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Cost of quality

  2. CONTENTS 1. Definition- Cost of Quality! 2. History 3. What is COST OF QUALITY? 4. Categories of Quality Costs 5. Cost of Poor Quality(COPQ) 6. Impact of TQM on COQ 7. Effects of identifying COQ. 8. Goal of COQ system 9. Why measure COQ? 10. Benefits of minimizing COQ. 11. Guidelines 12. Steps in implementing Quality Costs 13. GainingApproval 14. Case Study : H&S Motors 15. Relationship 16. Investing in Prevention costs. 17. Concluson 18. Bibliography
  3. DEFINITIO N The term “QUALITY COSTS” has different meanings to different people.  Some equate “QUALITY COSTS” with the costs of poor quality (mainly the costs of finding and correcting defective work).  Others equate the term with the costs to attain quality.  Still others use the term to mean the costs of running the Quality department.
  4. HISTORY • It was Joseph Juran who first discussed the cost of quality analysis in 1951 in the first edition of “Quality Control Handbook” • And it was Armand Feigenbaum who identified four quality cost categories in 1956 in “Total Quality Control” in the Harvard Business Review, Vol. 34 • The Quality Cost Committee was established by the then ASQC in 1961.
  5. WHAT IS COST OF QUALITY? • It is the term that is widely used and widely misunderstood. • The "cost of quality" is not the price of creating a quality product or service. • It's the cost of NOT creating a quality product or service.
  6. WHAT IS COST OF QUALITY? Every time work is redone, the cost of quality increases. Examples include: • The reworking of a manufactured item. • The retesting of an assembly. • The rebuilding of a tool. • The correction of a bank statement. • The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant
  7. WHAT IS COST OF QUALITY? Cost of quality = Cost of conformance + Cost of non-conformance • Cost of conformance is the cost incurred in ensuring that things are done right the first time. • It is the cost of providing products or services as per the required standards. • This can be termed as good amount spent. (Prevention & Appraisalcosts) • Cost of non-conformance is cost incurred as a result of not doing things right the first time. • It is the failure cost associated with a process not being operated to the requirements. • This can be termed as unnecessary amount spent.( Internal & External failure costs)
  9. 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 rather than appraisal” .  In the ideal situation, Prevention costs will be the largest portion of the Total Cost of Quality  Typically, prevention is less than 10% of Total COQ where it should be about 70%
  10. ACTIVITIES ASSOCIATED WITH PREVENTION COSTS • Market Research • Quality planning : It includes the cost associated with creating the entire quality plan , communication of quality plans to all the employees. • New product review :Cost of reliability and other quality related activities associated to launching new designs. • Tolerance analysis before design release. • Field Trials • Cost of research and development activities , analysis and correction of causes and defects. • Cost of training : It consists of either training the workers , supervisors and managers .Cost involved in arranging training programs, attending technical exhibitions , seminars and conferences etc. • Quality audits : Cost involved in evaluating the execution of activities in overall quality plans involved in the organization. • Cost involved in prevention of defects ,it may be technical or non-technical. THESE ARE ALLPLANNED PROACTIVEACTIVITIES.
  11. APPRAISAL COSTS • Appraisal costs are spent to detect defects to assure conformance to qualitystandards. • It is the cost expenditure on inspection and testing. • Appraisal cost activities sums up to the “cost of checking if things arecorrect”. • The appraisal costs are focused on the discovery of defects rather than prevention ofdefects  Appraisal Costs should be the second largest category, but should not exceed prevention costs
  12. ACTIVITIES ASSOCIATED WITH APPRAISAL COSTS • Inspection/test of purchased material • In-process and final inspection/test • Product, process or service audits • Calibration of measuring and test equipment • Maintaining accuracy of testing equipment,performed in terms of periodic calibration. • Cost of non-destructive testing such as electric probes,X rays,radiographyetc. THESE AREALL PLANNEDACTIVITIES
  13. INTERNAL FAILURE COSTS • These are the failure costs occurring prior to delivery or shipment of the product, orthe furnishing of a service, to the customer. • These are the costs that would disappear if no defect is found in the product beforedispatching.
  14. ACTIVITIES ASSOCIATED WITH INTERNAL FAILURE COSTS • Cost of rework , scrap , defectives , waste etc. • Cost of re-inspection , re-tests to verify the performanceanalysis. • Cost of 100% inspection. • Changing processes: Modifying manufacturing or service processes to correctdeficiencies • Lost production due to supplier materials and own material.
  15. EXTERNAL FAILURE COSTS • These are the costs incurred after the product is dispatched to theconsumer. • It may include the cost to the business of providing a bad service or product and this mayalso result into cancellation of order. • These costs also would disappear if there were no deficiencies.
  16. ACTIVITIES ASSOCIATED WITH EXTERNAL FAILURE COSTS • Warranty charges • Complaint adjustment : Costs of investigation and adjustment of justified complaints attributed to defective product or installation. • Returned material : Costs associated with receipt and replacementof defective product received from the field. • Recalling of the product,due some reasons such as safety,health ,accidents etc. • Allowances : The costs of concessions made to customers due to substandard products accepted by the customer as is or to conforming product that does not meet customer needs.
  18. COST OF POOR QUALITY (COPQ)  “How much is it costing our organization by not doing a good job on quality?” Thus we will use the term “cost of poor quality.”  The obvious and visible costs are a small portion of the overall COPQ. The bottom of the iceberg represents the majority of the COPQ and are not easily identified and quantified. By revealing new hidden costs of poor quality, a company can prevent the production of a nonconforming product.
  19. 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 program 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.
  20. IMPACT OF TQM ON COSTS. Internal Failure Appraisal prevention Prevention Appraisal Internal Failure 0 5 10 15 30 25 20 35 % of sales An example from Xerox Corp. Before TQM AfterTQM
  22. GOAL OF COQ SYSTEM The goal of using COQ is to increase prevention activities in order to eliminate internal and external failures and to reduce appraisal activities.
  23. WHY MEASURE COQ? “When you measure what you are speaking about and express it in numbers, you know something about it” – Kelvin You cannot manage what you cannot measure ” – Anon
  24. WHY MEASURE COQ? • Measure COQ - Why?  COQ can be used to identify quality improvement candidates  COQ provides one measure of comparing the success of projects  COQ can provide cost data for motivational purpose Money is the language of management, you need to show them the numbers - Crosby
  25. BENEFITS OF MINIMIZING COQ…  Increases • Sales • Profit • Capacity • Customer Satisfaction • Market Share • Competitive Edge • Employee Satisfaction Decreases • Defects • Overall Costs • Returned Goods • Customer Complaints • Owner & Mgmt. Stress • Decrease Legal Costs
  26. MEASURING COST OF QUALITY… COQ data can be measured and presented in many different ways. • % age of sales • % age of profits • % age of manufacturing cost • Rs per direct labor hr • Rs per unit of product
  27. STEPS IN IMPLEMENTING QUALITY COSTS The following sequence applies to most organizations - • 1. Review the literature on quality costs or consult others in similar industries who are using the same tool. • 2. Select one organizational unit of the company to serve as a pilot site. This unit may be oneplant, one large department, one product line, etc. • 3. Discuss the objectives of the study with the key people in theorganization. • 4. Collect whatever cost data are conveniently available from the accounting system and usethis information to gain management support to make a full cost study. • 5. Make a proposal to management for a full study. The proposal should provide for a task forceof all concerned parties to identify the work activities that contribute to the cost of poor quality. Work records, job descriptions, flowcharts, interviews, and brainstorming can be used toidentify the activities.
  28. STEPS IN IMPLEMENTING QUALITY COSTS (CONTD.) • 6. Publish a draft of the categories defining the cost of poorquality. • 7. Finalize the definitions and secure management approval. • 8. Secure agreement on responsibility for data collection and reportpreparation. • 9. Collect and summarize the data. Ideally, this should be done byAccounting. • 10. Present the cost results to management along with the results of a demonstrationquality improvement project (if available). Request authorization to proceed with a broader companywide program of measuring the costs and pursuingprojects. Clearly, the sequence must be tailored for each organization.
  29. GAINING APPROVAL… • Establish that the costs are large enough to justifyaction. - Use the grand total to demonstrate the need for quality improvement. This is themost significant figure in a quality cost study. - Relate the grand total to business measures. • Estimate the savings and other benefits. - If the company has never before undertaken an organized program to reducequality- related costs, then a reasonable goal is to cut these costs in two, within a space of 5 years. - Don’t imply that the quality costs can be reduced to zero.
  30. GAINING APPROVAL(CONTD.) • Calculate the return on investment resulting from improvement in quality. • Use a successful case history (a “bellwether” project) of quality improvement in the companyto justify a broader program. • Identify the initial specific improvement projects. • Propose the structure of the improvement program including organization,problem selection,training, review of progress, and schedule
  31. CASE STUDY: H&S MOTORS • The H&S motor company produces small motors for use in lawnmowers and garden equipment. The company instituted a quality improvement program in 1999 and has recorded the following quality cost data and accounting measures for 4 years. The company wants to assess its quality assurance program and develop quality index using sales basis for the 4 year period.
  32. KEY POINTS OF STUDY: • Approximately 75% of the H&S’s total quality costs are a result of internal and externalfailures. • In 2000 company spent more money on product monitoring and inspection that resulted into high appraisal cost. • With this strategy, H&S was able to identify more defective items, resulting in anapparent increase in internal failure cost and lower external failurecost. • In year 2001 & 2002 company spent more money on prevention activities i.e. training of employees, redesigning the production process and planning how to build in product qualityetc. • Prevention costs increased by more than 300 % during the 4 year period resulted into decrease in overall quality costs.
  33. The H&S company also desired to develop index numbers using quality costs as a proportionof sales. Quality index no. for 1999 sales is: = (810,400/4,360,000)*100 = 18.58 and similarly for other years: These index no's alone provide little insight into the effectiveness of the quality management program; however as a standard to make comparisons over time they can be useful.
  35. INVESTING IN PREVENTION COSTS.. • Richard W.Anderson, former general manager of the computers systems division of Hewlett- Packard, expresses this point in his widely cited quote explaining the damage caused by atwo- cent resistor: • If you catch the resistor before it is used and throw it away, you lose two cents. If you don’t catch it until it has to be soldered into a computer component, it may cost $100 to repair the part. If you don’t catch the component until it is in a computer user’s hands, the repair cost will amount to hundreds of dollars and may exceed the manufacturing costs. By eliminating a defective product in the early stages of production, a company can greatly reduce its cost of poor quality. Investing in prevention costs, therefore, is extremelyimportant.
  36. Is Cost related to Prevention ofNon- Conformance? Is Cost relatedto Evaluating the Conformance? Is Cost related to Non-conformance? Is Non-Conformance found prior to Shipment ? YES NO PREVENTION APPRAISAL INTERNAL FAILURE EXTERNAL FAILURE YES YES NO NO Not a QualityCost YES NO CONCLUSION…
  37. CONCLUSIO N • The cost of poor quality can be reported in an endless number of ways. • It can take a variety of different forms. • It can represent 10% of a company’s annual sales, or it can represent 40%, depending on how far they “peel the onion”.
  38. CONCLUSIO N • However, once quality costs are presented in the language of money, misunderstandings evaporate and executives immediately realize the true significance of the cost of poor quality. • “Quality costs are dynamic and constantly changing over time.”
  39. BIBLIOGRAPH Y • Juran Quality Control Handbok _5th edition • Total Quality management by Dale. H. Besterfield • • • • costofpoorquality-research-120625132610-phpapp02 •
  40. THANK YOU!