cost of quality

Cost Of QualityLECTURE PREPARED

BYPROF.R.C.PANDA,ACET.

What can wedo to improvequality?

How much willit cost toimprove quality?

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Understand Quality Costs• Understand quality costs enables you to

– Understand hidden costs– Reduce and eliminate unnecessary cost

• Prevent problems from happening• Management responsibility to enable this

• 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

3Total Quality Management - Spring 2010 - IUG

“Cost of quality is …the expense of noncomformance –

the cost of doing things wrong.”

Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto

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Cost of Quality

Quality Cost Breakout

Testing26%

Planning4%

Training4%

Bug Fix35%

Development31%

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Quality and the New Production Environment

Objective – To stay competitive through: Improving customer service and product

quality Reducing costs

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Cost of Quality

Quality costs can mean two things: Cost of attaining quality Cost of poor quality

Can run 10 - 30% of sales or 25 – 40% of operating expenses

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Cost of Quality

“We need to communicate to management the impact of quality in language they understand which is

often in terms of dollars.”

“Quality cost measurement and publication does not solve quality

problems.”

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Cost of Quality

0 100

Failure Cost

Costs of appraisal and Prevention Total Cost

Quality of Conformance, %

Cost per good unit of product

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Hidden Cost of Quality

Lost Customers

Bad Will

Hidden Rework

Rework

Testing Costs

Inspection CostsCanceled Licenses

Bugs

Employee TurnoverExpediting Costs

Excessive Overtime

Field Service Costs

Customer Allowances

Missed Payments

Loss of Market Share

Excessive Travel Expense

Consulting Time

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Group Exercise – Quality Costs Analysis

The costs are as follows: code reviews - 20 hrs training - 240 hrs system test – 1200 hrs component testing - 300 hrs test script writing - 200 hrs requirements review - 50 hrs bug fixes - 1780 Hrs retesting fixed bugs - 1200 hrs post-mortem review - 8 hrs Total effort – 6500 hrs

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Sequence of Events To reduce CQ:

Review available literature Select an organizational unit in the company Discuss the objectives with key people Collect cost available Make proposal for full study Publish draft of categories, get agreement Finalize definitions and get management buy in Establish who will collect data Collect and summarize data Present the results

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Cost of Quality – Example

FebruaryBug Fix Testing Planning Training Development Hrs Available

Phil Smith 140.0 25.0 8.0 110 283.0Ilene Bloggins 87.0 120.0 8.0 56 271.0Skip Roy 92.0 4.0 4.0 75 175.0Bill Lee 20.0 82.5 4.0 8.0 33.5 148.0Matt Truman 65.0 100 165.0

Total 404.0 227.5 8.0 28.0 374.5 1042.0% of Hrs Available 38.8% 21.8% 0.8% 2.7% 35.9% 100.0%

Total Quality Costs 667.5

Quality Costs % 64.06%

Bug Fix % of Quality Costs 60.52%Testing % of Quality Costs 34.08%Planning % of Quality Costs 1.20%Training % of Quality Costs 2.69%

Improving QualityTotal Quality Management (TQM)

Managing an organization so that it excels in areas important to the customer

Organization strives for excellence

Quality is definedby the customer

Is Quality Worth the Investment?

Cost vs. Benefit Quality is free

Costs of quality programsare easily measured, butbenefits of increasedcustomer satisfaction aredifficult to measure.

The long-run benefits ofincreased customersatisfaction far outweighthe costs of improvingquality.

Two Views

The Quality Is Free Concept

Greatercustomersatisfaction

Qualityproductsandservices

Increasedbusinessandprofits

Methods to IdentifyQuality Problems

Control charts

Pareto diagrams

Cause andeffect analysis

Additional Quality Concepts

MotivationEmployees respond favorably

to quality initiatives

Strategic advantagesFavorable reputation among competitors

BenchmarkingContinuous process of measuring performance against best of similar organizations

Products are completed just in time for shipment to customers

Raw materials are received just in time for production

Just-In-Time (JIT) Inventory Just-In-Time (JIT) Inventory

In conventional system, materials are

“pushed” through assembly process.

In JIT system, materials are “pulled”

through assembly process by customers’

needs.

Just-In-Time (JIT) Inventory

Complete partsjust in time forassembly into products

Receive materialsjust in time forproduction

Receivecustomerorders

Complete productsjust in time toship to customers

Scheduleproduction

Just-In-Time (JIT) Inventory

Relationship Between JIT andTotal Quality Management

Less warehousespace needed

Reducedinventorycarrying costs

Reduced riskof obsoleteinventory


More rapidresponse tocustomer orders

Greatercustomersatisfaction

Higher qualityproducts

Less warehousespace needed

Reducedinventorycarrying costs

Reduced riskof obsoleteinventory


JIT factory isidle, waiting onquality rawmaterials

Raw materials

Poor qualityitems returned

Unhappy customer

Late

deliv

ery

Quality must be stressedfrom the very beginning forJIT to be successful.

Impact of Just-in-Time on Accounting Procedures

JIT goal is to minimize inventories:

Production costs are assigned directlyto cost of goods sold.

Raw Materials

Work inProcess

FinishedGoods

Impact of Just-in-Time on Accounting Procedures

Any end-of-period inventory is recorded in a procedure known

as backflush costing.

Cost ofGoods Sold Inventory

34

• Phillip B. Crosby (Quality is free . . . ):

• The system for causing quality is prevention, not appraisal – Quality is Free

• The performance standard must be Zero Defects, not "that's close enough"

• The measurement of quality is the Price of Non-conformance.

• Cost of quality is only the measure of operational performance

• “Quality is free. It’s not a gift, but it is free. What costs money are the unquality things -- all the actions that involve not doing jobs right the first time.”

Founders Point of View

Total Quality Management - Spring 2010 - IUG

Total Quality Management (TQM)

W. Edwards Deming proposed that improving quality reduces cost and

improves profitability.Quality can be and should be

improved continuously.

Revenues

Cost

Max Profit

Max Quality


Return on Quality (ROQ)Profit is maximized at the

optimum quality level.The optimum quality level is always achieved before maximum attainable profit is reached.

Revenues

Cost

Max Profit

Optimum Quality


Preventing Poor Quality (Comparison)

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


1-10-100 Rule

$

$$

$$

$$

$

$$

1

10

100

Prevention

Correction

Failure


The 1:10:100 rule: Re.1 spent on prevention will save Rs.10 spent on

appraisal and Rs.100 on failure costs.

One dollar spent on prevention will save $10 on appraisal and $100 on failure costs.

This rule helps one to prioritize expenditure on prevention, which is sure to bring in greater returns.

“The earlier you detect and prevent a defect the more you can save. If you catch a two cent resistor before you use it and throw it away, you lose two Cents. If you don’t find it until it has been soldered into a computer component, it may cost $10 to repair the part. If you don’t catch the component until it is in the computer user’s hands, the repair will cost hundreds of dollars. Indeed, if a $5000 computer has to be repaired in the field, the expense may exceed the manufacturing cost.”


Difficulties in using Quality costing

Management have not believed in the possibilities of improvement

Quality costing is demanding◦ It requires a lot of data of each activity related to quality

Other limitations

◦ Does not resolve quality problems◦ Does not provide specific actions◦ vulnerable to short-term mismanagement◦ difficult to match effort and accomplishment◦ subject to measurement errors◦ may neglect important or include inappropriate costs


Steps in implementing quality cost

1. Involve accountants right from the start2. Decide purpose and objectives3. Decide how to deal with overheads4. Distinguish between basic work and quality related activities5. Collection data which offers the prospect of real gains6. Start by examining failure costs7. Evaluate the costs of inspection8. Analyze and use the data9. Collecting and reporting quality cost data


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


The Quality Gurus – Edward Deming

1900-1993

1986

Quality is “uniformity and dependability”

Focus on SPC and statistical tools

“14 Points” for management

PDCA method

The Quality Gurus – Joseph Juran

1904 - 2008

1951

Quality is “fitness for use”

Pareto Principle

Cost of Quality

General management approach as well as statistics

Developing quality specifications

Input Process Output

Design Design quality

Dimensions of quality

Conformance quality

Tools used for continuous improvement

4. Cause and effect diagram (fishbone)

Environment

Machine Man

Method Material


5. Check sheet

Item A B C D E F G

---------------------

√ √ √√ √

√ √

√

√

√ √√ √ √

√√√

√√ √


6. Histogram

Frequency


7. Pareto Analysis

A B C D E F

Freq

uenc

y

Per

cent

age

50%

100%

0%

75%

25%10

2030405060

Summary of Tools

1. Process flow chart

2. Run diagram

3. Control charts

4. Fishbone

5. Check sheet

6. Histogram

7. Pareto analysis

Makes customer wait

Absent receiving party

Working system of operators

Customer Operator

Fishbone diagram analysis

Absent

Out of officeNot at desk

Lunchtime

Too many phone calls

Absent

Not giving receiving party’s coordinates

Complaining

Leaving a message

Lengthy talk

Does not know organization

wellTakes too much time to explain

Does not understand customer

Statistical Process Control (SPC)

Every output measure has a target value and a level of “acceptable” variation (upper and lower tolerance limits)

SPC uses samples from output measures to estimate themean and the variation (standard deviation)

Example

We want beer bottles to be filled with 12 FL OZ ± 0.05 FL OZ

Question:

How do we define the output measures?

cost of quality

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