costofquality-

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Cost of Quality


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Scrap

Rework

Warranty costs

Hidden Costs

Visible costs

Excessive use of material

High inventory

Inadequate resource utilization

Cost of redesign and re-inspection

Cost of resolving customer problems

Lost customers / Goodwill

Visible and hidden costs

Conversion efficiency of materials


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Categories of Quality Costs

Conformance Non-Conformance

Quality Costs

AppraisalPrevention External failureInternal failure


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Cost of quality

Cost of quality = Cost of conformance + Cost of non-conformance

Cost of conformance is the cost of providing products orservices as per the required standards. This can be termed asgood amount spent. (Prevention & Appraisal costs)

Cost of non-conformance is the failure cost associated with aprocess not being operated to the requirements. This can betermed as unnecessary amount spent.( Internal & Externalfailure costs)


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Prevention Costs

Prevention costs are associated with design, implementation ,maintenance, and planning prior to actual operation, in order to avoid

defects from happening. The emphasis is on the prevention of defects in order to reduce the

probability of producing defective products. Prevention activities leadto reduction of appraisal costs and both type of failures ( internal andexternal ).The motto is Preventionrather than appraisal.


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Activities associated withPrevention costs

Market research

Quality training programs.

Contract review Design review

Field trials

Supplier evaluation

Process plan review

Process capability review

Design and manufacture of jigs and fixtures

Preventive checks & maintenance


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Appraisal costs

Appraisal costs are spent to detect defectsto assure conformance to quality standards.Appraisal cost activities sums up to the cost

of checking if things arecorrect

.Theappraisal costs are focused on the discoveryof defects rather than prevention of defects


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Internal failure costs

Internal failure costs occurs when results of work fail to reachdesignated quality standards , and are detected before transfer tothe customer takes place.


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ExamplesInternal failure costs

Design changes/ corrective action

Scrap due to design changes

Excess inventory

Rectification / reject disposition ofpurchased material

Rework/rejection in manufacturing

Downgrading of end product

Downtime of plant & machinery

Trouble-shooting & investigation ofdefects


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External failure costs

External failure costs occur when the product or service from aprocess fails to reach designated quality standards , and is notdetected until after transfer to the customer.


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Activities associated withExternal failure costs

Processing / investigation of customer complaint

Repair/replacement of sold goods

Warranty claims

Product liability & litigation costs

Interest charges on delayed payment due to qualityproblems

Loss of customer goodwill & sales.


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Size of four categories of quality costs.

The organizations which do not follow TQM,there is less emphasis onprevention and their main quality efforts are on appraisal with very

little control on internal and external failure costs.

Various studies have shown that quality cost in manufacturingcompanies the world over range from 20 % to 30 % of turnover andin the case of service companies it can go up to 40 % as illustrated in

graph on the next slide.


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Impact of TQM oncosts.

TQM is primarily aimed to improve the quality of the product , highercustomer satisfaction and better working environment for theemployees. The most dramatic impact of TQM is on reduction ofquality costs which directly effect the profitability .

This is demonstrated by the results of TQM program in Xerox Corp .The change in various elements of quality cost before and afterlaunching TQM by Xerox Corp is shown on the next slide.


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Impact of TQM on costs.

prevention

Appraisal

Internal

Failure

Prevention

Appraisal

Internal

Failure

0

5

10

15

20

25

30

35

%o

fsales

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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cost of quality

Traditionally recorded quality cost generally account for only4 to 5 percent of sales which mainly comprise of cost ofscrap, re-work and warranty.


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Hidden costs of quality

There are additional costs of quality which are hidden and do notappear in the account books of the company, as they are intangibleand difficult to measure. These additional costs could be as high as20-25% of sales.

Vi ibl d hidd t


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Scrap

Rework

Warranty costs

Hidden Costs

Visible costs

Excessive use of material

High inventory

Inadequate resource utilization

Cost of redesign and re-inspection

Cost of resolving customer problems

Lost customers / Goodwill

Visible and hidden costs

Conversion efficiency of materials


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costofquality-