COST OF QUALITY

(QUALITY COSTS)

COST OF QUALITY
TM looks at every activity in terms of return on direct and indirect investment. Does not mean looking for short-term gains only. Dont mind waiting for years, if ultimately the efforts are going to pay. Adopt ISO 9000 or TQM if it is going to help the organization.

COST OF QUALITY
TQM was evolved to satisfy customers in the most economical way. Quality means cost effectiveness. It means reducing expenditure by eliminating wastes through systematic quality management approach. Therefore it is important to compute expenditure incurred on account of poor quality and prevent it.

COST OF QUALITY
TQM should result in the progressive reduction of inferior quality goods. QC is a tool to demonstrate cost of poor quality to the top management as well as the entire organization. TQM aims at gradual reduction of wasteful expenditure and eventually their total elimination.

COST OF QUALITY
QC should be accounted separately so as to know how much the organization is loosing on account of poor quality. Decreasing cost of production should indicate quality improvement. Accounting and analyzing costs has given innumerable benefits to the organizations. Thus QC is an important tool for TQM.

COST OF QUALITY
COQ is the sum of costs incurred by an organization in preventing poor quality. There are three types of QC: 1. Prevention Costs 2. Appraisal Costs 3. Failure Costs (see figure 2.1 PAF Model)

COST OF QUALITY
PREVENTION COSTS Are the planned costs incurred by an organization to ensure that no defects occur in any stages such as design, development, production and delivery of a product or service. They are incurred to reduce the inspection as well as the failure costs.

COST OF QUALITY
PREVENTION COSTS The expenditure on account of TQM implementation is a prevention costs. Include education and training of employees, field testing, preventive maintenance, calibration of instruments, audits, quality assurance staff, etc.

COST OF QUALITY
APPRAISAL COSTS Incurred in verifying, checking or evaluating a product or service at various stages during manufacturing or delivering. Incurred due to lack of confidence in the quality of the P/S either due to the incoming material or due to the process.

COST OF QUALITY
APPRAISAL COSTS Example The incoming materials are inspected because the receiver is not sure about the quality of the incoming goods. During the process, a number of inspections take place, since the quality of the process is in doubt.

COST OF QUALITY
APPRAISAL COSTS If the quality improves in the organization as well as among the vendors, inspection cost can be reduced. Appraisal costs include incoming inspection, internal product audit, supplier evaluation and audit, inspection during process and final inspection, etc.

COST OF QUALITY
FAILURE COSTS Incurred by an organization because the product or service did not meet the expected requirements and the product had to be fixed or replaced or the service had to be repeated. Due to the incurred failure of the organization to control defects in the product.

COST OF QUALITY
FAILURE COSTS Defective products in the market can lead to the loss of reputation and customer loyalty. One dissatisfied customer will tell 100 others, which means the loss of both present and future customers. It will also affect the brand image, leading to loss of goodwill and customer loyalty.

CLASSIFICATION OF FAILURE COST

INTERNAL FAILURE COSTS - includes costs of every failure that takes place before the product is delivered to customers. It accrues due to defective processes. Rejected material, supplied by vendor Rejected pieces of sub assemblies Rejected products at final inspection Scrap on account of poor workmanship Overtime due to non-conforming products

CLASSIFICATION OF FAILURE COST

EXTERNAL FAILURE COST -these are on cost of failure of the product after its delivery to the customers. Warranty costs Free replacements given to failure of items supplied Cost incurred to travel to customers site for repair Cost of products returned Cost of customer complaint administration Cost of customer follow up and service department

CLASSIFICATION OF FAILURE COST

The aim of strategic planning and quality planning is the total elimination wastes. This elimination leads to meeting customer requirements at the lowest possible cost. Any defective component only adds to the cost of product. A sub-assembly that contains defective component is a waste as is the case with any product that does not work for the first time after the assembly.

CLASSIFICATION OF FAILURE COST

Any defective part supplied by the vendor is a waste. Also problems encountered in the field, in the product, causes a lot of unnecessary expenditure. Such causes of waste are too many. Juran introduced the concept of Cost of Quality (COQ) in the year 1951 in his Quality Control Handbook.

CLASSIFICATION OF FAILURE COST

The other Gurus such as Philip Crosby, Harrington also advocated due emphasis on COQ. The cost of poor quality accounted for about 25 per cent of the assets, 25 per cent of the people and 40 percent of the inventory and space, in companies, which dont care about quality. - Harrington

Reducing Costs
Reduction of Prevention Cost Prevention cost has to be incurred. Every preventive activity should have been preplanned to avoid wastes during process. Senior Management should devote time to prevent problems from occurring. The establishment of a Quality System in every organization calls for the preparation of a MANUAL and a set of PROCEDURES.

Reducing Costs
Documented policy should have been planned with a vision. If a documented set of policies and procedures already exist for an organization, the employees should adhere to the same. Prevention costs means expenditure. While the organization should not hesitate to improve the processes and reduce the waste through prevention, the prevention activity itself should be carried out without wastes.

Reducing Costs
Progressive Reduction of Appraisal Costs Inspection is essential before a new vendor, new process or a new product line. Inspection generates a lot of information. This information should be utilized skillfully by the organization to reduce future costs.

Reducing Costs
Example For a new vendor who is already qualified, the organization may start with 100 per cent inspection; with experience this could be reduced to sampling inspection. With the increase in confidence level , the responsibility of the inspection could be totally left to the vendor.

Reducing Costs
The organization should try to make best use of the data available within the organization in the form of inspection records to improve quality and reduce the need for inspection. The inspection costs should also be reduced with the maturity of the processes.

Reducing Costs
Reduction of Failure Costs Manufacturing or delivery of a product or service with defects is a total waste. Everything should be done right the first time and every time. There should be no occasion to reject a product or a service either at the initial stage, the intermediate stages or at the final stages.

Reducing Costs
Right the first time will happen only if the processes are streamlined and made effective and efficient. A lot of emphasis should be given to establishing a proper system to control processes. It will lead to automatic control of the quality of the output.

HIDDEN COSTS
There are many costs which cannot be identified. They may be defined as hidden costs. These include customer-incurred costs, lost reputation costs, and customer dissatisfaction costs. These costs can vary and some times affects business. They can be eliminated by eliminating external failures.

JURANS MODEL OF OPTIMUM QUALITY COSTS

The quality level increases, when the number of defects in the product or service reduces. The cost of non-conformance (failure cost) decreases as quality improves. The quality level increases when the cost of conformance (sum of prevention and appraisal cost) increases. The figure indicates that 100 percent quality is very expensive.

JURANS MODEL OF OPTIMUM QUALITY COSTS

At the minimum total cost, every peso spent on conformance reduces non-conformance by one peso. The minimum quality costs occur at 100 per cent quality level. This is the ideal situation. Six sigma quality level is very close to 100 per cent.

ANALYSIS OF COQ FOR IMPROVEMENT

Management should also use the COQ data to identify and prioritize improvement opportunities. The first priority is to eliminate external and internal failures. Thereafter inspection can be reduced gradually. By spending more money on prevention all these can be achieved.

ANALYSIS OF COQ FOR IMPROVEMENT

During 1997, increasing appraisal without increasing prevention increased internal failures and reduced external failures. However, the total COQ did not change. This is certainly an improvement because external failures affect business very badly. During 1997, the organization decided to get ISO 9000 and focus on prevention.

ANALYSIS OF COQ FOR IMPROVEMENT

During 1999 when prevention was stepped up, keeping the same inspection, the failures and overall COQ came down. In 1999, the CEO decided to adopt TQM. Vigorous efforts were made to improve quality further and do things right, the first time and every time.

ANALYSIS OF COQ FOR IMPROVEMENT

The COQ analysis gives the following benefits to the organization. Brings out the magnitude of the quality problem in the organization, it further leads to establishing goals for the organization to improve quality. Enables cost reduction owing to steps taken for improvement based on analysis. Enables taking steps to improve customer satisfaction Displaying the results motivates employees to improve further.