TOTAL TOTAL QUALITY QUALITY

MANAGEMENTMANAGEMENT

By: -By: -Sarfraz RashidSarfraz Rashid

PhD-Total Quality Management (In Progress) PhD-Total Quality Management (In Progress) MS–Total Quality Management, MIT, M.Sc MS–Total Quality Management, MIT, M.Sc

Lead Auditor ISO 9001-2008 IRCA(UK)Lead Auditor ISO 9001-2008 IRCA(UK)

TT MMQQQUALITY COSTING MEASUREMENT &

PRODUCTIVITY

COST OF QUALITYCOST OF QUALITY

Expenses or costs of Quality department?? Costs or losses associated with poor quality

of products or services?? Expenses or costs associated with Expenses or costs associated with

preventing defects and improving quality??preventing defects and improving quality?? Expenses or costs associated with checking Expenses or costs associated with checking

and maintaining quality??and maintaining quality??

QUALITY COSTQUALITY COST

Feigenbaum defined quality costs Feigenbaum defined quality costs as:as:““Those costs associated with the Those costs associated with the definition, definition, creation, and controlcreation, and control of quality as well as the of quality as well as the evaluation and feedback of conformanceevaluation and feedback of conformance with quality, reliability, and safety with quality, reliability, and safety requirements, and those costs associated requirements, and those costs associated with the with the consequences of failure consequences of failure to meet the to meet the requirements both within the factory and in requirements both within the factory and in the hands of customers.”the hands of customers.”

QUALITY–COST QUALITY–COST RELATIONSHIPRELATIONSHIP

FOUR ABSOLUTES OF QUALITYFOUR ABSOLUTES OF QUALITY– Conformance to the requirement, “Not Goodness”Conformance to the requirement, “Not Goodness”– System for causing quality is prevention not appraisal System for causing quality is prevention not appraisal – Performance standard is Zero defectsPerformance standard is Zero defects– Measure of quality is the price of non–conformance Measure of quality is the price of non–conformance

In his book “Quality Without Tears”, explains that the In his book “Quality Without Tears”, explains that the dollar cost of quality is the difference between price of dollar cost of quality is the difference between price of nonconformance and conformancenonconformance and conformance

– Cost of doing things wrongCost of doing things wrong 20 to 35% of revenues20 to 35% of revenues

– Cost of doing things rightCost of doing things right 3 to 4% of revenues3 to 4% of revenues

– Profitability Profitability In the long run, quality is freeIn the long run, quality is free

“QUALITY IS FREE”

COST OF QUALITYCOST OF QUALITY

CATEGORIES OF QUALITY COST:CATEGORIES OF QUALITY COST:– COST OF ACHIEVING GOOD QUALITY– COST OF POOR QUALITY

COST OF ACHIEVING GOOD QUALITYCOST OF ACHIEVING GOOD QUALITY– PREVENTION COSTSPREVENTION COSTS

The cost of any action taken to investigate, prevent or reduce the risk of a non-conformity

Include quality planning costs, designing products with designing products with quality characteristics, Training Costs, etc.quality characteristics, Training Costs, etc.

– APPRAISAL COSTSAPPRAISAL COSTS The costs associated with measuring, checking, or

evaluating products or services to assure conformance to quality requirements

Include inspection & Testing Costs, Test Equipment Costs, Operator Costs, etc.

COST OF QUALITYCOST OF QUALITY CATEGORIES OF QUALITY COST:CATEGORIES OF QUALITY COST:

– COST OF ACHIEVING GOOD QUALITY– COST OF POOR QUALITY

COST OF POOR QUALITYCOST OF POOR QUALITY– INTERNAL FAILURE COSTSINTERNAL FAILURE COSTS

The costs arising within the organization due to non-conformities or defects

include scrap, rework, process failure, include scrap, rework, process failure, downtime, and price reductionsdowntime, and price reductions

– EXTERNAL FAILURE COSTSEXTERNAL FAILURE COSTS The costs arising after delivery of product or The costs arising after delivery of product or

service to the customer due to non-conformities service to the customer due to non-conformities or defectsor defects

include complaints, returns, warranty claims, include complaints, returns, warranty claims, liability, and lost salesliability, and lost sales

THE 1-10-100 RULE THE 1-10-100 RULE

GOAL OF GOAL OF COST OF QUALITY SYSTEMCOST OF QUALITY SYSTEM

TO FACILITATE QUALITY EFFORTS

THAT WILL LEAD TO OPERATING COST

REDUCTION OPPORTUNITIES

TO FACILITATE QUALITY EFFORTS

THAT WILL LEAD TO OPERATING COST

REDUCTION OPPORTUNITIES

STRATEGY Direct attack on Failure Costs to minimize them

Investment in Prevention activities Reduction in Appraisal Costs

STRATEGY Direct attack on Failure Costs to minimize them

Investment in Prevention activities Reduction in Appraisal Costs

MODEL OF MODEL OF OPTIMUM COST OF QUALITYOPTIMUM COST OF QUALITY

MEASURING AND MEASURING AND REPORTING QUALITY REPORTING QUALITY

COSTSCOSTS INDEX NUMBERSINDEX NUMBERS

– ratios that measure quality costs against a ratios that measure quality costs against a base valuebase value

– LABOR INDEXLABOR INDEX ratio of quality cost to labor hoursratio of quality cost to labor hours

– COST INDEXCOST INDEX ratio of quality cost to manufacturing costratio of quality cost to manufacturing cost

– SALES INDEXSALES INDEX ratio of quality cost to salesratio of quality cost to sales

– PRODUCTION INDEXPRODUCTION INDEX ratio of quality cost to units of final ratio of quality cost to units of final

productproduct

AN EVALUATION OF QUALITY AN EVALUATION OF QUALITY COSTS & QUALITY INDEX COSTS & QUALITY INDEX

NUMBERSNUMBERS EXAMPLE: EXAMPLE: The H&S Motor Company small motors (e.g., 3 hp) for The H&S Motor Company small motors (e.g., 3 hp) for use in lawnmowers and garden equipment. The company instituted a use in lawnmowers and garden equipment. The company instituted a quality management program in 2004 and has recorded the following quality management program in 2004 and has recorded the following quality cost data and accounting measures for four years. quality cost data and accounting measures for four years.

YEAR

2004 2005 2006 2007

QUALITY COSTS

Prevention $27,000 41,500 74,600 112,300

Appraisal 155,000 122,500 113,400 107,000

Internal Failure 386,400 469,200 347,800 544,400

External Failure 242,000 196,000 103,500 106,000

TOTAL $810,400 829,200 639,300 544,400

ACCOUNTING MEASURES

Sales $4,360,000 4,450,000 5,050,000 5,190,000

Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000

The company wants to assess its quality–assurance program and The company wants to assess its quality–assurance program and develop quality index numbers using sales and manufacturing develop quality index numbers using sales and manufacturing cost bases for the four–year period. cost bases for the four–year period.

AN EVALUATION OF QUALITY COSTS & QUALITY AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS: INDEX NUMBERS: ““EXAMPLE (Cont…)EXAMPLE (Cont…)””

Quality Index = [(Total Quality Costs) / Base] X 100Quality Index = [(Total Quality Costs) / Base] X 100

The Index Number for 2004 sales is:The Index Number for 2004 sales is:– Quality Cost per sale = [(810,400/4,360,000)] X 100 = 18.58%Quality Cost per sale = [(810,400/4,360,000)] X 100 = 18.58%

Year Quality Sales Index

Quality Manufacturing Index

2004 18.58 46.04

2005 18.63 45.18

2006 12.66 34.00

2007 10.49 28.80

“The H&S Company quality index numbers reflect dramatically improved quality during he four – year period”

Quality Costs as a Proportion of both sales & manufacturing costs improved significantly

Quality Index Numbers are useful in showing trends in product quality over time and reflecting the impact of product quality relative to accounting measures with which managers are usually familiar

QUALITY INDEX NUMBERS: QUALITY INDEX NUMBERS: “QUESTION”“QUESTION”Backwoods American, Inc., produces expensive water-repellent, down-Backwoods American, Inc., produces expensive water-repellent, down-

lined parkas. The company implemented a total quality management lined parkas. The company implemented a total quality management program in 2002. Following are quality related accounting data that have program in 2002. Following are quality related accounting data that have been accumulated for the five year period after the program’s start.been accumulated for the five year period after the program’s start.

YEARS2003 2004 2005 2006 2007

QUALITY COSTS (000s)Prevention $3.2 10.7 28.3 42.6 50.0Appraisal 26.3 29.2 30.6 24.1 19.6Internal Failure 39.1 51.3 48.4 35.9 32.1External Failure 118.6 110.5 105.2 91.3 65.2ACCOUNTING MEASURES (000s)Sales $2,700.6 2,690.1 2,705.3 2,810.

22,880.

7Manufacturing Cost

420.9 423.4 424.7 436.1 435.5

Compute quality–sales indices and quality–cost indices for each of the five years. Is it possible to assess the effectiveness of the company’s quality management program from these index values?

Compute quality–sales indices and quality–cost indices for each of the five years. Is it possible to assess the effectiveness of the company’s quality management program from these index values?

QUALITY INDEX NUMBERS: QUALITY INDEX NUMBERS: “QUESTION”“QUESTION”ANSWER

:ANSWER:

These index values do not provide much information regarding the effectiveness of the quality assurance program. They are, however, useful in making comparisons from one period to the next and in showing trends in product quality over time.

QUALITY MANAGEMENT QUALITY MANAGEMENT AND PRODUCTIVITYAND PRODUCTIVITY

ProductivityProductivity– ratio of output to inputratio of output to input

Yield: Yield: – is a measure of output used as an indicator is a measure of output used as an indicator

of productivityof productivity– Improved quality increases product yieldImproved quality increases product yield

Yield=(total input)(% good units) + (total input)(1-%good units)(% reworked)

oror

Y=(I)(%G)+(I)(1-%G)(%R)Y=(I)(%G)+(I)(1-%G)(%R)

COMPUTING PRODUCT COMPUTING PRODUCT YIELDYIELD EXAMPLE:EXAMPLE:

– The H & S Motor company starts production for a particular type of motor with a steel motor housing. The production process begins with 100 motors each day. The percentage of good motors produced each day average 80% and the percentage of poor–quality motors that can be reworked is 50%. The company wants to know the daily product yield and the effect on productivity if the daily percentage of good–quality motors is increased to 90%.

Yield=(total input)(% good units) + (total input)(1-%good units)(% reworked)

Y=(I)(%G)+(I)(1-%G)(%R)Y=(I)(%G)+(I)(1-%G)(%R)

Y = (100)(0.80) + (100)(1 – 0.80)(0.50) = 90 MotorsY = (100)(0.80) + (100)(1 – 0.80)(0.50) = 90 Motors

If product quality is increased to 90% good motors, the yield will If product quality is increased to 90% good motors, the yield will be:be:

Y = (100)(0.90) + (100)(1 – 0.90)(0.50) = 95 MotorsY = (100)(0.90) + (100)(1 – 0.90)(0.50) = 95 Motors

A 10% point increase in quality products results in a 5.5% ((95/90 )*100) increase in productivity output.

COMPUTING PRODUCT YIELD COMPUTING PRODUCT YIELD “QUESTION”“QUESTION”

The Colonial House furniture company manufactures two-draw oak file The Colonial House furniture company manufactures two-draw oak file cabinets that are sold unassembled through catalogues. The company cabinets that are sold unassembled through catalogues. The company initiates production of 180 cabinets’ packages each week. The initiates production of 180 cabinets’ packages each week. The percentage of good-quality cabinets averages 83% per week, and percentage of good-quality cabinets averages 83% per week, and percentage of poor-quality cabinets that can be reworked is 60%.percentage of poor-quality cabinets that can be reworked is 60%.

a)a) Determine the weekly product yield of file cabinets.Determine the weekly product yield of file cabinets.

b)b) If the company desires a product yield of 174 units per week, what If the company desires a product yield of 174 units per week, what increase in the percentage of good quality products must results? increase in the percentage of good quality products must results?

PRODUCT COST PER UNITPRODUCT COST PER UNIT

Y

RKIK rd ))(())(( Product

Costwhere:Kd = direct manufacturing cost per unitI = inputKr = rework cost per unitR = reworked unitsY = yield

COMPUTING PRODUCT COST PER COMPUTING PRODUCT COST PER UNITUNIT EXAMPLE:EXAMPLE:

– The H & S Motor company has a direct manufacturing cost per unit of $30, and motors that are of inferior quality can be reworked for $12 per unit. From previous Example, 100 motors are produced daily, 80% (on average) are of good quality and 20% are defective. Of the defective motors, half can reworked to yield good–quality products. Through its quality management program, the company has discovered a problem in its production process that, when corrected (at a minimum cost), will increase the good – quality products to 90%. The company wants to assess the impact on the direct cost per unit of improvement in product quality.

The Original manufacturing cost per motor is:Product Cost

= [($30)(100) + ($12)(10)] / 90 motors

= $34.67 per motorThe manufacturing cost per motor with the quality improvement is: Product Cost = [($30)(100) + ($12)(5)] / 95 motors = $32.21 per motor

“The improvement in the production process as a result of the quality management program will result in a decrease of $2.46 per unit, or [(34.67–32.21)/34.67] X 100 = 7.1%, in direct manufacturing cost per unit as well as a 5.5% increase in product yield (computed in previous example), with a minimal investment in Labor, plant, or equipment.

The Original manufacturing cost per motor is:Product Cost

= [($30)(100) + ($12)(10)] / 90 motors

= $34.67 per motorThe manufacturing cost per motor with the quality improvement is: Product Cost = [($30)(100) + ($12)(5)] / 95 motors = $32.21 per motor

“The improvement in the production process as a result of the quality management program will result in a decrease of $2.46 per unit, or [(34.67–32.21)/34.67] X 100 = 7.1%, in direct manufacturing cost per unit as well as a 5.5% increase in product yield (computed in previous example), with a minimal investment in Labor, plant, or equipment.

Y

RKIK rd ))(())((

COMPUTING PRODUCT COST PER COMPUTING PRODUCT COST PER UNIT: UNIT: “QUESTION”“QUESTION”

The Omega Shoe Company manufactures a number of different styles of The Omega Shoe Company manufactures a number of different styles of athletic shoes. Its biggest seller is the X–pacer running shoe. In 2005 athletic shoes. Its biggest seller is the X–pacer running shoe. In 2005 Omega implemented a quality–management program. The company’s shoe Omega implemented a quality–management program. The company’s shoe production for the past three years and manufacturing costs are as fellows.production for the past three years and manufacturing costs are as fellows.

YEAR2005 2006 2007

Units Produced (Input) 32,000 34,600 35,500Manufacturing Cost $278,00

0291,000 305,000

Percent good quality 78% 83% 90%

Only one–quarter of the defective shoes can be reworked, at a cost of $2 apiece. Compute the manufacturing cost per good product for each of the three years and indicate the annual percentage increase or decrease resulting from the quality management program.

Only one–quarter of the defective shoes can be reworked, at a cost of $2 apiece. Compute the manufacturing cost per good product for each of the three years and indicate the annual percentage increase or decrease resulting from the quality management program.

COMPUTING PRODUCT COST PER COMPUTING PRODUCT COST PER UNIT: UNIT: “QUESTION”“QUESTION”

ANSWER

COMPUTING PRODUCTCOMPUTING PRODUCTYIELD FOR MULTISTAGE YIELD FOR MULTISTAGE

PROCESSESPROCESSES

Y = (I)(%g1)(%g2) … (%gn)

where:I = input of items to the production process that will result in finished productsgi = good-quality, work-in-process products at stage i

COMPUTING PRODUCT YIELD FOR COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESSMULTISTAGE PROCESS

EXAMPLE:EXAMPLE:– At the H&S motor company, motors are produced in a four–stage

process. Motors are inspected following each stage, with percentage yields (on average) of good–quality, work in process units as follows:

STAGE

AVERAGE PERCENTAGE GOOD QUALITY

1 0.93

2 0.95

3 0.97

4 0.921.1. The company wants to know the daily product yield for product The company wants to know the daily product yield for product input of 100 units per day. input of 100 units per day.

2.2. Furthermore, it would like to know how many input units it would Furthermore, it would like to know how many input units it would have to start with each day to result in a final daily yield of 100 have to start with each day to result in a final daily yield of 100 good – quality units.good – quality units.

COMPUTING PRODUCT YIELD COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESSFOR MULTISTAGE PROCESS

SOLUTION:SOLUTION:– Y = (I)(%g1)(%g2)(%g3)(%g4) = (100)(0.93)(0.95)(0.97)(0.92)– Y = 78.8 motors Thus, the production process has a daily good – quality product

yield of 78.8 motors.

– To determine the product input that would be required to achieve a product yield of 100 motors, “I” is treated as a decision variable when Y equals 100:

– I = (Y) / (%g1)(%g2)(%g3)(%g4) – I = (100) / (0.93)(0.95)(0.97)(0.92)– I = 126.8 motors

To achieve output of 100 good – quality motors, the production process must start with approximately 127 motors.

COMPUTING PRODUCT YIELD FOR COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS: MULTISTAGE PROCESS:

“QUESTION”“QUESTION”The Colonial House Furniture Company manufactures four–drawer oak filing cabinets in The Colonial House Furniture Company manufactures four–drawer oak filing cabinets in six stages. In the first stage, the boards forming the walls of the cabinet are cut; in the six stages. In the first stage, the boards forming the walls of the cabinet are cut; in the second stage, the front drawer panels are wood-worked; in the third stage, the boards second stage, the front drawer panels are wood-worked; in the third stage, the boards are sanded and finished; in the fourth stage, the boards are cleaned, stained, and are sanded and finished; in the fourth stage, the boards are cleaned, stained, and painted with a clear finish; in the fifth stage, the hardware for pulls, runners, and fittings painted with a clear finish; in the fifth stage, the hardware for pulls, runners, and fittings is installed; and in the final stage, the cabinets are assembled. Inspection occurs at each is installed; and in the final stage, the cabinets are assembled. Inspection occurs at each stage of the process, and the average percentage of good quality units are as fellows.stage of the process, and the average percentage of good quality units are as fellows.

StageAverage

PercentageGood Quality

1 87%2 91%3 94%4 93%5 93%6 96%

The cabinets are produced in weekly production runs with a product input for 300 units.a.Determine the weekly product yield of good–quality cabinets.b.What would weekly product input have to be in order to achieve a final weekly product yield of 300 cabinets?

The cabinets are produced in weekly production runs with a product input for 300 units.a.Determine the weekly product yield of good–quality cabinets.b.What would weekly product input have to be in order to achieve a final weekly product yield of 300 cabinets?

QUALITY–PRODUCTIVITY QUALITY–PRODUCTIVITY RATIORATIO

QPR:QPR:– productivity index that includes productivity productivity index that includes productivity

and quality costsand quality costs– It increases if either processing cost or It increases if either processing cost or

rework costs or both decrease.rework costs or both decrease.– It increases if more good-quality units are It increases if more good-quality units are

produced relative to total product input(i.e., produced relative to total product input(i.e., number of units that begin the production number of units that begin the production process)process)

QPR =(non-defective units)

(input) (processing cost) + (defective units) (reworked cost)

COMPUTING QUALITY & PRODUCTIVITY COMPUTING QUALITY & PRODUCTIVITY RATIORATIO

EXAMPLE:EXAMPLE:– The H&S Motors Company produces small motors at a process

cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day on average 80% good-quality motors., resulting in 20% defects, 50% of which can be reworked prior to shipping to customers. The company wants to examine the effects of:1. Increase the production rate to 200 motors per day2. Reducing the processing cost to $26 and the rework cost to

$10 3. Increasing, through quality improvement, the product yield of

good quality products to 95% 4. The combination 2 & 3

SOLUTION:SOLUTION:– QPR for the base case:

QPR = [(80 + 10) / {(100)($30) + (10)($12)}] X 100 QPR = 2.89

QPR =(non-defective units)

(input) (processing cost) + (defective units) (reworked cost)

COMPUTING QUALITY & PRODUCTIVITY COMPUTING QUALITY & PRODUCTIVITY RATIORATIO SOLUTION:SOLUTION:

– Case#1: “Increase input to production capacity of 200 units” QPR = [(160 + 20) / {(200)($30) + (20)($12)}] X 100 QPR = 2.89“Increasing production capacity alone has no effect on the QPR”

– Case#2: “Reduce processing cost to $26 and rework cost to $10” QPR = [(80 + 10) / {(100)($26) + (10)($10)}] X 100 QPR = 3.33“Processing & Rework cost decreases caused the QPR to

increase”– Case#3: “Increasing, through quality improvement, the product

yield of good quality products to 95% ” QPR = [(95 + 2.5) / {(100)($30) + (2.5)($12)}] X 100 QPR = 3.22“Again, QPR increases as product quality improves”

– Case#4: “Decrease costs & increase initial good-quality units” QPR = [(95 + 2.5) / {(100)($26) + (2.5)($10)}] X 100 QPR = 3.71“The larger increase in the QPR results from decreasing costs &

increasing initial good quality products through improved quality”

COMPUTING QUALITY & COMPUTING QUALITY & PRODUCTIVITY RATIO: PRODUCTIVITY RATIO:

“QUESTION”“QUESTION”Air–Phone, Inc., manufactures cellular telephones at a process cost of Air–Phone, Inc., manufactures cellular telephones at a process cost of $47 per unit. The company produces an average of 250 phones per $47 per unit. The company produces an average of 250 phones per week and has a yield of 87% good-quality phones, resulting in 13% week and has a yield of 87% good-quality phones, resulting in 13% defective phones, all of which can be reworked. The cost of reworking defective phones, all of which can be reworked. The cost of reworking a defective telephone is $16.a defective telephone is $16.

a.a. Compute the Quality–Productivity Ratio (QPR).Compute the Quality–Productivity Ratio (QPR).

b.b. Compute the QPR if the company increase the production rate to Compute the QPR if the company increase the production rate to 320 phones per week while reducing the processing cost to $42, 320 phones per week while reducing the processing cost to $42, reducing the rework cost to $12, and increasing the product yield reducing the rework cost to $12, and increasing the product yield of good–quality telephones to 94%.of good–quality telephones to 94%.

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