Basic concept:Cost of quality refers to the sum of costs incurredto prevent non-conformance from happening andthe costs incurred when non-conformance inproducts and system occurs which is commonlyknown as cost of poor qualityCost of poor quality is actually the cost of doingthings wrongCost of poor quality refers to the costs associatedwith 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 CostsScrap Rework Warranty 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 goodqualityPrevention Costs AppraisalCosts 2 - Cost of poor qualityInternal failure Costs External failureCosts
Preventive costs:Preventive costs are the cost of all activities specificallydesigned to prevent poor quality product or service. These costs are incurred to keep appraisal and failurecosts 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 assureconformance 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 costThese are the costs incurred when product or service failto meet quality requirements prior to the transfer ofownership to the customer.
External failure cost These are the costs incurred by a business due to failureof product or service at the customer end. These costsresults 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 costsThe following sequence applies to most organizations1. Review the literature on quality costs or consult others in similar industries who are using the same tool.2. Select one organizational unit of the company to serve as a pilot site3. Discuss the objectives of the study with the key people in the organization4. Collect whatever cost data are conveniently available from the accounting system5. Make a proposal to management for a full study
6. Publish a draft of the categories defining the cost of poor quality7. Finalize the definitions and secure management approval8. Secure agreement on responsibility for data collection and report preparation9. Collect and summarize the data10. Present the cost results to management along with the results of a demonstration quality improvement project
Case study: H&S motorsThe H&S motor company produces small motors for use in lawnmowersand garden equipment. The company instituted a quality improvementprogram in 1999 and has recorded the following quality cost data andaccounting measures for 4 years.The company wants to assess its quality assurance program and developquality index using sales basis for the 4 year period.
Key points of study:• Approximately 75% of the H&S’s 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 qualitycosts 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 nos alone provide little insight into the effectiveness of thequality management program; however as a standard to make comparisonsover time they can be useful.
Conclusion:When the cost of achieving good qualityincreases; cost of poor quality decreasesautomatically.
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