Cost of Quality-Presentation

(COQ)

RAMJAN Sheik

RAMDOO Krish

RAMRUTTON Natasha

RAMKALAWON Avinash

RAMPERSAD Mitilesh

PRESENTED BY:

COST OF QUALITY

COST CATEGORIES

COLLECTION SYSTEM DESIGN

QUALITY COST BASES

ANALYSIS

PROGRAM IMPLEMENTATION

OBJECTIVES

Performance measurement is how

organizations, whether public or private

measure the quality of their activities and

services.

Cost of Poor Quality- a technique for

measuring Performance Measures.

INTRODUCTION

First appearance in 1930

1951- Dr Feigenbaum and Dr Juran give a new

dimension of the concept

1979- Crosby find that many organization spend about 15 to 20% of sales on quality cost

EVOLUTION OF COQ

According to Dale and Plunkett (1995), quality costs

refers to all necessary costs and non-value added

activities required to achieve a quality product or

service.

COQ is usually understood as the sum of

conformance plus nonconformance costs,

(Schiffauerova, 2006)

COST OF QUALITY (CoQ)

Quality costs mainly are used by management in order to be aware of:

1) Quality Improvement

2) Customer Satisfaction

3) Profit enhancement

Understanding quality cost enables management to be aware of hidden costs.

COST OF QUALITY AS A MANAGEMENT

TECHNIQUE

3) Profit enhancement

Source: Cookins 2010, Measuring the Cost of Quality for Management

HIDDEN COST

Source: Krishnan 2006 . pp.84

IMPORTANCE OF CoQ

To identify the global optimum for a

process

Quality along with the cost responds to

time and is flexible

The quality concept continues to evolve

Used as a measuring tool

External failure costs are less relevant to

services than to manufacturing

Internal failure costs might not be as

evident in services as in manufacturing

Internal failure costs tend to be lower in

service organizations

CoQ: SERVICE V/S MANUFACTURING ORGANIZATION

Year 1989: saved the company $53 million

Year 1990: saved the company $77 million

Year 1991: saved the company $20 million

COQ concentrates on tasks that have high

opportunity costs and makes those tasks more

efficient

QUALITY COST: XEROX’s case

COST CATEGORIES

PREVENTION COST

The cost of any action taken to investigate, prevent or reduce the risk of a non-conformity

INTERNAL FAILURE COST

The costs arising within the organization due to non-conformities or defects

APPRAISAL COST

The costs associated with measuring, checking, or evaluating products or services to assure conformance to quality requirements

EXTERNAL FAILURE COST

The costs arising after delivery of product or service to the customer due to non-conformities or defects

Cost Of ConformanceCost Of Non Conformance

Prevention cost is achieved by examining

closely the total of the lessons learnt or the

experience gained

Developing and integrating activities into

the management systems making it difficult

for the same errors to occur again

Cost of Good Quality: 1. PREVENTION COST

1. PREVENTION COST (Con’d)

1. PREVENTION COST (Con’d)

1. PREVENTION COST (Con’d)

1. PREVENTION COST (Con’d)

1. PREVENTION COST (Con’d)

The appraisal costs of poor quality have

been defined to include all costs incurred in

the planned conduct of product or service

appraisals to determine compliance to

requirements

Cost of Good Quality: 2. APPRAISAL COST

2. APPRAISAL COST (Con’d)

2. APPRAISAL COST (Con’d)

2. APPRAISAL COST (Con’d)

2. APPRAISAL COST (Con’d)

2. APPRAISAL COST (Con’d)

Internal Failure Cost refers to those costs associated with

defects that are found prior to transfer of the product to the

customer (Krishnan 2006). For ex:

Scrap;

Rework;

Material review;

Trouble shooting and retest;

Customer service

Cost of Poor Quality: 3. INTERNAL FAILURE COST

3. Internal Failure Cost (Con’d)3. Internal Failure Cost (Con’d)

3. Internal Failure Cost (Con’d)3. Internal Failure Cost (Con’d)

Purchased items are not

conformant to the requirements

due to degradation or

depreciation of the item

Sub-elements are purchased

material reject disposition

costs, supplier corrective

actions, rework of the supplier

rejects, etc

A significant portion of

overall quality costs

Sub-elements are: material

review, corrective action

costs, operations rework,

internal failure labour

losses, equipment repair,

etc

Costs associated with defects that are found after product is shipped to the customer (Krishnan 2006).

common examples of the external failure costs are:

Customer incurred cost; Customer dissatisfaction cost; Loss of reputation; and Lost opportunity cost

Cost of Poor Quality: 4. EXTERNAL FAILURE COST

4. EXTERNAL FAILURE COST (Con’d)

According to Besterfield et al., (2006), external failure cost is

divided into eight elements:

Complaint investigations of customer or user service

Returned goods

Retrofit and recall costs

Warranty claims

Liability Costs

Penalties

Customer or User Goodwill

Lost sales

THE 1- 10- 100 RULE

Ross (2009) pp.

Crosby’s Model

Crosby (1979) sees quality as conformance to

requirements

The price of conformance:

Actual Prevention and Appraisal Cost

Price of non-conformance:

Failure Costs

QUALITY COST MODEL

Opportunity Cost or Intangible costs’

models

Emphasizes the role of intangible cost

within the overall quality cost scheme

Intangible or opportunity losses cost is

incorporated into a typical P-A-F model.

QUALITY COST MODEL (Con”d)

Process cost model

Recognizes the importance of process cost measurement

and ownership

Total of the cost of conformance and the cost of

nonconformance

The use of a process cost model is suggested as a

preferred method for quality costing within TQM

The model pursues a continuous improvement policy on

key processes

QUALITY COST MODEL (Con”d)

ABC Model

Uses the two-stage procedure to achieve the

accurate costs of various cost objects

Early ABC systems focus on the accurate

assignment of overhead costs to products

A two-dimensional model of ABC was proposed

by Tsai (1998)

QUALITY COST MODEL (Con’d)

ABC MODEL (Con’d)

Vaxevanidis and Petropoulos (2008) pp 279

The system requires the close

interaction of the Quality and

Accounting departments

Some quality costs data cross departmental lines

Insignificant costs of poor quality may be difficult

to determine

COLLECTION SYSYTEM DESIGN

Quality Dept

Accounting Dept

ACCOUNTING SYSTEMtime sheets,

Schedules,

Minutes of meetings,

Expense reports,

Purchase orders,

Rework reports,

Scrap report,

Debit and credit memos,

Quality costs provide little information

Vary due to factors such as production volume or

seasonality

Measurement base sensitive to change must be

chosen which is compared to quality cost to obtain an

index

Index numbers are used to measure prices, costs or

other numerical quantities

QUALITY COST BASES

QUALITY COST BASES (Con’d)

FOR EXAMPLE :

Cost index in quarter t

= costs in quarter t x 100

Base period cost

QUALITY COST BASES (Con’d)

1.1. LabourLabour

2.2. ProductionProduction

3.3. SalesSales

4.4. UnitUnit

HOW TO START A QUALITY COST AUDIT

QUALITY COST AUDIT (Con’d)

Howard (2005) proposed a fourteen steps

approach to cost of quality

The decisive stage is to prepare the report after

the audit, communicating its results or getting buy-

in for the necessary changes

QUALITY COST AUDIT (Con’d)STEP 1STEP 1

Choose the audit team

QUALITY COST AUDIT (Con’d)

STEP 2STEP 2Choose the process

STEP 3STEP 3Communicate the audit plan

QUALITY COST AUDIT (Con’d)

STEP 4STEP 4Choose people working on the process to assist

with the audit

STEP 5STEP 5Agree a mission, set a schedule and identify any

training needed

STEP 6STEP 6Define and map the process

QUALITY COST AUDIT (Con’d)

STEP 7STEP 7Prepare to calculate Quality costs

What is cost of quality?

Definition of each category of cost should be written and distributed to all users

QUALITY COST AUDIT (Con’d)

STEP 8STEP 8

Determine the causes of Quality costs

STEP 9STEP 9

Interview staff

STEP 10STEP 10

Allocate costs

STEP 11STEP 11

Prepare the assessment reports

QUALITY COST AUDIT (Con’d)

STEP 12STEP 12

Prepare the audit report

STEP 13STEP 13

Share the findings and take action

STEP 14STEP 14

Develop a cycle of improvement

Morse (1983):

Systematic means of achieving planning and

controlling quality costs

Provides some enlightment to management

To reduce the misdistribution of quality costs

Goals for the reduction of quality costs

PURPOSE OF QUALITY COST SYSTEM

LMorse (1983):

Information is subjective

Important costs are omitted from the report

Overhead costs may be imprecise

Variation in activity

LIMITATION OF QUALITY COST INFORMATION

QUALITY COST REPORT

VENTURA COMPANY QUALITY COST

REPORT (Con’d)

Quality Cost Analysis is the process that

consists in comparing and examining the

individual quality cost item to each other and

to the total so that appropriate action could be

taken

QUALITY COST ANALYSIS

QUALITY COST ANALYSIS (Con’d)

Main Analysis Technique

Trend Analysis

Pareto Analysis

Comparative Analysis between the level of the

costs from the present and from the past.

Besterfield et al., 2006

Trend analysis can be made from cost categories

and subcategories, on products, on the

measurement scale, by plants within a corporation,

departments, and work-centres

1.TREND ANALYSIS

1.TREND ANALYSIS (Con’d) By Cost Category

1.TREND ANALYSIS (Con’d) By Index

1.TREND ANALYSIS (Con’d) By Product

1.TREND ANALYSIS (Con’d) Within a Category

1.TREND ANALYSIS (Con’d) Short Run Trend Analysis Graph

Pareto analysis is a classical technique for ranking

the problems or activities after their importance

founded Vilfredo Pareto

A small number of problems or

activities usually have caused larger proportion of

the troubles or consequences

called 80-20% principle

2. PARETO ANALYSIS

PARETO ANALYSIS (Con’d)By Category Vital Few

Useful Many

PARETO ANALYSIS (Con’d)By Element

In line with Besterfield et al., (2006) there are three

techniques to find out about optimum costs

To make comparisons with other

organizations

To optimize the individual categories

To analyze the relationships among the

cost categories

OPTIMIZING COST

OPTIMIZING COST (Con’d)Optimum Quality Cost

The idea of a quality improvement

strategy is that each failure has a root

cause, causes are preventable, and

prevention is cheaper

Projected teams is established to take corrective

actions after a problem has been identified with

the use of various analysis techniques

QUALITY IMPROVEMENT STRATEGY

QUALITY IMPROVEMENT STRATEGY (Con’d)

2 types of problems when projected team is

established

1. Firstly, problems which need to be dealt with

little or no help from other departments

2. Problems which need to be handled with full

co-ordination from the various departments in

the organization.

Most of the quality improvement projects will be

directed toward reducing failure costs

Failures which are detected at the beginning of

operations are less costly than failures detected at the

end of the operations or by customers and are also

cheaper to correct

The project team must concentrate on finding the root

cause of the problem

REDUCING FAILURE COST

REDUCING FAILURE COST (Con’d)

Once the cause has been determined, the project

team can concentrate on developing the corrective

action

Follow-up activities are conducted to ensure that

the corrective action was effective in solving the

problem

cost saving is calculated

Appraisal cost are non –valued added as they do

not change the quality of the product delivered

As failure costs are reduced, most likely the need

for appraisal activities will be reduced

The project team should review the entire

appraisal activity to determine its effectiveness

REDUCING APPRAISAL COST

REDUCING APPRAISAL COST (Con’d)

Typical question that the project team might investigate:

Is 100% inspection necessary or would statistical process

control work more efficiently and effectively?

Can inspection stations be combined, relocated, or

eliminated?

Are inspection methods the most efficient?

Could the inspection and test activity be automated?

Could data be more efficiently collected, reported and

analyzed using the computer?

The most effective way to manage quality cost is to

avoid having defects in the first place

Prevention activities are related to employee attitudes

and to formal techniques to eliminate problems in the

product cycle

Companies employs many technique to prevent

defects for eg.SPC, Quality engineering, training and

a variety of tools from TQM

PREVENTION OF QUALITY COST

With reference to Besterfield et al., (2006) the

program implementation is divided into six steps

STEP 1STEP 1

Determine if the program can be beneficial to the

organization

STEP 2STEP 2

Management Commitment

PROGRAM IMPLEMENTATION

PROGRAM IMPLEMENTATION (Con’d)

STEP 3STEP 3

Pretesting

STEP 4STEP 4

Train and educate the personnel

STEP 5STEP 5

Revise the accounting procedures in order to

accommodate the quality cost system

PROGRAM IMPLEMENTATION (Con’d)

STEP 6STEP 6

Expand the quality cost system in the entire

organization

There is by no means a uniform view of

what is meant by quality cost and what

should be included under the quality

cost umbrella.” (Barrie Dale and James

Plunkett, 1991 “Quality Costing”)

CONCLUSION