cost of quality --tej

Cost Of Quality 2009

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INTRODUCTION

“Quality Costs represent the difference between the actual cost of a

product or service and what the reduced cost would be if there were

no possibility of substandard service, failure of products, or defects in

their manufacturers.”

Improving quality is considered by many to be the best way to enhancecustomer satisfaction, to reduce manufacturing costs and to increaseproductivity. Any serious attempt to improve quality must take intoaccount the costs associated with achieving quality, since nowadays itdoes not suffice to meet customer requirements, it must be done at thelowest possible cost as well. This can only happen by reducing the costsneeded to achieve quality, and the reduction of these costs is onlypossible if they are identified and measured.

The identification itself is not straightforward because there is no generalagreement on a single broad definition of quality costs. However, CoQ isusually understood as the sum of conformance plus non-conformancecosts, where cost of conformance is the price paid for prevention of poorquality (for example, inspection and quality appraisal) and cost of non-conformance is the cost of poor quality caused by product and servicefailure (for example, rework and returns). According to Dale and Plunkett(1995), it is now widely accepted that quality costs are the costs incurredin the design, implementation, operation and maintenance of a qualitymanagement system, the cost of resources committed to continuousimprovement, the costs of system, product and service failures, and all


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other necessary costs and non-value added activities required to achievea quality product or service. Measuring and reporting these costs shouldbe considered a critical issue for any manager who aims to achievecompetitiveness in today’s markets.

CoQ analysis links improvement actions with associated costsand customer expectations, and this is seen as the coupling of reducedcosts and increased benefits for quality improvement. Therefore, arealistic estimate of CoQ and improvement benefits, which is thetradeoff between the level of conformance and non-conformance costs,should be considered an essential element of any quality initiative, andthus, a crucial issue for any manager. A number of organizations are nowseeking both information on the theoretical background of qualityrelated costs as well as practical evidence about the implementation ofquality costing systems

So Cost of Quality is commonly referred to as the “cost of doing thingswrong”. Every time a business makes a mistake it costs money to makethe mistake and then correct it.

For example may be a video game wasn’t published correctly on aCD/DVD and so there could be a direct cost of fixing that and an indirectcost of missing a marketing window. In his book, Quality is Free; Crosbysuggests the cost is 10% to 15% of revenue. Mr. Vorley and Tickle in theirbook, Quality Management, suggested the figure is 5% to 25% ofrevenue. An incredible figure in terms of wasted revenue wherever itfalls for a business. If we take the 15% figure as EA (monopoly in videogames) has lower material scrap costs, for example, and to leave a littleto the imagination, what’s the estimated Cost of Quality for EA? Revenuewas reported as $2.95b for 2006 and $442.6m a year were theirreplacement costs just for quality reasons.

"Highest quality is lowest cost" is a Japanese manufacturing aphorismbased on the premise that the highest quality manufacturer will earn a


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reputation that makes buyers prefer, price being reasonably similar, tobuy its goods. This means that the manufacturer will produce more thanits competitors, and thus will both have economies of scale and be ableto accept a lower profit per unit—thus the highest quality goods willhave a lower cost by driving other goods from the market. Theproduction of higher quality goods can also reduce quality costs.

From the purchaser's point of view the highest quality goods will havethe fewest problems, and the cost of dealing with a problem faroutweighs the extra purchase cost.


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COST OF QUALITY MODELS

There are several methods that can be used to collect, categorize andmeasure quality costs.

P-A-F METHOD

The traditional P-A-F method suggested by Juran (1951) and Feigenbaum(1956) classifies quality costs into prevention, appraisal and failure costs.Prevention costs are associated with actions taken to ensure that aprocess provides quality products and services, appraisal costs areassociated with measuring the level of quality attained by the process,and failure costs are incurred to correct quality in products and servicesbefore (internal) or after (external) delivery to the customer.

1. Prevention Costs are those associated with preventing defects beforethey happen. This is a proactive approach to defect prevention ratherthan defect correction and removes the idea of quality efforts essentiallybeing reactive in efforts to "put out fires." Prevention costs involveinvestments aimed at getting work done right the first time andpreventing quality problems from ever coming up, as far as it is possible.It is long-term strategy adopted by the organization for the continuousimprovement in their processes. The elimination of the rework goeshand in hand with increase in quality, and decreases in schedule andcost; this is the fastest, cheapest, and highest approach to buildingsoftware. They include:-

v Staff Trainingv Requirement Analysisv Fault-Tolerant Designv Defensive Programmingv Usability Analysisv Clear Specificationv Accurate internal communication


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2. Appraisal Costs include cost incurred in detecting the error. Appraisaltechniques are used for the verification and validation. These techniqueshelp organization to increase in quality with lesser cost. Examples ofappraisal costs include code inspections, testing, software designreviews. They may be summarized as:-

v Design reviewv Code inspectionv Glass box testingv Black box testingv Training testersv Test automationv Usability Testingv Pre-release out-of-box testing by customer service staffv Calibration costv Laboratory expenses

3. Failure Costs: The cost resulting from products or services notconforming to requirements or needs of the customer. Failure costs aredivided into – A. Internal failure costs and B. External failure costs.

Internal Failure Costs:Failure costs occurring prior to delivery or shipment of the product, offinishing of a service to the customer. Examples are the costs of:v Scraps and rejectsv Repair and Reworkv Downtimev Bug fixesv Wasted in-house user timev Wasted tester timev Wasted marketer time


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v Wasted advertisementsv Direct cost of late shipmentv Opportunity cost of late shipmentv Retestingv Material reviewv Sales and discounts for inferior products

External Failure Costs:Failure costs occurring after delivery of shipment of the product andduring or after furnishing of a service to the customer. Examples are thecosts of:v Warranty costsv Off warranty repairs and replacementv Customer complaintsv Product liabilityv Transportation lossesv Technical support callsv Preparation of support answer booksv Refunds and replacement with updated productv Lost salesv PR work to soften drafts of harsh reviewsv Lost customer goodwillv Costs imposed by lawv Customer returns

Total Quality Costs:It is the sum of the above costs. It represents the difference between theannual cost of a product or service and what the reduced cost would beif there were no possibility of substandard service, failure of products ordefects in their manufacture.


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CROSBY’S MODEL

The cost categories of Crosby’s model (Crosby, 1979) are similar to the P-A-F scheme. Crosby sees quality as “conformance to requirements”, andtherefore, defines the cost of quality as the sum of price of conformanceand price of non-conformance (Crosby, 1979). The price of conformanceis the cost involved in making certain that things are done right the firsttime and the price of non-conformance is the money wasted when workfails to conform to customer requirements.

Figure 1: Classical view on the left and the modern view on the right

0 % QUALITY LEVEL 100 %

(100 % defective) (0 % good)

Conformance Cost

Non-Conformance Cost

0 % QUALITY LEVEL 100 %

(100 % defective) (0 % good)

Prevention Cost

Appraisal Cost

Internal Failure Cost

External Failure


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OPPORTUNITY AND INTANGIBLE COSTS

Several references propose CoQ models that include the additionalcategory of intangible costs. These are costs that can be only estimatedsuch as profits not earned because of lost customers and reduction inrevenue owing to non-conformance. The importance of opportunityand intangible costs for quality costing has been describe a less formalmethod based on collecting quality costs by department.

Cost area Examples

Tangible costs—factory accounts

· Materials scrapped or junked· Labor and burden on product scrapped or

junked· Labor, materials, and burden necessary to

effect repairs on salvageable product· Extra operations added because of presence

of defectives· Burden arising from excess production

capacity necessitated by defectives· Excess inspection costs· Investigation of causes of defects

Tangible costs—sales accounts

· Discount on seconds· Customer complaints· Charges to quality guarantee account

Intangible costs

· Delays and stoppages caused by defectives· Customer good will· Loss in morale due to friction between

departments


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TEAM APPROACH METHOD

Another recently proposed CoQ methodology is a method based on ateam approach, in which the aim is to identify the costs associated withthings that have gone wrong in a process (Robison, 1997).

PROCESS COST MODEL

Another formal quality costing approach is the process cost model,which was developed by Ross (1977) and first used for quality costingby Marsh (1989); it represents quality cost systems that focus onprocess rather than products or services. Process cost is the total costof conformance and non-conformance for a particular process. The costof conformance is the actual process cost of producing products andservices first time to the required standard by a given specified process,whereas cost of non-conformance is the failure cost associated with theprocess not being executed to the required standard. These costs canbe measured at any step of the process. Accordingly, it can bedetermined whether high non-conformance costs show therequirement for further expenditure on failure prevention activities orwhether excessive conformance costs indicate the need for a processredesign. The use of a process cost model is suggested as a preferredmethod for quality costing within total quality management (TQM) as itrecognizes the importance of process cost measurement andownership, and presents a more integrated approach to quality than aP-A-F model. Also analysts place emphasis on the cost of each processrather than on an arbitrarily defined cost of quality under a P-A-Fmodel. Moreover, the quality cost categorization is simpler and someresearchers argue that it is also more relevant than the P-A-F scheme.The process model has wider application in that it facilitates thecollection and analysis of quality costs for both direct and indirectfunctions. However, the process cost model is not in widespread use.


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ACTIVITY BASE QUALITY MODEL

Existing accounting systems are usually considered as poorly fitted forgenerating reports on quality measurements .They do not provideappropriate quality related data, and benefits resulting from improvedquality are not measured .Although most CoQ measurement methodsare activity/process oriented, traditional cost accounting establishescost accounts by the categories of expenses instead of activities. Thus,many CoQ elements need to be estimated or collected by othermethods.

There is no consensus method on how to allocate overheads to CoQelements and no adequate method to trace quality costs to theirsources.

An activity-based costing (ABC) model was developed by Cooper andKaplan to solve this problem. Under ABC, accurate costs for various costobjects are achieved by tracing resource costs to their respectiveactivities and the cost of activities to cost objects. The ABC approach isactually not a CoQ model. It is an alternative approach that can be usedto identify, quantify and allocate quality costs among products, andtherefore, helps to manage quality costs more effectively. The long-term goal of ABC systems is to eliminate non-value added activities andto continuously improve processes, activities and quality so that nodefects are produced.


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No matter which quality costing approach is used, the main idea behindthe CoQ analysis is the linking of improvement activities with associatedcosts and customer expectations, thus allowing targeted action forreducing quality costs and increasing quality improvement benefits.

Therefore, a realistic estimate of CoQ, which is the appropriate tradeoffbetween the levels of conformance and non-conformance costs, shouldbe considered an essential element of any quality initiative and a crucialissue for any manager. A number of organizations are now seeking boththeoretical advice and practical evidence about quality related costsand the implementation of quality costing systems.


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QUALITY

As stated by Will A. Foster, "Quality is never an accident; it is always theresult of high intention, sincere effort, intelligent direction and skilfulexecution; it represents the wise choice of many alternatives."

Quality is something, which is complex and varies from one industry toanother. Quality needs to be model on the basis of customer need,context of the market, industrial goals, system requirements etc.Quality has many layers, and no universal definition will apply in everycase. Even the experts could not agree on single definition for thequality.

Quality gurus have given definitions that cover the meaning of quality.Some of them have been considered as the starting point to definequality; for example the definitions given by Philip Crosby and JosephM. Juran. The experts disagree both on the definition of quality andhow to achieve it.

“Quality is the conformance to requirements.” Requirements must beclearly stated so that people involved can clearly understand that. Thenin the development process, measurements are taken continually todetermine conformance to those requirements. The non-conformancewill be treated as absence of quality (or defect).

Or

“Quality of a good is its Fitness for use.” Customer requirements andexpectations involves whether the products or service fit for their uses.Since the different customer may use the products in different ways, itmeans that products must possess multiple elements of fitness for use.Each of these elements is a quality characteristic and they can becategories into two types that is quality of design and quality ofconformance.


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QUALITY MANAGEMENT

It is a method for ensuring that all the activities necessary to design,develop and implement a product or service are effective and efficientwith respect to the system and its performance. Quality managementcan be considered to have three main components:

1. Quality control2. Quality assurance3. Quality improvement.

Quality management is focused not only on product quality, but alsothe means to achieve it. Quality management therefore uses qualityassurance and control of processes as well as products to achieve moreconsistent quality. Quality Management is all activities of the overallmanagement function that determine the quality policy, objectives andresponsibilities and implement them by means such as quality controland quality improvements within a quality system.

The International Organization for Standardization (ISO) created theQuality Management System (QMS) standards in 1987. These were theISO 9000, ISO 9001, ISO 9002 and ISO 9003which all were 1987 series ofstandards comprising which were applicable in different types ofindustries, based on the type of activity or process: designing,production or service delivery. The standards have been regularlyreviewed every few years by the International Organization forStandardization. The version in 1994 and was called the ISO 9000:1994series; comprising of the ISO 9001, 9002 and 9003. The last revision wasin the year 2000 and the series was called ISO 9000:2000 series.However the ISO 9002 and 9003 standards were integrated and onesingle certifiable standard was created under ISO 9001:2000. SinceDecember 2003, ISO 9002 and 9003 standards are not valid, and theorganizations previously holding these standards need to do a


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transition from the old to the new standards. The ISO 9004:2000document gives guidelines for performance improvement over andabove the basic standard (i.e. ISO 9001:2000). This standard provides ameasurement framework for improved quality management, similar toand based upon the measurement framework for process assessment.

The Quality Management System standards created by ISO are meantto certify the processes and the system of an organization and not theproduct or service itself. ISO 9000 standards do not certify the qualityof the product or service.

Recently the International Organization for Standardization released anew standard, ISO 22000, meant for the food industry. This standardcovers the values and principles of ISO 9000 and the HACCP standards.It gives one single integrated standard for the food industry and isexpected to become more popular in the coming years in such industry.

ISO has a number of standards that support quality management, onegroup describes processes (including ISO 12207, ISO 15288) andanother describes process assessment and improvement ISO 15504.The Software Engineering Institute has its own process assessment andimprovement methods, called CMMi (Capability Maturity Model -integrated) and IDEAL respectively.


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COST OF POOR QUALITY (COPQ)Cost of poor quality (COPQ) or poor quality costs (PQC), are defined ascosts that would disappear if systems, processes, and products wereperfect. COPQ was popularized by IBM quality expert H. JamesHarrington in his 1987 book “Poor Quality Costs.”

COPQ is a refinement of the concept of quality costs. In the 1960s, IBMundertook an effort to study its own quality costs and tailored theconcept for its own use. While Feigenbaum's term "quality costs" istechnically accurate, it's easy for the uninitiated to jump to theconclusion that better quality products cost more to produce.Harrington adopted the name "poor quality costs" to emphasize thebelief that investment in detection and prevention of product failures ismore than offset by the savings in reductions in product failures.

Cost element Examples

Directpoor-qualitycosts

Controllablepoor-qualitycost

Preventioncost

Quality planning (for test,inspection, audits, processcontrol)

Education and training

Performing capability analyses

Conducting design reviews

Appraisalcost

Test and inspection

Supplier acceptance sampling


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Auditing processes

Resultantpoor-qualitycost

Internalerror cost

In-process scrap and rework

Troubleshooting and repairing

Design changes

Additional inventory requiredto support poor process yieldsand rejected lots

Re-inspection and retest ofreworked items

Downgrading

Externalerror cost

Sales returns and allowances

Service level agreementpenalties

Complaint handling

Field service labor and partscosts incurred due to warrantyobligations

Equipment poor-qualitycost

Micrometers, voltmeters,automated test equipment(but not equipment used tomake the product)


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Indirectpoor-qualitycosts

Customer-incurred cost

Loss of productivity due toproduct or service downtime

Travel costs and time spent toreturn defective product

Repair costs after warrantyperiod

Backup product or service tocover failure periods

Customer-dissatisfactioncost

Dissatisfaction shared by wordof mouth

Loss-of-reputation cost Customer perception of firm


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COST OF QUALITY: TWO COMPONENTS

We tend to think of Quality Assurance as a necessary evil. What weoften overlook is that the cost of quality has two distinct components:Appraisal Costs and Failure Costs.

Appraisal Costs of Quality are the ones we tend to focus on because wehave direct control over them. We explicitly plan for certain appraisalactivities, and we decide when we have done enough of them. Webudget for the cost of the QA staff and their tools, the time they spendand the resources they use doing test planning, testing, and other partsof their jobs. But Appraisal Costs aren’t even the biggest part of ourCost of Quality.

Failure Costs of Quality are the ones that happen to us. They arevariable costs that are hard to predict, and are the more significantportion of our Cost of Quality. These costs (often called the “Cost ofPoor Quality”) are the ones that are caused by defects in our workproducts. Failure Costs have an insidious way of sneaking up on us inthe form of costs that we don’t immediately see as Costs of Quality.Let’s look at a few of those.

Failure Cost: Busted Budget

The single largest Failure Cost of Quality is the effort that ourdevelopers spend investigating and diagnosing defects, and thenreworking designs and code to correct them. Although we may try tominimize those costs by putting less expensive people on the line, wefind that our most experienced (and most expensive) developers endup being sucked into the fray on the most challenging and elusive of thedefects. The bottom line is that the people we most need to havefocusing on the next product–the future of our company–are stuckprocessing an endless stream of bug reports.


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These costs are so significant that we routinely engage in triage ofproblem reports. We decide that a few of the defects must be fixedimmediately. Others can wait till later. (Maybe next week we’ll havetime to fix them.) We will defer many of the problems until the nextrelease. (This can cause a firestorm of protest from QA or fromMarketing, and the ensuing negotiations waste even more ofeveryone’s effort as we sort it all out.) Finally, we will choose to ignoresome defects. (After all, there is a reasonable workaround, so it won’tcause the customers too much trouble.)

The vast majority of us no longer expect to fix all known defects beforereleasing our software. We simply hold it back until we decide that thecost of not shipping the software has exceeded the cost of shipping adefective product. That is why so many of us can identify with thestatement made by a recent client of mine who said, “We don’t releasesoftware, it escapes!”

Of course, fixing the problem next week or next release, or lettingcustomer support deal with it does not get rid of the failure cost; it onlydefers it until later. The company ends up paying the cost one way orthe other.

Failure Cost: Slipped Schedule

Developers seem to be lousy estimators. No matter how long they say aproject will take, even if we double the schedule, they still can’t deliveron time! This is a common frustration. But if you could gain insight intowhy schedules slip, you might be surprised at the most common cause.While there are times when technical challenges or grossunderestimates are to blame, the most common cause of scheduleproblems is defects.

Testing is like a big black hole. Software is sucked into test, and it isnever seen again. Sometimes we blame the testers; “We delivered the


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software to QA on schedule, but they are holding up the release!” ButQA is only finding defects, and it is the defective software that isholding the schedule up.

More often that not, defects prevent test suites from being completed.Testing is halted until the defects that block execution can be removed.When the fixed software is available, QA first re-tests to be sure thedefect was fixed, then they move forward–until the next blockingdefect is encountered. This cycle continues for a much longer time thananyone would like. Even when the testing can be completed, thebacklog of defects that are being fixed requires continual re-testing.And of course too often, defect fixes introduce new defects into thesystem, starting the cycle all over again.

While delivering the software on time is critically important, we oftenfind that defects simply prevent it. We must hold the product back untilwe can reach some reasonable quality level. Of course, the definition of“reasonable quality” is a matter of great debate. No matter when wefinally release, some people will think we waited too long, and otherswill fear the consequences of the remaining defects.

Failure Cost: Costly Customers

Once the product has been released, the Failure Costs associated withit are not over. In fact a significant portion of them will continue for aslong as the product is in use. Let’s face it: The reason we want to forceour customers to upgrade is to stop the hemorrhaging of support costs!

Most of the effort in our customer support group is spent helpingcustomers to deal with all of the defects we shipped to them. But thecost of support is not limited to the support group. Every time acustomer reports a new defect, a developer must investigate it and


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diagnose the problem. Fixing the defect in the next release does notavoid the cost; it only defers it, while aggravating the customer.

For those defects that are deemed to be significant, the costs can bestaggering. The developer must rework the design or code or develop apatch, QA must test the fix to be sure it works and it did not causeunforeseen problems, and finally, it must be installed at the customersite to fix their particular problems. It is easy to see why the researchshows that the cost of the average defect found by the customer is 50to 100 times higher than those found in-house.

Failure Cost: Meager Market

Alienating customers is easy. Deliver the product late. Defer shippingpromised features while you are correcting defects. Ship lots of defectsfor customers to find. Continually tell them “it will be fixed in the nextversion”. Placate them with “ingenious” work-around.

The biggest Failure Costs are nearly impossible to quantify; loss ofcustomer good will, tarnished reputation in the market, and loss ofproduct momentum. The customers who dump your product in favor ofyour competitor’s immediately erode your market share. But thosewho don’t go that far are still unlikely to encourage others to buy yourproducts, and your market share will continue to erode.


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TOTAL QUALITY CONTROL

Total quality control (TQC) is a management process based on thebelief that quality costs are minimized with zero defects. The phrasequality is free given by Philip Crosby is commonly advocated byproponents of TQC, who argue that the reduction of failure costs dueto improved quality outweigh additional prevention and appraisalcosts.

TQC begins with the design and engineering of the product. Designing aproduct to be resistant to workmanship defects may not beincrementally more costly than the present design process, but thereduction in other quality costs can be substantial. TQC is oftenassociated with just-in-time (JIT) manufacturing. Under JIT each workeris trained to be a quality inspector. Therefore teams specializing inquality inspection become unnecessary. With suppliers delivering high-quality parts and materials, a company can substantially reduce if noteliminate the appraisal costs. Total quality control is sometimesreferred to as total quality management (TQM) because a completelynew orientation must be taken by management to make TQCsuccessful. New performance measures that reinforce qualityimprovements must be initiated. Standard cost variance such as thematerials price variance and labor efficiency variance tend toemphasize price and quantity rather than quality and should not beused to reward employees. The productivity measures described in thenext section are more useful in motivating workers to achieve bothquality and productivity.


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REDUCING THE FAILURE COST OF QUALITY

Conventional wisdom would tell us that when you have some costs youcan directly control (Appraisal Costs) and others that you cannot (FailureCosts), that you should keep a tight reign on the controllable costs andhope for the best with the others. Like most paragraphs that begin witha statement about “conventional wisdom”, this one argues against thatstrategy. The fact is that you can exercise indirect control over yourorganization’s Failure Costs by appropriately managing the AppraisalCosts. This is not to say that you should allow your Appraisal Costs torun wild. But it also infers that you may not want to cut them toodeeply.

All of your Failure costs (every dollar of them) are caused by a finitenumber of defects in your software. Every defect that you can removemore economically than you currently do represents money on yourcompany’s bottom line. Every defect you can remove in a more timelyway represents hours or days (or weeks!) of schedule saved. Everydefect that you avoid shipping to you customer, and every usefulfeature that you do ship is priceless good will that builds yourreputation in the marketplace. The key is to find more efficientmethods to detect and remove defects.

Defect Removal Activities

This is a list of the various methods that different organizations use toremove defects from their software. They are listed roughly in orderfrom most effective to least effective (in terms of both time and costper defect removed). Beside each is the word “Appraisal” or “Failure”,indicating how most of the effort involved in that activity would beclassified.


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Effectiveness

Testing is a relatively ineffective way to remove defects, but it is still anecessary part of your development lifecycle. Rather than continuing tomake it your main defect removal mechanism, you would do better touse it to gage of the effectiveness of your earlier defect removalactivities like reviews, inspections and unit testing.

Many of the above methods will be discussed in future articles on thissite. In the mean time, you can begin to reduce your total cost of qualityby moving your defect removal activities up toward the top of this list.

Activity Cost ofQuality

v Personal Reviews (PSP reviews) Appraisal

v Software Inspections (FaganInspections)

Appraisal

v Peer Reviews Appraisal

v Compiling Failure

v Unit Testing Failure

v Beta Testing Failure

v System Testing (and performance &other testing)

Failure

v Acceptance Testing Failure

v Walkthroughs Appraisal


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GOAL OF COST OF QUALITY

The most costly condition occurs when a customer finds defects. Hadthe manufacturer or service organization found the defects, throughmuch inspection, testing and checking, a less costly condition wouldhave resulted. If the manufacturing or service organization’s qualityprogram had been geared toward defect prevention and continuousquality improvement, defects and their resulting costs would have beenminimized, which is, obviously, the most desirable condition. The mostcostly condition occurs when a customer finds defects. Had themanufacturer or service organization found the defects, through muchinspection, testing, and checking, a less costly condition would haveresulted? If the manufacturing or service organization's quality programhad been geared toward defect prevention and continuous qualityimprovement, defects and their resulting costs would have beenminimized—obviously, the most desirable condition.

Recent successes have resulted in revisions to the classic model ofoptimum quality costs. Previously, prevention and appraisal costs wereportrayed as rising asymptotically as defect-free levels were achievedthere is increasing evidence that the processes of improvement andnew loss prevention are themselves subject to increasing cost effec-tiveness. New technology has reduced inherent failure rates ofmaterials and products, while robotics and other forms of automationhave reduced human error during production, and automatedinspection and testing have reduced the human error of appraisal.These developments have resulted in an ability to achieve perfection atfinite costs.

The goal of any quality cost system, therefore, is to facilitate qualityimprovement efforts that will lead to operating cost reductionopportunities.


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The strategy for using quality costs is quite simple:

1. Take direct attack on failure costs in an attempt to drive them tozero;

2. Invest in the "right" prevention activities to bring aboutimprovement;

3. Reduce appraisal costs according to results achieved; and (4)continuously evaluate and redirect prevention efforts to gain furtherimprovement.

This strategy is based on the premise that

v For each failure there is a root cause. -v Causes are preventable.v Prevention is always cheaper.

In a practical sense, real quality costs can be measured and thenreduced through the proper analysis of cause and effect. As failures arerevealed through appraisal actions or customer complaints, they areexamined for root causes and eliminated through corrective action.Elimination of root causes means permanent removal. The furtheralong in the operating process that a failure is discovered—that is, thenearer to product or service use by the customer—the more expensiveit is to correct.

Usually, as failure costs are reduced, appraisal efforts can also bereduced in a statistically sound manner. The knowledge gained fromthis improvement can then be applied, through prevention activities ordisciplines, to all new work.

As straightforward as this approach may appear, it cannot work unlessthere is first a basic quality measurement system that clearly identifiesthe correctable elements of performance failures which represent the


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best potential for cost improvement. Such a system is designed to usethe data from inspections, tests, process control measurements orevaluations, quality audits, and customer complaints as a measure ofcompany performance and a source of determining cost reductionprojects. This measurement is a basic and important part of qualitymanagement. The potential for improvement can be determined by asystem of accurate and dependable quality cost measurement andanalysis.

Since every dollar of quality cost saved can have a positive effect on prof-its, the value of clearly identifying and using quality costs should beobvious. By minimizing quality costs, quality performance levels can beimproved.


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COMPANY REFERRED

SIGMA FREUDENBERG NOK PVT. LTD.

(An Indo German Japanese Joint Venture) - Established in 1964

World leader in sealing technology

TS-16949, ISO-14001, OHSAS-18001 & ISO-9001 Certified Company

About The Company:

In August' 2000 Delhi based Sigma Corporation, Freudenberg Germany& NOK Japan formed a joint venture company, Sigma Freudenberg NOKPvt. Ltd. (SFN) to manufacture the Freudenberg & NOK range of seals inIndia and to act as a sole marketing arm of both partners for theirproducts manufactured worldwide in India.

This joint venture in India is closing one of the last gaps in theinternational set up of the Freudenberg NOK Group of Companies,since it is the 28th country and the 46th factory to manufacture thesealing range of their products. Being the unchallenged market leaderin sealing technology, the Freudenberg & NOK, group of companiestogether with their Indian partner, Sigma will bring the latesttechnology in design, material, application engineering and productionto India to support their Indian customers with state of the art seals,giving them a competitive edge in a more and more competitiveenvironment.

Freudenberg & NOK will support the company with all know howavailable and guarantee the implementation with a full time TechnicalDirector from Germany, having more than 30 years experience in othergroup companies worldwide. The core team of the factory has beentrained in Germany for 6 months and the sales engineers have been


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intensively trained by experienced design Engineers from Freudenberg& NOK.

Production started in November 2001 and will continue to increaseover the next years. Together with the trading business, SigmaFreudenberg NOK (SFN) will be able to offer a unique range of seals forevery kind of application in the Engineering Industry.

Access to all R&D centres within the group leads to the best and mosteconomical solutions for the Indian customers. The involvement ofSigma Freudenberg NOK from the first design step onwards gives thecustomer, access to the worldwide knowhow of the Freudenberg &NOK group, whereas the management expertise of the Sigma Groupensures the best possible implementation of the Freudenberg & NOKknow how and technology in the Indian Company.

Sigma Freudenberg NOK is actively participating globally tocontinuously improve its performance in all business areas by adopting"GROWTTH" as its key strategy.

Our success, along with ongoing organization streamlining andcontinuous improvement measures, are powerful indicators of ourability to meet the challenges of the market with close customer focus.


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Cost Of Quality(Rs.) 12,63,280

Internal Quality CostCosts related to scrap 9,11,954Rework Cost 2,097Unplanned sorting inspectionRepeat inspections and testsWaste – Discrepancies in quantities (Inventory Correction)Special Tests (Problem examination) 5,396Costs resulting from customer complaints which will not becompensated, e.g. costs of travelling, special examination, sortingtests, non-chargeable stoppage, etc.

Costs resulting from extra transport under responsibility of FDSSalary of Q.A. Dept. 3,19,750Total Internal Cost 12,39,197

External Quality CostScrapping of returned goodsRework of returned goodsCosts of inspection and testing, rework, assembly and disassemblyat the customer’s end

Recall from fieldChargeable subsequent expenditures at the customer’s, e.g. afterprocess interruption

Costs of warranty claims – less insurance payments, if applicableTravel expenses and expense allowancesCosts of special inspection and testingProduct liability insurance premiums 7,083Total External Cost 7,083

Prevention CostQuality System Audit Cost 9,000Calibration Cost 5,000Supplier Development Cost 3,000Total Prevention Cost 17,000

Production Value 357 Lacs% of Production Value 3.54%


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Customers:ABB Harig Rane TRWABI Showa TechHindustan Hydraulics SimpsonsAshok Leyland Int. Combuston UTBosch Knorr VoltasBHEL Komatzu VickersBajaj Tempo L & T VeljanBrakes India LML WiproDelphi Automotive Systems Lincon HelliousDantal Mahindra & MahindraEicher New HollandEscorts OscarHegglunds Royal Enfield

Contact at:

Head Off. & PlantB-70, Industrial Area, Phase-VII,Sector-73, Mohali-160055(India)

Contact person:Mr. Ajay Gupta(Senior Executive Finance & Accounts)Mobile No. : 987266288


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GILARD ELECTRONICS PVT. LTD.

A Buyer-Company with ISO 9001 CertificationEstablished in 1962Number of Employees: 101 to 500 PeopleTurnover: US$ 1-10 Million (or Rs. 4-40 Crore Approx.)

About the Company:Gilard Electronics is an ISO-9001:2000 and ISO/TS 16949:2002 certifiedcompany. Set up in 1961 as a Radio components manufacturingcompany, it later enhanced its range to electronic components fortelecom, instrumentation, entertainment and defense. Over a period oftime Gilard built up its strength in Re engineering of components andmanufacturing import substitution components. This was madepossible with an infrastructure backed by a very strong Tool room andDesign. Based on its strength, in 1987 the organization diversified intothe manufacture of components for the Automobile companies and arenow considered the most preferred source for the same. Today Gilardis a Design responsible Company and also assists its customers inresearch and develops products for them, from concept to completion.

Gilard is also certified for ISO14001:2004 and OHSAS 18001:1996

Gilard is an ISO 9001:2000 and TS16949:2002 certified Company and isalso certified for ISO 14001:2004 & OHSAS 18001:1999. Allcertifications have been done by the UL (Underwriters Laboratory) ofUSA. Gilard has the honor of being a supplier to the First 4 Auto-Electrical Companies of the world :

Delphi, Bosch, Denso and Visteon


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Products:

Toggle switches, Snap Action / Micro Switches, Connectors, Cold Startof Diesel Engines, Relays and Relay Sockets, Receptacles / PowerOutlet, Rocker Switches, Tractor Switches, Switches for Trucks, BusesLCVs, AC Switches, Selector Switches, Resistors, Solenoid Valve, Flasher,2-Wheeler Switches, Fuel Gauge Float Assembly, Wiper Covers,Moulded Products

Quality Costs: Definition

v Also termed as cost of quality (COQ)v COQ should not be misunderstood as the cost of making a quality

product or service. It is the cost of not making a quality product orservice. Or it is the cost that an organization will have to sufferdue to poor quality product/service.

v Understanding the cost of quality concept shatters the generalperception or paradigm that higher quality requires higher costs.In fact, it is the other way round.

v Therefore, quality saves; quality is free.

First Time Right Saves; Rework is Expensive

v The quality cost is barest minimum when the goods produced orservices given are first time right and are with zero defects.

v When you cannot produce, right the first time, you may have tocarry out rework on them to make it of acceptable quality.

v Rework means: literally doing it all over again and that may costalmost twice as much of the cost of first time right product.Worse, it will be a reworked product/service that can never matchthe quality of first time right one since rework is usually doneusing a less capable process ( not using the process which is used


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for normal manufacturing line and which has better processcapability).

Components of Costs of Quality

Costs of conformance (Cost of control): It has two components:

1. Prevention costs2. Appraisal costs

Costs of non conformance (Cost of failure of control): It has twocomponents:

1. Internal failure costs2. External failure costs

Prevention Costs

v The costs of any action taken to investigate, prevent orreduce defects and failures.

v The costs of all the efforts to keep defects from occurring atall.

v The costs of quality planning, quality enhancement projects,quality training and development, supplier quality capabilityevaluation, process capability improvement, new productquality review etc.

Appraisal Costs

v The costs of assessing the quality achieved.v The costs of detecting defects through inspection/audit and

test procedures and sifting out defects from OK products.v The costs of inspection of bought out materials at the source

or in-coming point in the organization, in process inspection,


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final product inspection, calibration of inspection/testinstruments and equipment etc.

Internal Failure Costs

v The costs arising within the manufacturing organization offailure to achieve quality specified (before transfer ofownership to the customer).

v The costs of defects identified internally and then,rejecting/scrapping or reworking on the defective items.

v The costs of lost lead times/cycle times and delayed deliveryto customers.

v The costs of scrapping/discarding, rework/repair, re-inspection/re-testing, downgrading the produced itemsfetching lower price/lower image.

External Failure Costs

v The costs arising outside the organization of failure toachieve quality specified (after the transfer of ownership tothe customer).

v The costs associated with the defects that actually reachcustomers and field failures.

v The costs of lost goodwill and image, lost existing andprospective customers, recalls, returned goods, freereplacements for defective goods, processing of warrantyclaims/customer complaints etc.


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Proportions of Costs

The estimates of proportion of these four quality costs are given below:

v Preventive costs: $1v Appraisal costs: $10 (if you are not interested in investing $1

on preventive costs)v Internal failure costs: $100 (if you are not interested in

investing $1 on preventive costs)v External failure costs: $1000 (if you are not interested in

investing $1 on preventive costs)

Quality is Free; Quality Saves

Look at the proportions of costs carefully. What's the inference? It saysclearly that if you invest wisely $1 in prevention costs, you canavoid/eliminate the appraisal costs, internal failure costs and externalfailure costs which total up to $1110.

Invest $1 in establishing quality systems and save $1110. Net savings:$1109.

So, quality is not only free, it saves.


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Cost of Quality

Particulars Amount

Internal Quality Cost

Costs related to scrap 298563

Waste-Discrepancies in quantities (Inventory Correction) 23987

Salary of Quality Department 312543

Man Days Salary 265432

Rework Cost 234198

Unplanned Sorting Inspection 765490

Repeat Inspection and Test

Estimated Cost of Rejected Piece 3476542

Cost of Consumables 548767

Costs resulting from customer complaints 127656

External Quality Cost

Scrapping of Returned goods 65789

Rework of Returned goods 61867

Travel Expenses and expense allowances

Costs of Special Inspection and Testing 467519

Product liability and insurance premium 4126743

Prevention Cost

Supplier Development Cost 35000

TOTAL 10810096

Production value 381982190

Percent of production value 2.83


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JAY BHARAT MARUTI LTD.

Jay Bharat Maruti Ltd. (JBML), a Public limited company, wasincorporated in 1987 as a Joint Venture with Maruti Suzuki India Limited(MSIL). Keeping pace with the steep rise in demand and quality ofpassenger cars and the fierce competition from the entry of internationalauto majors in the country, JBML had to continually expand itsmanufacturing capacity and capability. The capacity, therefore, wasexpanded in 1991-92 and in 1993-94. A new plant was set up in 1995-96.The capacities were further expanded in 1996-97, 2001-02 and 2002-03.

The world-class manufacturing capabilities include imported andindigenous press lines, robotic welding lines as well as plating andpainting facilities.

JBML added capabilities to produce exhaust systems, axles and fuel neckfillers to the existing capabilities of sheet metal components and weldedmodules. With several awards to its credit and support of its partners thecompany stands posed atop a launch pad to the future fully geared tomeet new challenges and is destined to touch new heights in excellence.

Jay Bharat Maruti limited, engaged in manufacturing of sheet metalcomponents, welded sub-assemblies and exhaust systems forautomotive applications, re-affirms its commitment to minimize theadverse impacts of its operations on the environment. To this end, weshall endeavor to:

1) Develop and maintain an environmental management system andcontinually monitor, set and review the environmental objectives andtargets.

2) Meet all applicable environmental legislations, regulations andcustomer requirements.


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3) Conserve natural resources and energy by constantly seeking toreduce their consumption or wastage and maximize their recycle / reuse.

4) Minimize / prevent air, water, noise and land pollution generatedfrom our activities.

5) Maintain a system for hazard waste management.

Cost of poor Quality (09-10)

MonthDescripti

onApr.'09

May'09

Jun.'09

Jul.'09

Aug.'09

Sep.'09

Oct.'09

Nov.'09

Dec.'09

Jan.'10

Feb.'10

Mar.'10

Cost ofRejection

419800

481700

404000

465100

Cost ofRework &Warranty

0 875 0 0 0

Cost ofConsumables

19319

32112 9796 9675 1064

0

Total 439119

514688

413796

474775

10640 0 0 0 0 0 0 0

Apr.'09 May'09 Jun.'09 Jul.'09 Aug.'09 Sep.'09 Oct.'09 Nov.'09 Dec.'09 Jan.'10 Feb.'10 Mar.'10

Cost of Rejection 419800 481700 404000 465100Cost of Rework & Warranty 0 875 0 0 0Cost of Consumables 19319 32112 9796 9675 10640Total 439119 514688 413796 474775 10640 0 0 0 0 0 0 0

0

100000

200000

300000

400000

500000

600000

Rs.

Cost of Poor Quality (09-10)


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GILCO EXPORT LTD.

Corporate Profile

Gilco Export Ltd. Was founded in 1978 with a vision to emerge a globalsupplier of metal based fabricator of a wide range of product. Thecompany’s commitment to the highest standard of quality and itsability to innovate over three decades, has seen it flourish to becomethe leader in manufacturing with business lines that focuses on:

v Design, manufacture and export of Wrought iron furniture.v Design, manufacture and implementation of conveyer system,

baggage handling systems and public seating systems for theaviation sector.

v Design, manufacture and export of retail solutions and storefixtures.

v Design, manufacture and export of metal based agricultureequipment and accessories.

Gilco Quality

The quality of products at Gilco Exports Ltd. is determined by stringentprocesses and systems that ensure highest standards of quality fromearly stages of production. The company’s quality department ensuresthat these processes support standard. in the procurement of rawmaterial, error profiling and proofing, best methods for checkingproduct defects and regular quality audits. A step-by-step methodologyfor quality assurance is followed to ensure that quality driven productsare effectively packaged and shipped to customer in a timely mannerresulting in zero defect deliveries consistently over the last severalyears.


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Current month cost (Rs.) Percentage Total (%)Prevention costQuality training 20000 1.3Reliability engineering 100000 6.5Pilot studies 50000 3.3System Development 80000 5.2Total Prevention 2,50,000 16.3Appraisal CostsMaterial Inspection 60000 3.9Supplies Inspection 30000 2.0Reliability Testing 50000 3.3Total Appraisal 1,40,000 25.5Internal failure CostsScrap 150000 9.8Repair 180000 11.8Rework 120000 7.8Downtime 60000 3.9Total Internal Costs 5,10,000 33.3External Failure CostsOff warranty repairs andreplacements

60000 3.9

Customer Complaints 30000 2.0Product Liability 100000 6.5Transportation Losses 50000 3.3Total External Failure 2,40,000 24.9Total Quality Costs 11,40,000 100

Documents

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