cost factor effects on coq

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System dynamics approach toanalysing the cost factors effects

on cost of qualityBehdad Kiani

Green Research Center, Iran University of Science & Technology,Tehran, Iran, and

Hadi Shirouyehzad, Fahime Khoshsaligheh Bafti andHamidreza Fouladgar

Department of Industrial Engineering, Science and Research Branch, Islamic Azad University, Tehran, Iran

Abstract

Purpose – The purpose of this paper is to propose a model for analysing the influence of costs of quality.

Design/methodology/approach – A model is designed by using a causal loop diagram and isanalysed through a system dynamics approach. The model simulation is prepared by Vensimsoftware.

Findings – Prevention and appraisal costs are the two effective cost factors. The model representedin this paper reveals that prevention costs have the most effect on total cost of quality and especiallyexternal failure costs. Hence, in order to achieve the customer expected quality level, prevention andappraisal costs should be considered.

Research limitations/implications – Calculating and measuring non-conformance costs is very

difficult in organizations and some errors and mistakes may happen.Practical implications – A system dynamics approach can analyse and measure the amount of prevention cost effects on cost of quality in different organizations.

Originality/value – The proposed methodology demonstrates the use of an innovative approach indeveloping a cost of quality concept and constructing a practical framework for system dynamics in areal case.

Keywords Quality costs, Modelling, Business analysis, Organizational processes

Paper type Research paper

1. Introduction Juran (Nanda, 2005) defines quality as “fitness for use”; it is also defined as“conformance to requirement” by Crosby (1979). According to the Deming’s definition,“Quality is uniformity with respect to a correct target” (Deming, 1986). It is clear thatcost is one of the main factors to achieve quality. The concept of quality was firstintroduced by Juran. He proposed that, “there is a direct correlation between qualityand profitability” and advocated the measurement of costs on a periodic basis as amanagement control tool. Therefore, better quality results in lower costs and higherprofitability (Kazaz et al., 2005).

Nowadays, it is accepted that quality costs are the costs incurred in design,implementation, operation and maintenance of a quality management system;

The current issue and full text archive of this journal is available at

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Analysing thecost factors

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Received 28 July 2008Revised 18 February 2009

Accepted 24 March 2009

International Journal of Quality &Reliability Management

Vol. 26 No. 7, 2009pp. 685-698

q Emerald Group Publishing Limited0265-671X

DOI 10.1108/02656710910975750



resources committed to continuous improvement; product and service failures; and allother necessary costs and non-value added activities required to achieve a qualityproduct or service. Measuring and reporting these costs should be considered a criticalissue for any manager who aims to achieve competitiveness in the market

(Schiffauerova and Thomson, 2006a).Cost of quality (COQ hereafter) analysis links improvement actions with associated

costs and customer expectations, and this is considered as the coupling of reducedcosts and increased benefits for quality improvement. Therefore, a realistic estimate of COQ and improvement benefits – which is the tradeoff between the level of conformance and non-conformance costs – should be considered as an essentialelement of any quality initiative, and thus, a crucial issue for managers (Schiffauerovaand Thomson, 2006b). So the achieved result from the quality cost analysis can be usedin all aspects of the process.

This study proposes a comprehensive framework for COQ analysis in which thesystem dynamic approach is constructed and the appropriate attributes are specified toprovide guidance for COQ system evaluation. The cost factors are categorized into fourgroups, and an integrated analysis of cost of quality based on a usable systemdynamics model is proposed to analyse the total cost of quality and achieve customersatisfaction. Causal loop diagram and Vensim software are also used to analyse thesefactors. To demonstrate the practical viability of the proposed method, an empiricalcase in Iran is described.

2. Background and literature reviewThe definition and categories of quality costs may be given differently by variousauthors. They use the terms “quality costs”, “costs of quality”, “eco-nomics of quality”,“poor quality cost”, “price of non-conformance” or “cost of poor quality”. According toSower et al. (2007), while the cost of quality was originated by Shewart and others in

the 1930’s, the modern quality cost system was developed out of the work of Joseph Juran and others in the 1950’s. In the 1960’s, the American Society for Quality’s (ASQ) – Quality Cost Committee – refined the technique and promoted its uses (Bottorff,1997). In the 1970’s and 1980’s Philip Crosby’s work helped to popularize the cost of quality (COQ) concept beyond the quality professions (Beecroft, 2001). According toCrosby, The only performance measurement is the cost of quality, which is the expenseof non-conformance (Crosby, 1979). According to Crosby, “quality is free”. What costsmoney is failure to do things right the first time. Juran (1951) agrees in his definition of quality costs as “the sum of all costs that would disappear if there were no qualityproblems”. Juran and Crosby were also leaders in the movement to report qualityinformation in dollar terms in order to attract the attention of top management. Theobjective of a COQ system is to find the level of quality that minimizes total COQ

(Schiffauerova and Thomson, 2006b).To collect quality costs, a firm needs to adopt a framework to classify costs. The

“Feigenbaum” classification system is almost universally accepted (Plunkett and Dale,1988). Juran divided the failure costs into two other categories: internal failure andexternal failure (Juran and Gryna, 1970). Feigenbaum (1974) identified three costcategories: prevention, appraisal, and failure (cited in Plunkett and Dale, 1988).

COQ is usually understood as the sum of conformance plus non-conformance costs,where cost of conformance is the price paid for prevention and appraisal (detection) of

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poor quality, and cost of non-conformance is the cost of poor quality caused by productand service failure (internal and external failure cost) (Schiffauerova and Thomson,2006b).

Two conceptual models are presented for the cost of conformance. Each model

shows three curves: failure, prevention plus appraisal, and total cost. As pointed out,the first model depicted in Figure 1 represents the conditions that prevailed duringmuch of the twentieth century. A major aspect of this model is the infinite costsrequired to attain perfection.

Figure 2 represents what has been termed the right costs or par value model. Theoptimal quality has been shifted to the 100 per cent conformance level. In contrast tothe older model, the total cost curve indicates less high conformance costs (Weheba andElshennawy, 2004).

The COQ system, which was developed has been formalized into four categories of costs (Campanella, 1990; Sower et al., 2007):

Figure 2.The par value model

Figure 1.The traditional model


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(1) Prevention costs are “the costs of all activities specifically designed to preventpoor quality in products and services”. This is a proactive approach to defectprevention rather than defect correction and removes the idea of quality effortsessentially being reactive in efforts to “put out fires”. Prevention expenses can

be recovered many times over through reduced appraisal and failure costs.(2) Appraisal costs are “the costs associated with measuring, evaluating, and auditing

products or services to assure conformance to quality standards and performancerequirements”. Appraisal techniques are used for the verification and validation.These techniques help organization to increase in quality with lower cost.

(3) Internal failure costs are “the costs resulting from products or services notconforming to requirements or customer/user needs (which) occur prior todelivery or shipment to the customer”.

(4) External failure costs are “the costs resulting from products or services notconforming to requirements or customer/user needs (which) occur after deliveryor shipment of the product, and during or after furnishing of a service to thecustomer”. External failure can include loss of failure business throughcustomer dissatisfaction (Tsai, 1998; Kazaz et al., 2005).

Some examples of quality costs in each COQ category are (Roden and Dale, 2001;Ramdeen et al., 2007; Ramudhin et al., 2008):

(1) Prevention costs: recruiting, quality audits, supplier assurance, quality training,marketing research, quality engineering, and equipment maintenance.

(2) Appraisal (detection) costs: quality audits, production control, processacceptance, product acceptance, prototype inspection, inspection of material,inspection of production, and continuous supplier verification.

(3) Internal failure costs: scrap, rework, retesting, re-inspection, design changes,failure analysis, downtime caused by defects, and downgrading caused by defects.

(4) External failure costs: product recall, customer service, product liability cost,complaint adjustment, warranty cost, discount due to defects, reputation losscost, and lost sales.

There are also correlations between the maturity of a quality system and thedistribution of quality costs. Some studies have been conducted to determine the actualeffectiveness of COQ systems and the degree of maturity, and total costs model relatesthe distribution quality costs to the maturity of the quality system, as shown in Table I(Sower et al., 2007)

Maturity level1 2 3 4 5

Prevention Very low Low Moderate High Very highAppraisal Low Low-moderate Moderate Low-moderate LowInternal failure High Very high Moderate-high Low-moderate Very lowExternal failure High High Moderate Low Very lowTotal COQ High Very high Moderate-high Low-moderate Low

Table I.Conceptual model of relative COQexpenditures versusquality system maturitylevel

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Measuring qualityThe operating quality costs of prevention and appraisal are considered to becontrollable quality costs, while the internal and external failure costs areuncontrollable. Juran has demonstrated the relationship between the controllable

and uncontrollable quality cost (QC) curve and the direct quality cost curve over time.As the controllable costs of prevention and appraisal increase, the uncontrollable costsof internal and external failures decrease. The point where the cost of preventing andappraising exceeds, the cost of correcting the product failure is the optimum operatingquality cost (Stamatis, 2001).

3. System dynamicsThe concepts of system dynamics were developed in 1961 by Dr Jay W. Forester andwere described in his book Industrial Dynamics. In this revolutionary book, Foresterproposed scientifically modelling the complex behaviour of the business world using aunique simulation strategy. The term “Industrial dynamics” was renamed “System

dynamics” to emphasize the use of this methodology in other fields besides business(Forrester, 1961). Coyle (1996) defines system dynamics as:

System dynamics deals with the time dependent behaviour of managed systems with the aimof describing the system and understanding through qualitative and quantitative models,how information feedback governs its behaviour, and designing robust information feedbackstructures and control policies through simulation and optimization.

Clark (1990) states, “System dynamics is the study of processes through the use of system and how they can be modelled, explored, and explained”. System dynamicsfocuses on the feedback behaviour of variables within the closed loop of the system. Allthe variables inside the system, and some exogenous ones, influence each other’sbehaviour. When it is difficult to predict the behaviour of system’s key variables and the

system is relatively complex, System Dynamics can be used. Clark states, “In theirtransient states, such systems are virtually impossible to solve mathematically, so theyare usually simulated”. By analysing the relationships and feedback behaviour of thesystems key elements, it is possible to understand the systems behaviour and influences.

Causal loop diagramSystem dynamics focuses on the structure and behaviour of the systems composed of interacting feedback loops. Causal loop diagramming is an easy tool, which helps theanalyser to conceptualise the real world system in terms of feedback loops. In a causalloop diagram, the arrows indicate the direction of influence, and the plus or minussigns indicate the type of influence. All other things being equal, if a change in onevariable generates a change in the same direction in the second variable, relative to its

prior value, the relationships between the two variables is referred to as positive. If thechange in the second variable takes place in the opposite direction, the relationship isnegative.

There are several ways to build a system dynamics model. Coyle uses a five-stepapproach (Coyle, 1996). Clark (1990) uses a less defined approach. The present researchuses a four-step process involving conceptualization, formulation, testing, andimplementation. This process was originally developed by Randers (1980) and adaptedby Albin (1997) through her work with Jay Forrester’s Road Maps.


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4. Proposed methodologyA quality cost study can reveals considerable information about the health of a qualitysystem. It tells whether the system produces good quality at the right price. If not, itindicates where improvement opportunities exist. COQ has a direct effect on quality

levels of products and customer satisfaction. But what is important is to consider inwhich area of costs to improve effectiveness in the organization.

To analyse the components of quality cost, it is necessary to know how the four costfeatures are interrelated. For example, a quality control manager might want to knowhow much of an increase in appraisal costs is necessary to reduce the external failurecosts by some amounts or how much an increase in prevention costs will reduce others.Such information is necessary when the quality control manager has to justify qualityinvestments through cost-benefit analysis.

Several tools such as Pareto, fishbone, histogram have been used in order toprioritise and analyse COQ, but these tools do not pay attention to the dynamicrelations of the cost factors. Prevention, appraisal, internal and external failure costsaffect one another, and investment on one of these components can change the other

cost factors. Thus, a dynamics approach is needed to analyse the effect of costfactors and to determine the most appropriate cost assignment to achieve customerexpected quality level. System dynamics uses causal loop diagram as a dynamicinstrument in order to determine the relation of variables and to analyse the costfactors.

The relations of cost factors, customer satisfaction, and quality level of product areshown in Figure 3. Costs of quality directly affect quality level of products andcustomer complaints, and these two factors have effect on customer satisfaction.

Cost of quality has also direct effect on production unit cost and indirect effect onprofitability. Figure 4 represents the details of different types of COQ.

Figure 3.Causal loop diagram of cost of quality

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Figure 4.Causal loop diagram – the

details of cost factors


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In Figure 5, cost factors are depicted. As shown, different types of costs dynamicallyaffect other cost factors. For example, prevention and appraisal costs affect internaland external costs.

5. Study of test caseThis study was carried out in a small scale manufacturing industry, which is called SabetPrint Company. The quality cost elements have been identified under the categories of prevention, appraisal, internal failure and external failure costs. This list just acts as aguideline for quality costing. Most elements in such lists are not relevant to a particularindustry, while many elements identified by practitioners are peculiar to an industry or acompany. The required data were collected by using questionnaire technique, which wasused to obtain an indication of the knowledge of quality cost within the industry.Departmental interviews were also carried out with the various staff of engineering,quality control department, marketing heads, etc. to find out which element(s) of qualitycost occurred within each department. Finally, a departmental study was done to examine

some of the cost elements in detail. The collected data are given in Table II.The information in Table II was submitted to Vensim Software and the problemwas simulated. In Figure 6 the structure of costs component is presented.

Confidence in system dynamicsConfidence in system dynamics models can be obtained by a variety of tests thatinclude tests of model structure, model behaviour, and model policy implications.Confidence in a system dynamics model accumulates gradually as the model passesmore tests and as new points of correspondence between the model and empiricalreality are identified (Sterman, 2000). In this paper in order to prove confidence of themodel, test of model structure was employed.

Figure 5.Causal loop diagram of cost factors

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MonthPrevention

costAppraisal

costInternalfailure

Externalfailure

Total qualitycost

For 2002-2003

April 23,242 31,832 60,300 29,825 145,198May 31,804 44,365 19,298 22,368 117,836 June 100,000 99,395 16,667 100,000 316,062 July 5,300 10,700 60,300 73,200 149,500August 35,474 53,230 17,544 17,105 123,353September 44,954 75,500 17,983 12,719 151,156October 38,838 55,352 17,544 15,790 127,523November 42,508 59,327 18,300 14,035 134,170December 56,200 88,073 18,421 7,200 169,895 January 33,028 46,505 18,425 19,737 117,694February 58,300 97,871 17,983 7,456 181,610March 60,245 96,330 18,421 7,456 182,452

For 2003-2004

April 11,927 20,489 37,719 58,772 128,907May 13,150 21,713 36,404 53,509 124,775 June 19,266 27,246 27,632 37,719 111,863 July 62,080 89,100 18,421 8,333 177,934August 31,804 47,422 18,421 21,491 119,138September 8,257 17,159 42,544 67,983 135,942October 10,092 20,184 37,719 58,772 126,766November 1,000 957 97,368 88,300 187625December 50,300 87,156 18,860 7,800 164,116 January 16,208 25,412 31,140 45,175 117,936February 65,138 89,100 18,221 8,333 180,792March 7,200 7,377 66,667 70,300 151,543

Table II.Total quality cost (US$)

Figure 6.Causal diagram in Vensim

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Test of model structureTest of model structure assesses structure and parameters directly, without examiningrelationships between structure, including the purpose of each test and how the test isconducted. This test includes five subtests and in this paper two subtests were carried

out (Sterman, 2000).

Structure-verification test Verifying structure means comparing structure of a model directly with structure of the real system that the model represents. To pass the structure verification test, themodel structure must not contradict knowledge about the structure of the real system.Structure verification may include review of model assumptions by people highlyknowledgeable about corresponding parts of the real system. Structure verificationmight also involve comparing model assumptions to descriptions of decision-makingand organizational relationships found in relevant literature.

Parameter-verification test Model parameters (constants) can be verified against observations of real life, just asstructure of a model can be compared to available knowledge. Parameter verificationmeans comparing model parameters to knowledge of the real system to determine if parameters correspond conceptually and numerically to real life. Conceptualcorrespondence means that parameters match elements of system structure. Thismodel includes parameters that are compatible with parameters in real present model.In this model by increasing the input value in a parameter, decreasing output value inanother parameter can be observed. As depicted in Figure 7, increasing the input valuecauses the output value to decrease in the four parameters f, g, k, and h.

(1) Factor f: the X-axis is prevention costs and the Y-axis is external failure costs.

(2) Factor g: the X-axis is appraisal and the Y-axis is external failure costs.

Figure 7.Relationship betweenconformance costs andnon-conformance costs

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(3) Factor k: the X-axis is prevention costs and the Y-axis is internal failure costs.

(4) Factor h: the X-axis is appraisal and the Y-axis is internal failure costs.

6. ResultsAccording to Table II, which is used in the software, modelling is done for thecoming years (until 2015). As shown in Figure 8, if the organization does not payany cost or pay a little on prevention and appraisal costs, total cost of qualitywould be very high. It is obvious that not paying these costs is not logical and willhave great effect on total cost of quality through failure costs. In contrast,increasing the prevention and appraisal costs will decrease the total COQ. Asdepicted in Figures 9(a) and 9(b), prevention costs have the most effect on total COQthan appraisal costs. Therefore, customer satisfaction and profitability can beattained through this methodology.

According to Figure 9(c), both prevention and appraisal costs affect total cost of quality simultaneously more than the case where one just increases. If prevention costs

gradually increase, but the appraisal costs do not changed (appraisal costs are equal to$10,000), failure costs and especially external failure costs decrease. This shows thatthe quality system attains the highest maturity level (see Table I).

Figure 8.COQ Diagram – zero

prevention and appraisalcosts


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Figure 9.The effects of differentprevention and appraisalon cost of quality

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7. ConclusionIn this paper the cost factor was analysed in order to achieve the expected quality levelof customer and a model was developed to show the effect of cost factors. To study theproposed methodology in a real case, an empirical study was also described to

demonstrate the practical viability of the proposed method.Based on the effect of quality costs on the level of customer satisfaction, it has been

proved that increasing prevention costs and decreasing external failure costs candirectly improve the level of customer satisfaction. The result of this paperdemonstrated that the effect of prevention costs in decreasing total quality cost is morethan the effect of appraisal costs. The results of this research are compatible with thedefinitions of both Juran (1951) and Schiffauerova and Thomson (2006b).

With the use of system dynamics it is determined that increasing both preventionand appraisal costs simultaneously will have more effect on decreasing failure costsand total quality cost. This framework is comprehensive because it considers all thefactors and details. These factors are available in all industries; however, their amountand importance may differ. This study suggests that organizations consider COQ as anintegrated approach and long-term process, and focus on the cost factors in order toimprove customer satisfaction. This study can be very useful to organizationsattempting to identify those characteristics that may provide an opportunity toimprove customer satisfaction and total cost of quality.

8. Suggestions for further studiesFor further research the following suggestions are given:

. Evaluating more detailed cost factors in the model.

. Since it is needed to calculate quality of costs, it is feasible to determine theirrelationship by probabilistic or regression methods without any need to data table.

.

It might be feasible to determine the most effective factor of failure costs on totalcosts of a firm.

References

Albin, S. (1997), Building a System Dynamics Model Part 1: Conceptualization, MassachusettsInstitute of Technology, Cambridge, MA.

Beecroft, G. (2001), “Cost of quality and quality planning affect the bottom line”, The Quality Management Forum, Vol. 27 No. 1, pp. 1-7.

Bottorff, D. (1997), “COQ systems: the right stuff”, Quality Progress, Vol. 30 No. 3, pp. 33-5.

Campanella, J. (Ed.) (1990), Principles of Quality Costs, 2nd ed., ASQC Quality Press, Milwaukee,IL.

Clark, R. (1990), System Dynamics and Modeling , Operations Research Society of America,Arlington, VA.

Coyle, R.G. (1996), System Dynamics Modeling: A Practical Approach, Chapman and Hall,London.

Crosby, P.B. (1979), Quality is Free, McGraw-Hill, New York, NY.

Deming, W.E. (1986), Out Of Crisis: Quality, Productivity and Competitive Position, CambridgeUniversity Press, Cambridge, MA.

Feigenbaum, A.V. (1974), Total Quality Control , McGraw-Hill, New York, NY.


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Forrester, J.W. (1961), Industrial Dynamics, MIT Press, Cambridge, MA.

Juran, J.M. (1951), Quality Control Handbook, McGraw-Hill, New York, NY.

Juran, J.M. and Gryna, F.M. (1970), Quality Planning and Analysis, McGraw-Hill, New York, NY.

Kazaz, A., Birgonul, M.T. and Ulubeyli, S. (2005), “Cost-based analysis of quality in developingcountries: a case study of building projects”, Building and Environment , Vol. 40 No. 10,pp. 1356-65.

Nanda, V. (2005), Quality Management, System Handbook for Product Development Companies,Taylor & Francis Group, London.

Plunkett, J.J. and Dale, B.G. (1988), “Quality costs: a critique of some economic cost of qualitymodels”, International Journal of Production Research, Vol. 26 No. 11, pp. 1713-26.

Ramdeen, C., Santos, J. and Chatfield, H.K. (2007), “Measuring the cost of quality in a hotelrestaurant operation”, International Journal of Contemporary Hospitality Management ,Vol. 19 No. 4, pp. 286-95.

Ramudhin, A., Alzaman, C. and Bulgak, A.A. (2008), “Incorporating the cost of quality in supplychain design”, Journal of Quality in Maintenance Engineering , Vol. 14 No. 1, pp. 71-86.

Randers, J. (1980), Elements of the System Dynamics Method , Productivity Press, Portland, OR.Roden, S. and Dale, B.G. (2001), “Quality costing in a small engineering company: issues and

difficulties”, The TQM Magazine, Vol. 13 No. 6, pp. 389-99.

Schiffauerova, A. and Thomson, V. (2006a), “Managing cost of quality: insight into industrypractice”, The TQM Magazine, Vol. 18 No. 5, pp. 542-50.

Schiffauerova, A. and Thomson, V. (2006b), “A review of research on cost of quality models and bestpractices”, International Journal of Quality & Reliability Management , Vol. 23 No. 6, pp. 647-69.

Sower, V.E., Quarles, R. and Broussard, E. (2007), “Cost of quality usage and its relationship toquality system maturity”, International Journal of Quality & Reliability Management ,Vol. 24 No. 2, pp. 121-40.

Stamatis, D.H. (2001), Six Sigma and beyond: Design For Six Sigma, Vol. VI, CRC Press,

Boca Raton, FL.Sterman, J.D. (2000), Business Dynamics: Systems Thinking and Modeling for a Complex World ,McGraw-Hill, New York, NY.

Tsai, W.H. (1998), “Quality cost measurement under activity based costing”, International Journal of Quality & Reliability Management , Vol. 15 No. 7, pp. 719-52.

Weheba, G.S. and Elshennawy, A.K. (2004), “A revised model for the cost of quality”, International Journal of Quality & Reliability Management , Vol. 21 No. 3, pp. 291-308.

Further reading

Campanella, J. and Corcoran, F. (1983), “Principles of quality costing”, Quality Progress, Vol. 16No. 4, pp. 17-22.

Giakatis, G., Enkawa, T. and Washitani, K. (2001), “Hidden quality costs and the distinctionbetween quality cost and quality loss”, Total Quality Management , Vol. 12 No. 2, pp. 179-90.

Corresponding authorHadi Shirouyehzad can be contacted at: [email protected]

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