cost of quality
TRANSCRIPT
MEL420: Total Quality Management
Cost of Quality
Cost & productivity
Traditional vs TQM view
PAF Model
Process Model
Other models
Quality & Productivity
Improved Quality Of Design
Higher Prices Higher Perceived Value
Higher PRODUCTIVITY
Increased revenues
Increased Market Share
Lower manufacturing
and service Costs
Improved Quality of conformance
Traditional view..
Cost
0 100 “Optimal Level”
Quality of Conformance (100% Conforming)
Cost of Quality
assurance
Cost due to
nonconformance
Total Cost
TQM view..
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
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.
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
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
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 %
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
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)
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
P-A-F Model..
Internal Failure costs
Scrap
Rework
Retest
Yield losses
Downtime
External Failure Costs
Return, replacements
Warranty
Liability
Complaint
investigation &
adjustment
Goodwill
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.
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.
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.
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.
“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
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.
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
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,
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
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..
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
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 %
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
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
COQ..
Costs of Conformance: Prevention & Appraisal
Costs of Non-Conformance: Internal Failure & External
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
Quality costs: A case
Credit: Rohit Chandel
Rajeev Solanki
Chandan Kumar
Kamal Kant
as a part of course assignment
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.
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
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
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
Trend Analysis of Quality Costs: Watches
0
20
40
60
80
100
1 2 3 4Quarter
Co
st
Ind
ex
Prevention
Appraisal
Internal Failure
External Failure
Trend Analysis of Quality Costs: Clocks
0
50
100
150
200
1 2 3 4Quarter
Co
st
Ind
ex
Prevention
Appraisal
Internal Failure
External Failure
Cost index Comparisons By Product
Percentage Cost Distribution by Category: Watches
Percentage Cost Distribution by Category: Clocks
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.
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.