3. Understand Quality Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
• 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
3Total Quality Management - Spring 2010 - IUG
4. “Cost of quality is …
the expense of noncomformance –
the cost of doing things wrong.”
Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto
10. Quality and the New
Production Environment
Objective – To stay competitive through:
Improving customer service and product
quality
Reducing costs
Objective – To stay competitive through:
Improving customer service and product
quality
Reducing costs
11. 08/02/16 11
Cost of Quality
Quality costs can mean two things:
Cost of attaining quality
Cost of poor quality
Can run 10 - 30% of sales or 25 – 40%
of operating expenses
12. 08/02/16 12
Cost of Quality
“We need to communicate to
management the impact of quality in
language they understand which is
often in terms of dollars.”
“Quality cost measurement and
publication does not solve quality
problems.”
13. 08/02/16 13
Cost of Quality
0 100
Failure Cost
Costs of appraisal
and Prevention
Total
Cost
Quality of Conformance, %
Cost
per
good
unit of
product
14. 08/02/16 14
Hidden Cost of Quality
Lost Customers
Bad Will
Hidden Rework
Rework
Testing Costs
Inspection Costs
Canceled Licenses
Bugs
Employee Turnover
Expediting Costs
Excessive Overtime
Field Service Costs
Customer Allowances
Missed Payments
Loss of Market Share
Excessive Travel Expense
Consulting Time
18. 08/02/16 18
Group Exercise –
Quality Costs Analysis
The costs are as follows:
code reviews - 20 hrs
training - 240 hrs
system test – 1200 hrs
component testing - 300 hrs
test script writing - 200 hrs
requirements review - 50 hrs
bug fixes - 1780 Hrs
retesting fixed bugs - 1200 hrs
post-mortem review - 8 hrs
Total effort – 6500 hrs
19. 08/02/16 19
Sequence of Events To reduce
CQ:
Review available literature
Select an organizational unit in the company
Discuss the objectives with key people
Collect cost available
Make proposal for full study
Publish draft of categories, get agreement
Finalize definitions and get management buy in
Establish who will collect data
Collect and summarize data
Present the results
20. 08/02/16 20
Cost of Quality – Example
February
Bug Fix Testing Planning Training Development Hrs Available
Phil Smith 140.0 25.0 8.0 110 283.0
Ilene Bloggins 87.0 120.0 8.0 56 271.0
Skip Roy 92.0 4.0 4.0 75 175.0
Bill Lee 20.0 82.5 4.0 8.0 33.5 148.0
Matt Truman 65.0 100 165.0
Total 404.0 227.5 8.0 28.0 374.5 1042.0
% of Hrs Available 38.8% 21.8% 0.8% 2.7% 35.9% 100.0%
Total Quality Costs 667.5
Quality Costs % 64.06%
Bug Fix % of Quality Costs 60.52%
Testing % of Quality Costs 34.08%
Planning % of Quality Costs 1.20%
Training % of Quality Costs 2.69%
21. Improving Quality
Total Quality Management (TQM)
Managing an organization so that it excels in areas
important to the customer
Total Quality Management (TQM)
Managing an organization so that it excels in areas
important to the customer
Organization strives
for excellence
Quality is defined
by the customer
22. Is Quality Worth the
Investment?
Cost vs. Benefit Quality is free
Costs of quality programs
are easily measured, but
benefits of increased
customer satisfaction are
difficult to measure.
The long-run benefits of
increased customer
satisfaction far outweigh
the costs of improving
quality.
Two Views
23. The Quality Is Free
Concept
Greater
customer
satisfaction
Quality
products
and
services
Increased
business
and
profits
25. Additional Quality
Concepts
Motivation
Employees respond favorably
to quality initiatives
Motivation
Employees respond favorably
to quality initiatives
Strategic advantages
Favorable reputation among competitors
Strategic advantages
Favorable reputation among competitors
Benchmarking
Continuous process of measuring performance against best of similar
organizations
Benchmarking
Continuous process of measuring performance against best of similar
organizations
26. Products are completed just in
time for shipment to customers
Raw materials are received just in
time for production
Just-In-Time (JIT) InventoryJust-In-Time (JIT) Inventory
27. In conventional
system, materials are
“pushed” through
assembly process.
In JIT system,
materials are “pulled”
through assembly
process by customers’
needs.
Just-In-Time (JIT) Inventory
28. Complete parts
just in time for
assembly into products
Receive materials
just in time for
production
Receive
customer
orders
Complete products
just in time to
ship to customers
Schedule
production
Just-In-Time (JIT) Inventory
30. and
Total Quality Management
More rapid
response to
customer orders
Greater
customer
satisfaction
Higher quality
products
Less warehouse
space needed
Reduced
inventory
carrying costs
Reduced risk
of obsolete
inventory
31. and
Total Quality Management
JIT factory is
idle, waiting on
quality raw
materials
Raw
materials
Poor quality
items returned
Unhappy
customer
Latedelivery
Quality must be stressed
from the very beginning for
JIT to be successful.
32. Impact of Just-in-Time on
Accounting Procedures
JIT goal is to minimize inventories:JIT goal is to minimize inventories:
Production costs are assigned directly
to cost of goods sold.
Production costs are assigned directly
to cost of goods sold.
Raw
Materials
Work in
Process
Finished
Goods
33. Impact of Just-in-Time on
Accounting Procedures
Any end-of-period inventory is
recorded in a procedure known
as backflush costing.
Any end-of-period inventory is
recorded in a procedure known
as backflush costing.
Cost of
Goods Sold
Inventory
34. 34
• Phillip B. Crosby (Quality is free . . . ):
• The system for causing quality is prevention, not
appraisal – Quality is Free
• The performance standard must be Zero Defects,
not "that's close enough"
• The measurement of quality is the Price of Non-
conformance.
• Cost of quality is only the measure of operational
performance
• “Quality is free. It’s not a gift, but it is free. What
costs money are the unquality things -- all the
actions that involve not doing jobs right the first
time.”
Founders Point of View
Total Quality Management - Spring 2010 - IUG
35. Total Quality Management
(TQM)
W. Edwards Deming proposed that
improving quality reduces cost and
improves profitability.
W. Edwards Deming proposed that
improving quality reduces cost and
improves profitability.
Quality can be and should be
improved continuously.
Quality can be and should be
improved continuously.
Revenues
Cost
Max Profit
Max Quality
35Total Quality Management - Spring 2010 - IUG
36. Return on Quality (ROQ)
Profit is maximized at the
optimum quality level.
Profit is maximized at the
optimum quality level.
The optimum quality level is always achieved
before maximum attainable profit is reached.
The optimum quality level is always achieved
before maximum attainable profit is reached.
Revenues
Cost
Max Profit
Optimum Quality
36Total Quality Management - Spring 2010 - IUG
40. The 1:10:100 rule:
Re.1 spent on prevention will save Rs.10 spent on
appraisal and Rs.100 on failure costs.
One dollar spent on prevention will save $10 on
appraisal and $100 on failure costs.
This rule helps one to prioritize expenditure on prevention,
which is sure to bring in greater returns.
“The earlier you detect and prevent a defect the more
you can save. If you catch a two cent resistor before
you use it and throw it away, you lose two Cents. If you
don’t find it until it has been soldered into a computer
component, it may cost $10 to repair the part. If you
don’t catch the component until it is in the computer
user’s hands, the repair will cost hundreds of dollars.
Indeed, if a $5000 computer has to be repaired in the
field, the expense may exceed the manufacturing
cost.”
40Total Quality Management - Spring 2010 - IUG
41. Difficulties in using Quality costing
Management have not believed in the possibilities of improvement
Quality costing is demanding
◦ It requires a lot of data of each activity related to quality
Other limitations
◦ Does not resolve quality problems
◦ Does not provide specific actions
◦ vulnerable to short-term mismanagement
◦ difficult to match effort and accomplishment
◦ subject to measurement errors
◦ may neglect important or include inappropriate costs
41Total Quality Management - Spring 2010 - IUG
42. Steps in implementing quality cost
1. Involve accountants right from the start
2. Decide purpose and objectives
3. Decide how to deal with overheads
4. Distinguish between basic work and quality related activities
5. Collection data which offers the prospect of real gains
6. Start by examining failure costs
7. Evaluate the costs of inspection
8. Analyze and use the data
9. Collecting and reporting quality cost data
42Total Quality Management - Spring 2010 - IUG
43. 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
43Total Quality Management - Spring 2010 - IUG
44. The Quality Gurus – Edward Deming
1900-1993
1986
Quality is “uniformity
and dependability”
Focus on SPC and
statistical tools
“14 Points” for
management
PDCA method
45. The Quality Gurus – Joseph Juran
1904 - 2008
1951
Quality is “fitness for
use”
Pareto Principle
Cost of Quality
General
management
approach as well as
statistics
47. Tools used for continuous improvement
4. Cause and effect diagram (fishbone)
Environmen
t
Machine Man
Method Material
48. Tools used for continuous improvement
5. Check sheet
Item A B C D E F G
-------
-------
-------
√ √ √
√ √
√ √
√
√
√ √
√ √ √
√
√
√
√
√ √
49. Tools used for continuous improvement
6. Histogram
Frequency
50. Tools used for continuous improvement
7. Pareto Analysis
A B C D E F
Frequency
Percentage
50
%
100%
0%
75
%
25
%10
20
30
40
50
60
51. Summary of Tools
1. Process flow chart
2. Run diagram
3. Control charts
4. Fishbone
5. Check sheet
6. Histogram
7. Pareto analysis
52. Makes
custom
er wait
Absent receiving
party
Working system of
operators
Customer Operator
Fishbone diagram analysis
Absent
Out of office
Not at desk
Lunchtime
Too many phone
calls
Absent
Not giving
receiving party’s
coordinates
Complaining
Leaving a
message
Lengthy talk
Does not know
organization
well
Takes too much time
to explain
Does not
understan
d customer
53. Statistical Process Control (SPC)
Every output measure has a target value and a level of “acceptable” variation
(upper and lower tolerance limits)
SPC uses samples from output measures to estimate the
mean and the variation (standard deviation)
Example
We want beer bottles to be filled with 12 FL OZ ± 0.05 FL OZ
Question:
How do we define the output measures?
