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1. Quality Costs and Productivity: Measurement, Reporting, and
Control Kristel Pamela P. Caluya
2. Eight Dimensions of Quality Performance Aesthetics
Serviceability Features (quality of design) Reliability Durability
Quality of Conformance Fitness of Use
3. Quality Defined Features (Quality of Design) refer to
characteristics of a product that differentiate functionally
similar products. Example: Compare first class air travel with
economy travel. First Class typically offers more leg room, better
meals and more luxurious seats. Quality of Conformance is a measure
of how well the product meets its requirements or specifications.
Example: If a Honda Civic does what it is designed to do and does
it well, quality exists. For example, if economy cars are designed
to provide reliable, low-cost, low-maintenance transportation, the
desired quality exists.
5. Examples of Quality Costs Prevention costs Appraisal Costs
Quality engineering Quality training programs Quality planning
Quality reporting Supplier evaluation and selection Quality audits
Quality circles Field trials Inspection of raw materials Testing of
raw materials Packaging inspection Supervising appraisal activities
Product acceptance Process acceptance Inspection of equipment Test
equipment Design reviews Outside endorsements
6. Examples of Quality Costs Internal failure costs Scrap
Rework Downtime (defect related) Reinspection Retesting Design
changes External failure costs Cost of recalls Lost sales
Returns/allowances Warranties Repairs Product liability Customer
dissatisfaction Lost market share Complaint adjustment
7. Estimating Hidden Quality Costs Hidden Quality Costs are
opportunity costs resulting from poor quality. The Multiplier
Method The Market Research Method Taguchi Quality Loss
Function
8. The Multiplier Method The multiplier method assumes that the
total failure cost is simply some multiple of measured failure
costs: Total external failure cost = k(Measured external failure
costs) where k is the multiplier effect If k =4, and the measured
external failure costs are $2 million, then the actual external
failure costs are estimated to be $8 million.
9. The Market Research Method The market research method uses
formal market research methods to assess the effect of poor quality
on sales and market share. Customer surveys and interviews with
members of a companys sales force can provide significant insights
into the magnitude of a companys hidden costs. Market research
results can be used to project future profit losses attributable to
poor quality
10. The Taguchi Quality Loss Function The Taguchi loss function
assumes any variation from the target value of a quality
characteristic causes hidden quality costs. Furthermore, the hidden
quality costs increase quadratically as the actual value deviates
from the target value.
11. L(y)= k(y-T) 2 Where k= a proportionality constant
dependent upon the organizations external failure cost structure y=
Actual value of quality characteristics T= Target value of quality
characteristic L= Quality loss y-T (y-T) 2 k(y-T) 2 1 Actual
Diameter (y) 9.9 -0.10 0.010 4.00 2 10.1 0.10 0.010 4.00 3 10.2
0.20 0.040 16.00 4 9.8 -0.20 0.040 16.00 Total 0.100 40.00 Average
0.025 10.00 Unit
12. Total units produced are 2,000 Total expected hidden
quality costs 10(0.025*$400)=$20,000 Total expected loss for the
2000 units
17. Multiple-Period Quality Costs Assume the following data:
Quality Costs 2002 2003 2004 2005 2006 $440,000 423,000 412,500
392,000 280,000 Actual Sales $2,200,000 2,350,000 2,750,000
2,800,000 2,800,000 % of Sales 20.0 18.0 15.0 14.0 10.0
18. Multiple-Period Trend Graph: Total Quality Costs % of Sales
20 15 10 5 0 1 2 3 Year 4 5
19. Multiple-Trend Analysis for Individual Quality Costs Assume
the following quality cost data: Prevention 2002 2003 2004 2005
2006 1Expressed Appraisal 6.0%1 6.0 5.4 5.6 4.4 as a % of sales
4.5% 4.0 3.6 3.2 2.4 Internal Failure 4.5% 3.5 3.0 3.1 3.0 External
Failure 6.0% 4.5 3.0 2.6 2.3
20. Productive Efficiency Productivity concerned with producing
output efficiently specifically addresses the relationship of
output and the inputs used to produce the outputs Total productive
efficiency is the point at which two conditions are satisfied For
any mix of inputs that will produce a given output, no more of any
one input is used than necessary to produce the output. Given the
mixes that satisfy the first condition, the least costly mix is
chosen 23
21. Productive Efficiency Technical Efficiency the condition
where no more of any one input is used than necessary to produce a
given output. Technical efficiency improvement occurs when less
inputs are used to produce the same output or more output are
produced using the same input. 24
22. Productive Efficiency 25
23. Productive Efficiency 26
24. Productive Efficiency 27
25. Productive Efficiency 28
26. Productive Efficiency Of the two combinations that produce
the same output, the least costly combination would be chosen.
29
27. Partial Productivity Measurement Partial Productivity
Measure Measuring productivity for one input at a time.
Productivity ratio = Output Input Operational Productivity Measure
Partial measure where both input and output are expressed in
physical terms. Financial Productivity Measure Partial measure
where both input and output are expressed in dollars. 30
28. Total Productivity Measurement 2009 2010 Number of frames
produced Labor hours used Materials used (lbs.) 240,000 60,000
250,000 240,000 240,000 250,000 60,000 50,000 1,200,000 1,150,000
50,000 1,200,000 250,000 1,150,000 31
29. Total Productivity Measurement Profit-Linkage Rule For the
current period, calculate the cost of the inputs that would have
been used in the absence of any productivity change Compare this
cost with the cost of the inputs actually used. The difference in
costs is the amount by which profits changed because of
productivity changes 32
30. Total Productivity Measurement PQ = the inputs that would
have been used Current-period output PQ = Base-period productivity
ratio 33
31. Total Productivity Measurement 2009 Number of frames
produced Labor hours used Materials used (lbs.) Unit selling price
(frames) Wages per labor hour Cost per pound of material 240,000
60,000 1,200,000 $30 $15 $3 2010 250,000 50,000 1,300,000 $30 $15
$3.50 34
32. Total Productivity Measurement PQ (labor) = PQ (materials)
= 250,000 4 = 250,000 0.200 = Cost of labor: (62,500 $15) Cost of
materials: (1,250,000 Total PQ cost The actual cost of inputs: Cost
of labor: (50,000 $15) Cost of materials: (1,300,000 Total current
cost 62,500 hrs. 1,250,000 lbs. $3.50) $ 937,500 4,375,000
$5,312,500 $3.50) $ 750,000 4,550,000 $5,300,000 35