 %.
 Size of various quality cost elements
10-15%
Quality costs in % of sales

The total quality

10-12% costs 25-35 %
of turnover.

4-6%

1%

Preventive Appraisal Internal External

Failure Failure
 Impact of TQM on costs.
➣ TQM is primarily aimed to improve
the quality of the product , higher
customer satisfaction and better
working environment for the
employees. The most dramatic
impact of TQM is on reduction of
quality costs which directly effect the
profitability .
➣ This is demonstrated by the results of
TQM programme in Xerox Corp . The
change in various elements of quality
cost before and after launching TQM
by Xerox Corp is shown on the next
slide.
 Impact of TQM on Quality
Costs
An example from Xerox Corp.
35 Internal Failure
Appraisal
30
Prevention
% of sales

25

20

15

10

0
Before TQM After TQM
 1-10-100 Rule

Cost of rectifying defect

1
Prevention Rs
Stages

Rs
10
Correction Rs
Rs

Rs
Failure Rs 100
Rs
Rs
Rs
Rs
Visible costs • Scrap
• Rework
• Warranty costs

• Excessive use of material

• High inventory
• Low plant utilization
• Cost of redesign and re inspection
• Cost of resolving customer problems
• Cost associated with poor quality
Hiddenof
Costs
purchased material
• Cost of non value adding activities
• Opportunity cost of lost customers