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AQM




            QUALITY AND COSTS




                          DFT (AP-06)
                          NIFT BANGALORE
      www.company.com
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.




              www.company.com
AQM                                      Cost of Quality


                                •   A product that meets or exceeds its
                                    design specifications and is free of
                                    defects that mar its appearance or
Chapter   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.




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AQM                                      Cost of Quality


                                Opportunity to Reduce Real Costs

Chapter   1
                                •   Quality costs enables to
                                        Understand hidden costs.
DEFINITION                              Reduce and eliminate unnecessary costs.
& MEANING                       •   Prevent problems from happening.




              www.company.com
AQM                                       Cost of Quality


                                Understated Quality Costs

Chapter   1
                                •   Quality costs are real and estimated at:
                                        25% of costs in manufacturing
DEFINITION                              35% of costs in service industry
& MEANING                       •   Quality costs can be categorised to
                                    enable better understanding.




              www.company.com
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 in
OBJECTIVES                          an organisation.
    OF                          •   Identify opportunities for reducing customer
EVALUATION                          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.
              www.company.com
AQM                            Cost of Quality


                          QUALITY COSTS

Chapter   3
 CATEGORIES
 OF QUALITY
   COSTS




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AQM                                      Cost of Quality


                                Internal Failure Costs

Chapter   3                         “ The costs of deficiencies discovered
                                    before delivery which are associated with
CATEGORIES                            the failure (nonconformities) to meet
OF 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.
              www.company.com
AQM                                          Cost of Quality

                                Internal Failure Costs
                                •   Failure to Meet Customer Requirements
                                    and Needs
Chapter   3                         •   Scrap
                                    •   Rework
CATEGORIES                          •   Lost or missing information
OF QUALITY                          •   Failure analysis
  COSTS                             •   Scrap and rework- supplier
                                    •   Reinspection, retest
                                    •   Changing processes
                                    •   Redesign of hardware/software
                                    •   Rework in internal support operations
                                    •   Downgrading
              www.company.com
AQM                                          Cost of Quality

                                Internal Failure Costs
                                •   Cost of Inefficient Processes
                                    •   Variability of product characteristics
Chapter   3                         •   Unplanned downtime of equipment
                                    •   Inventory shrinkage
CATEGORIES                          •   Variation of process characteristics from “best
OF QUALITY                              practice”
  COSTS                             •   Non-value added activities.


                                •   “These are the costs that would disappear
                                    if no deficiencies existed.”

              www.company.com
AQM                                      Cost of Quality


                                External Failure Costs

Chapter   3                          “ The costs associated with the
CATEGORIES                             deficiencies that is found after
OF QUALITY                               product is received by the
  COSTS                                          customer.”

                                •   Also includes the lost opportunities for
                                    sales revenue.


              www.company.com
AQM                                          Cost of Quality

                                External Failure Costs
                                •   Failure to Meet Customer Requirements
                                    and Needs
Chapter   3                         •   Warranty charges
                                    •   Complaint adjustment
CATEGORIES                          •   Returned material
OF QUALITY                          •   Allowances
  COSTS                             •   Penalties due to poor quality
                                    •   Rework on support operations
                                    •   Revenue losses in support operations.




              www.company.com
AQM                                          Cost of Quality

                                External Failure Costs
                                •   Lost Opportunities for Sales Revenue
                                    •   Customer defections
Chapter   3                         •   New customer lost because of quality
                                    •   New customer lost because of lack of capability.
CATEGORIES
OF QUALITY
  COSTS                         •   “These costs also would disappear if no
                                    deficiencies existed.”




              www.company.com
AQM                                       Cost of Quality

                                External Failure Costs

                                •   Those costs incurred if poor quality
Chapter   3                         products receive further processing
CATEGORIES                      •   If this occurs then the previous processing
OF QUALITY                          is wasted •cost
                                                  Why would you do this?
  COSTS




              www.company.com
AQM                                      Cost of Quality


                                Appraisal Costs

Chapter   3                         “Appraisal costs support activities
CATEGORIES                           whose purpose is to determine the
OF 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.
              www.company.com
                                •   Sometimes called inspection costs.
AQM                                        Cost of Quality


                                Appraisal Costs
                                •   Examples
                                    •   Incoming inspection and test
Chapter   3                         •   In-process inspection and test
CATEGORIES                          •   Final inspection and test
OF 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
              www.company.com       the department.
AQM                                     Cost of Quality


                                Appraisal Costs

Chapter   3                     •   Those costs incurred because poor
                                    quality products might exist
CATEGORIES
OF QUALITY
                                •   If these costs are necessarythis? the
                                          •Why would you permit then
                                    process is flawed and management is
  COSTS
                                    guilty.




              www.company.com
AQM                                       Cost of Quality


                                Prevention Costs
                                “Prevention costs support activities
Chapter   3                         whose purpose is to reduce the
                                         number of defects.”
CATEGORIES
OF 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.
              www.company.com
AQM                                         Cost of Quality


                                Prevention Costs
                                •   Examples
                                    •   Quality planning
Chapter   3                         •   New-product review
CATEGORIES                          •   Process planning
OF QUALITY                          •   Process control
  COSTS                             •   Quality audits
                                    •   Supplier quality evaluation
                                    •   Training.
                                •   Do not include basic activities.


              www.company.com
AQM                                 Cost of Quality


                                Prevention Costs

Chapter   3                     •   Those costs incurred because
                                    management is committed to
CATEGORIES                          prevent poor quality products from
OF QUALITY                          happening
  COSTS
                                •   Why would you not do this?




              www.company.com
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.

              www.company.com
AQM                                        Cost of Quality

                                •   ISO      9004-1   (1994),   Quality
                                    Management and Quality System
                                    Elements- Guidelines, Section 6,
                                    “Financial Consideration of Quality
Chapter   5
                                    Systems.”
INTERNATIONAL
  STANDARDS                         •   Identifies the approaches to data collection
                                        and reporting.

                                         •   Quality costing approach
                                         •   Process cost approach
                                         •   Quality loss approach.


              www.company.com
AQM                                      Cost of Quality


                                •   Quality Costing Approach
                                    •   Failure, appraisal and prevention approach.

Chapter   5                     •   Process Cost Approach
INTERNATIONAL                       •   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.


              www.company.com
AQM                                    Cost of Quality


                                Benefits of an improvement effort

                                •   Reduced costs of errors
          6
Chapter
                                •   Improved process capability
  RETURN ON                     •   Reduced customer defections
   QUALITY                      •   Increase in new customers.




              www.company.com
AQM
                                  Cost of Quality


                 Return on Quality


               Prevention Costs                Benefit
costs




                Appraisal Costs
                                             Prevention Costs

                 Failure Costs
                   • Internal                Appraisal Costs
                  • External
                                              Failure Costs
            Before Quality                  After Quality
            Cost Alignment                 Cost Alignment
        www.company.com
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   6
RETURN ON
 QUALITY




              www.company.com
AQM                                   Cost of Quality




                                •   Would it not make sense to prevent
Chapter   7                         poor quality products from happening?
PREVENTION OF                   •   How can this be done?
POOR QUALITY                    •   Whose responsibility is this?
    PAYS




              www.company.com
AQM                                    Cost of Quality


                                How to Prevent Poor Quality

Chapter   7                     •   Prepare to measure costs of quality

PREVENTION OF
                                     – Determine categories of quality
                                        costs
POOR QUALITY
    PAYS                             – Create measurement system that
                                        captures categories of quality
                                        costs
                                •   Assign responsibility to collect data
                                •   Analyse collected data.

              www.company.com
AQM                                   Cost of Quality


                                Determine Quality Cost Categories

Chapter   7                     •   Understand product

PREVENTION OF
                                •   Understand process
POOR QUALITY                    •   Understand where problems occur
    PAYS                        •   Determine precisely what goes wrong
                                •   Determine what costs represents each
                                    problem.



              www.company.com
AQM                                     Cost of Quality


                                Assign Responsibility

Chapter   7                     •   Make     individuals    at    all   levels
                                    responsible for collecting quality cost
PREVENTION 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.
              www.company.com
AQM                                    Cost of Quality


                                Analyse Collected Data

Chapter   7                     •   Data on its own is useless

PREVENTION 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.


              www.company.com
AQM                                      Cost of Quality


                                Data Collection Approaches
                                •   Established accounts
Chapter   7
                                •   Analysis of ingredients of established
                                    accounts
PREVENTION OF                   •   Basic accounting documents
POOR QUALITY                    •   Estimates
    PAYS
                                    •   Temporary records
                                    •   Work sampling
                                    •   Allocation of total resources
                                    •   Unit cost data
                                    •   Market research data

              www.company.com
AQM                                    Cost of Quality


                                Useful Quality Cost Knowledge

Chapter   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.


              www.company.com
AQM                                 Cost of Quality


                                Summarize Collected Data

Chapter   7   The most basic ways are:

PREVENTION OF
              • By product, process, component, defect
                type, or other likely defect concentration
POOR QUALITY    pattern.
    PAYS
              • By organizational unit.
              • By category cost of poor quality.
              • By time.

              www.company.com
AQM                                    Cost of Quality


                                Reporting the Results

Chapter   7   Must provide the following perspective with
              integration     into overall   performance
PREVENTION 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)
              www.company.com
AQM                                        Cost of Quality
                       Gaining approval for the improvement
                       program
                                •   Establish that costs are large enough to
                                    justify the action
Chapter   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 major
QUALITY 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
              www.company.com
                                    program.
AQM                                    Cost of Quality


                                Management is Responsible

Chapter   7                     •   Management decides what to produce in
                                    terms of Products (goods and / or
PREVENTION OF                       services).
POOR QUALITY                    •   Management assigns responsibilities to
    PAYS                            produce products.
                                •   Management       is   accountable   for
                                    effectively using resources to produce
                                    products.

              www.company.com
“Cost of quality is …
        the expense of nonconformance –
         the cost of doing things wrong.”
                  Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto




www.company.com

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QUALITY & COST

  • 1. AQM QUALITY AND COSTS DFT (AP-06) NIFT BANGALORE www.company.com
  • 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. www.company.com
  • 3. AQM Cost of Quality • A product that meets or exceeds its design specifications and is free of defects that mar its appearance or Chapter 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. www.company.com
  • 4. AQM Cost of Quality Opportunity to Reduce Real Costs Chapter 1 • Quality costs enables to Understand hidden costs. DEFINITION Reduce and eliminate unnecessary costs. & MEANING • Prevent problems from happening. www.company.com
  • 5. AQM Cost of Quality Understated Quality Costs Chapter 1 • Quality costs are real and estimated at: 25% of costs in manufacturing DEFINITION 35% of costs in service industry & MEANING • Quality costs can be categorised to enable better understanding. www.company.com
  • 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 in OBJECTIVES an organisation. OF • Identify opportunities for reducing customer EVALUATION 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. www.company.com
  • 7. AQM Cost of Quality QUALITY COSTS Chapter 3 CATEGORIES OF QUALITY COSTS www.company.com
  • 8. AQM Cost of Quality Internal Failure Costs Chapter 3 “ The costs of deficiencies discovered before delivery which are associated with CATEGORIES the failure (nonconformities) to meet OF 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. www.company.com
  • 9. AQM Cost of Quality Internal Failure Costs • Failure to Meet Customer Requirements and Needs Chapter 3 • Scrap • Rework CATEGORIES • Lost or missing information OF QUALITY • Failure analysis COSTS • Scrap and rework- supplier • Reinspection, retest • Changing processes • Redesign of hardware/software • Rework in internal support operations • Downgrading www.company.com
  • 10. AQM Cost of Quality Internal Failure Costs • Cost of Inefficient Processes • Variability of product characteristics Chapter 3 • Unplanned downtime of equipment • Inventory shrinkage CATEGORIES • Variation of process characteristics from “best OF QUALITY practice” COSTS • Non-value added activities. • “These are the costs that would disappear if no deficiencies existed.” www.company.com
  • 11. AQM Cost of Quality External Failure Costs Chapter 3 “ The costs associated with the CATEGORIES deficiencies that is found after OF QUALITY product is received by the COSTS customer.” • Also includes the lost opportunities for sales revenue. www.company.com
  • 12. AQM Cost of Quality External Failure Costs • Failure to Meet Customer Requirements and Needs Chapter 3 • Warranty charges • Complaint adjustment CATEGORIES • Returned material OF QUALITY • Allowances COSTS • Penalties due to poor quality • Rework on support operations • Revenue losses in support operations. www.company.com
  • 13. AQM Cost of Quality External Failure Costs • Lost Opportunities for Sales Revenue • Customer defections Chapter 3 • New customer lost because of quality • New customer lost because of lack of capability. CATEGORIES OF QUALITY COSTS • “These costs also would disappear if no deficiencies existed.” www.company.com
  • 14. AQM Cost of Quality External Failure Costs • Those costs incurred if poor quality Chapter 3 products receive further processing CATEGORIES • If this occurs then the previous processing OF QUALITY is wasted •cost Why would you do this? COSTS www.company.com
  • 15. AQM Cost of Quality Appraisal Costs Chapter 3 “Appraisal costs support activities CATEGORIES whose purpose is to determine the OF 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. www.company.com • Sometimes called inspection costs.
  • 16. AQM Cost of Quality Appraisal Costs • Examples • Incoming inspection and test Chapter 3 • In-process inspection and test CATEGORIES • Final inspection and test OF 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 www.company.com the department.
  • 17. AQM Cost of Quality Appraisal Costs Chapter 3 • Those costs incurred because poor quality products might exist CATEGORIES OF QUALITY • If these costs are necessarythis? the •Why would you permit then process is flawed and management is COSTS guilty. www.company.com
  • 18. AQM Cost of Quality Prevention Costs “Prevention costs support activities Chapter 3 whose purpose is to reduce the number of defects.” CATEGORIES OF 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. www.company.com
  • 19. AQM Cost of Quality Prevention Costs • Examples • Quality planning Chapter 3 • New-product review CATEGORIES • Process planning OF QUALITY • Process control COSTS • Quality audits • Supplier quality evaluation • Training. • Do not include basic activities. www.company.com
  • 20. AQM Cost of Quality Prevention Costs Chapter 3 • Those costs incurred because management is committed to CATEGORIES prevent poor quality products from OF QUALITY happening COSTS • Why would you not do this? www.company.com
  • 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. www.company.com
  • 22. AQM Cost of Quality • ISO 9004-1 (1994), Quality Management and Quality System Elements- Guidelines, Section 6, “Financial Consideration of Quality Chapter 5 Systems.” INTERNATIONAL STANDARDS • Identifies the approaches to data collection and reporting. • Quality costing approach • Process cost approach • Quality loss approach. www.company.com
  • 23. AQM Cost of Quality • Quality Costing Approach • Failure, appraisal and prevention approach. Chapter 5 • Process Cost Approach INTERNATIONAL • 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. www.company.com
  • 24. AQM Cost of Quality Benefits of an improvement effort • Reduced costs of errors 6 Chapter • Improved process capability RETURN ON • Reduced customer defections QUALITY • Increase in new customers. www.company.com
  • 25. AQM Cost of Quality Return on Quality Prevention Costs Benefit costs Appraisal Costs Prevention Costs Failure Costs • Internal Appraisal Costs • External Failure Costs Before Quality After Quality Cost Alignment Cost Alignment www.company.com
  • 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 6 RETURN ON QUALITY www.company.com
  • 27. AQM Cost of Quality • Would it not make sense to prevent Chapter 7 poor quality products from happening? PREVENTION OF • How can this be done? POOR QUALITY • Whose responsibility is this? PAYS www.company.com
  • 28. AQM Cost of Quality How to Prevent Poor Quality Chapter 7 • Prepare to measure costs of quality PREVENTION OF – Determine categories of quality costs POOR QUALITY PAYS – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data. www.company.com
  • 29. AQM Cost of Quality Determine Quality Cost Categories Chapter 7 • Understand product PREVENTION OF • Understand process POOR QUALITY • Understand where problems occur PAYS • Determine precisely what goes wrong • Determine what costs represents each problem. www.company.com
  • 30. AQM Cost of Quality Assign Responsibility Chapter 7 • Make individuals at all levels responsible for collecting quality cost PREVENTION 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. www.company.com
  • 31. AQM Cost of Quality Analyse Collected Data Chapter 7 • Data on its own is useless PREVENTION 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. www.company.com
  • 32. AQM Cost of Quality Data Collection Approaches • Established accounts Chapter 7 • Analysis of ingredients of established accounts PREVENTION OF • Basic accounting documents POOR QUALITY • Estimates PAYS • Temporary records • Work sampling • Allocation of total resources • Unit cost data • Market research data www.company.com
  • 33. AQM Cost of Quality Useful Quality Cost Knowledge Chapter 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. www.company.com
  • 34. AQM Cost of Quality Summarize Collected Data Chapter 7 The most basic ways are: PREVENTION OF • By product, process, component, defect type, or other likely defect concentration POOR QUALITY pattern. PAYS • By organizational unit. • By category cost of poor quality. • By time. www.company.com
  • 35. AQM Cost of Quality Reporting the Results Chapter 7 Must provide the following perspective with integration into overall performance PREVENTION 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) www.company.com
  • 36. AQM Cost of Quality Gaining approval for the improvement program • Establish that costs are large enough to justify the action Chapter 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 major QUALITY 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 www.company.com program.
  • 37. AQM Cost of Quality Management is Responsible Chapter 7 • Management decides what to produce in terms of Products (goods and / or PREVENTION OF services). POOR QUALITY • Management assigns responsibilities to PAYS produce products. • Management is accountable for effectively using resources to produce products. www.company.com
  • 38. “Cost of quality is … the expense of nonconformance – the cost of doing things wrong.” Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto www.company.com