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    Cost of Quality

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    maherkamel
    Cost of quality refers to the costs associated with preventing poor quality and the costs incurred when poor quality occurs. There are four categories of quality costs: prevention costs which are incurred to prevent defects, appraisal costs which are costs of inspection and auditing, internal failure costs which are costs associated with defects found before delivery, and external failure costs which are costs associated with defects found after delivery such as warranty claims. Measuring quality costs helps identify opportunities for improvement, shows how quality affects profits, and allows companies to track the impact of quality initiatives. When a motor company increased spending on prevention activities like training and process improvements, their overall quality costs decreased over a four year period.

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    Cost of Quality

    Uploaded by

    maherkamel
    70 views21 pages
    Cost of quality refers to the costs associated with preventing poor quality and the costs incurred when poor quality occurs. There are four categories of quality costs: prevention costs which are incurred to prevent defects, appraisal costs which are costs of inspection and auditing, internal failure costs which are costs associated with defects found before delivery, and external failure costs which are costs associated with defects found after delivery such as warranty claims. Measuring quality costs helps identify opportunities for improvement, shows how quality affects profits, and allows companies to track the impact of quality initiatives. When a motor company increased spending on prevention activities like training and process improvements, their overall quality costs decreased over a four year period.

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    Lean Tools

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    costofquality-110408111653-phpapp02

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    Cost of quality refers to the costs associated with preventing poor quality and the costs incurred when poor quality occurs. There are four categories of quality costs: prevention costs which are incurred to prevent defects, appraisal costs which are costs of inspection and auditing, internal failure costs which are costs associated with defects found before delivery, and external failure costs which are costs associated with defects found after delivery such as warranty claims. Measuring quality costs helps identify opportunities for improvement, shows how quality affects profits, and allows companies to track the impact of quality initiatives. When a motor company increased spending on prevention activities like training and process improvements, their overall quality costs decreased over a four year period.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    70 views21 pages

    Cost of Quality

    Uploaded by

    maherkamel
    Cost of quality refers to the costs associated with preventing poor quality and the costs incurred when poor quality occurs. There are four categories of quality costs: prevention costs which are incurred to prevent defects, appraisal costs which are costs of inspection and auditing, internal failure costs which are costs associated with defects found before delivery, and external failure costs which are costs associated with defects found after delivery such as warranty claims. Measuring quality costs helps identify opportunities for improvement, shows how quality affects profits, and allows companies to track the impact of quality initiatives. When a motor company increased spending on prevention activities like training and process improvements, their overall quality costs decreased over a four year period.

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    © All Rights Reserved
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    of 21

    Cost of quality

    Basic concept:
    Cost of quality refers to the sum of costs incurred to prevent non-conformance
    from happening and the costs incurred when non-conformance in products
    and system occurs which is commonly known as cost of poor quality

    Cost of poor quality is actually the cost of


    doing things wrong
    Cost of poor quality refers to the costs associated
    with providing poor quality product or service

    Why do we need to know COQ?


    This tool speaks in the language of management $$$$
    Research shows that cost of poor quality can range from
    15 % to 40 % of the business costs
    It can prioritize quality improvement actions
    Cost of quality data shows how profit is affected by quality
    It helps identify the redundant activities

    Hidden Failure Costs


    Scrap

    Warranty

    Rework

    Engineering time
    Management time
    Shop and field downtime
    Increased inventory
    Decreased capacity
    Customer dissatisfaction
    Lost sales
    Lost customer trust

    Cost of quality categories

    Quality costs fall into two main


    categories:

    1 - Cost of achieving good


    quality
    Prevention Costs
    Appraisal Costs
    2 - Cost of poor quality
    Internal failure Costs
    failure Costs

    External

    Preventive costs:
    Preventive costs are the cost of all activities specifically
    designed to prevent poor quality product or service.
    These costs are incurred to keep appraisal and failure
    costs at minimum.

    Examples of preventive costs:

    Process Capability studies


    Market surveys
    Pilot scale projects and testing
    Procedure writing
    Vendor evaluation and testing
    Training and education
    Quality improvement projects
    Customer survey
    House keeping
    Design review

    Appraisal costs:
    These are the costs associated with measuring,
    evaluating or auditing product or service to assure
    conformance to standard or performance requirement.

    Examples of Appraisal costs:

    Internal audits
    Incoming material inspection
    Laboratory testing
    Calibration costs
    In process material inspection
    Equipment calibration
    Procedure evaluation
    Final product inspection
    Automated testing tools

    Internal failure cost


    These are the costs incurred when product or service fail
    to meet quality requirements prior to the transfer of
    ownership to the customer.

    Examples of internal failure costs:

    Rework
    Scrap
    Overtime
    Downtime
    Excess inventory
    Excess material handling
    Redesign
    Downgrading
    Retesting
    100% sorting inspection
    Scrap & rework - supplier

    External failure cost


    These are the costs incurred by a business due to failure
    of product or service at the customer end. These costs
    results into warranty claims and loss of reputation.

    Examples of external failure costs:

    Warranty costs
    Customer dissatisfaction
    Loss of market share
    Price concession
    Premium freight
    Product recalls
    Time spent to resolve customer complaints
    Restocking costs
    Other penalties

    Measuring cost of quality


    COQ data can be measured and presented in many
    different ways.

    % age of sales
    % age of profits
    % age of manufacturing cost
    Rs per direct labor hr
    Rs per unit of product

    Steps in implementing quality costs


    The following sequence applies to most organizations
    1.
    2.
    3.
    4.
    5.

    Review the literature on quality costs or consult others in similar


    industries who are using the same tool.
    Select one organizational unit of the company to serve as a pilot
    site
    Discuss the objectives of the study with the key people in the
    organization
    Collect whatever cost data are conveniently available from the
    accounting system
    Make a proposal to management for a full study

    6.

    Publish a draft of the categories defining the cost of poor quality

    7.

    Finalize the definitions and secure management approval

    8.

    Secure agreement on responsibility for data collection and report


    preparation

    9.

    Collect and summarize the data

    10.

    Present the cost results to management along with the results of


    a demonstration quality improvement project

    Case study: H&S motors


    The H&S motor company produces small motors for use in lawnmowers and
    garden equipment. The company instituted a quality improvement program in 1999
    and has recorded the following quality cost data and accounting measures for 4
    years.

    The company wants to assess its quality assurance program and develop quality
    index using sales basis for the 4 year period.

    Key points of study:

    Approximately 75% of the H&Ss total quality costs are a result of


    internal and external failures.
    In 2000 company spent more money on product monitoring and
    inspection that resulted into high appraisal cost.
    With this strategy, H&S was able to identify more defective items,
    resulting in an apparent increase in internal failure cost and lower
    external failure cost.
    In year 2001 & 2002 company spent more money on prevention
    activities i.e. training of employees, redesigning the production
    process and planning how to build in product quality etc.
    Prevention costs increased by more than 300 % during the 4 year
    period resulted into decrease in overall quality costs.

    The H&S company also desired to develop index numbers using quality
    costs as a proportion of sales.
    Quality index no. for 1999 sales is:
    = (810,400/4,360,000)*100 = 18.58 and similarly for other years:

    Year

    Quality sales index

    1999

    18.58

    2000

    19.32

    2001

    12.66

    2002

    10.49

    These index no's alone provide little insight into the effectiveness of the
    quality management program; however as a standard to make comparisons
    over time they can be useful.

    Conclusion:
    When the cost of achieving good quality
    increases; cost of poor quality decreases
    automatically.

    Benefits of using quality costs


    Quantify the size of the quality problem
    Identify major opportunities for cost reductions
    It helps in Identification of opportunities for reducing customer
    dissatisfaction and associated threats to product salability
    Measures the results of quality improvement activities
    Align quality goals with organizational goals
    Set cost reduction targets

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