topic 4 - quality costs & productivity latest 2
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1. Identify and describe the four types of qualitycosts.
2. Prepare a quality cost report and explain the
difference between the conventional view ofacceptable quality level and the view
espoused by total quality control.
3. Tell why quality cost information is neededand how it is used.
4. xplain what productivity is! and calculate
the impact of productive chan"es on profits.
ObjectivesObjectives
ObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
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Quality Defined
# quality product
or service is onethat meets or
exceeds customer
expectations...
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Quality Defined
$ on the followin" ei"ht dimensions%
Performance
#esthetics
&erviceability
'eatures(eliability
)urability
*uality ofconformance
'itness for use
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Quality Defined
$ on the followin" ei"ht dimensions%
Performance
#esthetics
&erviceability
'eatures(eliability
)urability
*uality ofconformance
'itness for use
+ow consistently+ow consistently
and well a productand well a product
functionsfunctions
+ow consistently+ow consistently
and well a productand well a product
functionsfunctions
The appearance ofThe appearance of
tan"ible productstan"ible products,style! beauty-,style! beauty-
The appearance ofThe appearance of
tan"ible productstan"ible products,style! beauty-,style! beauty-
easures the ease ofeasures the ease of
maintainin" and/ormaintainin" and/or
repairin" the productrepairin" the product
easures the ease ofeasures the ease of
maintainin" and/ormaintainin" and/or
repairin" the productrepairin" the product
0haracteristics of a0haracteristics of a
product that differentiateproduct that differentiate
functionally similarfunctionally similar
productsproducts
0haracteristics of a0haracteristics of a
product that differentiateproduct that differentiate
functionally similarfunctionally similarproductsproducts
The probability that theThe probability that the
product or service willproduct or service will
perform its intendedperform its intended
function for a specifiedfunction for a specified
len"th of timelen"th of time
The probability that theThe probability that the
product or service willproduct or service will
perform its intendedperform its intended
function for a specifiedfunction for a specified
len"th of timelen"th of time
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Quality Defined
# defective product
is one that does notconform to
specifications.
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Quality Defined
Zero defects
means that allproducts
conform to
specifications.
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Quality Defined
The definition of qualityrelated activities imply
four cate"ories of quality costs%
1- Preventive costs
2- #ppraisal costs
3- Internal failure costs
4- xternal failure costs
Incurred to
prevent poor
quality or
services bein"
produced
Incurred to
prevent poor
quality or
services bein"produced
Incurred to
determinewhether products
and services
conform to
requirements
Incurred to
determine
whether products
and services
conform to
requirements
Incurred when
products and
services do not
conform tospecifications
Incurred when
products and
services do not
conform tospecifications
Incurred when
products and
services fail toconform to
requirements after
bein" delivered
Incurred when
products and
services fail to
conform to
requirements after
bein" delivered
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Examples of Quality Costs
!e"ention #osts!e"ention #osts*uality en"ineerin"
*uality trainin" pro"rams
*uality plannin"
*uality reportin"
&upplier evaluation and selection
*uality audits
*uality circles
'ield trials
)esi"n reviews
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Examples of Quality Costs
$pp!aisal Costs$pp!aisal Costs
Inspection of raw materials
Testin" of raw materials
Paca"in" inspection
&upervisin" appraisal
Product acceptance
Process acceptance
Inspection of equipment
Testin" equipment
utside endorsements
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%nte!nal failu!e #osts%nte!nal failu!e #osts
&crap
(ewor)owntime ,defect related-
(einspection
(etestin")esi"n chan"es
Examples of Quality Costs
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0ost of recalls
ost sales
(eturns/allowances
5arranties
(epairs
Product liability
0ustomer dissatisfaction
ost maret share
0omplaint ad6ustment
Exte!nal failu!e #osts
Examples of Quality Costs
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Measuring Quality Costs
The ultiplier ethod
The aret (esearch ethod
Ta"uchi *uality oss 'unction
Hidden Quality Costs areopportunity costs resulting from
poor quality.
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Te Multiplier Metod
&'e multiplier metodassumes t'at t'e total failu!e#ost is simply some multiple of measu!ed failu!e#osts(
Total external failure cost = k(Measured externalfailure costs
!here k is the "ultiplier effect
If ! " 4, and te measured e#ternal failure costs are $%million, ten te actual e#ternal failure costs are estimatedto &e $' million(
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Te Mar!et Researc Metod
&'e mar!et researc metoduses fo!mal ma!)et!esea!#' met'ods to assess t'e effe#t of poo! *ualityon sales and ma!)et s'a!e+
#usto"er surveys and intervie!s !ith "e"bers
of a co"pany$s sales force can provide significantinsight into the "agnitude of a co"pany$s hiddencosts%
Market research results can be used to projectfuture profit losses attributable to poor &uality%
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Te Taguci Quality )oss *unction
&'e Taguci loss functionassumes any "a!iation
f!om t'e ta!,et "alue of a *uality #'a!a#te!isti#
#auses 'idden *uality #osts+
'urther"ore, the hidden &uality costs increase
&uadratically as the actual value deviates
fro" the target value%
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Te Taguci Quality )oss *unction7
0ost
ower
&pecification
imit
Tar"et
8alue
9pper
&pecification
imit
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Te Taguci Quality )oss *unction
(y = k(y ) T*k: # proportionately constant dependent
upon the or"ani;ation
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Quality Cost epo!tQuality Cost epo!t
.nit $#tual Diamete! /.nit $#tual Diamete! /yy y+T y -T.y+T y -T./ !y+T.// !y+T./
1 =.= >.1> >.>1> 7 4.>>
2 1>.1 >.1> >.>1> 4.>>
3 1>.2 >.2> >.>4> 1?.>>4 =.@ >.2> >.>4> 1?.>>
Total >.1>> 74>.>>
#vera"e >.>2A 71>.>>
% d
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Quality Costs of alesQuality Costs of ales
Prevention costs%
*uality trainin" 73A!>>>
(eliability en"ineerin" @>!>>> 711A!>>> 4.11B
#ppraisal costs%
aterials inspection 72>!>>>Product acceptance 1>!>>>
Process acceptance 3@!>>> ?@!>>> 2.43
Internal failure costs%
&crap 7A>!>>>
(ewor 3A!>>> @A!>>> 3.>4xternal failure costs%
0ustomer complaints 72A!>>>
5arranty 2A!>>>
(epair 1A!>>> ?A!>>> 2.32
Total quality costs 7333!>>> 11.=>B
%ma,e !odu#ts
Quality Cost epo!t
o! t'e ea! Ended a!#' 31 2004
1122
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elati"e Dist!iution of Quality Costsxternal
'ailure
,1=.AB-
Prevention
,34.AB-
Internal
'ailure
,2A.?B-
#ppraisal
,2>.4B-
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Quality Cost !ap'
Cost
0
e!#ent Defe#ts
100%
ailu!e Costs
Cont!ol Costs
&otalQuality
Costs
$:
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Contemporary Quality Cost 0rap
Cost
0
e!#ent Defe#ts
100
ailu!e Costs
Cont!ol Costs
&otal
Quality
Costs
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&!end $nalysis
Quality Costs $#tual ales of ales
2>>> 744>!>>> 72!2>>!>>> 2>.>B2>>1 423!>>> 2!3A>!>>> 1@.>
2>>2 412!A>> 2!CA>!>>> 1A.>
2>>3 3=2!>>> 2!@>>!>>> 14.>
2>>4 2@>!>>> 2!@>>!>>> 1>.>
$ssume t'e follo;in, data($ssume t'e follo;in, data(
M lti l P i d T d 0
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11-26Multiple+Period Trend 0rap:
Total Quality Costs
5
10
15
20
0 1 2 3 4
5
ofales
ea!
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ultiple-&!end $nalysis fo!
%ndi"idual Quality Costs
%nte!nal Exte!nal
!e"ention $pp!aisal ailu!e ailu!e
2>>> 2.>B1 2.>B ?.>B 1>.> B
2>>1 3.> 2.4 4.> @.?
2>>2 3.> 3.> 3.> ?.>
2>>3 4.> 3.> 2!A 4.A2>>4 4.1 2.4 2.> 1.A
$ssume t'e follo;in, *uality #ost data(
1Exp!essed as a of sales
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ultiple-e!iod &!end !ap'i#(
%ndi"idual Quality Cost Cate,o!iesPercenta"e
of &ales1>
=
@
C?
A
4
3
2
1
>> 1 2 3 4 Dear
xternal failureInternal failure
Prevention
#ppraisal
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11-29!odu#ti"ity( easu!ement
and Cont!ol
Productivity is concerned
with producin" output
efficiently! and is itspecifically addresses the
relationship of output and
the inputs used to produce
the outputs.
Productivity is concerned
with producin" output
efficiently! and is itspecifically addresses the
relationship of output and
the inputs used to produce
the outputs.
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1. for any mix of inputs that will producea "iven output! no more of any oneinput is used than necessary to producethe output
2. "iven the mixes that satisfy the firstcondition! the least costly mix ischosen.
!odu#ti"ity( easu!ement
and Cont!ol
Total productive efficiency is the point atwhich two conditions are satisfied%
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Tecnical 1fficiency
&e#'ni#al Effi#ien#yis t'e #ondition ;'e!e no mo!e of any
one input is used t'an ne#essa!y to p!odu#e a ,i"en output+
Technical efficiency i"prove"entis !hen less
inputs are used to produce the sa"e output or
"ore output are produced using the sa"e input%Cu!!ent p!odu#ti"ity
utputs%
?
Inputs%
abor
#apital
4
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Tecnical 1fficiency
ame utput e;e! %nputs
o!e utput ame %nputs
utputs%
?utputs%
@
Inputs%
abor
#apital
4
Inputs%
abor
#apital
3
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Tecnical 1fficiencyo!e utput e;e! %nputs
&e#'ni#ally Effi#ient Comination %(
utputs%
@
utputs%
@
Inputs%
abor
#apital
3
Inputs%
abor
#apital
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Tecnical 1fficiency
&e#'ni#ally Effi#ient Comination %%(
f the two combinations that produce the same output!
the least costly combination would be chosen.
f the two combinations that produce the same output!
the least costly combination would be chosen.
utputs%
@
Inputs%
abor
#apital
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Partial Productivity Measurement: Measuringproductivity for one input at a ti"e%
+artial Measure = Output-nput
Operational Productivity Measure: +artial "easure!here both input and output are expressed in
physical ter"s%
*inancial Productivity Measure: +artial "easure!here both input and output are expressed indollars%
Partial Productivity easurementPartial Productivity easurementPartial Productivity easurementPartial Productivity easurement
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Profile measurementprovides a
series or a vector of separate anddistinct partial operational measures.
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!ofile !odu#ti"ity easu!es
Example 1(
The productivity of both labor labor and materials
moves in the same direction%
2003 2004Eumber of motors produced 12>!>>> 1A>!>>>
abor hours used 4>!>>> 3C!A>>
aterials used ,lbs.- 1!2>>!>>> 1!42@!AC1
Partial Productivity (atiosPartial Productivity (atios
2>>3 Profile 2>>4 Profile2>>3 Profile 2>>4 Profile
abor productivity ratio 3.>>> 4.>>>
aterial productivity ratio >.1>> >.1>A
1A>!>>>/3C!A>>1A>!>>>/3C!A>>1A>!>>>/1!42@!AC11A>!>>>/1!42@!AC1
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!ofile !odu#ti"ity easu!es
Example 2(
#ssume the same data as xample 1 except the material
used is 1!C>>!>>> pounds.
2003 2004Eumber of motors produced 12>!>>> 1A>!>>>
abor hours used 4>!>>> 3C!A>>
aterials used ,lbs.- 1!2>>!>>> 1!C>>!>>>
Partial Productivity (atios
2>>3 Profile 2>>4 Profile
abor productivity ratio 3.>>> 4.>>>
aterial productivity ratio >.1>> >.>@@
1A>!>>>/3C!A>>1A>!>>>/3C!A>>1A>!>>>/1!C>>!>>>1A>!>>>/1!C>>!>>>
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!ofit-:in)ed !odu#ti"ity
easu!ement
!ofit-:in)ed !odu#ti"ity
easu!ement
Profit+)in!age Rule: 'or the current period! calculate
the cost of the inputs that would have been used in the
absence of any productivity chan"e! and compare this
cost with the cost of the inputs actually used. The
difference in costs is the amount by which profits
chan"ed because of productivity chan"es.
To compute te inputs tat 2ould ave &een usedPQ., use te follo2ing formula:
PQ " Current Output3ase+Period Productivity Ratio
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1#ample:1#ample: 5un!ul provided te follo2ing data:
%667%667 %664%664
Eumber of motors produced 12>!>>> 1A>!>>>
abor hours used 4>!>>> 3C!A>>
aterials used ,lbs.- 1!2>>!>>> 1!C>>!>>>
9nit sellin" price ,motors- 7A> 74@5a"es per labor hour 711 712
0ost per pound of material 72 73
!ofit-:in)ed !odu#ti"ity
easu!ement
!ofit-:in)ed !odu#ti"ity
easu!ement
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!ofit-:in)ed !odu#ti"ity
easu!ement
!ofit-:in)ed !odu#ti"ity
easu!ement
P* ,labor- : 1A>!>>>/3 : A>!>>> hrs.
P* ,materials- : 1A>!>>>/>.1>> : 1!A>>!>>> lbs.
0ost of labor% ,A>!>>> x 712- 7 ?>>!>>>
0ost of materials% ,1!A>>!>>> x 73- 4!A>>!>>>
Total P* cost 7A!1>>!>>>
0ost of labor% ,3C!A>> x 712- 7 4A>!>>>
0ost of materials% ,1!C>>!>>> x 73- A!1>>!>>>
Total current cost 7A!AA>!>>>
The actual cost of inputs%
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!ofit-:in)ed !odu#ti"ity
easu!ement
!ofit-:in)ed !odu#ti"ity
easu!ement
Profitlined effect : Total P* cost Total current cost
: 7A!1>>!>>> F 7A!AA>!>>>
: 74A>!>>> decrease in profits
Te net effect of te process cange 2as
unfavora&le( Profits declined $486,666&ecause of productivity canges(
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!i#e-e#o"e!y Component
The difference between the total profit chan"e and the
profitlined productivity chan"e is called theprice+recovery component+
2>>4 2>>3 )ifference
(evenues 7C!2>>!>>> 7?!>>>!>>> 7 1!2>>!>>>0ost of inputs A!AA>!>>> 2!@4>!>>> 2!C1>!>>>
Profit 71!?A>!>>> 73!1?>!>>> 71!A1>!>>>
!i#e !e#o"e!y : Profit chan"e F Profitlined productivity chan"e: 71!A1>!>>> F 74A>!>>>
: 71!>?>!>>>
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The ndThe ndThe ndThe nd
Topic &ixTopic &ix