Quality Cost Analysis

7/28/2019 Quality Cost Analysis

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Quality-Cost Analysis

By:Mahendra Singh

Central University of Jharkhand, Ranchi


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Quality Cost:

- It is represented by the costs encountered in:

- preventing

- finding- correcting the defective work

- warranty & rework

- It represents the basis through which investment in qualityprojects can be actually evaluated in terms of cost improvement,

profit enhancement.- Quality Costs have an impact through the entire life cycle of theproduct, it does not stop at the shipping phase

- They represent in general a significant amount

- It is affected (reduced) by Total Quality Control.

- A little bit of History:

- Gold in the Mine concept

- This concept triggered a better understanding of:

- 1. The companys accounting system

- 2. The identification of all the quality related costs

- 3. The idea of an optimum for quality costs.


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Quality Cost Analysis: The process that consists in comparing and examining

the individual quality cost item to each other and to thetotal so that appropriate action could be taken.Generally, it is more meaningful to talk about timeintervals and about absolute dollar amounts.

History: One of its first advocates was quality theorist:Joseph Juran.

The ob ject iv eof quality cost analysis is to minimizethe total cost of quality across the life of a product(therefore, to reduce the quality costs)

Quali ty cost analysis is a standard part oftradi t ional qual ity con tro l


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Manufacturing Context Quality Costs (sometimes overlap)

Prevention Costs (Pc): Costs associated with preventing poor quality.

examples: design errors, coding errors

Appraisal Costs (Ac):

Costs associated with revealing the poor quality

Testing

Design reviews are somewhere in the middle

Failure Costs (Fc):

Internal Failure Costs

Costs encountered before the product was shipped to thecustomer

Example: fixing bugs

External Failure Costs

Costs encountered after product was shipped to thecustomer

Example: patching a released product and distributing the

patch Total Cost of Quality = Pc + Ac +Fc


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COQ Models

COQ models are classified into four groups(Schiffauerova and Thomson,2006).

1. P-A-F models: Prevention costs+ Appraisal costs+

Failure costs

2. Crosbys model: Cost of conformance+ Cost ofnon-conformance

3. Opportunity or intangible cost models: [Prevention

costs+ Appraisal costs + Failure costs+ Opportunity

costs] / [Cost of conformance+ Cost of non-conformance+ Opportunity costs] / [Tangibles +

intangibles]

4. Process cost models: Cost of conformance + Cost

of non-conformance


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Optimum quality cost model

The traditional model detailed by Brown and Kane (1984) hasgot widespread acceptance. there is an inverse relationship

between prevention and appraisal effort and failure cost. The

optimum conformance to quality or defect level is where the

increasing costs of the prevention and appraisal curve

converges with the curve of decreasing failure costs. Totalquality costs are minimized to the point where the cost of

prevention plus appraisal equals the cost of failure. The total

quality cost curve represents the sum of the other two curves,

and the location of the minimum point on the total quality cost

curve, sometimes referred to as the optimum point


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Model of op t imum qual ity cos t


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Prevention Costs

The costs encountered in the activities preventingpoor quality.

Examples: Staff training

Early Prototyping/Requirements analysis

Clear Specification/unambiguous documentation Evaluation of the development tools that will be used

Interesting features: The costs are distributed to almost all the groups involved in

the product development. Any group that might not beaffected?

Defensive programming?


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Defensive Programming

Defensive programming is the practice of anticipatingwhere failures can occur and then creating aninfrastructure that tests for errors, notifies you whenanticipated failures occur, and performs damage-controlactions you have specified-- such as stopping programexecution, redirecting users to a backup server, enabling

debugging information you can use to diagnose theproblem.

This way:

problems that might otherwise go unnoticed are detected

small errors that might turn into disasters are caught

a lot of debugging and maintenance could be saved.


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Appraisal Costs:

The Costs encountered in the activities aimed atrevealing quality problems.

Examples:

Glass box testing

Black box testing

Code inspections

Test automation

Interesting issues:

What about design review?

Part appraisal, part prevention


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Internal Failure

The Costs encountered before the product distribution tothe customers.

Examples

Fixing bugs

Regression testing

Interesting issues:

What about cost of delays and of lost opportunity?

Like: Direct and Opportunity cost of late shipment and Wastedadvertisements

These are costs borne by the groups outside the product

development Might give birth to controversy, so it is recommended not to be

used especially the first times the organization is try toimplement the quality-cost analysis.


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External Failure

Costs encountered after the product has alreadybeen shipped to the customers.

Examples: Investigation of customer complaints

Refunds and recalls

Lost sales

Coding/testing/shipping of updated product Can this always be done?

All costs imposed by law

Interesting issues: What about cost of high turnover or cost of lost pride?

Hard to estimate


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Benefits

The goal is to reach minimum quality costs at the desired outgoingquality level.

Its a feed-back mechanism: quality costs data is used by themanagement to make decisions that will impact the quality costs.

Applications of Quality Costs

Measurement Tool:

Quality costs provide comparative measurements forevaluating quality programs versus the value of the resultsachieved

Process-Quality Analysis Tool

Quality costs can serve effectively as an analysis tool and pointout where the problems are

Programming Tool

Quality costs determine how the available resources to bedivided

Predictive Tool

Quality costs can also be used to evaluate and assureperformance in relation to the goals and objectives of theorganization.


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Risks

Implementation Risks Not being realistic and trying to achieve too much too

soon.

Controversial costs should be left aside, especially thefirst few times the company is trying to implement thequality-costs analysis

Other risks: Looking only from the point of view of the company, not

looking at the customers costs

Might result in other types of risk: Customer Dissatisfaction

Litigation


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Tool:

1. Cost of quality data can be either collected on a sampling basis or ona continuous basis.

2. After confirming that the data is accurate and comprehensive orrepresentative, and consistent with previous definitions andimplementations, data is analyzed for trends and opportunities.

3. Statistical analysis such as regression analysis, indexes,correlations, Pareto analysis, etc., is utilized to formulate conclusionsabout the present state and recommendations.

4. In some cases utilizing tools such as modeling can predict theoptimum cost of quality and the process design or improvementnecessary for achieving the optimum can be defined.

5. A plan is then defined to modify the current process, phasing asappropriate, to move towards the optimum cost of quality.

6. Projects are analyzed for their impact on cost of quality, and projectsor processes that how a high return on quality (Return on Quality =(Dollar Cost of Quality Savings/Dollar Cost of Implementation) x 100 )

7. Improvements are measured and evaluated for effectiveness, and acontinuous improvement cycle is implemented. Results are alsocommunicated widely.


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Ford Pinto litigation

Benefits and Costs Relating to Fuel Leakage

Associated with the Static Rollover Test Portion of FMVSS 208

Benefits

Savings 180 burn deaths, 180 serious burn injuries, 2100 burnedvehicles

Unit Cost -- $200,000 per death, $67,000 per injury, $700 per vehicle

Total Benefit 180 x ($200,000) + 180 x ($67,000) + 2100 x ($700) =

$49.5 million.Costs

Sales 11 million cars, 1.5 million light trucks.

Unit Cost -- $11 per car, $11 per truck

Total Cost 11,000,000 x ($11) + 1,500,000 x ($11) = $137 million.


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Ford Pinto

Quality-cost analysis looks at the costs from onlythe companies perspective.

However, these costs might not be easilyestimated

It ends up costing Ford way more Motors Corp vs Johnston

When calculating the trade-off between severalfactors (costs one of them) it is important for thecompanies to realize and take into account the

customers costs.


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Another look at External Failure Costs

Borne by seller Given in the previous slide

Borne by buyer

Death / Injury

Embarrassment

Might affect their customers

Cost of tech support Cost of replacing product


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Why are the companies reluctant to

implement quality-costs analysis?

Skepticism ; some companies have tried and failedor they are aware of other companies that tried andfailed

They dont know whom to trust; there are manyadvocates and agendas.

They believe in Our business is different. Mediocre quality is still saleable.

The confusion in languagethe belief that higherquality costs more.


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Certification to the ISO 9000 will solve all their issues related to qualityperformance.

ISO 9000: The quality management system standards,which are based on the eight quality managementprinciples:

Principle 1 Customer focus

Principle 2 Leadership Principle 3 Involvement of people

Principle 4 Process approach

Principle 5 System approach to management

Principle 6 Continual improvement

Principle 7 Factual approach to decision making Principle 8 Mutually beneficial supplier relationships

Quality Cost Analysis

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