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  2. 2. AQM Cost of Quality “Cost of quality is … the expense of nonconformance –Chapter 1 the cost of doing things wrong.”DEFINITION • The "cost of quality" is not the price of& MEANING creating a quality product or service. It is the cost of NOT creating a quality product or service.
  3. 3. AQM Cost of Quality • A product that meets or exceeds its design specifications and is free of defects that mar its appearance orChapter 1 degrade its performance is said to have high quality of conformance.DEFINITION& MEANING • Preventing, detecting and dealing with defects cause costs that are called quality costs or costs of quality.
  4. 4. AQM Cost of Quality Opportunity to Reduce Real CostsChapter 1 • Quality costs enables to Understand hidden costs.DEFINITION Reduce and eliminate unnecessary costs.& MEANING • Prevent problems from happening.
  5. 5. AQM Cost of Quality Understated Quality CostsChapter 1 • Quality costs are real and estimated at: 25% of costs in manufacturingDEFINITION 35% of costs in service industry& MEANING • Quality costs can be categorised to enable better understanding.
  6. 6. AQM Cost of Quality • Quantify the size of the quality problem in language that will have an impact on upper management.Chapter 2 • Identify major opportunities for reduction in cost of poor quality throughout all activities inOBJECTIVES an organisation. OF • Identify opportunities for reducing customerEVALUATION dissatisfaction and associated threats to sales revenues. • Provide a mean of measuring the result of quality improvement activities instituted to achieve the above mentioned opportunities. • Align quality goals with organisation goals.
  8. 8. AQM Cost of Quality Internal Failure CostsChapter 3 “ The costs of deficiencies discovered before delivery which are associated withCATEGORIES the failure (nonconformities) to meetOF QUALITY explicit requirements or implicit needs of COSTS external or internal customers.” • Also include avoidable losses and inefficiencies that occur even when requirements and needs are met.
  9. 9. AQM Cost of Quality Internal Failure Costs • Failure to Meet Customer Requirements and NeedsChapter 3 • Scrap • ReworkCATEGORIES • Lost or missing informationOF QUALITY • Failure analysis COSTS • Scrap and rework- supplier • Reinspection, retest • Changing processes • Redesign of hardware/software • Rework in internal support operations • Downgrading
  10. 10. AQM Cost of Quality Internal Failure Costs • Cost of Inefficient Processes • Variability of product characteristicsChapter 3 • Unplanned downtime of equipment • Inventory shrinkageCATEGORIES • Variation of process characteristics from “bestOF QUALITY practice” COSTS • Non-value added activities. • “These are the costs that would disappear if no deficiencies existed.”
  11. 11. AQM Cost of Quality External Failure CostsChapter 3 “ The costs associated with theCATEGORIES deficiencies that is found afterOF QUALITY product is received by the COSTS customer.” • Also includes the lost opportunities for sales revenue.
  12. 12. AQM Cost of Quality External Failure Costs • Failure to Meet Customer Requirements and NeedsChapter 3 • Warranty charges • Complaint adjustmentCATEGORIES • Returned materialOF QUALITY • Allowances COSTS • Penalties due to poor quality • Rework on support operations • Revenue losses in support operations.
  13. 13. AQM Cost of Quality External Failure Costs • Lost Opportunities for Sales Revenue • Customer defectionsChapter 3 • New customer lost because of quality • New customer lost because of lack of capability.CATEGORIESOF QUALITY COSTS • “These costs also would disappear if no deficiencies existed.”
  14. 14. AQM Cost of Quality External Failure Costs • Those costs incurred if poor qualityChapter 3 products receive further processingCATEGORIES • If this occurs then the previous processingOF QUALITY is wasted •cost Why would you do this? COSTS
  15. 15. AQM Cost of Quality Appraisal CostsChapter 3 “Appraisal costs support activitiesCATEGORIES whose purpose is to determine theOF QUALITY degree of conformance to the COSTS quality requirements.” • Any defective parts and products should be caught as early as possible in the production process. • Sometimes called inspection costs.
  16. 16. AQM Cost of Quality Appraisal Costs • Examples • Incoming inspection and testChapter 3 • In-process inspection and testCATEGORIES • Final inspection and testOF QUALITY • Document review COSTS • Balancing • Product quality audits • Managing accuracy of test equipments • Inspection and test materials and services. • The kind of the work done is decisive, not the department.
  17. 17. AQM Cost of Quality Appraisal CostsChapter 3 • Those costs incurred because poor quality products might existCATEGORIESOF QUALITY • If these costs are necessarythis? the •Why would you permit then process is flawed and management is COSTS guilty.
  18. 18. AQM Cost of Quality Prevention Costs “Prevention costs support activitiesChapter 3 whose purpose is to reduce the number of defects.”CATEGORIESOF QUALITY COSTS • The most effective way to manage quality costs is to avoid having defects in the first place. • much less costly to prevent a problem from ever happening than it is to find and correct the problem after it has occurred.
  19. 19. AQM Cost of Quality Prevention Costs • Examples • Quality planningChapter 3 • New-product reviewCATEGORIES • Process planningOF QUALITY • Process control COSTS • Quality audits • Supplier quality evaluation • Training. • Do not include basic activities.
  20. 20. AQM Cost of Quality Prevention CostsChapter 3 • Those costs incurred because management is committed toCATEGORIES prevent poor quality products fromOF QUALITY happening COSTS • Why would you not do this?
  21. 21. AQM Cost of Quality • Important points to be kept in mind • Definitions should be tailor-made for each organization.Chapter 4 • Failure cost elements are key categories. FINALIZING • Agreement should be reached on the categories THE of cost to include before any data are collected.DEFINITIONS • Certain costs routinely incurred may have been accepted as inevitable but are really part of the cost of poor quality. • As the detailed categories of the cost of poor quality are identified, some categories will be controversial.
  22. 22. AQM Cost of Quality • ISO 9004-1 (1994), Quality Management and Quality System Elements- Guidelines, Section 6, “Financial Consideration of QualityChapter 5 Systems.”INTERNATIONAL STANDARDS • Identifies the approaches to data collection and reporting. • Quality costing approach • Process cost approach • Quality loss approach.
  23. 23. AQM Cost of Quality • Quality Costing Approach • Failure, appraisal and prevention approach.Chapter 5 • Process Cost ApproachINTERNATIONAL • Collects data for a process rather than a product. STANDARDS • Costs are divided into cost of conformity and cost of nonconformity. • Quality Loss Approach • Collects data on many of the “hidden” costs.
  24. 24. AQM Cost of Quality Benefits of an improvement effort • Reduced costs of errors 6Chapter • Improved process capability RETURN ON • Reduced customer defections QUALITY • Increase in new customers.
  25. 25. AQM Cost of Quality Return on Quality Prevention Costs Benefitcosts Appraisal Costs Prevention Costs Failure Costs • Internal Appraisal Costs • External Failure Costs Before Quality After Quality Cost Alignment Cost Alignment
  26. 26. AQM Cost of Quality Optimum Cost of Poor Quality • Minimum level of total quality costs when the quality of conformance is 100%, i.e., perfection.Chapter 6RETURN ON QUALITY
  27. 27. AQM Cost of Quality • Would it not make sense to preventChapter 7 poor quality products from happening?PREVENTION OF • How can this be done?POOR QUALITY • Whose responsibility is this? PAYS
  28. 28. AQM Cost of Quality How to Prevent Poor QualityChapter 7 • Prepare to measure costs of qualityPREVENTION OF – Determine categories of quality costsPOOR QUALITY PAYS – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data.
  29. 29. AQM Cost of Quality Determine Quality Cost CategoriesChapter 7 • Understand productPREVENTION OF • Understand processPOOR QUALITY • Understand where problems occur PAYS • Determine precisely what goes wrong • Determine what costs represents each problem.
  30. 30. AQM Cost of Quality Assign ResponsibilityChapter 7 • Make individuals at all levels responsible for collecting quality costPREVENTION OF data:POOR QUALITY – If quality cost data is required then PAYS make it the responsibility of the person who creates the cost to collect the data • If no one is responsible no one will bother.
  31. 31. AQM Cost of Quality Analyse Collected DataChapter 7 • Data on its own is uselessPREVENTION OF • Data must be analysed to extract meaning.POOR QUALITY PAYS • Determine what knowledge is required. • Develop an analysis system that provides the knowledge which is required.
  32. 32. AQM Cost of Quality Data Collection Approaches • Established accountsChapter 7 • Analysis of ingredients of established accountsPREVENTION OF • Basic accounting documentsPOOR QUALITY • Estimates PAYS • Temporary records • Work sampling • Allocation of total resources • Unit cost data • Market research data
  33. 33. AQM Cost of Quality Useful Quality Cost KnowledgeChapter 7 • What needed to be known is useful.PREVENTION OF • What do not need to be known is useless.POOR QUALITY PAYS • Only ask for knowledge that is needed to be known. • Demand that knowledge is presented so that it can be understood easily.
  34. 34. AQM Cost of Quality Summarize Collected DataChapter 7 The most basic ways are:PREVENTION OF • By product, process, component, defect type, or other likely defect concentrationPOOR QUALITY pattern. PAYS • By organizational unit. • By category cost of poor quality. • By time.
  35. 35. AQM Cost of Quality Reporting the ResultsChapter 7 Must provide the following perspective with integration into overall performancePREVENTION OF reporting system of organisation.POOR QUALITY • How do customer see us? (customer PAYS perspective) • What must we excel at? (internal perspective) • Can we continue to improve and create value? (innovation and learning perspective) • How do we look to shareholders? (financial perspective)
  36. 36. AQM Cost of Quality Gaining approval for the improvement program • Establish that costs are large enough to justify the actionChapter 7 • Use the grand total to demonstrate the need.PREVENTION • Relate the grand total to business measures. OF POOR • Show the subtotals for the broad majorQUALITY PAYS groupings of quality costs. • Estimate the savings and other benefits. • Calculate the return on investment. • Use a successful case history. • Identify the specific improvement projects. • Propose the structure of the improvement program.
  37. 37. AQM Cost of Quality Management is ResponsibleChapter 7 • Management decides what to produce in terms of Products (goods and / orPREVENTION OF services).POOR QUALITY • Management assigns responsibilities to PAYS produce products. • Management is accountable for effectively using resources to produce products.
  38. 38. “Cost of quality is … the expense of nonconformance – the cost of doing things wrong.” Crosby, P. 1979, Quality is Free, McGraw-Hill,