quality and cost 7-8

8/7/2019 quality and cost 7-8

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ByGeetika 7&

Kartik Goel 8


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the costs of poor quality

the costs to attain quality

the costs of running the Quality department


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1. Quantify the size of the quality problem in language that willhave an impact on upper management.

2. Identify major opportunities for reduction in cost of poor quality throughout all activities in an organization.

3. Identify opportunities for reducing customer dissatisfactionand associated threats to sales revenues.

4. Align quality goals with organization goals.


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Internal Failure Costs:Failure to Meet Customer Requirements and Needs.Cost of Inefficient Processes.

External Failure Costs: These are costs associated withdeficiencies that are found after product is received by the customer Failure to Meet Customer Requirements and Needs.Lost Opportunities for Sales Revenue.

Appraisal Costs: These are the costs incurred to determine thedegree of conformance to quality requirements.

Prevention Costs: These are costs incurred to keep failure andappraisal costs to a minimum.


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Hidden Costs: The cost of poor quality may be undervaluedbecause of costs which are difficult to estimate. These costs occur in both manufacturing and service industries and include:

1. Potential lost sales2. Costs of redesign of products due to poor quality.

3. Costs of changing processes due to inability to meet quality

requirements for products.

4. Costs of software changes due to quality reasons.

5. Costs of downtime of equipment and systems including

computer information systems.


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6. Extra indirect costs due to defects and errors.

7. Scrap and errors not reported.

8. Extra process costs due to excessive product variability

9. Cost of errors made in support operations

10. Cost of poor quality within a suppliers company.


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1. Quality costing approach : This is the failure, appraisal,and prevention approach.

2. Process cost approach: The focus is to reduce both thecost of conformity and the cost of nonconformity. The cost of conformity this is the cost incurred when a process is runningwithout failure, i.e., material, labour, and overhead includingprevention and process control activities. The cost of nonconformityis the traditional cost of internal and external failures.

3. Quality loss approach: Conceptually it tries to collectdata on many of the hidden costs such as loss of sales revenuedue to poor quality, process inefficiencies, and losses when aquality characteristic deviates from a target value even though it iswithin specification limits.


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1. Review the literature on quality costs.

2. Select one organizational unit of the company to serve as apilot site.

3. Discuss the objectives of the study with the key people inthe organization, particularly those in the accounting function.Two objectives are paramount:

a. Determine the size of the quality problem and

b. Identify specific projects for improvement.

4. Collect whatever cost data are conveniently available fromthe accounting system and use this information to gainmanagement support to make a full cost study.


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5. Make a proposal to management for a full study. The proposal should provide for a task force of all concerned parties

to identify the work activities that contribute to the cost of poor quality.

6. Publish a draft of the categories defining the cost of poor quality. Secure comments and revise.

7. Finalize the definitions and secure management approval.

8. Secure agreement on responsibility for data collection andreport preparation.

9. Collect and summarize the data. Ideally, this should be doneby Accounting.

10. Present the cost results to management along with theresults of a demonstration quality improvement project.


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The allocation of overhead has a significant impact on calculatingthe total cost of poor quality and also on determining the distribution

of the total over the various departments.

Earlier, manufacturing overhead costs were allocated to functionaldepartments and to products based on direct labour hours.


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Three approaches are used in practice:Include total overhead using direct labour hours.Include variable overhead only , eg. Machine setup, shipmentetc.

Or do not include overhead at allActivity based costing is an accounting method that improves

cost effectiveness through a focus on key cost elements calledcost drivers (measureable activities that increases overheadcosts ).

ABC refines the way product costs are determined by usingcomputer technology to economically track overhead costs insmaller categories with many cost drivers such as machinesetups, purchase orders, shipments etc


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Improvement requires an investment of resources, and theinvestment must be justified by the blossoming benefits of

improvement. The comparison of benefits to investment is called the return on

quality (ROQ).

Some of the issues involved in estimating the benefits are: a. Reduced cost of errors: Expected savings must be based on

specific plans for improvement with the problem areas for improvement been explicitly identified and an action plan withresources been developed.


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C

ost of

Fromcurrentenvironment

Applying Cost of Quality& processiamprovement

To reduce cost& improvequality


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b. Improved process capability : Expected savings can comefrom a reduction in variability (of product characteristics or processcharacteristics) and other process losses such as redundantoperations, sorting inspections, retrieving missing information etc.

c. Reduced customer defections: Progress should be made inquantifying the benefits of an effort to reduce defections. Theparameters include the economic effect of losing customers over the customer life, the level of quality to retain present customersand the effect on retention of the quality of handling customer

complaints.


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To achieve a significant and lasting reduction in defects and costsrequires a structured process for attacking the main sources of lossthe failure costs. Such an attack requires proceeding on aproject-by-project basis.

To gain approval from upper management for a quality improvementeffort, we recommend the following steps:

1. Establish that the costs are large enough to justifyaction:

a. Use the grand total to demonstrate the need for qualityimprovement. This is the most significant figure in a quality coststudy.


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b. Relate the grand total to business measures:Interpretation of the total is aided by relating total quality costs toother figures with which managers are familiar. Two universallanguages are spoken in the company.At the bottom, the language is that of objects and deeds: squaremeters of floor space, output of 400 tons per week, rejection ratesof 3.6 percent,At the top, the language is that of money: sales,profit, taxes,investment.

c. Show the subtotals for the broad major groupings of qualitycosts, when these are available:Typically, most of the quality costs are associated with failures,internal and external. The proper sequence is to reduce the failurecosts first, not to start by reducing inspection costs. Then as thedefect levels come down, we can follow through and cut the

inspection costs as well.


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2. Estimate the savings and other benefits:

a. Dont imply that the quality costs can be reduced to zero.b. For any benefits that cannot be quantified as part of the return onquality, present these benefits as intangible factors to help justify the

improvement program. Sometimes, benefits can be related toproblems of high priority to upper management such as meetingdelivery schedules, controlling capital expenditures, or reducing adelivery backlog.

3. Calculate the return on investment resulting fromimprovement in quality : Where possible, this return should reflect savings in the traditional

cost of poor quality, savings in process capability improvement, andincreases in sales revenue due to a reduction in customer defections

and increases in new customers.


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4. Use a successful case history of qualityimprovement in the company to justify a broader program.

5. Identify the initial specific improvement projects.

6. Propose the structure of the improvementprogram including organization, problem selection,training, review of progress, and schedule.


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Roles to Support Improvement:

1. Identify the most significant losses for an individual

problem and the specific costs to be eliminated. Thishelps to focus the diagnostic effort on root causes.

2. Provide a measure of effectiveness of the remediesinstituted on a specific project. Thus, a project quality

improvement team should provide for measuring the costs toconfirm that the remedies have worked.


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3. Provide a periodic report on specific quality costs. Such areport might be issued quarterly or semI-annually.

4. Repeat the full cost of poor quality study. This study could

be conducted annually to assess overall status and help toidentify future projects.

5. Identify future improvement projects by analyzing the fullstudy (see item 4 above) using Pareto analysis and other

techniques for problem selection.


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Reporting on the cost of poor quality focuses on supportingstructured quality improvement teams.

These reports provide information which helps to diagnose the

problem and to track the change in costs as a remedy isimplemented to solve the problem.

These reports provide information which helps to diagnose theproblem and to track the change in costs as a remedy isimplemented to solve the problem.

After finalizing the categories for a cost scoreboard, the planningmust include collecting and summarizing the data, establishingbases for comparison, and reporting the results.


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Summarizing the Data :

The most basic ways are

1. By product, process, component, defect type, or other

likely defect concentration pattern 2. By organizational unit

3. By category cost of poor quality

4. By time


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The specific matters are the same as for those for other reportsformat, frequency, distribution, responsibility for publication.

The likely trend is for cost of poor quality and other quality-relatedinformation to become integrated into the overall performancereporting system of organizations. Kaplan and Norton(1996)propose that such a system provide a balanced scorecardallowing managers to view an organization from four perspectives:

1. How do customers see us? (Customer perspective.)

2. What must we excel at? (Internal perspective.) 3. Can we continue to improve and create value? (Innovation

and learning perspective.)

4. How do we look to shareholders? (Financial perspective.)


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The costs of poor quality affect two partiesthe provider of the goods or service and the user. Poor quality alsoincreases the costs of the user of the product in the form of

repair costs after the warranty period, various losses due todowntime, etc.

This section stresses the potentialfor profit improvementby reducing provider costs and by reducing loss of salesrevenue due to poor quality.


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Jurans Quality Handbook

Costs of poor quality-concepts and applications- Rajmanohar


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Thank you

quality and cost 7-8

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