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Quality and the Customer

The Cost of Quality

SCM 440, Fall 2011

Rui Yin

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Strategic Quality Management:Defining Characteristic #1

Quality is defined from the customers

point of view.

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David Garvin's Eight Dimensions of Quality

Dimension Description

Performance A products primary operating characteristics

Features Secondary characteristics that supplement basicfunctions

Reliability Probability of a product failing within a specified period oftime

Conformance Degree to which a products design and operatingcharacteristics match pre-established standards

Durability Expected product life

Serviceability Speed, courtesy, and competence of repair

Aesthetics How a product looks, feels, sounds, tastes, or smells

Perceived Quality Images, advertising or brand names

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The Strategic Importance of QualityDimensions

Segmentation strategy: Compete on a niche dimension

Avoid quality errors: Tailor organization and operationsto meet specific needs

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Quality in Practice:L. L. Bean

The Best Strategy: Customer utilitymatrices

Disaggregate approach to quality: Product,service and communications

Compare against the competitors

Develop an internal group which operates as

a customer: Getting customers viewinternalized

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Quality in Practice:Baxter Healthcare

Internal survey: Quality profile

External market research

Qualitative Quantitative

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Customer Listening Posts

Comment cards andformal surveys

Focus groups

Direct customer contact Field intelligence

Complaint analysis

Internet monitoring

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Customer Relationship Management

Accessibility and commitments

Selecting and developing customer contactemployees

Relevant customer contact requirements

Effective complaint management

Strategic partnerships and alliances

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Quality in Practice:Pals Sudden Service

2001 Malcolm Baldrige National QualityAward in Small Business

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Case Discussions:Missing Reservation

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Strategic Quality Management:Defining Characteristic #2

Quality is linked with profitability on boththe market and the cost sides

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Quality and Cost

Prevent ProblemsReduce Defects

LowerMfg.

Costs

LowerServiceCosts

Increased Profits

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Escalation in Cost of ErrorsDown the Production Line

SupplierInspectionCosts

FinalProductTest

Costs

ProductServiceCosts

$ 0.003

$ 30

$ 300

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The Cost of Quality (COQ) Model

Purpose: Translates defects, errors, etc.into the language of money $$$

COQ the cost of avoiding poor quality, orincurred as a result of poor quality

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Quality Cost Classification

Internal failure costs Scrap and rework costs

Costs of correctiveactions

Downgrading costs

Process failures

External failure costs Costs due to customer

complaints or returns

Product recall costs andwarranty claims

Product liability costs

Prevention costs Quality planning costs Process control costs Information system

costs

Training and generalmanagement costs

Appraisal costs Test and inspection

costs

Instrumentmaintenance costs

Process measurementcosts

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Quality Cost Index

Relative index: current value / a base period value

Labor base index: current value / direct labor cost Sales base index: current value / total sales

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Pareto Analysis

Complaint Count Cumulative Count Cumulative Percentage

Delayed delivery 1200 1200 52.20%

Pizza not hot 600 1800 78.29%

Inadequate topping quantity 105 1905 82.86%

Damaged delivery 100 2005 87.21%Wrong size delivered 95 2100 91.34%

No or less seasoning 75 2175 94.61%

Incorrect billing 57 2232 97.09%

Inadequate cheese quantity 55 2287 99.48%

Not baked properly 12 2299 100.00%

Total 2299

Complaint Count

Pizza not hot 600

Inadequate topping quantity 105Inadequate cheese quantity 55

Not baked properly 12

No or less seasoning 75

Delayed delivery 1200

Damaged delivery 100

Incorrect billing 57Wrong size delivered 95

Example:Pizza Delivery

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Pareto Diagrams

Pareto Principle: 80-20 rule or rule of vital few(Dr. Juran: vital few vs. usefulmany )

0

200

400

600

800

1000

1200

1400

Delay

eddelivery

Pizza

notho

t

Inade

quate

topping

quantit

y

Dama

gedd

elivery

Wron

gsize

delivered

Noor

less

seas

oning

Incorr

ectbilling

Inade

quate

chee

sequantit

y

Notb

aked

properly

Complaint

Count

0%

20%

40%

60%80%

100%

120%

Cumulative

Percentage

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Quality and Profitability

Improved Quality

MoreMarket

Share

HigherPrices

Increased Profits

Improved Reputation