UNIT-1Introduction to quality

Presented by N.Vigneshwari

Today’s topic

Cost of quality

Quality and Cost A quality cost is defined as ‘The expenditure incurred by the producer, by

the user and by the community, associated with the product or service quality’.

And a quality related cost is defined as ‘The expenditure incurred in defect prevention and appraisal activities plus the losses due to internal and external failure’.

Quality cost measurement focuses attention on areas of high expenditure and wastage and identifies potential problem areas and cost-reduction opportunities.

This is leads to improved quality that increases customer satisfaction, reduce process time, reduce wastages, improve profit margin, and reduce operating costs, resulting in higher profits.

The quality costs are classified into 3 major groups

Cost of conformance

Any product produced or serviced is done according to some specified norms. It needs to be checked whether the finished goods and the completed services conform to the specifications. Different methodologies are adopted to do the checking. The costs involved for this are classified as costs of conformance.

It includes Prevention costs Appraisal costs.

Prevention costs

Generally the most effective way to manage quality costs is to avoid having defects in the first place. It is much less costly to prevent a problem from ever happening than it is to find and correct the problem after it has occurred. Prevention costs support activities whose purpose is to reduce the number of defects. Companies employ many techniques to prevent defects.

Prevention costs include activities relating to quality circles and statistical process control.

Quality circles consist of small groups of employees that meet on a regular basis to discuss ways to improve quality. Both management and workers are included in these circles.

Statistical process control is a technique that is used to detect whether a process is in or out of control. An out of control process results in defective units and may be caused by a miscalibrated machine or some other factor. In statistical process control, workers use charts to monitor the quality of units that pass through their workstations. With these charts, workers can quickly spot processes that are out of control and that are creating defects. Problems can be immediately corrected and further defects prevented rather than waiting for an inspector to catch the defect later.

Prevention costs:Costs incurred in quality planning

for the overall quality planfor the inspection planfor the reliability plan

Costs incurred in design and developmentcost of designing and developingcost of documentingcost of design inspection

Costs incurred for quality reviewcost of design reviewcost of verification activitiescost of design approval testscost of tests to demonstrate reliability and maintainability

Costs incurred for calibration of test equipmentscost of calibration and maintenance of templates, fixtures etccost of calibration of other test equipments / instruments

Costs incurred for the calibration and maintenance of product equipments used to evaluate qualitycost of calibration of measurement and evaluating devices

Costs incurred for supplier assurancecost of audit of supplierscost of surveillance audit of suppliers

Costs incurred in providing quality trainingcost of attending training programmecost of developing and conducting training programmes

Costs incurred in quality auditingcost of appraisal of entire systems of quality

Costs incurred for acquisition analysis and reporting of quality datacost of data collection and analysiscost of processing and storing data

Costs incurred for the conduct of quality improvement programmescost of developing and organizing programmes, such asdefect prevention programmes and quality motivation programmes, etc.

Appraisal costs Any defective parts and products should be caught as early as possible in

the production process. Appraisal costs, which are sometimes called inspection costs, are incurred to identify defective products before the products are shipped to customers. Unfortunately performing appraisal activates doesn't keep defects from happening again and most managers realize now that maintaining an army of inspectors is a costly and ineffective approach to quality control.

Employees are increasingly being asked to be responsible for their own quality control. This approach along with designing products to be easy to manufacture properly, allows quality to be built into products rather than relying on inspections to get the defects out.

Appraisal costs:

Costs incurred in preproduction verificationcost of testing and measurement during preproduction stagecost of verifying conformance of the design features

Costs incurred in receiving inspectioncost of inspection and testing of incoming partscost of inspection and testing of incoming materialscost of inspection at the supplier’s premises

Costs incurred in laboratory acceptance testingcosts of testing and evaluating the quality of purchased materials in the laboratory

Costs incurred in inspection and testingcost of inspection and testing during the process of manufacturecost of inspection and testing at the delivery pointcost of conducting product quality auditscost of man-hours spent in supervision, clerical assistance, production operation etc.

Costs incurred for inspection and test equipmentscosts of depreciation of the equipment and associated facilitiescost of setting up of equipmentcost of maintenance of such equipments

Costs incurred for materials consumed during inspection and testingcost of materials destroyed during the course of destruction tests

Costs incurred in analysis and reporting of test and inspection resultscost of the activity conducted prior to the release of the ownership in order to establish whether the quality requirement has been met.

Costs incurred in performance testingcost of testing performed in the user environment

Costs incurred for approval and endorsementscost of fees levied for mandatory approvals and endorsements by the concerned authorities

Costs incurred for stock evaluation and storagecost of inspecting and testing the stocks of products and spares which have limited shelf life

Cost of storage of quality control resultsCost of storage of reference standards

Costs of non-conformance

When a product or service does not conform to norms or specifications, they are defective. They have to be either thrown away and considered to be waster or rework has to be done and make it conform to norms. In either cases it involves cost. These are classified as costs of conformance

It includes Internal failure cost (IFC) External failure cost (EFC) Cost of exceeding requirements (CER)

Internal failure cost (IFC)

Internal failure costs result from identification of defects before they are shipped to customers. These costs include scrap, rejected products, reworking of defective units. The more effective a company's appraisal activities the greater the chance of catching defects internally and the greater the level of internal failure costs. This is the price that is paid to avoid incurring external failure costs, which can be devastating.

The internal failure costs include the following

Costs incurred due to scarpcost of materials, parts, components which failed to conform to quality requirementscost of labour and other overheads due to the scraped items

Costs incurred due to replacement of productcost of replacing the product because of the non-conformity

Cost incurred due to rework and repaircost of correcting the defective itemscost of planning and scheduling the corrective processcost of materials procured for rework etc.

Costs incurred in troubleshooting and failure analysiscost of analyzing non-conforming materialscost of determining causes and taking remedial actions

Costs incurred due to the fault of subcontractorcost of failure of purchased material to meet the quality requirements

External failure cost When a defective product is delivered to customer, external failure cost is

the result. External failure costs include warranty, repairs and replacements, product recalls, liability arising from legal actions against a company, and lost sales arising from a reputation for poor quality. Such costs can decimate profits.

In the past, some managers have taken the attitude, "Let's go ahead and ship everything to customers, and we'll take care of any problems under the warranty." This attitude generally results in high external failure costs, declining market share and profits.

External failure costs usually give rise to another intangible cost. These intangible costs are hidden costs that involve the company's image. They can be three or four times greater than tangible costs. Missing a deadline or other quality problems can be intangible costs of quality.

The external failure costs include the following

Costs incurred due to customer complaintscost of investigation carried out by the companycost of compensation provided by the companycost of reinstallation

Costs incurred due to warranty claimscost of repair of defective itemscost of replacement of defective items

Costs incurred due to rejected and returned productscost of repair/replacement of components/productscost of handling components / products

Costs incurred due to concessionscost of concessions, such as discounts given to the products

Costs incurred due to recalling of productscost associated due to recalling of productscost of premiums paid for insurance to minimize liability litigation damages

Cost of exceeding requirements (CER)

Unnecessary or unimportant services or information (i.e) redundant copies of documents, reports that are not read, giving details when not necessary, conducting huge analytical study.

Costs of lost opportunity

Costs due to the loss of customers (both existing and potential)

References

Total quality management – L.Suganthi Anand A.Samuel

Thank you