Quality Cost Final[1]
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Transcript of Quality Cost Final[1]
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Quality is measured by the cost of quality which is the expense of non
conformance-the cost of doing things wrong
Philip Crosby
Quality is Free
QUALITY COSTS
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COST OF QUALITY. DEFINED
The cost difference between present operation andthe possible operation of a business with all systemsand employees at 100% performance.
Quality costs are defined as costs incurred becausepoor quality may or does exist.
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3 VIEWS OF QUALITY COSTS
Higher quality means higher cost: Quality attributes like
performance and features cost more in terms of labor,material andother costly resources.
The cost of improving quality is less than the resulting savings:The savings result from less rework,scrap and other direct
expenses related to defects.
Quality costs are those incurred in excess of those that would havebeen incurred if the product was built right the first time.
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TOTAL COST SPLIT
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COST OF POOR QUALITY
INTERNAL FAILURE COSTS
Internal failure costs: Costs that are caused by products orservices not conforming to requirements or customer/user needsand are found before delivery of products and services to externalcustomers.
Examples include the costs for:
Rework
Delays
Re-designing Shortages
Failure analysis
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COST OF POOR QUALITY
EXTERNAL FAILURE COSTS
External failure costs: Costs that are caused by deficiencies foundafter delivery of products and services to external customers,which lead to customer dissatisfaction.
Examples include the costs for:
Complaints
Repairing goods and redoing services
Warranties Customers bad will
Losses due to sales reductions
Environmental costs
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COST OF GOOD QUALITY
PREVENTION COSTS
Prevention costs: Costs of all activities that are designed to preventpoor quality from arising in products or services.
Examples include the costs for:
Quality planning
Supplier evaluation
New product review
Error proofing
Quality improvement team meetings
Quality improvement projects
Quality education and training
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COST OF GOOD QUALITY
APPRAISAL COSTS
Appraisal costs: Costs that occur because of the need to controlproducts and services to ensure a high quality level in all stages,conformance to quality standards and performance requirements.
Examples include the costs for: Checking and testing purchased goods and services
In-process and final inspection/test
Field testing
Calibration of measuring and test equipment
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SCRAP
REWORK
WARRANTY COSTS
ENGINEERING TIME
MANAGEMENT TIME
INCREASED INVENTORY
DECREASED CAPACITY
DELIVERY PROBLEMSLOST ORDERS
COMMONLY MEASURED
FAILURE COSTS
HIDDEN FAILURE
COSTS
FAILURE
COSTS
HIDDEN COST OF QUALITY
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JURANS MODEL OF OPTIMUM QUALITY COSTS
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NEW MODEL OF OPTIMUM QUALITY COSTS
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STRATEGY FOR USING QUALITY COSTS
Take direct action on FAILURE costs
Invest in the right PREVENTION activities to bring about
improvements
Reduce APPRAISAL costs according to results achieved
Continuously evaluate & redirect PREVENTION efforts to gain
further improvement
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Cost of
Quality%
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Total Sales
TOTAL SALES
Appraisal
Prevention
Internal
Failures
External
Failures
C O Q (Rs)
NORMAL DISTRIBUTION
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COST MODELS
Most cost models are based on a P-A-F classification (Plunkettand Dale 1987, Machowski and Dale 1998, Sandoval-Chvez andBeruvides 1997)
It was Joseph Juran (1951) who first discussed the cost of qualityanalysis and became a pioneer of quality costing, and it wasArmand Feigenbaum (1956) who identified four quality cost
categories: Prevention
Appraisal
Failure (internal and external).
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CROSBY MODEL
Crosby sees quality as conformance to requirements, &therefore, defines the cost of quality as the sum of price ofconformance & price of non-conformance (Crosby, 1979).
The price of conformance is the cost involved in making certainthat things are done right the first time, which includes actual
prevention and appraisal costs.
The price of non-conformance is the money wasted when workfails to conform to customer requirements, usually calculated byquantifying the cost of correcting, reworking or scrapping, whichcorresponds to actual failure costs.
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OPPORTUNITY AND INTANGIBLE COST
Intangible costs are costs that can be only estimated such asprofits not earned because of lost customers
Sandoval-Chavez and Beruvides (1998) incorporate
opportunity losses into traditional P-A-F quality expenses
Opportunity losses may be broken down into threecomponents:
Underutilization of installed capacity
Inadequate material handling
Poor delivery of service
Expresses total CoQ as revenue lost and profit not earned.
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OPPORTUNITY & INTANGIBLE COST contd
Quality costs are defined in three categories: Cost of conformance
Cost of non-conformance
Cost of lost opportunity.
Jurans model also recognizes the importance of intangibles
His CoQ scheme includes two measurable cost : Tangible factory costs
Tangible sales costs
He suggests the inclusion of intangible internal benefits
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PROCESS COST METHOD
The process cost model developed by Ross (1977) and first usedfor quality costing by Marsch (1989) represents quality costsystems that focus on process rather than products or services
Process cost is the total cost of conformance and non-
conformance for a particular process.
The process modeling method called IDEF (the computer-aidedmanufacturing integrated program definition methodology)developed by Ross is used.
The use of a process cost model is suggested as a preferredmethod for quality costing within total quality management(TQM) as it recognizes the importance of process costmeasurement and ownership, and presents a more integrated
approach to quality than a P-A-F modelwww.a2zmba.com
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ABC ANALYSIS METHOD
Activity-based costing (ABC) model was developed by Cooperand Kaplan (Cooper 1988, Cooper and Kaplan 1988) .
Under ABC accurate costs for various cost objects areachieved by tracing resource costs to their respective activitiesand the cost of activities to cost objects.
The ABC approach is actually not a CoQ model. It is analternative approach that can be used to identify, quantify andallocate quality costs among products, and therefore, helps tomanage quality costs more effectively.
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Company (reference) Method, model Gains
P-A-F model
UTC. Essex Group.
(Fruin, 1986)
CoQ = P+A+F
CoQ is calculated as a % of
total manufacturing cost
1. CoQ reduced from
23% to 17%.AT&T Bell Lab.
(Thompson and
Nakamura, 1987)
CoQ = P + A + F (I+E)
Hydro Coatings(Purgslove and Dale,
1995)
CoQ = P + A + F (I+E)CoQ is calculated as a % of
annual sales turnover. CoQ
is also expressed as a % of
raw material usage.
1. CoQ reduced from4.1% to 2.5% in 4 years
2. Investment in quality
paid back in the first
year.
Electronic manufacturer(Denzer, 1978) CoQ = P + A + F (I+E)
Examples of successful use of CoQ models & methods
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Crosbys model
Solid State Circuits
(Denton and Kowalski,
1988)
CoQ = COC + CONC
CoQ is expressed as a % of
the revenue.
1. CoQ reduced from 37%
to 17%.
BDM International
(Slaughter et al.,1998)
CoQ = COC + CONC
Opportunity and alternative costs modelsXerox
(Carr, 1992)
CoQ = COC + CONC +
OC
1. CoQ reduced by $53
million in first year.
Pharmaceutical company
(Malchi and McGurk,
2001)
CoQ = Operating Cost +
CONC + Alternative Cost
1. 11% reduction in CoQ
Examples of successful use of CoQ models
& methods
Company (reference) Method, model Gains
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Process model
GEC AlsthomEngineering Systems
(Goulden and Rawlins,
1995)
CoQ = COC + CONC
ABC model
Hewlett Packard
(Jorgenson and Enkerlin,
1992)
ABC (activity-based costing)
CoQ = Process Quality + Board Test + Repair + Bench
Test + Defect analysis
Company (reference) Method, model
Examples of successful use of CoQ models
& methods
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COST OF SOFTWARE QUALITY (CoSQ)
Following are the key dimensions of software quality
Level of satisfaction.
Product value.
Key attributes.
Defectiveness.
Process quality.
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QUALITY COSTS ASSOCIATED WITH SOFTWARE
PRODUCTS
PREVENTION :
STAFF TRAINING
EARLY PROTOTYPING
DEFENSIVE PROGRAMMING
USABILITY ANALYSIS
APPRAISAL :
DESIGN REVIEW
BLACK BOX TESTING
CODE INSPECTION
TRAINIG TESTERS
INTERNAL FAILURE :
BUG FIXES
REGRESSION TESTING
WASTED TESTER TIME
WASTED WRITER TIME
EXTERNAL FAILURE :
TECHNICAL SUPPORT CALLS
REFUNDS AND RECALLS
LOST SALES
WARRANTY COSTS
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GLOBAL METRICS FOR CoQ METRIC
RoQ = increase in profit / cost of quality
improvement program
Quality rate = input (quality defects + startupdefects + rework)/ input
Process quality = available time reworktime/available time
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BENEFITS OF IMPROVED QUALITY
Decreases
Defects Overall Costs
Returned Goods
Employee Turnover
Customer Complaints Owner & Mgmt. Stress
Increases
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Revenue
Sales Capacity
Employee Satisfaction
Customer Satisfaction
Market Share Competitive Edge
Personal Time Away
