Cost Reduction by QMS

Categories of Quality Costs
Conformance Non-Conformance
Quality Costs
AppraisalPrevention External failureInternal failure

FICCI CE
Cost of quality
Cost of quality = Cost of conformance + Cost of non-conformance
• Cost of conformance is the cost of providing products or services as
per the required standards. This can be termed as good amount
spent. (Prevention & Appraisal costs)
• Cost of non-conformance 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)

Prevention Costs
 Prevention costs are associated with Tool design & Simulation, Equipment
Maintenance, Strategies for Die Care & HT process validation and planning
prior to actual operation in order to avoid the occurrence of defects.
 The emphasis is on the prevention of defects so as to reduce the probability of
occurrence of 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”.

Activities associated with Prevention costs
 7.1 Quality Planning – Determine Manufacturing process and
inputs required, Decide check points – Quality Plan / Process Plan
 7.2 Market research – Determine customer requirement
 7.2 Contract review
 7.3 Design review
 7.4 Supplier evaluation, selection, performance monitoring
 7.4 Purchasing specification - Clear communication
 7.5 Production Planning, Job Set up process, Correct Input
 7.6 Calibration
 8.2.4 Field trials
 Process capability review
 Design and manufacture of jigs and fixtures
 Preventive maintenance Quality training programs

FICCI CE
Should we try to reduce Prevention Costs
to
Bring down Cost of Quality ?
No
Why
Better take Preventive Actions to
reduce the Cost of Non-
Conformance

FICCI CE
Should we try to Increase Prevention Costs
To Improve Quality & Reduce Non-Conformance
Yes/No
Right approach would be to optimize
Prevention Costs
By Focusing on:
a) Quality Planning (7.1) –Horizontal deployment of actions while
preparing QUALITY PLAN / PROCESS PLAN of similar successful products .
d) Jigs & Fixture(7.1)-
1)Commonising non critical components of Jigs & Fixtures,
2)video shoot set up and eliminate waste operations.
b) Supplier Evaluation, Performance(7.4)- Upgrading, Educating
& Standardizing Supplier Base.
c) Calibration (7.6)- Usage based frequency, Replacement Strategy.

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 if things are correct”. The appraisal costs are focused on the
discovery of defects rather than prevention of defects.

FICCI CE
How to Reduce Appraisal Costs?
7.4.2- Vendor Surveillance-
- Standardize Product/ Grade specific Machining/Raw material vendors based
on their Quality & Delivery Performance.
- Motivate standardized product/ Grade specific vendors by giving regular &
sustained long term business.
7.4.3- Incoming Material Inspection-
- Introduce self certification policy for suppliers by intensive education
training & support to improve their processes. Take Experts Help.
- Price incentive & business guarantee for self certified suppliers.
-Motivate & reward self certified suppliers at regular intervals.
8.2.2 & 8.2.4- Process Design & Product
Inspection-
-Design idiot proof process & controls. Validate all special processes e.g HT.
-Cover all critical processes by mistake proofing-Pokayoke
--Reduce 100% part inspection by validating & stabilizing Mfg. Processes

Activities associated with Appraisal costs
 8.2.4 Proto type measurement & testing
 7.4.2 Vendor surveillance
 7.4.3 Incoming material inspection
 8.2.2 Process Design /control
 8.2.4 Product Inspection
 7.6 Laboratory testing / measurement
 8.2.2 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.
ZERO

Activities associated with Internal failure costs
 Design changes/ corrective action
 Scrap due to tool / process design
changes
 Excess inventory
 Rectification / disposition of purchased
raw material
 Rework/rejection in manufacturing
 Downgrading of end product
 Downtime of plant & machinery
 Trouble-shooting & investigation of
defects

FICCI CE
Is it possible to have zero internal failure cost??
NO
Strive to consistently reduce till it is minimized
to best industry practices
Design Changes/ Corrective Actions (7.3.3.2 & 7.3.5 & 7.3.6)
1) Conduct design simulations to validate die design, Validate HT process
for all new parts at development stage.
TO AVOID
a) Scrap cost due to design changes , b) Rework cost, c) set up cost
d) Inspection & re-inspection cost, e) HT rework & Retesting cost,
f) Opportunity Cost etc. etc.
But How?
2) Improve designs & HT processes upfront from lessons learnt & wrongs
done in designing, manufacturing & heat treatment of similar products &
similar material grade in past.

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/ recogonised until informed by the customer.

Activities associated with External failure costs
 Processing / investigation of customer complaint
 Repair/replacement of sold goods
 Warranty claims
 Premium Freights due to delays associated with quality problems
 Loss of customer goodwill & sales.

FICCI CE
Is it possible to have zero external failure cost??
NO
Strive to consistently reduce till it is minimized
& close to best industry norms.
Processing/ Investigation of customer complaints (8.5.2 & 8.5.3)
1. Conduct thorough , sincere & honest root cause analysis fearlessly using
simple QC tools e.g. 3-legged , why-why analysis,
But How?
2. Arrive at achievable corrective & preventive actions
3. Ensure implementation of CAPA.
4. Measure effectiveness of CAPA by conducting Surprise Audits.
5. Standardize CAPA by modifying work instructions supported by pictorials
6. Train & motivate operating level persons to rigorously follow CAPA and
by appraising them the tangible results & benefits of CAPA.

FICCI CE
This Will have Direct Impact on
a. Repair/ Replacement of sold goods.
b. Warranty Claims.
↓
↓
c. Premium Freights. ↓
d. Customer good will & sales. ↑

Size of four categories of quality costs.
 The organizations which do not follow TQM, give 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 the
world over range from 20 % to 30 % of turnover and in the case of service
companies it can go up to 40 % as illustrated in graph on the next slide.

Size of various quality cost elements
Preventive
1%
Appraisal
4-6%
Internal
Failure
10-12%
External
Failure
10-15%
The total quality
costs 25-35 %
of turnover.
Qualitycostsin%ofsales

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 reflect in profitability in balance sheets .
 Results of TQM program followed in Xerox Corp is demonstrated.
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 costs.
prevention
Appraisal
Internal
Failure
Prevention
Appraisal
Internal
Failure
0
5
10
15
20
25
30
35
%ofsales
An example from Xerox Corp.
Before TQM After TQM

1-10-100 Rule
1
10
100
Rs
Rs
Rs
Rs
Rs
Prevention
Correction
Failure
Stages

FICCI CE
cost of quality
Traditionally recorded quality cost generally account for only 4 to
5 percent of sales which mainly comprise of cost of scrap, re-work
and warranty.
BUT IS IT ACTUALLY SO???

FICCI CE
Hidden costs of quality
There are additional costs of quality which are hidden and do not appear in
the account books of the company, as they are intangible and difficult to
measure. These additional costs could be as high as 20-25% of sales and
comprise of low conversion efficiency of materials, cost of resolving
customer problems, inadequate resource utilization, high inventory, long
cycle times, more set-up times, penalties due to late delivery and lost
customer loyalty and goodwill.

•Scrap
•Rework
•Warranty costs
Hidden Costs
Visible costs
• Excessive use of material
• High inventory
• Inadequate resource utilization
• Cost of redesign and re-inspection
• Cost of resolving customer problems
• Lost customers / Goodwill
Visible and hidden costs
• Conversion efficiency of materials

FICCI CE
10 Steps to reduce hidden costs.
 Identify Hidden Costs
 Measure Hidden Costs
 Appraise Impact of Hidden costs to CFT
 Explore solutions to reduce Hidden costs
 Get sanctions for investments if any
 Implement &Evaluate effectiveness of solutions
 Share the Impact with CFT
 Appraise tangible benefits to Top Management
 Identify new opportunities.
 Repeat the cycle

FICCI CE
Slide- 27
Cost of Poor Quality in Rupees.
Cost Of Poor Quality= [{Cost of Internal Rejection + Cost of External Rejections + QAAppraisal
Cost(wages of QA persons) + Expenses incurred on account of Travel to attend quality complaint + Cost of
prevention (cost incurred on calibration of instruments/equipments + cost of new instruments+ cost of repair
of instruments) + Opportunity cost.(cost of opportunity lost for making good forgings due to rejections
produced) + Rework/salvage cost + Transportation cost incurred for incoming rejection and replacement}÷
Total sales ] X 100
Month 1st
Month 2nd
Month 3rd
Month 4th
Month
Target for Internal Rejection <1.50% <1.50% <1.50% <1.50%
Actual Internal rejection 1.21% 1.22% 1.24% 1.20
Costs not included to
compute COPQ
Calibration Cost+ Opportunity
cost+ cost of RW at
hammer+Salvage cost by
machining or Grinding.
Opportunity cost+ Salvage
cost by Machining /
grinding+ Cost of RW at
hammer.
Opportunity cost+
Salvage cost by
machining or grinding.
Opportunity cost
Cost of Internal Rejection 4.84 Lacs 6.3 Lacs 7.75 Lacs 9.0 Lacs
Cost of Poor Quality
12.80 Lacs
(Air Freight-0.69 Lacs)
11 Lacs
(Air Freight-0.12 Lacs)
10.8 Lacs.
(Air Freight-0.12 Lacs)
10.5 Lacs
(Air Freight-0.10 Lacs)
Difference(∂) between
COPQ and cost of Internal
rejection
7.96 Lacs 5.3 Lacs 3.05 Lacs 1.5 Lacs

FICCI CE
Slide- 28
Cost of Poor Quality(COPQ) Calculation Sheet –of Forging Industry
Red Box- Focus Area to reduce COPQ
Sr. No. Cost Heads 1st Month 2nd Month 3rd Month 4th Month 5th Month 6th Month
1 Cost of Appraisal
a QA & QC salary 281534 285000 286500 283450
b
Cost of Calibration of measuring Equipments(
Dimensions+ Metallurgy)
247950 140230 98405 56490 0 0
A=a+b TOTAL SALE VALUE 529484 425230 384905.00 339940.00 #REF! #REF!
% =(A/G)100 % of A W.R.T. SALE VALUE 0.75% 0.60% 0.52% 0.43% #REF! #REF!
2 Internal Cost
c Sale Value of internal Scrap 484245 630243 775200 906500
b Recovery from scrap
d Cost of In-house Re-work Forge 0 41900 34900
e
Opportunity cost (cost of opportunity lost by
producing rejected parts i.e cost of lost shifts
to recover scrap parts
f
Cost incurred for salvaging by Machining /
grinding
0 0 0 24510 0 0
B=c+d+e+f TOTAL SALE VALUE 484245 630243 817100 965910 0 0
% of B W.R.T. SALE VALUE 0.68% 0.88% 1.11% 1.21% #DIV/0! #DIV/0!
3 External cost
f
Sale price of rejections received in plant &
Scrapped
154050 149900 150690 132740 0 0
g Sale price of parts scrapped at cust end 0 0 0 0 0 0
h
Cost incurred to travel to attend customer
complaint
5060 3600 2900 2500 0 0
i Cost Incurred for rework at customer end 35090 21860 22750 12450 0 0
j Debit Note Values( export + domestic) 285096 104906 37068 21654 0 0
C=f+g+h+i TOTAL SALE VALUE 479296 280266 213408 169344 0 0
% of C W.R.T. SALE VALUE 0.68% 0.39% 0.29% 0.21% #DIV/0! #DIV/0!
D= A+B+C SUB TOTAL 1493025 1335739 1415413 1475194 #REF! #REF!
E Recovery from scrap 212450 235650 334950 425090
F= D--E Final Cost for calculating COPQ 1280575 1100089 1080463 1050104
G SALE VALUE 70978000 71250000 73690000 79980000
5=F÷Gx100 COST OF POOR QUALITY(COPQ) 1.80% 1.87% 1.92% 1.84% #REF! #REF!

FICCI CE
Conclusion.
Cost Reduction with Systemic approach is simple
 Use Quality Management Systems to your advantage
OK is no longer OK
Race against time and strive to be the best
Be your own critic
Do not keep systems bound in manuals for audits
 Success Guaranteed
Thanks