Cost of quality
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The document discusses the concept of cost of quality and its various categories. It explains that total quality costs are the sum of prevention costs, appraisal costs, and internal and external failure costs. Prevention costs are incurred to prevent poor quality, while appraisal costs are for measuring and testing. Failure costs occur due to poor quality products. The document emphasizes that understanding quality costs can help reduce hidden costs and eliminate unnecessary expenses by focusing on prevention rather than correction. It is the responsibility of management to produce high quality products and minimize quality costs.
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Cost of quality
- 1. Cost of Quality Cost of Quality
- 2. Quality cost A quality cost is considered to be any cost that the company would not have incurred if the quality of the product or service were perfect. Cost of Quality
- 3. Quality costs Total quality costs are the sum of prevention costs, appraisal costs, and internal and external failure costs. Cost of Quality
- 4. Quality costs increase over time Cost of Quality FailureCosts Time when failure found Prevention Costs Failure found during design phase Failure found at onset of manufacture Failure found at final inspection Failure found at installation Field repair costs Failure found by customer Liability costs Low High High
- 5. Hidden Costs of Poor Quality Cost of Quality ReprocessingReprocessing RejectsRejects Customer returnsCustomer returns Warranty expensesWarranty expenses Lost salesLost sales Overtime to correct errorsOvertime to correct errors Extra inventoryExtra inventory Premium freight costsPremium freight costs Extra process capacityExtra process capacity Loss of goodwillLoss of goodwill Process downtimeProcess downtime DelaysDelays Extra inventoryExtra inventory
- 6. Balanced Score Card Cost of Quality TQM Element Financial Measure Non-financial Measure Customer satisfaction External failure cost. Field service expense. Results of customer satisfaction survey. On-time delivery. Number of customer complaints. Internal performance Appraisal cost. Internal failure cost. Prevention cost. Defect rates Yields Lead times Idle capacity Unscheduled machine downtime
- 7. Traditional Model Cost of appraisal plus prevention Failure costs Total quality costs Quality of conformance0% 100% Costpergood unitofproduct
- 8. Emerging COQ Model Cost of appraisal plus prevention Failure costs Total quality costs Quality of conformance0% 100% Costpergood unitofproduct
- 9. COQ as motivator Companies under TQM do not focus on quality cost minimization. Quality improvement projects tend to focus on zero defects or defect reduction to the six-sigma level.
- 11. COQ Theme Costs are not incurred or allocated, but rather caused. Cost information does not solve quality problems, nor does it suggest specific solutions. Problems are solved by tracing the cause of a quality deficiency.
- 12. Opportunity to Reduce Real Costs • Understand quality costs enables you to – Understand hidden costs – Reduce and eliminate unnecessary cost • Prevent problems from happening • Management responsibility to enable this Dr Lionel Boxer Intergon 2004 Cost of Quality Page 12
- 13. Understand Quality Costs • Quality costs are real and estimated at: – 25% of costs in manufacturing – 35% of costs in service industry • Quality costs can be categorised to enable better understanding
- 14. Categories of Quality Costs • Failure Costs • Repair Costs • Appraisal Costs • Prevention Costs
- 15. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 15 Failure Costs • Those costs incurred because poor quality products do exist • Can be further divided into sub-categories of: – Internal failure costs – External failure costs
- 16. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 16 Repair Costs • Those costs incurred if poor quality products receive further processing • If this occurs then the previous processing is wasted cost • Why would you do this?
- 17. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 17 Appraisal Costs • Those costs incurred because poor quality products might exist • If these costs are necessary then the process is flawed and management is guilty • Why would you permit this?
- 18. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 18 Prevention Costs • Those costs incurred because poor quality products can exist and • Those costs incurred because management is committed to prevent poor quality products from happening • Why would you not do this?
- 19. Opportunity to Reduce Real Costs • Understand quality costs enables you to – Understand hidden costs – Reduce and eliminate unnecessary cost • Prevent problems from happening • Management responsibility to enable this Dr Lionel Boxer Intergon 2004 Cost of Quality Page 19
- 20. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 20 Understand Quality Costs • Quality costs are real and estimated at: – 25% of costs in manufacturing – 35% of costs in service industry • Quality costs can be categorised to enable better understanding
- 21. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 21 Categories of Quality Costs • Failure Costs • Repair Costs • Appraisal Costs • Prevention Costs
- 22. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 22 Failure Costs • Those costs incurred because poor quality products do exist • Can be further divided into sub-categories of: – Internal failure costs – External failure costs
- 23. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 23 Repair Costs • Those costs incurred if poor quality products receive further processing • If this occurs then the previous processing is wasted cost • Why would you do this?
- 24. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 24 Appraisal Costs • Those costs incurred because poor quality products might exist • If these costs are necessary then the process is flawed and management is guilty • Why would you permit this?
- 25. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 25 Prevention Costs • Those costs incurred because poor quality products can exist and • Those costs incurred because management is committed to prevent poor quality products from happening • Why would you not do this?
- 26. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 26 Preventing Poor Quality Pays Failure Costs • Internal • External Failure Costs Repair Costs Repair Costs Appraisal Costs Appraisal Costs Prevention Costs Prevention Costs$ Before Quality Cost Alignment After Quality Cost Alignment Benefit
- 27. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 27 Preventing Poor Quality Pays • Would it not make sense to prevent poor quality products from happening? • How can this be done? • Whose responsibility is this?
- 28. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 28 How to Prevent Poor Quality • Prepare to measure costs of quality – Determine categories of quality costs – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data
- 29. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 29 Determine Quality Cost Categories • Understand your product • Understand your process • Understand where problems occur • Determine precisely what goes wrong • Determine what costs represents each problem
- 30. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 30 Creating Data Collection System • Create measurement system – Attempt to harness existing financial accounting system – Manipulate existing financial data – Collect costs as they occur • Whatever you do ensure costs are accurate
- 31. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 31 Assign Responsibility • Make individuals at all levels responsible for collecting quality cost data: – If quality cost data is required then make it the responsibility of the person who creates the cost to collect the data • If no one is responsible no one will bother
- 32. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 32 Analyse Collected Data • Data on its own is useless • You must have it analysed to be able to extract meaning • Determine what knowledge you require • Develop an analysis system that provides the knowledge you require
- 33. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 33 Useful Quality Cost Knowledge • What you need to know is useful • What you do not need to know is useless • Only ask for knowledge you need to know • Demand that knowledge is presented so that it can be understood easily
- 34. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 34 Management is Responsible • Management decides what to produce in terms of Products (goods and / or services) • Management assigns responsibilities to produce products • Management is accountable for effectively using resources to produce products
- 35. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 35 Preventing Poor Quality Pays Failure Costs • Internal • External Failure Costs Repair Costs Repair Costs Appraisal Costs Appraisal Costs Prevention Costs Prevention Costs$ Before Quality Cost Alignment After Quality Cost Alignment Benefit
- 36. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 36 Preventing Poor Quality Pays • Would it not make sense to prevent poor quality products from happening? • How can this be done? • Whose responsibility is this?
- 37. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 37 How to Prevent Poor Quality • Prepare to measure costs of quality – Determine categories of quality costs – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data
- 38. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 38 Determine Quality Cost Categories • Understand your product • Understand your process • Understand where problems occur • Determine precisely what goes wrong • Determine what costs represents each problem
- 39. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 39 Creating Data Collection System • Create measurement system – Attempt to harness existing financial accounting system – Manipulate existing financial data – Collect costs as they occur • Whatever you do ensure costs are accurate
- 40. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 40 Assign Responsibility • Make individuals at all levels responsible for collecting quality cost data: – If quality cost data is required then make it the responsibility of the person who creates the cost to collect the data • If no one is responsible no one will bother
- 41. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 41 Analyse Collected Data • Data on its own is useless • You must have it analysed to be able to extract meaning • Determine what knowledge you require • Develop an analysis system that provides the knowledge you require
- 42. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 42 Useful Quality Cost Knowledge • What you need to know is useful • What you do not need to know is useless • Only ask for knowledge you need to know • Demand that knowledge is presented so that it can be understood easily
- 43. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 43 Management is Responsible • Management decides what to produce in terms of Products (goods and / or services) • Management assigns responsibilities to produce products • Management is accountable for effectively using resources to produce products
- 44. Opportunity to Reduce Real Costs • Understand quality costs enables you to – Understand hidden costs – Reduce and eliminate unnecessary cost • Prevent problems from happening • Management responsibility to enable this Dr Lionel Boxer Intergon 2004 Cost of Quality Page 44
- 45. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 45 Understand Quality Costs • Quality costs are real and estimated at: – 25% of costs in manufacturing – 35% of costs in service industry • Quality costs can be categorised to enable better understanding
- 46. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 46 Categories of Quality Costs • Failure Costs • Repair Costs • Appraisal Costs • Prevention Costs
- 47. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 47 Failure Costs • Those costs incurred because poor quality products do exist • Can be further divided into sub-categories of: – Internal failure costs – External failure costs
- 48. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 48 Repair Costs • Those costs incurred if poor quality products receive further processing • If this occurs then the previous processing is wasted cost • Why would you do this?
- 49. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 49 Appraisal Costs • Those costs incurred because poor quality products might exist • If these costs are necessary then the process is flawed and management is guilty • Why would you permit this?
- 50. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 50 Prevention Costs • Those costs incurred because poor quality products can exist and • Those costs incurred because management is committed to prevent poor quality products from happening • Why would you not do this?
- 51. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 51 Preventing Poor Quality Pays Failure Costs • Internal • External Failure Costs Repair Costs Repair Costs Appraisal Costs Appraisal Costs Prevention Costs Prevention Costs$ Before Quality Cost Alignment After Quality Cost Alignment Benefit
- 52. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 52 Preventing Poor Quality Pays • Would it not make sense to prevent poor quality products from happening? • How can this be done? • Whose responsibility is this?
- 53. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 53 How to Prevent Poor Quality • Prepare to measure costs of quality – Determine categories of quality costs – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data
- 54. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 54 Determine Quality Cost Categories • Understand your product • Understand your process • Understand where problems occur • Determine precisely what goes wrong • Determine what costs represents each problem
- 55. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 55 Creating Data Collection System • Create measurement system – Attempt to harness existing financial accounting system – Manipulate existing financial data – Collect costs as they occur • Whatever you do ensure costs are accurate
- 56. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 56 Assign Responsibility • Make individuals at all levels responsible for collecting quality cost data: – If quality cost data is required then make it the responsibility of the person who creates the cost to collect the data • If no one is responsible no one will bother
- 57. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 57 Analyse Collected Data • Data on its own is useless • You must have it analysed to be able to extract meaning • Determine what knowledge you require • Develop an analysis system that provides the knowledge you require
- 58. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 58 Useful Quality Cost Knowledge • What you need to know is useful • What you do not need to know is useless • Only ask for knowledge you need to know • Demand that knowledge is presented so that it can be understood easily
- 59. Dr Lionel Boxer Intergon 2004 Cost of Quality Page 59 Management is Responsible • Management decides what to produce in terms of Products (goods and / or services) • Management assigns responsibilities to produce products • Management is accountable for effectively using resources to produce products
- 60. COQ Theme Costs are not incurred or allocated, but rather caused. Cost information does not solve quality problems, nor does it suggest specific solutions. Problems are solved by tracing the cause of a quality deficiency.
- 61. Copyright 2006 John Wiley & Sons, Inc. 3-61 Cost of Quality Cost of Achieving Good Quality Prevention costs costs incurred during product design Appraisal costs costs of measuring, testing, and analyzing Cost of Poor Quality Internal failure costs include scrap, rework, process failure, downtime, and price reductions External failure costs include complaints, returns, warranty claims, liability, and lost sales
- 62. 3-62 Prevention Costs Quality planning costs costs of developing and implementing quality management program Product-design costs costs of designing products with quality characteristics Process costs costs expended to make sure productive process conforms to quality specifications Training costs costs of developing and putting on quality training programs for employees and management Information costs costs of acquiring and maintaining data related to quality, and development of reports on quality performance
- 63. 3-63 Appraisal Costs Inspection and testing costs of testing and inspecting materials, parts, and product at various stages and at the end of a process Test equipment costs costs of maintaining equipment used in testing quality characteristics of products Operator costs costs of time spent by operators to gar data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality
- 64. Copyright 2006 John Wiley & Sons, Inc. 3-64 Internal Failure Costs Scrap costs costs of poor-quality products that must be discarded, including labor, material, and indirect costs Rework costs costs of fixing defective products to conform to quality specifications Process failure costs costs of determining why production process is producing poor-quality products Process downtime costs costs of shutting down productive process to fix problem Price-downgrading costs costs of discounting poor-quality products— that is, selling products as “seconds”
- 65. Copyright 2006 John Wiley & Sons, Inc. 3-65 External Failure Costs Customer complaint costs costs of investigating and satisfactorily responding to a customer complaint resulting from a poor-quality product Product return costs costs of handling and replacing poor-quality products returned by customer Warranty claims costs costs of complying with product warranties Product liability costs litigation costs resulting from product liability and customer injury Lost sales costs costs incurred because customers are dissatisfied with poor quality products and do not make additional purchases
Editor's Notes
- Greater emphasis placed on prevention and appraisal. It assumes appraisal and prevention costs to be relatively fixed over time. Model does not encourage tradeoffs. Total cost is NOT minimized at less than 100% conformance.
- Companies under TQM do not focus on quality cost minimization, specially if it occurs at less than 100% conformance. Cost of quality numbers tend to be “soft,” in particular those used to estimate external failure cost.
- The earlier you detect and prevent a defect the more you can save. If you catch a defective 2 cent resistor before is used, you loose two cents. If you find after is solder into a computer component, it may cost $10 to repair the part. If you don’t catch it until it reaches the customer’s hands, the repair will cost hundreds of dollars. Indeed, for a $5000 computer, a field repair may exceed the manufacturing cost.