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QualityCosts
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Many think that quality costs money andadversely affects
profits. But these costs are the
costs of doing it wrong first time .Quality in the long run
results in increasedprofitability.
Quality is Free
For example if we design the product right firsttime, build it
right first time - we save all the costsof redesign, rework, scrap,
resetting, repair,warranty work etc.
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Quality and Profit
If the organization does notoffer high quality product
orservice, it will soon go out ofbusiness. But just having
highquality will not be enough,
because your competitors willalso have the high quality. Towin,
companies will need tooffer high quality for a lower
price than their competitors.This requires organizations
toidentify and reduce theirquality costs
HighQuality
Lowerprice
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Quality Costs
Quality costs are all those costs that arisefrom not performing
a task the right waythe first time.
1. Prevention Costs
2. Appraisal Costs
3. Internal Failure Costs4. External Failure Costs
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PreventionCosts
Prevention costs are associated withdesign, implementation,
maintenance andplanning prior to actual operation in orderto avoid
defects from happening.
The emphasis is on the prevention ofdefects in order to reduce
the probabilityof producing defective products.
Prevention activities lead to reduction ofappraisal costs and
both type of failures(internal and external). The motto
isPrevention rather thanappraisal.
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Activities associated with Prevention costs
Market research Quality training programmes Contract review
Design review Field trials Supplier evaluation,Supplier Q programs
Process plan review Process capability review Design and
manufacture of jigs and
fixtures Preventive maintenance Engineering changes for easy
Producibility
Make Certain programs data reqments,Qmeasurements
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Appraisal costs
Appraisal costs are spent to detectdefects to assure conformance
toquality standards. Appraisal costactivities sums up to the cost
ofchecking whether things arecorrect. The appraisal costs are
focused on the discovery of defectsrather than prevention of
defects
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Activities associated with Appraisal costs
Proto type testingVendor surveillance
Incoming material inspection
Process inspection/control Final inspection- product,
package
Laboratory testing/measurement
Field testing
Depreciation cost for measuring
Quality audits
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Internal failure costs
Internal failure costs occurs when
results of work fail to reachdesignated quality standards,
andare detected before transfer to the
customer takes place.
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Activities associated with Internal failure costs
Design changes/ corrective action Scrap due to design
changes
Excess inventory
Rectification / reject disposition of purchasedmaterial
Rework/rejection in manufacturing
Downgrading of end product
Downtime of plant & machinery
Trouble-shooting & investigation of defects
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External failure costs
External failure costs occur whenthe product or service from
aprocess fails to reach designatedquality standards, and is
notdetected until or after transfer to
the customer.
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Activities associated with External failure costs
Processing/investigation of customercomplaints
Repair/replacement of sold goods
Warranty claims Product liability & litigation costs
Interest charges on delayed payment due
to quality problems Loss of customer goodwill & sales.
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Size of four categories of quality costs
The organizations which do notfollow TQM, there is less emphasis
onprevention and their main qualityefforts are on appraisal with
very
little control on internal and externalfailure costs.
Various studies have shown thatquality cost in
manufacturingcompanies world over range from20% to 30% of turnover
and in thecase of service companies it can goup to 40 %.
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Size of various quality cost elements
Preventive
1%
Appraisal
4-6%
Internal
Failure
10-12%
External
Failure
10-15%
The total qualitycosts 25-35 %of turnover.
Qualitycostsin%o
fsales
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Impact of TQM on costs.
TQM is primarily aimed to improve thequality of the product ,
higher customersatisfaction and better workingenvironment for the
employees. The mostdramatic impact of TQM is on reduction ofquality
costs which directly effect theprofitability .
This is demonstrated by the results of TQMprogramme in Xerox
Corp . The change invarious elements of quality cost beforeand
after launching TQM by Xerox Corp isshown on the next slide.
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Impact of TQM on Quality Costs
Internal Failure
Appraisal
Prevention
0
5
10
15
20
25
30
35
%of
sales
An example from Xerox Corp.
Before TQM After TQM
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1-10-100 Rule
1
10
100
Rs
Rs
Rs
Rs
Rs
Prevention
Correction
Failure
Sta
ges
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Scrap
Rework Warranty costs
Hidden Costs
Visible costs
Excessive use of material
High inventory
Low plant utilization
Cost of redesign and re inspection
Cost of resolving customer problems Cost associated with poor
qualityof purchased material
Cost of non value adding activities
Opportunity cost of lost customers
