Cost of quality

Cost of Quality

•Scrap•Rework•Warranty costs

Hidden Costs

Visible costs

• Excessive use of material

• High inventory

• Inadequate resource utilization

• Cost of redesign and re-inspection

• Cost of resolving customer problems

• Lost customers / Goodwill

Visible and hidden costs

• Conversion efficiency of materials

Categories of Quality Costs

Conformance Non-Conformance

Quality Costs

Appraisal Prevention External failure Internal failure

Cost of quality

Cost of quality = Cost of conformance + Cost of non-conformance

• Cost of conformance is the cost of providing products or services as per the required standards. This can be termed as good amount spent. (Prevention & Appraisal costs)

• Cost of non-conformance is the failure cost associated with a process not being operated to the requirements. This can be termed as unnecessary amount spent.( Internal & External failure costs)

Prevention Costs

Prevention costs are associated with design, implementation , maintenance, and planning prior to actual operation, in order to avoid defects from happening.

The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures ( internal and external ).The motto is “Prevention rather than appraisal” .

Activities associated with Prevention costs

Market research Quality training programs. Contract review Design review Field trials Supplier evaluation Process plan review Process capability review Design and manufacture of jigs and fixtures Preventive checks & maintenance

Appraisal costs

Appraisal costs are spent to detect defects to assure conformance to quality standards. Appraisal cost activities sums up to the “cost of checking if things are correct”.The appraisal costs are focused on the discovery of defects rather than prevention of defects

Activities associated with Appraisal costs

Proto type testing Vendor surveillance Incoming material inspection Process inspection/control Final inspection Laboratory testing / measurement Depreciation cost for measuring Quality audits.

Internal failure costs

Internal failure costs occurs when results of work fail to reach designated quality standards , and are detected before transfer to the customer takes place.

ExamplesInternal failure costs

Design changes/ corrective action Scrap due to design changes Excess inventory Rectification / reject disposition of

purchased material Rework/rejection in manufacturing Downgrading of end product Downtime of plant & machinery Trouble-shooting & investigation of

defects

External failure costs

External failure costs occur when the product or service from a process fails to reach designated quality standards , and is not detected until after transfer to the customer.

Activities associated with External failure

costs

Processing / investigation of customer complaint Repair/replacement of sold goods Warranty claims Product liability & litigation costs Interest charges on delayed payment due to quality

problems Loss of customer goodwill & sales.

Size of four categories of quality costs.

The organizations which do not follow TQM,there is less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs.

Various studies have shown that quality cost in manufacturing companies the world over range from 20 % to 30 % of turnover and in the case of service companies it can go up to 40 % as illustrated in graph on the next slide.

Size of various quality cost elements

Preventive

1%

Appraisal

4-6%

Internal Failure

10-12%

External Failure

10-15%

The total qualitycosts 25-35 %of turnover.

Qua

lity

cos

ts in

% o

f sa

les

Impact of TQM on costs.

TQM is primarily aimed to improve the quality of the product , higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly effect the profitability .

This is demonstrated by the results of TQM program in Xerox Corp . The change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide.

Impact of TQM on costs.

prevention

Appraisal

InternalFailure

Prevention

Appraisal

InternalFailure

0

5

10

15

20

25

30

35

% o

f sa

les

An example from Xerox Corp.

Before TQM After TQM

1-10-100 Rule

1

10

100

Rs

Rs

Rs

Rs

RsRs

Rs

Rs

Rs

Rs

Prevention

Correction

Failure

Cost

of

recti

fyin

g d

efe

ct

Sta

ges

cost of quality

Traditionally recorded quality cost generally account for only 4 to 5 percent of sales which mainly comprise of cost of scrap, re-work and warranty.

Hidden costs of quality

There are additional costs of quality which are hidden and do not appear in the account books of the company, as they are intangible and difficult to measure. These additional costs could be as high as 20-25% of sales.

•Scrap•Rework•Warranty costs

Hidden Costs

Visible costs

• Excessive use of material

• High inventory

• Inadequate resource utilization

• Cost of redesign and re-inspection

• Cost of resolving customer problems

• Lost customers / Goodwill

Visible and hidden costs

• Conversion efficiency of materials