Cost of quality

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Cost of quality

  1. 1. Cost of Quality
  2. 2. Visible and hiddencosts Visible costs •Scrap •Rework •Warranty costs Hidden Costs • Conversion efficiency of materials • Inadequate resource utilization • Excessive use of material • Cost of redesign and re-inspection • Cost of resolving customer problems • Lost customers / Goodwill • High inventory
  3. 3. Categories of Quality Costs Quality Costs Conformance Non-ConformancePrevention Appraisal Internal failure External failure
  4. 4. Cost of quality Cost of quality = Cost of conformance + Cost of non- conformance• Cost of conformance is the cost of providing products or services as per the required standards. This can be termed as good amount spent. (Prevention & Appraisal costs)• Cost of non-conformance is the failure cost associated with a process not being operated to the requirements. This can be termed as unnecessary amount spent.( Internal & External failure costs)
  5. 5. Prevention Costs Prevention costs are associated with design, implementation , maintenance, and planning prior to actual operation, in order to avoid defects from happening. The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures ( internal and external ).The motto is “Prevention rather than appraisal” .
  6. 6. Activities associated withPrevention costs Market research Quality training programs. Contract review Design review Field trials Supplier evaluation Process plan review Process capability review Design and manufacture of jigs and fixtures Preventive checks & maintenance
  7. 7. Appraisal costsAppraisal costs are spent to detect defectsto assure conformance to quality standards.Appraisal cost activities sums up to the “costof checking if things are correct”.Theappraisal costs are focused on the discoveryof defects rather than prevention of defects
  8. 8. Activities associated with AppraisalcostsProto type testingVendor surveillanceIncoming material inspectionProcess inspection/controlFinal inspectionLaboratory testing / measurementDepreciation cost for measuringQuality audits.
  9. 9. Internal failure costsInternal failure costs occurs when results of work fail to reachdesignated quality standards , and are detected before transfer tothe customer takes place.
  10. 10. ExamplesInternal failure costsDesign changes/ corrective actionScrap due to design changesExcess inventoryRectification / reject disposition ofpurchased materialRework/rejection in manufacturingDowngrading of end productDowntime of plant & machineryTrouble-shooting & investigation ofdefects
  11. 11. External failure costsExternal failure costs occur when the product or service from aprocess fails to reach designated quality standards , and is notdetected until after transfer to the customer.
  12. 12. Activities associated with External failure costs Processing / investigation of customer complaint Repair/replacement of sold goods Warranty claims Product liability & litigation costs Interest charges on delayed payment due to quality problems Loss of customer goodwill & sales.
  13. 13. Size of four categories of quality costs.The organizations which do not follow TQM,there is less emphasis onprevention and their main quality efforts are on appraisal with verylittle control on internal and external failure costs.Various studies have shown that quality cost in manufacturingcompanies the world over range from 20 % to 30 % of turnover and inthe case of service companies it can go up to 40 % as illustrated ingraph on the next slide.
  14. 14. Size of various quality cost elements 10-15%Quality costs in % of sales 10-12% The total quality costs 25-35 % of turnover. 4-6% 1% Preventive Appraisal Internal External Failure Failure
  15. 15. Impact of TQM on costs.TQM is primarily aimed to improve the quality of the product , highercustomer satisfaction and better working environment for theemployees. The most dramatic impact of TQM is on reduction ofquality costs which directly effect the profitability .This is demonstrated by the results of TQM program in Xerox Corp .The change in various elements of quality cost before and afterlaunching TQM by Xerox Corp is shown on the next slide.
  16. 16. Impact of TQM on costs. An example from Xerox Corp. 35 30 25 Internal% of sales Failure 20 15 Internal Failure 10 Appraisal Appraisal 5 Prevention prevention 0 Before TQM After TQM
  17. 17. 1-10-100 Rule Cost of rectifying defect 1 Prevention Rs RsStages 10 Correction Rs Rs R Rs s 100 Failure Rs Rs Rs Rs
  18. 18. cost of qualityTraditionally recorded quality cost generally account for only4 to 5 percent of sales which mainly comprise of cost ofscrap, re-work and warranty.
  19. 19. Hidden costs of qualityThere are additional costs of quality which are hidden and do notappear in the account books of the company, as they are intangibleand difficult to measure. These additional costs could be as high as20-25% of sales.
  20. 20. Visible and hiddencosts Visible costs •Scrap •Rework •Warranty costs Hidden Costs • Conversion efficiency of materials • Inadequate resource utilization • Excessive use of material • Cost of redesign and re-inspection • Cost of resolving customer problems • Lost customers / Goodwill • High inventory

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