Cost of quality concepts are highlighted in this presentation.

1. MEL420: Total Quality
Management
Cost of Quality
 Cost &
productivity
 Traditional vs
TQM view
 PAF Model
 Process Model
 Other models

2. Quality & Productivity
Improved Quality
Of Design
Higher PricesHigher
Perceived Value
Higher
PRODUCTIVITY
Increased
revenues
Increased Market
Share
Lower
manufacturing
and service Costs
Improved Quality
of conformance

3. Traditional view..
Cost
0 100
“Optimal Level”
Quality of Conformance (100% Conforming)
Cost of Quality
assurance
Cost due to
nonconformance
Total Cost

4. TQM view..

5. 1-10-100 Rule
The 1-10-100 rule states that as a product or service moves through the
production system, the cost of correcting An error multiplies by 10.
Activity Cost
Order entered correctly Rs 1
Error detected in billing Rs 10
Error detected by customer Rs 100
Dissatisfied customer shares the experience with others the costs is
Rs 1000

6. Cost of Quality (COQ)…
 “Higher quality is less expensive to produce than lower
quality.” --W. Edwards Deming
 The endless pursuit of quality produces lower costs,
higher productivity, greater market share, and more
satisfied customers.
 Experts estimate that the cost of “bad quality” may
range from 20% to 30% of sales.

7. Why COQ?
 COQ helps in focusing manager’s attention on the cost
of poor quality
 It assists in problem solving by comparing costs and
benefits of different quality-improvement programs
and setting priorities for cost reduction
 COQ provides a single, summary measure of quality
performance for evaluating
Prevention/appraisal/failure cots

8. An example..
 An item with sales price (P)= Rs 70/unit
 Planned items per month = 1300
 Planned revenue: Rs 91,000 /month
 Actual items manufactured in a month = 1243
 Actual revenue= Rs 87,010 (i.e.Rs 70 x 1243)
 Assume Man-Hour cost : Rs 7.05/hr
 Time spent on inspection & control of bought-out
item = 3.5 hrs/month
 Validation inspection = 169 hrs/month
 Commercial testing = Rs 113/month
 Repair & rectification = 500 hours/month

9. Example (contd.)
(A) Cost of Inspection & control = Rs 3.5 hrs x Rs 7.05/hr = Rs
24.67
(B) Validation Inspection & testing cost = 169 hrs x Rs 7.05/hr +
Rs 113= Rs 1191.45
( C ) Cost of repair & rectification = 500 hrs x Rs 7.05 /hr= Rs
3525
(D) Delay cost = 57 items short fall x Rs 70 /item = Rs 3990
Total Quality related Cost = (A) +(B) +( C) +(D)
= Rs 8844.12/month
 Quality costs as % of expected revenue =
 Rs 8844.12/91,000 = 9.72 %

10. Quality Cost Models
 Feigenbaum’s P-A-F Model
 Juran’s Model
 Tangible factory cost
 Tangible sales cost
 Intangible cost
 Process Cost Model
 Cost-benefit Model

11. COQ... P-A-F Model
Quality Costs are those categories of costs
that are associated with producing,
identifying, avoiding, or repairing products
that do not meet requirements. These costs
are:
 Prevention Costs (Make it right the first time)
 Appraisal Costs (Inspection, testing, equipment accuracy)
 Internal Failure Costs (Scrap, rework, retest, yield losses)
 External Failure Costs (Warranty, liability, returns)

12. Cost Of Quality..
P-A-F Model
 Cost of achieving good quality
Prevention
Appraisal
 Cost of poor quality
Internal failure costs
External failure costs

13. P-A-F Model..
Prevention costs
Planning
Product design, process
design & review
Process control
Data collection, analysis &
reporting
Appraisal Costs
Inspection
Testing
Testing equipment
maintenance costs

14. P-A-F Model..
Internal Failure costs
Scrap
Rework
Retest
Yield losses
Downtime
External Failure Costs
Return, replacements
Warranty
Liability
Complaint
investigation &
adjustment
Goodwill

15. P-A-F Model.. Prevention Costs
 Quality Planning Costs are those costs associated with the time
spent planning the quality system.
 Process Control Costs include costs spent on the analysis of
production processes to improve capability and the
implementation of process control plans.
 Information Systems Costs include salaries expended to
develop data requirements and quality measurements.
 Training Costs are those associated with developing and
operating formal training programs or attending seminars on
quality assurance.
 General Management Costs include those for clerical staff,
supplies and communication related to quality of efforts.

16. P-A-F Model..Appraisal Costs
 Test and Inspection Costs are those associated with testing
and inspecting incoming materials, work-in-progress, and
finished goods and includes salaries for inspectors, supervisors,
and other personnel as well as the cost of equipment.
 Costs of Maintaining Instruments include such costs as those
associated with calibration of gages and test equipment, and
repair of such instruments.
 Process Control Costs involve the cost of time spent by
operators in gathering and analyzing quality measurements.

17. P-A-F Model..Internal Failure Costs
 Scrap and Rework Costs include material,
labor and overhead associated with
production losses. Costs of Correction Action
arise from time spent determining the causes
of failure and correcting production problems.
Downgrading Costs include lost revenue as a
result of selling a product at a lower price
because it does not meet specifications but
still usable.

18. P-A-F Model..External Failure Costs
 Costs of Customer Complaints and Returns includes
the cost of investigating complaints and taking
corrective action.
 Production recall Costs are those of administration
and direct production costs of making adjustments.
 Warranty Claims Costs includes the cost of repair or
replacement of products.
 Product Liability Costs of legal action and settlements
are major sources of external failure costs.

19. “Quality is Free” (Crosby)
 For the average company, the cost of
quality is about 25% of total sales
 The cost of prevention is a fraction of
the cost of fixing mistakes after they
are made
 Investments in prevention can
drastically reduce the total cost of
quality

20. Juran’s model
 Categorizes costs into
 Tangible & Intangible costs
 Tangible costs: measurable/visible/easy to
identify/measure & control
 Tangible factory cost
 Tangible sales cost
 Intangible costs: difficult to measure and hence monitor
& control, proxy measures/sometimes hidden
 Cost of lost goodwill/loss of brand image etc.

21. Process Cost Model
 Categorization into P-A-F may not be
possible/overlapping
 True purpose of cost reporting : constant drive to
lower costs
 Costs based on individual process activities
 Identify key aspects of process
 Spilt cots into COC (cost of conformance) & CONC
(Cost of non-conformance)
 Use of regular reporting

22. Some processes in a hostel
mess..
 Prepare & present food
 COC: cost of food/energy/labor
 CONC: waste food/waste labor
 Clean Facilities
 COC: cost of
labor/inspection
 CONC: re-cleaning,

23. People involved..
 Mess supervisors
 Placing
orders/ordering for
special
occasions/food bill
verification etc.
 Mess committee
 Plan working of
mess/plan for special
events/re-planning
 Mess secretary
 Investigate
complaints/food bill
verification etc.
 Accountant
 Mess bill
accounting/account
rectification/Food bill
verification

24. Cost-benefit model
 This approach is typically associated with quality
improvement initiatives
 Identify all elements associated with investment &
expenditures (as cost elements)
 Identify all elements associated with benefits/savings and
quantify them , may be in terms of Rs
 Form the ratio of Cost to Benefit
 If the ratio is less than one, go for the improvement
initiative..

25. Quality Indexes
 Labor index
quality cost / labor hours
 Cost index
quality cost / manufacturing cost
 Sales index
quality cost / sales
 Production index
quality cost / units produced

26. Example of P-A-F model
Costs(In Mu ‘000) 2004 2003
Machine maintenance 215 214
Training supervisors 5 45
Design reviews 20 102
Total Prevention costs 240 362
Incoming inspection 45 53
Final testing 160 160
Total Appraisal costs 205 213
Rework 120 106
Scrap 68 64
Total Internal Failure costs 188 170
Warranty repairs 69 31
Customer returns 262 251
Total External Failure costs 331 282
Total Quality costs 964 1027
Total revenues 4120 4540
Total Q-cost/Total
Revenue (in %)
23.39 % 22.62 %

27. Quality Index Example
2010 2011 2012 2013
Quality Costs
Prevention Mu 27,000 41,500 74,600 112,300
Appraisal 155,000 122,500 113,400 107,000
Internal failure 386,400 469,200 347,800 219,100
External failure 242,000 196,000 103,500 106,000
Total Mu 810,400 829,200 639,300 544,400
Accounting measures
Sales Mu 4,360,000 4,450,000 5,050,000 5,190,000
Mfg costs 1,760,000 1,810,000 1,880,000 1,890,000
Mu: Monetary Unit

28. Quality Index
Example for year 2010
Year Sales Cost
2010 18.58 46.04
2011 18.63 45.18
2012 12.66 34.00
2013 10.49 28.80
Total quality costs * 100 / base
Mu 810,400 * 100 / 4,360,000 = 18.58

29. COQ..
Costs of Conformance: Prevention &
Appraisal
Costs of Non-Conformance: Internal Failure
& External

30. Implementation of COQ model
 Management sensitization
 Planned pilot programs
 Education to all
 Development of Q-cost accounting system
 Collection and analysis of company wide data
 Q-cost reporting and control

31. Quality costs: A case
Credit: Rohit Chandel
Rajeev Solanki
Chandan Kumar
Kamal Kant
as a part of course assignment

32. ABC Time Corporation
 ABC Time Corporation produces a high volume of
inexpensive quartz watches and finer desk clocks.
 ABC is engaged in an assembly operation, with
quartz crystals imported from Japan and other
materials from domestic suppliers.
 The desk clocks are made from oak that is cut and
stained in the plant. The process used is labor-
intensive; therefore, a measurement base of direct
labor cost has been chosen.
 ABC recently implemented a quality cost program.
The first year’s result in dollars is quarter for each
product and cost category.

33. Quality Cost Data and index
Calculations for ABC (in Mu)
Quarter
1 2 3 4
Watch Clock Watch Clock Watch Clock Watch Clock
Prevention 2 4 2 4 2 4 2 4
Appraisal 10 20 13 31 16 22 9 24
Internal Failure 19 106 16 107 23 194 17 195
External
Failure
23 16 21 14 34 14 30 12
Total quality
costs
54 146 52 156 75 234 58 235
Standard direct
labor costs
35 90 28 86 40 94 30 93
Index 154.3 162.2 185.7 181.4 187.5 248.9 193.3 252.7

34. Cost index..
Quality Cost Index:
Total Quality Costs /Direct Labor Cost x 100
for instance, the index for prevention costs for
watches in the first quarter is computed by
dividing the cost by direct labor costs or (2/35)
* (100) = 5.7

35. Quality Indexes by Cost Category
Product: Watches
Quarter
1 2 3 4
Prevention 5.7 7.1 5.0 6.7
Appraisal 28.6 46.4 40.0 30.0
Internal Failure 54.3 57.1 57.5 56.7
External Failure 65.7 75.0 85.0 100
Total 154.3 185.7 187.5 193.3
Product: Clocks
Quarter
1 2 3 4
Prevention 4.4 4.7 4.3 4.3
Appraisal 22.2 36.0 23.4 25.8
Internal Failure 117.8 124.4 206.4 209.7
External Failure 17.8 16.3 14.9 12.9
Total 162.2 181.4 248.9 252.7

36. Trend Analysis of Quality Costs:
Watches
0
20
40
60
80
100
1 2 3 4Quarter
CostIndex
Prevention
Appraisal
Internal Failure
External Failure

37. Trend Analysis of Quality
Costs: Clocks
0
50
100
150
200
1 2 3 4
Quarter
CostIndex
Prevention
Appraisal
Internal Failure
External Failure

38. Cost index Comparisons By Product

39. Percentage Cost Distribution by
Category: Watches

40. Percentage Cost Distribution by
Category: Clocks

41. Implementation Plan
 Obtain management commitment and support:
 Establish an installation team: the quality cost team
should include individuals from throughout the
organization
 Select an organizational segment as a prototype:
 Obtain cooperation and support of users and
suppliers of
 Define quality costs and quality costs categories.

42. Implementation Plan
 Identify quality cost within each category
 Design quality cost reports and graphs: reports
 Establish producers to collect quality cost
information
 Collect data, prepare and distribute reports
 Eliminate the bugs from the system
 Expand the system: after the initial project has
succeeded, plans should be developed to expand the
system to other segments of the organization.