LECTURE (3)

COMPANYWIDE ASSESSMENT OF QUALITY

Major Topics

Why Assessment? Assessment of Quality Cost of Poor Quality Optimum Cost of Quality Standing in the Marketplace

Why Assessment?

To help develop a quality strategy a formal assessment of quality provides a guide for improvement by telling us :(1) The size of the quality issue(2) The areas demanding attention

Assessment of Quality

Assessment of quality comprises four elements :1. Cost of poor quality2. Standing in the marketplace3. Quality culture in the organization4. Operation of the company quality

system

Cost of Poor Quality (1)

Cost of poor is the cost of attaining quality

Cost of poor quality is the annual monetary loss of products and processes that are not achieving their quality

Cost of poor quality is one of the component of assessment in reducing costs and customer dissatisfaction

Cost of Poor Quality (2) Companies estimate the cost of poor quality for several reasons:

1. Quantifying the size of the quality problem in the language of money improves communication between middle managers and upper managers.

2. Major opportunities for cost reduction can be identified.3. Opportunities for reducing customer dissatisfaction and associated

threats to product salability can be identified.4. Measuring this cost provides a means of evaluating the progress of

quality improvement activities and spotlighting obstacles to improvements.

5. Knowing the cost of poor quality leads to the development of a strategic quality plan that is consistent with overall organization goals.

Cost of Poor Quality (3)

Cost of Poor Quality

Cost of nonconformities

Cost of inefficient processes

Cost of Lost opportunities

of sales revenue

Categories of Quality Costs

Internal Failures Costs External Failures Costs Appraisal Costs Prevention Costs

Internal Failures Costs

Failure to meet customer requirements and needs:(scrap, rework, lost or missing information,

failure analysis, scrap and rework-supplier) Cost of inefficient processes

(variability of product characteristics, unplanned downtime of equipment, inventory

shrinkage)

External Failure Costs Failure to meet customer

requirements and needs :(warranty charges, complaint adjustments, returned material, allowances, penalties due to poor quality, rework on support operations, revenue losses in support operations)

Lost opportunities for sales revenue(customer defections, new customers lost because of lack of capability to meet customer needs)

Appraisal Cost Incoming inspection and test In-process inspections and test Final inspection and test Document review Balancing Product quality audits Maintaining accuracy of test equipment Inspection and test materials and

services Evaluation of stocks

Prevention Costs

Quality planning New products review Process planning Process control Quality audits Supplier quality evaluation Training

HIDDEN QUALITY COSTS1. Potential lost sales2. Costs redesign of products due to poor quality3. Costs of changing processes due to inability to

meet quality requirements for products4. Costs of software changes due to quality

reasons5. Costs of downtime of equipment and systems

including IS6. Costs included in standards7. Extra indirect cost due to defects and errors8. Scrap and errors not reported9. Extra process costs due to excessive product

variability10. Costs of errors made in support operations11. Cost of poor quality within a supplier’s

company

Language of Management Money (annual cost of poor quality)

- 24% of sales revenue- 15% of manufacturing cost- 13 cents per share of common stock- $ 7.5 million per year for scrap and rework compared to a profit of

$1.5 million- 40% of the operating cost of a department

Other languages- 32 % of engineering resources spent in finding and correcting design

weaknesses- 25 % of manufacturing capacity devoted to correcting quality

problems- 13% of sales order canceled- 70% of inventory carried attributed to poor quality levels- 25% of manufacturing personnel assigned to correcting quality

problems

Optimum Cost of Quality

Cost of appraisal plus prevention

Failure costs

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Standing in the Marketplace

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Quality TIP

“In fact, customer satisfaction is regarded as the only relevant objective for ensuring stable and continuously increasing business”