coq

1. Cost of Quality
Cost of Quality

2. Quality cost
A quality cost is considered to be any
cost that the company would not have
incurred if the quality of the product or
service were perfect.
Cost of Quality

3. Quality costs
Total quality costs are the sum of
prevention costs, appraisal costs, and
internal and external failure costs.
Cost of Quality

4. Quality costs increase over
time
Cost of Quality
FailureCosts
Time when failure found
Prevention Costs
Failure found during design phase
Failure found at onset of manufacture
Failure found at final inspection
Failure found at installation
Field repair costs
Failure found by customer
Liability costs
Low
High
High

5. Hidden Costs of Poor Quality
Cost of Quality
ReprocessingReprocessing
RejectsRejects
Customer returnsCustomer returns
Warranty expensesWarranty expenses
Lost salesLost sales
Overtime to correct errorsOvertime to correct errors
Extra inventoryExtra inventory
Premium freight costsPremium freight costs Extra process capacityExtra process capacity
Loss of goodwillLoss of goodwill
Process downtimeProcess downtime
DelaysDelays
Extra inventoryExtra inventory

6. Balanced Score Card
Cost of Quality
TQM Element Financial Measure Non-financial Measure
Customer
satisfaction
External failure cost.
Field service expense.
Results of customer
satisfaction survey.
On-time delivery.
Number of customer
complaints.
Internal
performance
Appraisal cost.
Internal failure cost.
Prevention cost.
Defect rates
Yields
Lead times
Idle capacity
Unscheduled machine
downtime

7. Traditional Model
Cost of appraisal
plus prevention
Failure costs
Total quality costs
Quality of conformance0% 100%
Costpergood
unitofproduct

8. Emerging COQ Model
Cost of appraisal
plus prevention
Failure costs
Total quality costs
Quality of conformance0% 100%
Costpergood
unitofproduct

9. COQ as motivator
 Companies under TQM do not focus on
quality cost minimization.
 Quality improvement projects tend to
focus on zero defects or defect
reduction to the six-sigma level.

10. The 1-10-100 Rule
$
$
$
$
$
1
10
100
Prevention
Correction
Failure

11. COQ Theme
 Costs are not incurred or allocated, but
rather caused.
 Cost information does not solve quality
problems, nor does it suggest specific
solutions.
 Problems are solved by tracing the
cause of a quality deficiency.

12. Opportunity to Reduce Real Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 12

13. Understand Quality Costs
• Quality costs are real and estimated at:
– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to
enable better understanding

14. Categories of Quality Costs
• Failure Costs
• Repair Costs
• Appraisal Costs
• Prevention Costs

15. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 15
Failure Costs
• Those costs incurred because poor quality
products do exist
• Can be further divided into sub-categories of:
– Internal failure costs
– External failure costs

16. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 16
Repair Costs
• Those costs incurred if poor quality
products receive further processing
• If this occurs then the previous
processing is wasted cost
• Why would you do this?

17. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 17
Appraisal Costs
• Those costs incurred because poor quality
products might exist
• If these costs are necessary then the process is
flawed and management is guilty
• Why would you permit this?

18. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 18
Prevention Costs
• Those costs incurred because poor quality
products can exist and
• Those costs incurred because management is
committed to prevent poor quality products from
happening
• Why would you not do this?

19. Opportunity to Reduce Real Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 19

20. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 20
Understand Quality Costs
• Quality costs are real and estimated at:
– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to enable
better understanding

21. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 21
Categories of Quality Costs
• Failure Costs
• Repair Costs
• Appraisal Costs
• Prevention Costs

22. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 22
Failure Costs
• Those costs incurred because poor quality
products do exist
• Can be further divided into sub-categories of:
– Internal failure costs
– External failure costs

23. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 23
Repair Costs
• Those costs incurred if poor quality products
receive further processing
• If this occurs then the previous processing is
wasted cost
• Why would you do this?

24. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 24
Appraisal Costs
• Those costs incurred because poor quality
products might exist
• If these costs are necessary then the process
is flawed and management is guilty
• Why would you permit this?

25. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 25
Prevention Costs
• Those costs incurred because poor quality products
can exist and
• Those costs incurred because management is
committed to prevent poor quality products from
happening
• Why would you not do this?

26. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 26
Preventing Poor Quality Pays
Failure Costs
• Internal
• External Failure Costs
Repair Costs
Repair Costs
Appraisal Costs
Appraisal Costs
Prevention Costs
Prevention Costs$
Before Quality
Cost Alignment
After Quality
Cost Alignment
Benefit

27. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 27
Preventing Poor Quality Pays
• Would it not make sense to prevent poor
quality products from happening?
• How can this be done?
• Whose responsibility is this?

28. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 28
How to Prevent Poor Quality
• Prepare to measure costs of quality
– Determine categories of quality costs
– Create measurement system that captures
categories of quality costs
• Assign responsibility to collect data
• Analyse collected data

29. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 29
Determine Quality Cost Categories
• Understand your product
• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each problem

30. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 30
Creating Data Collection System
• Create measurement system
– Attempt to harness existing financial accounting
system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are accurate

31. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 31
Assign Responsibility
• Make individuals at all levels responsible for
collecting quality cost data:
– If quality cost data is required then make it the
responsibility of the person who creates the cost
to collect the data
• If no one is responsible no one will bother

32. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 32
Analyse Collected Data
• Data on its own is useless
• You must have it analysed to be able to extract
meaning
• Determine what knowledge you require
• Develop an analysis system that provides the
knowledge you require

33. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 33
Useful Quality Cost Knowledge
• What you need to know is useful
• What you do not need to know is useless
• Only ask for knowledge you need to know
• Demand that knowledge is presented so that
it can be understood easily

34. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 34
Management is Responsible
• Management decides what to produce in terms of
Products (goods and / or services)
• Management assigns responsibilities to produce
products
• Management is accountable for effectively using
resources to produce products

35. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 35
Preventing Poor Quality Pays
Failure Costs
• Internal
• External Failure Costs
Repair Costs
Repair Costs
Appraisal Costs
Appraisal Costs
Prevention Costs
Prevention Costs$
Before
Quality Cost
Alignment
After Quality
Cost
Alignment
Benefit

36. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 36
Preventing Poor Quality Pays
• Would it not make sense to prevent poor
quality products from happening?
• How can this be done?
• Whose responsibility is this?

37. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 37
How to Prevent Poor Quality
• Prepare to measure costs of quality
– Determine categories of quality costs
– Create measurement system that captures
categories of quality costs
• Assign responsibility to collect data
• Analyse collected data

38. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 38
Determine Quality Cost Categories
• Understand your product
• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each problem

39. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 39
Creating Data Collection System
• Create measurement system
– Attempt to harness existing financial accounting
system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are accurate

40. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 40
Assign Responsibility
• Make individuals at all levels responsible for
collecting quality cost data:
– If quality cost data is required then make it
the responsibility of the person who creates
the cost to collect the data
• If no one is responsible no one will bother

41. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 41
Analyse Collected Data
• Data on its own is useless
• You must have it analysed to be able to extract
meaning
• Determine what knowledge you require
• Develop an analysis system that provides the
knowledge you require

42. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 42
Useful Quality Cost Knowledge
• What you need to know is useful
• What you do not need to know is useless
• Only ask for knowledge you need to know
• Demand that knowledge is presented so
that it can be understood easily

43. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 43
Management is Responsible
• Management decides what to produce in terms
of Products (goods and / or services)
• Management assigns responsibilities to produce
products
• Management is accountable for effectively using
resources to produce products

44. Opportunity to Reduce Real Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 44

45. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 45
Understand Quality Costs
• Quality costs are real and estimated at:
– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to enable
better understanding

46. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 46
Categories of Quality Costs
• Failure Costs
• Repair Costs
• Appraisal Costs
• Prevention Costs

47. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 47
Failure Costs
• Those costs incurred because poor quality
products do exist
• Can be further divided into sub-categories of:
– Internal failure costs
– External failure costs

48. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 48
Repair Costs
• Those costs incurred if poor quality products
receive further processing
• If this occurs then the previous processing is
wasted cost
• Why would you do this?

49. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 49
Appraisal Costs
• Those costs incurred because poor quality
products might exist
• If these costs are necessary then the process
is flawed and management is guilty
• Why would you permit this?

50. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 50
Prevention Costs
• Those costs incurred because poor quality products
can exist and
• Those costs incurred because management is
committed to prevent poor quality products from
happening
• Why would you not do this?

51. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 51
Preventing Poor Quality Pays
Failure Costs
• Internal
• External Failure Costs
Repair Costs
Repair Costs
Appraisal Costs
Appraisal Costs
Prevention Costs
Prevention Costs$
Before Quality
Cost Alignment
After Quality
Cost Alignment
Benefit

52. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 52
Preventing Poor Quality Pays
• Would it not make sense to prevent poor
quality products from happening?
• How can this be done?
• Whose responsibility is this?

53. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 53
How to Prevent Poor Quality
• Prepare to measure costs of quality
– Determine categories of quality costs
– Create measurement system that captures
categories of quality costs
• Assign responsibility to collect data
• Analyse collected data

54. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 54
Determine Quality Cost Categories
• Understand your product
• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each problem

55. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 55
Creating Data Collection System
• Create measurement system
– Attempt to harness existing financial accounting
system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are accurate

56. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 56
Assign Responsibility
• Make individuals at all levels responsible for
collecting quality cost data:
– If quality cost data is required then make it the
responsibility of the person who creates the cost
to collect the data
• If no one is responsible no one will bother

57. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 57
Analyse Collected Data
• Data on its own is useless
• You must have it analysed to be able to extract
meaning
• Determine what knowledge you require
• Develop an analysis system that provides the
knowledge you require

58. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 58
Useful Quality Cost Knowledge
• What you need to know is useful
• What you do not need to know is useless
• Only ask for knowledge you need to know
• Demand that knowledge is presented so that
it can be understood easily

59. Dr Lionel Boxer
 Intergon 2004
Cost of Quality
Page 59
Management is Responsible
• Management decides what to produce in terms of
Products (goods and / or services)
• Management assigns responsibilities to produce
products
• Management is accountable for effectively using
resources to produce products

60. COQ Theme
 Costs are not incurred or allocated, but
rather caused.
 Cost information does not solve quality
problems, nor does it suggest specific
solutions.
 Problems are solved by tracing the
cause of a quality deficiency.

61. Copyright 2006 John
Wiley & Sons, Inc. 3-61
Cost of Quality
 Cost of Achieving Good Quality
 Prevention costs

costs incurred during product design
 Appraisal costs

costs of measuring, testing, and analyzing
 Cost of Poor Quality
 Internal failure costs

include scrap, rework, process failure, downtime,
and price reductions
 External failure costs

include complaints, returns, warranty claims,
liability, and lost sales

62. 3-62
Prevention Costs
 Quality planning costs
 costs of developing and
implementing quality
management program
 Product-design costs
 costs of designing
products with quality
characteristics
 Process costs
 costs expended to make
sure productive process
conforms to quality
specifications
 Training costs
 costs of developing and
putting on quality training
programs for employees
and management
 Information costs
 costs of acquiring and
maintaining data related
to quality, and
development of reports
on quality performance

63. 3-63
Appraisal Costs
 Inspection and testing
 costs of testing and inspecting materials, parts, and
product at various stages and at the end of a
process
 Test equipment costs
 costs of maintaining equipment used in testing
quality characteristics of products
 Operator costs
 costs of time spent by operators to gar data for
testing product quality, to make equipment
adjustments to maintain quality, and to stop work to
assess quality

64. Copyright 2006 John
Wiley & Sons, Inc. 3-64
Internal Failure Costs
 Scrap costs
 costs of poor-quality
products that must be
discarded, including labor,
material, and indirect costs
 Rework costs
 costs of fixing defective
products to conform to
quality specifications
 Process failure costs
 costs of determining why
production process is
producing poor-quality
products
 Process downtime
costs
 costs of shutting down
productive process to fix
problem
 Price-downgrading
costs
 costs of discounting
poor-quality products—
that is, selling products
as “seconds”

65. Copyright 2006 John
Wiley & Sons, Inc. 3-65
External Failure Costs
 Customer complaint costs
 costs of investigating and
satisfactorily responding to a
customer complaint resulting
from a poor-quality product
 Product return costs
 costs of handling and replacing
poor-quality products returned
by customer
 Warranty claims costs
 costs of complying with
product warranties
 Product liability costs
 litigation costs
resulting from product
liability and customer
injury
 Lost sales costs
 costs incurred
because customers
are dissatisfied with
poor quality products
and do not make
additional purchases