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Concept of Cost of Quality
• Was developed to bring and attract
the attention of the top management.
• Top management understands the
language of money than
1. Indices 2. Percentages 3. Volume of
work and 4. Rejection.
• Top management must be shown that
1. Money wasted on avoidable operation
2. Non conformance to quality and
• Reduce cost by increasing the Quality
Cost of Quality
‰ Costs of quality fall into two categories
• Cost of quality assurance – cost of
achieving quality
• Prevention costs
– The second type of cost must be saved
– examples of prevention costs - quality
planning costs, product design costs,
process costs, training costs, and
information costs
Importance of Cost of Quality
• It is an instrument to attract the attention
of top management to the problem of
quality.
• To understand where the company
stands in terms of quality of their
products/services
• To know department wise the position of
quality, and
• To take corrective actions
Components of Cost of Quality (cont)
1. Cost of prevention to achieve
2. Costs appraisal Quality
3. Cost of Internal Failure cost of
4. Cost of external failure. Poor quality
– cost of not conforming to specifications – costs
associated with poor quality
• cost of failures is difference between what it actually
costs to produce a product and what it would cost if
there were no failures
• cost of poor quality is usually largest quality cost
source in organization
Cost of prevention
• Market research
• Product qualification
• Process validation
• System development
• Good manufacturing practices
• Quality of education
• Process improvement
These are to prevent problems about quality
Cost of appraisal
• Company spends money to asses
or test quality
–catch mistakes after the fact
• examples of appraisal costs –
inspection and testing of incoming
materials, testing equipments, field
testing and operator costs
Cost of internal failure
Two types of cost of nonconforming
• Internal failure costs
1. Discovered before product is delivered to customer
2. Rejection
3. Rework and re-processing
4. Scrap and re-inspection
– examples of internal failure costs – money spent on
scrap, rework, process failure,
process downtime, price-downgrading
Cost of Quality (cont)
• external failure costs
– discovered after customer
receives poor quality product
– examples of external failure costs
– customer complaint, product
return, warranty claims, product
liability, and lost sales
Cost of Quality (cont)
• index numbers are means of
measuring and reporting quality costs
• index numbers are ratios which
measure quality costs against a base
value
• general form is quality index = (total
quality cost / base) x 100
• useful as standard to make
comparisons over time
Measurement of Cost of
Quality
• labor index
– (total quality cost / direct labor hours) x 100
– may not be appropriate for comparisons where
technology change reduces labor usage
• cost index
– (total quality cost / manufacturing cost) x 100
– not affected by technology change
Cost of Quality (cont)
• sales index
– (total quality cost / sales) x 100
– may be distorted by changes in selling price or
costs
• production index
– (total quality cost / # units final product) x 100
– may not be as effective where have number of
different products
Cost of Quality (cont)
• quality-cost relationship
– as prevention and appraisal costs
increase, internal and external failure
costs typically decrease
– as company focuses on achieving quality,
cost of achieving good quality goes down
– leads companies to frequently seek
100% quality or zero defects
Cost of Quality (cont)
• Japanese focus on improving quality at minimum
cost
– improve capabilities and training of employees
rather than on engineering solutions
– concentrate on quality characteristics in
design stage rather than trying to build quality
in production process
– long-term view of firm success suggests firms
who take long-term focus on quality do
increase profitability
Cost of Quality (cont)
• impact of quality management on
productivity
– productivity = output / input
– quality impact on productivity – fewer
defects increases output while quality
improvement reduces inputs

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Cost of Quality Concept Brings Top Management Attention

  • 1. Concept of Cost of Quality • Was developed to bring and attract the attention of the top management. • Top management understands the language of money than 1. Indices 2. Percentages 3. Volume of work and 4. Rejection. • Top management must be shown that 1. Money wasted on avoidable operation 2. Non conformance to quality and • Reduce cost by increasing the Quality
  • 2. Cost of Quality ‰ Costs of quality fall into two categories • Cost of quality assurance – cost of achieving quality • Prevention costs – The second type of cost must be saved – examples of prevention costs - quality planning costs, product design costs, process costs, training costs, and information costs
  • 3. Importance of Cost of Quality • It is an instrument to attract the attention of top management to the problem of quality. • To understand where the company stands in terms of quality of their products/services • To know department wise the position of quality, and • To take corrective actions
  • 4. Components of Cost of Quality (cont) 1. Cost of prevention to achieve 2. Costs appraisal Quality 3. Cost of Internal Failure cost of 4. Cost of external failure. Poor quality – cost of not conforming to specifications – costs associated with poor quality • cost of failures is difference between what it actually costs to produce a product and what it would cost if there were no failures • cost of poor quality is usually largest quality cost source in organization
  • 5. Cost of prevention • Market research • Product qualification • Process validation • System development • Good manufacturing practices • Quality of education • Process improvement These are to prevent problems about quality
  • 6. Cost of appraisal • Company spends money to asses or test quality –catch mistakes after the fact • examples of appraisal costs – inspection and testing of incoming materials, testing equipments, field testing and operator costs
  • 7. Cost of internal failure Two types of cost of nonconforming • Internal failure costs 1. Discovered before product is delivered to customer 2. Rejection 3. Rework and re-processing 4. Scrap and re-inspection – examples of internal failure costs – money spent on scrap, rework, process failure, process downtime, price-downgrading
  • 8. Cost of Quality (cont) • external failure costs – discovered after customer receives poor quality product – examples of external failure costs – customer complaint, product return, warranty claims, product liability, and lost sales
  • 9. Cost of Quality (cont) • index numbers are means of measuring and reporting quality costs • index numbers are ratios which measure quality costs against a base value • general form is quality index = (total quality cost / base) x 100 • useful as standard to make comparisons over time
  • 10. Measurement of Cost of Quality • labor index – (total quality cost / direct labor hours) x 100 – may not be appropriate for comparisons where technology change reduces labor usage • cost index – (total quality cost / manufacturing cost) x 100 – not affected by technology change
  • 11. Cost of Quality (cont) • sales index – (total quality cost / sales) x 100 – may be distorted by changes in selling price or costs • production index – (total quality cost / # units final product) x 100 – may not be as effective where have number of different products
  • 12. Cost of Quality (cont) • quality-cost relationship – as prevention and appraisal costs increase, internal and external failure costs typically decrease – as company focuses on achieving quality, cost of achieving good quality goes down – leads companies to frequently seek 100% quality or zero defects
  • 13. Cost of Quality (cont) • Japanese focus on improving quality at minimum cost – improve capabilities and training of employees rather than on engineering solutions – concentrate on quality characteristics in design stage rather than trying to build quality in production process – long-term view of firm success suggests firms who take long-term focus on quality do increase profitability
  • 14. Cost of Quality (cont) • impact of quality management on productivity – productivity = output / input – quality impact on productivity – fewer defects increases output while quality improvement reduces inputs