customer relation management presentation roadmap what is known and

Meaning of Quality – Quality Concepts
The Eight Dimensions of Quality
Lead Indicators of Quality - Detecting Poor Quality
Diagnostic Information - Correcting Quality Problems
Quality Cost Behavior Models
1

The Meaning of Quality
• A quality product or service is one that meets or exceeds
customer expectations.
• The issue of quality is no longer a subject of discussion and
comparison between its costs and the benefits that can be
obtained from it.
• Rather, quality has now become an imperative necessity that must
be available in any company that wishes to survive and continue
in the market.
• This means that quality is now no longer a competitive advantage
that one company can benefit from over another, but rather it has
become one of the basic necessary conditions and requirements
that must be met so that the company can be a member of the
market and participate in the arena of competition.
2

• In view of the amazing improvements that have been achieved
in the quality of products and the great advantages and savings
that have been achieved from these improvements, the
application of the quality philosophy has now been extended to
include all areas and activities in companies at the present time,
and it is now called “Total Quality Management” (TQM).
Quality concepts
• Merely meeting the customer's basic needs, although required,
does not mean excellence from the customer's point of view.
Rather, the distinction that guarantees customer loyalty and
return to purchase again without searching for alternatives is
fulfilling needs that the customer does not know.
3

• Therefore, discussing quality as a strategy requires that
the term quality be “analyzed” to find out its essential
components and thus be easier to manage and deal with.
• This analysis is considered a basic requirement for
knowing the quality specifications that will be competed
against.
• In this regard, there are eight dimensions or categories of
quality that can serve as a framework for strategic
analysis of quality:
4

The Eight Dimensions of Quality
o Performance
o Features
o Reliability
o Conformance (compatibility)
o Durability (longevity)
o Serviceability
o Aesthetics (beauty elements)
o Perceived Quality (quality excellence)
5

1 – Performance:
• It indicates the operational specifications of the product. For
example, for a television set, performance means clarity of
sound, picture and color, and the ability to receive from distant
stations or in unusual weather conditions.
2 – Features:
• It refers to features that complement or support the operational
characteristics of the product, such as the presence of
automatic channel tuning in the television set. It is noted here
that it is difficult to separate between what is considered
operational characteristics (performance) and what is
considered complementary characteristics (advantages).
However, complementary characteristics can play a large role
in customers' quality preferences. 6

3 – Reliability:
• This dimension reflects the probability of bad performance or
failure within a specific period of time.
• The reliability of a product can be measured by the average
time to first failure, or the average time between failures
during a given unit of time.
• The importance of this dimension of quality increases from the
perspective of customers as the cost of malfunctions and
maintenance increases, such as the cost of malfunctions and
maintenance in electronic computers in information systems
or agricultural machinery during the harvest period.
7

4 – Conformance (compatibility):
• It refers to the degree to which a product's design and
operating characteristics meet established quality
standards and specifications, which is usually expressed
in the form of a quality target value.
• Deviation from this value can be allowed within certain
limits.
• Therefore, the product is considered to meet quality if it
falls within these limits.
8

5 – Durability (longevity):
• It measures the life of the product, i.e. how long it remains
usable.
• This life can be measured by the number of times or how
much a product is used before it expires.
• There are products that expire when they fail for the first time,
such as light bulbs.
• In this case, the life of the product is measured by the number
or amount of use (for example, the number of hours for bulbs)
before it fails.
9

• There are other products that can be repaired when they fail.
In this case, repair costs are usually compared to replacement
costs.
• The life of these products is measured by the number of times
or the amount of use of the product before it breaks down and
replacing it is better than continuing to repair it.
• It is noted here that there is a connection between the two
dimensions of quality: the product’s reliability and its lifespan
(durability).
• The product that has many malfunctions and failures will often
be scraped early compared to another product that can be
relied upon and lasts for a longer period of time.
10

6 – Serviceability:
• It means speed, good handling, efficiency, and ease of
repairing the product in the event of a breakdown.
• The customer is not only concerned with product
malfunctions, but he is also concerned with the time required
to repair and restart it, the extent of commitment to the
deadlines given to the customer, the good treatment of the
customer, and the accuracy in discovering the defect, fixing
it, and not returning to it again.
• It is noted here that the degree of customer satisfaction with
the service provided to him is due to his appreciation for this
service. Therefore, the customer may remain dissatisfied
even after the product is repaired.
11

• Therefore, the company's reputation and the customer's
decision to continue or not continue dealing with it can be
affected by how the company deals with customer complaints
and requests.
7 – Aesthetics (beauty elements):
• It means how the product looks in terms of shape, texture,
sound, taste, smell, etc., which are aspects that depend to a
large extent on personal appreciation.
• These aspects greatly influences the customer's preferences
and prioritization among competing products.
• The difficulty of achieving this dimension of quality is due to
the impossibility of satisfying the tastes and preferences of all
customers.
12

8 – Perceived Quality (quality excellence):
• Consumers usually do not have complete information about
the specifications of the product or service except within the
limits of the information they obtain from advertisements and
comparison between different brands.
• There is no doubt that the company's reputation and goodwill
will have a major impact on consumers' preference for its
products due to the assumption that the quality of today's
products will be like the quality of yesterday's products, which
was the reason for the company’s goodwill.
13

14
Dimensions of Quality
 Product or
Service Attributes
 Customer service
before and after the sale
Tangible
• Performance
• Adherence to
specifications
• Functionality
Intangible
• Reputation
• Appearance
• Appeal
• Prompt and accurate responses
to customer inquires
• Proper treatment of
customers by salespeople
• On-time deliveries
• Customer follow-up after the sale
• Timely and accurate resolution of
customer concerns
• Good warranty and repair services

• It is noted from these eight dimensions of quality that they
represent a broader strategic framework for quality instead of
the traditional focus on the dimensions of compatibility and
reliability of the product only.
• Thus, companies must use this framework to explore the
opportunities available to the company that make it able to
provide products that appear distinct and different from
competitors’ products from the customers’ point of view.
• It is also noted that this strategic framework for quality
focused on the dimensions of quality from the point of view of
the customer who buys the product or receives the service. In
doing so, he neglects a very vital element in any quality
improvement program, which is the internal customer.
15

• Any product or service that reaches the customer at the end
is the result of a series of processes and services that begin
within the company and end with the external customer.
Therefore, any shortcoming or weakness in the services
provided at any link in this chain will ultimately impact the
customer, who will suffer from an increase in costs, a delay
in receipt, or a poor quality product or service.
• It is clear from the above that satisfying the external
customer begins with satisfying the internal customers. That
is, quality in its broad sense does not mean striving to
satisfy the external customer only (quality of product or
service), but it also means striving to satisfy employees
(quality of processes: tools, training, and support they need
from management.
16

• Workers are the ones who experience routine daily problems
at work, and they are the most knowledgeable about their
causes, and therefore they are the most capable of knowing
the appropriate solutions to them.
• Therefore, in order for management to benefit from this
knowledge, it must allow these workers to intervene in
solving these problems and proposing appropriate solutions
to them, for example by forming ““Quality Circles or Rings.”
• This change in the definition of quality in its broad sense
resulted in three fundamental shifts in the prevailing
thought about quality:
17

First: Quality design instead of quality inspection:
• The thought and focus has now shifted from “quality inspection
during and after manufacturing to designing quality” and building
it into the product before manufacturing.
Second: The possibility of manufacturing instead of the
ability to perform:
• Meaning that there has been a shift from separating “product
design” from the “manufacturing process” to designing the
product and processes simultaneously.
• It has now become necessary to combine production engineers
with product designers in order to avoid any technical
complications during the manufacturing processes. 18

Third: Quality is compatible with cost instead of conflict:
• The belief has now shifted from the existence of a conflict
between quality and cost, which means that improving quality
necessarily means an increase in costs (the concept of quality
inspection), to the belief that improving quality is the primary
factor in reducing costs (the concept of quality design).
19

Sales Gains:
 Improved satisfaction
 Improved reputation
 Higher Sales
 Improved response
Reduced Costs
 Increased productivity
 No Inspection Costs
 No Internal Failure
 (Lower scrap, rework, and spoilage costs)
 No External Failure
(Lower warranty, replacement, refund
 sales returns, and negative effect costs)
Quality Can Improve Productivity and Profits
Increased Profits
Improved Quality
20

A Process is...
The combination of:
 Methods
 Materials
 Machines
 People
 Environment
 Measurement
 Used together to perform a service, produce a
product, or to complete some other task.
 A process has measurable inputs and outputs.
21

A Process is...
Methods Materials Machines
Process
People Environment Measurement
Output
22

Lower Return
Sales
Lower
Manufacturing
Cost
Higher
Perceived
Value
Lower
Throughput
(Lead) Time
Lower
Warranty and
Service Costs
Higher
Prices
Improved Quality
Higher
Market
Share
Faster
Delivery
Increased
Revenue
Financial Performance
Conceptual linkage between Quality and Financial Performance
23

56
Variation indicates poor quality. To measure variation,
there are several tools that can be used:
Histograms Run Charts Control Charts
0
10
20
30
40
50
60
70
80
90
Mon. Tues Wed. Thur. Fri.
A graphical display of the
frequency distribution of
attributes.

58
A graph showing trends in
variation over time.
0
20
40
60
80
100
M
o
n
.
T
u
e
s
W
e
d
.
T
h
u
r
.
F
r
i
.

59
Notice that this process seems
to be out of control on Fridays.
0
20
40
60
80
100
M
o
n
.
T
u
e
s
W
e
d
.
T
h
u
r
.
F
r
i
.

27
Control Charts
The circled observations are unacceptable, that is, they suggest an out-
of-control process. Management may want to investigate the underlying
causes of these observations and take appropriate corrective action.

61
Diagnostic Information - Correcting Quality Problems
While lead indicators tell us that there IS a problem,
diagnostic tools help determine WHAT the problem
is.
Cause-and-Effect
Diagrams Scatter Diagrams
Flow Charts Pareto Charts

62
Cause-and-Effect Diagrams
Defect = Late
Deliveries
Trucks
Breakdown
Flat Tire
Drivers
Don’t know the
route
Too slow
Poorly
Trained
Other
Road
Conditions
Rain or
snow
Ice
Road
Work
Wrong
directions from
customer
Sometimes called “fishbone” or
Ishikawa diagrams

64
Scatter Diagrams
A plot of two variables that might be related. Patterns often
indicate a causal relationship.
0
10
20
30
40
50
0 5 10 15 20
Frequency of Incorrect Information
Average
Customer-
Response
Time
(Min)
This pattern indicates a causal relationship.

65
Flowchart
A graphical illustration of
sequential linkages among
process activities.
Standardized symbols are
used to represent
decisions, actions,
documents, and storage
devices.
Taking Phone Orders
SI2
SI1
Sales
invoice
Items on
hand?
Select items and
place on conveyor
Initial SI1 and
attach to items
SI1
Sales
invoice
Cancel
sales
invoice
Notify
customer
in writing
Update perpetual
inventory records
SI2
Duplicate
invoice
File
Yes
No
SI2
SI1
Sales
invoice
Inventory
records.
Prepare invoice in
duplicate
Send goods and
invoice to customer
Gather customer
information

66
Pareto Charts
A histogram of causes of an error or errors arranged in order of
frequency or size. Helps in prioritizing actions to address problems.
0
10
20
30
40
50
60
70
80
Late Delivery Defective
Produce
Incorrect Bill Backorders Wrong Item

Quality Cost Behavior Models
 How the quality cost is changing as a result of the improvement
program?
• Accounting for the costs of quality requires knowing what the
costs of quality are, or more precisely what the costs of not
having quality are, then, identifying the different forms of
behavior of these costs (dependent variable) as a result of
making improvements in quality (independent variable) so that
they can be measured and reported.
• There are three quality cost behavior models
1- The Economic of Conformance Model
2- Zero – Defect Model
3- Taguchi (Quality Loss Function) Model 33

Economic of Conformance Model
(Juran or Traditional Model)
• Conformance means satisfying quality specifications.
Components of the Total Cost of Quality
• This model is based on the assumption that the total cost of
quality can be classified into two groups:
• Conformance Costs group:
1.Preventive (protective) Costs
2.Appraisal Costs
• Non - Conformance ( Failure) Costs group:
3.Internal Failure Costs
4.External Failure Costs
34

1- Preventive (protective) Costs
• These are the costs of preventing or eliminating the
existence of defected units before production (during
the design stage).
• Example:
• Quality engineering
• Quality training
• Recruiting
• Design reviews
• Quality circles
35

2- Appraisal Costs
• These are the costs of preventing and detecting defects
during the manufacturing process.
• Example:
• Inspection of materials
• Packaging inspection
• Product acceptance
• Process acceptance
• Field testing
36

3- Internal Failure Costs
• These are the costs of detecting (discovering) defected
units after production before shipping to the
customers.
• Example:
• Costs of Scrap.
• Rework Costs.
• Spoiled Units loss.
• Downtime (defect-related)
• Re-inspection
• Retesting
• Repairs
37

4- External Failure Costs
• These are the costs of detecting (discovering) defected
units after shipping to the customers.
• Example:
• Costs of Warranties
• Costs of Replacements
• Lost sales (performance- related)
• Returns/Allowances/Discounts
• Product liability
• Complaint adjustment
38

Basic Assumption
• The model is based on the assumption that there is a
trade-off (opposite direction, to decrease one you have to
increase the other) between the conformance costs and
the failure costs.
• This means that reducing failure costs requires increase in
the conformance costs as follow:
39

The quality level will not reach to the 100% level because of the
reflection point in the second stage as a result of the trade-off
between the conformance and the failure costs. 40

1st Stage
• Decrease in failure costs > Increase in conformance costs
• The result : decrease in the total quality costs
• Action : Continue the improvement program
• 2nd Stage
• Decrease in failure costs = Increase in conformance costs
• The result : total quality costs at minimum
• Action: this is the optimal quality level
• 3rd Stage
• Decrease in failure costs < Increase in conformance costs
• The result : increase in the total quality costs
• Action: Stop the improvement program
41

• Advantages
1. It is simple and easy to understand model.
2. It is the first model that represent the quality specification
using monetary terms.
• Criticisms
1. It is a static model. It represent the behavior of the quality
costs in one period of time.
2. The model focus on the recorded costs only and ignores the
intangible costs of quality.
3. It is difficult if not impossible practically to determine the
intersection point.
4. It ignores the effect of learning and the experience gained
over several periods of time. 42

• Assume the following quality cost data for a manufacturing company :
• 2011 2012
• Sales return 5000 1000
• Scrap 3000 1500
• Rework 4000 1500
• line inspection 1500 2000
• Design Engineering 1000 4000
• Inspection materials 500 2500
• Training 1000 2000
• Warranty repairs 6000 500
• Sales revenues 100000 150000
• Required : Prepare the quality cost report with very short comment on
the results
43

2011 2012
Sales 100,000 100% 150,000 100%
1- Preventive Costs
Engineering design
Training
Total Preventive Costs
1,000
1,000
2,000 2%
4,000
2,000
6,000 4%
2- Appraisal Costs
Line Inspection
Material Inspection
Total Appraisal Costs
1,500
0,500
2,000 2%
2,000
2,500
4,500 3%
Conformance Costs 4,000 4% 10,500 7%
3- Internal Failure Costs
Scrap
Rework
Total I. Failure Costs
3,000
4,000
7,000 7%
1,500
1,500
3,000 2%
4- External failure Costs
Sales Return
warranty Repairs
Total E. Failure Costs
5,000
6,000
11,000 11%
1,000
0,500
1,500 1%
Failure Costs 18,000 18% 4,500 3%
Total quality Costs 22,000 22% 15,000 10% 44

• There is a decrease in the total cost of quality by 12% of sales
from 22% in 2011 to 10% in 2012 as a result of the
improvement program.
• An increase in the conformance costs by 3% from 4% in 2011
to 7% in 2012 leads to greater decrease in the failure costs by
15% from 18% in 2011 to 3% in 2012, which in turn lead to
decrease in the total cost of quality by 12% (15% - 3%).
• Therefore, the company should continue the improvement
program by increasing the conformance costs to achieve more
decrease in the failure costs which in turn leads to more
decrease in the total cost of quality.
45

Zero – Defect Model
• Basic Assumption:
• This model is based on the assumption that , because of the effect
of learning and gaining experience, it is possible to reduce the
failure costs without the need for increasing the conformance costs.
As a result it is possible to reach to 100% level of quality.
Steps for Applying the Model
1. Specify or determine the target (designed) value of the quality
specification (optimal level of the quality).
2. Assign allowances (tolerance) limits for the targeted (designed)
value of quality. As a result we have a range (upper and lower
limits) of quality specification level.
3. If the produced unit has quality level within the range, then it is
good unit, otherwise, it is defected unit (there is a loss).
46

Advantages
• This is the first model that make it possible to have 100%
quality level as a result of learning and gained experience.
Criticisms
1. There is no scientific rule for specifying the tolerance
(allowance) limits. The limits is specified based on the past
experience which is different from one to another.
2. The risk of getting used to work around the limits based on
the human nature.
3. The risk of the accumulated effect of the tolerance limits for
the components of the product.
48

Taguchi (Quality loss Function) Model
• Taguchi's ideas can be concentrated into two basic concepts:
(a) Quality loss should be defined as deviation from target
values, not compliance with judgmentally determined
specification limits. That is, the loss of quality must be
defined in broader cost thinking as “loss to the society” and
not in traditional thinking at the point of discovering defects.
(b) The economic achievement of high levels of quality is
achieved through quality design within the product and
processes and not through tests and inspection after
production.
49

Meaning of loss to society:
• Taguchi believes that quality costs or losses must be defined
from the point of view of society as a whole in which the product
is manufactured (internal costs) and used (external costs).
• That is, we must not limit ourselves to taking into account the
costs of reoperation and scrap at the various stages of the
manufacturing process only, but we must also take into account
the costs of lost productivity as a result of the inefficiency
caused by deviation from the target value.
• These costs include: increased maintenance costs, holidays due
to production cessation, increases in inventory, increases in labor
and clerical work, and time lost in meetings and unproductive
discussions with suppliers, agents, and distributors.
50

• Worst of all, and at the same time difficult to quantify and
measure, are the costs incurred by customers as a result of
the decline in product quality in the broad sense previously
mentioned at the beginning of this presentation (performance,
features, reliability, compatibility, longevity, service, beauty
elements, and quality excellence).
• For example, the presence of a defective product for one
Egyptian company will unfortunately affect the reputation
of all Egyptian companies that produce the same product.
• The costs and losses of poor quality can be infinite if they
result in the customer searching for products from other
countries that better meet his requirements and
expectations.
51

Taguchi (Quality loss Function) Model
• Basic Assumption:
1. The quality loss = zero if we produce at the target
value only. There is a quality loss for any deviation
(d) from the target value (T).
2. The quality loss reach to the maximum if the actual
quality level reach to the limit.
3. The quality loss is hidden because the company will
not know if the customer decided to change
52

• The concept of quality loss according to Taguchi's model is
based on three basic assumptions:
1- There is a quality loss when there is any deviation from
the target value.
• The only case in which the quality loss = zero is when
the actual value = the target value,
• for example, the actual color density of the TV screen in the
previous example = 10.
53

2- The loss of quality reaches its maximum when the
actual value is close to the tolerance limits.
• For example, in the previous example, the difference will not
be noticeable to the customer if the actual color density
value of the TV screen is 10.1 or 9.9 compared to the target
value of 10.
• However, if the actual color density value is 13 (dark) or 7
(light), the difference will be very noticeable to the customer
in the form of a defect in the product compared to the target
value of 10.
• The loss will be greater if the television with a color density
of the target value of 10 is produced by another competing
company.
54

3- The most important costs and losses resulting from lack
of quality (failure) will be hidden, which means that they
will not appear in the accounting records and the company
may not know anything about them.
• Examples of these hidden costs and losses include a
decrease in market share as a result of product dissimilarity,
and customer dissatisfaction as a result of the actual quality
changing from the target specifications.
• Therefore, we do not expect the customer to ask the
company’s permission before leaving its products and
switching to the products of competing companies.
55

56
Loss
(defects)
Loss
(defects)
Good Product
Loss = Zero
Quality level
losses

Mathematical representation of the quality loss function
• Taguchi believes that when the quality loss function takes the
form of a parabola, it can be expressed mathematically in the
form of a simple quadratic function to approximate the loss
behavior. Therefore, the loss function L (y) can be expressed
mathematically to determine the amount of quality loss per unit
of product as follows:
L ( y ) = k ( y – T) 2 ……… (1)
where :
K: a fixed proportional amount determined based on the
failure cost structure applied by the company.
y = actual value of quality.
T = Quality target value.
57

• It is clear from equation (1) that the value of the constant
proportionality (k) must first be estimated so that it can be used
in calculating the loss for the product. It is noted from equation
(1) that the greater the value of (k), the greater the sensitivity of
the loss function (i.e. the value of the loss) or the degree of
slope in the parabola, meaning that the amount of (k)
determines the slope of the loss function. (k) can be estimated
by knowing both the quality specification limit and the loss
resulting from the unit that falls within it, by dividing the loss of
the unit whose specifications fall between the upper and lower
limits of the quality specifications by the square of the deviation
of the specification limit from the target value as follows:
58

where :
C = Loss associated with the unit produced within
specifications, assuming that the loss is zero at the target
value.
d = deviation of the specification from the target value
(distance from the target value to the specification limit).
For example, suppose that: C = $40, and d = .2 mm
permission :
59

• Thus, equation (1) can be used to calculate the loss
for any actual value (y). For example, if the target
value for one of the product characteristics = 10 mm
and the actual value for this characteristic = 10.5
mm, then the loss per unit of this product can be
estimated using equation (1) as follows:
60

• It is noted that the loss function in equation (1) gives the loss
resulting from one unit. Determining the loss resulting from all
units produced in the particular production line during the
period requires calculating the loss resulting from each unit
and then summing the result to obtain the total losses.
• In the case of production in large quantities, it is possible to
draw a sample of production units and estimate the
average unit loss from this sample, then multiply the result by
the number of units produced during the period to obtain an
estimated total of the total losses.
• The average unit loss is determined by knowing both the
actual average of the sample and the standard deviation of
the distribution of the quality characteristic in the sample
according to the following equation:
61

• Quality loss function :
• L( Y ) = K [ S² + ( T – Y )² ]
• Where:
• L ( Y ) = loss at the actual quality level
• Y = the actual quality level at average
• K = constant number (a fixed proportional amount is
determined based on the failure cost structure applied
by the company).
• S = standard deviation
• T = Target value of quality
62

• K = c ÷ d²
• Where:
C = the quality loss for a defected produced unit from the
society view
d = the tolerance limits (the distance between the target
value and the upper and lower limits).
• It is clear from the previous equation that the average loss
increases as the standard deviation of the distribution increases
and as the difference between the actual average value and the
target value increases.
63

• Assume that the target value of one part = 9 with tolerance limits
± 1 . The average actual value = 8.3 with standard deviation = .1
. Estimated loss per a unit produced at the limits = 2 . selling
price per unit = 8 , number of units produced and sold = 100000
units .
• Required : Prepare a report for the hidden cost of quality loss .
• C = 2, d = 1, Y = 8.3, S = 0.1, T = 9, K = C / d² = 2 / (1)² = 2
• L( Y ) = K [ S² + ( T – Y )² ]
• L(8.3) = 2 [ (0.1)² + ( 9 – 8.3)² ]
• L(8.3) = 2 [ (0.1)² + ( 0.7)² ]
• L(8.3) = 2 [ 0.01 + 0.49 ] = 2 x 0.50
• L(8.3) = 1 $/unit (quality loss per unit) 64

• Total quality loss = 100,000 x $1 = $100,000
• Total sales value = 100,000 x $8 = $800,000
• 100,000
• % of quality loss = ----------- x 100 = 12.5 %
• 800,000
• There is a significant amount of sales revenue (12.5%) lost by
the company as a result of producing parts with actual value
other than (deviated from) the target value.
• The company should improve the actual value of the quality of
the produced units 8.3 to make it as close as possible to the
target value 9 in order to reduce the quality loss, for example
8.8. 65

L(8.8) = 2 [ (0.1)² + ( 9 – 8.8)² ]
L(8.8) = 2 [ (0.1)² + ( 0.2)² ]
L(8.8) = 2 [ 0.01 + 0.04] = 0.05 $/unit (quality loss per unit)
Total quality loss = 100,000 x $0.05 = $5,000
Total sales value = 100,000 x $8 = $800,000
5,000
% of quality loss = ----------- x 100 = 0.625 %
800,000
• Significant reduction in the quality loss to the society, 5,000
compared to 100,000.
66

Report on quality costs:
• It is noted in the previous three sections that they did not
focus only on measuring the visible, tangible costs of quality,
which have become almost known to everyone and can be
obtained from the records of the company’s cost accounting
system, such as conformance (compliance) costs (prevention
costs and evaluation costs) and non-conformance (non-
compliance) costs (internal failure costs and external failure
costs).
• But it also focused on the other, more important part, which is
measuring the hidden, invisible costs of quality, whose
existence must be acknowledged and its causes must be
eliminated.
67

• These hidden costs of quality do not appear in the records
of the cost accounting system either because they are not
recorded at all, such as the opportunity cost of lost sales in
the future as a result of the company’s reputation being
affected by defective production, or because they are
difficult to measure, such as the cost of confusion in
production schedules, delays, and irregularity in delivery
dates.
• These hidden costs of quality are what Taguchi called the
cost of loss to society.
68

1. It is the first model to introduce the cost of quality from
the society point of view.
2. It is the first model to call the attention to the hidden cost
of quality and how to estimate the hidden cost.
• Criticism
• The value of ( C ). There is no scientific rule for
determining the exact value of (C). All we can do is to
estimate this value.
69
Advantages

Problem (1):Alex Company's quality cost report is to be based on the following data:
70
11. What would be the total prevention cost appearing on the quality cost report?
A. $145,000 B. $75,000 C. $93,000 D. $76,000
12. What would be the total appraisal cost appearing on the quality cost report?
A. $92,000 B. $102,000 C. $184,000 D. $104,000
13. What would be the internal failure cost appearing on the quality cost report?
A. $127,000 B. $26,000 C. $84,000 D. $150,000
14. What would be the external failure cost appearing on the quality cost report?
A. $153,000 B. $26,000 C. $413,000 D. $69,000

• Problem (2):
• Assume the following quality cost data for one of the company products :
• 2011 2012
• Sales units 10000 15000
• % of rework units 20 % 4 %
• Inspection hours / unit .1 .15
• Hours spent on Design 500 1125
• % of units repaired at customer site 10% 2%
• Repair cost / unit $70 $50
• Estimated loss from sales return 500 375 units
• Given that: selling price/unit = $100, variable cost/unit = $ 60, rework
cost/unit = $ 50, inspection cost/hour = $ 20, design cost/hour = $ 80
• Required : Prepare the quality cost report .
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Problem (3):
1- What are the assumptions and the diagram of the quality loss
“Taguchi” function?
What is quality loss from the society view?
2- Target value of one part = 10, with tolerance limits ± .5, the
average actual value = 9.7, with standard deviation = .1,
estimated loss per a unit produced at the limits = 5, selling price
per unit = 10, number of units produced and sold = 150000 units.
Required:
Prepare a report for the hidden cost of quality loss
(L(Y) = K [S² + (T – Y)²])
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