TOPIC 4 - Quality Costs & Productivity Latest 2

7/21/2019 TOPIC 4 - Quality Costs & Productivity Latest 2

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1. Identify and describe the four types of qualitycosts.

2. Prepare a quality cost report and explain the

difference between the conventional view ofacceptable quality level and the view

espoused by total quality control.

3. Tell why quality cost information is neededand how it is used.

4. xplain what productivity is! and calculate

the impact of productive chan"es on profits.

ObjectivesObjectives

ObjectivesObjectives

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:


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Quality Defined

# quality product

or service is onethat meets or

exceeds customer

expectations...


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Quality Defined

$ on the followin" ei"ht dimensions%

Performance

#esthetics

&erviceability

'eatures(eliability

)urability

*uality ofconformance

'itness for use


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Quality Defined

$ on the followin" ei"ht dimensions%

Performance

#esthetics

&erviceability

'eatures(eliability

)urability

*uality ofconformance

'itness for use

+ow consistently+ow consistently

and well a productand well a product

functionsfunctions

+ow consistently+ow consistently

and well a productand well a product

functionsfunctions

The appearance ofThe appearance of

tan"ible productstan"ible products,style! beauty-,style! beauty-

The appearance ofThe appearance of

tan"ible productstan"ible products,style! beauty-,style! beauty-

easures the ease ofeasures the ease of

maintainin" and/ormaintainin" and/or

repairin" the productrepairin" the product

easures the ease ofeasures the ease of

maintainin" and/ormaintainin" and/or

repairin" the productrepairin" the product

0haracteristics of a0haracteristics of a

product that differentiateproduct that differentiate

functionally similarfunctionally similar

productsproducts

0haracteristics of a0haracteristics of a

product that differentiateproduct that differentiate

functionally similarfunctionally similarproductsproducts

The probability that theThe probability that the

product or service willproduct or service will

perform its intendedperform its intended

function for a specifiedfunction for a specified

len"th of timelen"th of time

The probability that theThe probability that the

product or service willproduct or service will

perform its intendedperform its intended

function for a specifiedfunction for a specified

len"th of timelen"th of time


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Quality Defined

# defective product

is one that does notconform to

specifications.


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Quality Defined

Zero defects

means that allproducts

conform to

specifications.


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Quality Defined

The definition of qualityrelated activities imply

four cate"ories of quality costs%

1- Preventive costs

2- #ppraisal costs

3- Internal failure costs

4- xternal failure costs

Incurred to

prevent poor

quality or

services bein"

produced

Incurred to

prevent poor

quality or

services bein"produced

Incurred to

determinewhether products

and services

conform to

requirements

Incurred to

determine

whether products

and services

conform to

requirements

Incurred when

products and

services do not

conform tospecifications

Incurred when

products and

services do not

conform tospecifications

Incurred when

products and

services fail toconform to

requirements after

bein" delivered

Incurred when

products and

services fail to

conform to

requirements after

bein" delivered


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Examples of Quality Costs

!e"ention #osts!e"ention #osts*uality en"ineerin"

*uality trainin" pro"rams

*uality plannin"

*uality reportin"

&upplier evaluation and selection

*uality audits

*uality circles

'ield trials

)esi"n reviews


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$pp!aisal Costs$pp!aisal Costs

Inspection of raw materials

Testin" of raw materials

Paca"in" inspection

&upervisin" appraisal

Product acceptance

Process acceptance

Inspection of equipment

Testin" equipment

utside endorsements


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%nte!nal failu!e #osts%nte!nal failu!e #osts

&crap

(ewor)owntime ,defect related-

(einspection

(etestin")esi"n chan"es



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0ost of recalls

ost sales

(eturns/allowances

5arranties

(epairs

Product liability

0ustomer dissatisfaction

ost maret share

0omplaint ad6ustment

Exte!nal failu!e #osts



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Measuring Quality Costs

The ultiplier ethod

The aret (esearch ethod

Ta"uchi *uality oss 'unction

Hidden Quality Costs areopportunity costs resulting from

poor quality.


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Te Multiplier Metod

&'e multiplier metodassumes t'at t'e total failu!e#ost is simply some multiple of measu!ed failu!e#osts(

Total external failure cost = k(Measured externalfailure costs

!here k is the "ultiplier effect

If ! " 4, and te measured e#ternal failure costs are $%million, ten te actual e#ternal failure costs are estimatedto &e $' million(


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Te Mar!et Researc Metod

&'e mar!et researc metoduses fo!mal ma!)et!esea!#' met'ods to assess t'e effe#t of poo! *ualityon sales and ma!)et s'a!e+

#usto"er surveys and intervie!s !ith "e"bers

of a co"pany$s sales force can provide significantinsight into the "agnitude of a co"pany$s hiddencosts%

Market research results can be used to projectfuture profit losses attributable to poor &uality%


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Te Taguci Quality )oss *unction

&'e Taguci loss functionassumes any "a!iation

f!om t'e ta!,et "alue of a *uality #'a!a#te!isti#

#auses 'idden *uality #osts+

'urther"ore, the hidden &uality costs increase

&uadratically as the actual value deviates

fro" the target value%


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Te Taguci Quality )oss *unction7

0ost

ower

&pecification

imit

Tar"et

8alue

9pper

&pecification

imit


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Te Taguci Quality )oss *unction

(y = k(y ) T*k: # proportionately constant dependent

upon the or"ani;ation


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Quality Cost epo!tQuality Cost epo!t

.nit $#tual Diamete! /.nit $#tual Diamete! /yy y+T y -T.y+T y -T./ !y+T.// !y+T./

1 =.= >.1> >.>1> 7 4.>>

2 1>.1 >.1> >.>1> 4.>>

3 1>.2 >.2> >.>4> 1?.>>4 =.@ >.2> >.>4> 1?.>>

Total >.1>> 74>.>>

#vera"e >.>2A 71>.>>

% d


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Quality Costs of alesQuality Costs of ales

Prevention costs%

*uality trainin" 73A!>>>

(eliability en"ineerin" @>!>>> 711A!>>> 4.11B

#ppraisal costs%

aterials inspection 72>!>>>Product acceptance 1>!>>>

Process acceptance 3@!>>> ?@!>>> 2.43

Internal failure costs%

&crap 7A>!>>>

(ewor 3A!>>> @A!>>> 3.>4xternal failure costs%

0ustomer complaints 72A!>>>

5arranty 2A!>>>

(epair 1A!>>> ?A!>>> 2.32

Total quality costs 7333!>>> 11.=>B

%ma,e !odu#ts

Quality Cost epo!t

o! t'e ea! Ended a!#' 31 2004

1122


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elati"e Dist!iution of Quality Costsxternal

'ailure

,1=.AB-

Prevention

,34.AB-

Internal

'ailure

,2A.?B-

#ppraisal

,2>.4B-


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Quality Cost !ap'

Cost

0

e!#ent Defe#ts

100%

ailu!e Costs

Cont!ol Costs

&otalQuality

Costs

$:


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Contemporary Quality Cost 0rap

Cost

0

e!#ent Defe#ts

100

ailu!e Costs

Cont!ol Costs

&otal

Quality

Costs


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&!end $nalysis

Quality Costs $#tual ales of ales

2>>> 744>!>>> 72!2>>!>>> 2>.>B2>>1 423!>>> 2!3A>!>>> 1@.>

2>>2 412!A>> 2!CA>!>>> 1A.>

2>>3 3=2!>>> 2!@>>!>>> 14.>

2>>4 2@>!>>> 2!@>>!>>> 1>.>

$ssume t'e follo;in, data($ssume t'e follo;in, data(

M lti l P i d T d 0


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11-26Multiple+Period Trend 0rap:

Total Quality Costs

5

10

15

20

0 1 2 3 4

5

ofales

ea!


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ultiple-&!end $nalysis fo!

%ndi"idual Quality Costs

%nte!nal Exte!nal

!e"ention $pp!aisal ailu!e ailu!e

2>>> 2.>B1 2.>B ?.>B 1>.> B

2>>1 3.> 2.4 4.> @.?

2>>2 3.> 3.> 3.> ?.>

2>>3 4.> 3.> 2!A 4.A2>>4 4.1 2.4 2.> 1.A

$ssume t'e follo;in, *uality #ost data(

1Exp!essed as a of sales


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ultiple-e!iod &!end !ap'i#(

%ndi"idual Quality Cost Cate,o!iesPercenta"e

of &ales1>

=

@

C?

A

4

3

2

1

>> 1 2 3 4 Dear

xternal failureInternal failure

Prevention

#ppraisal


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11-29!odu#ti"ity( easu!ement

and Cont!ol

Productivity is concerned

with producin" output

efficiently! and is itspecifically addresses the

relationship of output and

the inputs used to produce

the outputs.

Productivity is concerned

with producin" output

efficiently! and is itspecifically addresses the

relationship of output and

the inputs used to produce

the outputs.


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1. for any mix of inputs that will producea "iven output! no more of any oneinput is used than necessary to producethe output

2. "iven the mixes that satisfy the firstcondition! the least costly mix ischosen.

!odu#ti"ity( easu!ement

and Cont!ol

Total productive efficiency is the point atwhich two conditions are satisfied%


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Tecnical 1fficiency

&e#'ni#al Effi#ien#yis t'e #ondition ;'e!e no mo!e of any

one input is used t'an ne#essa!y to p!odu#e a ,i"en output+

Technical efficiency i"prove"entis !hen less

inputs are used to produce the sa"e output or

"ore output are produced using the sa"e input%Cu!!ent p!odu#ti"ity

utputs%

?

Inputs%

abor

#apital

4


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Tecnical 1fficiency

ame utput e;e! %nputs

o!e utput ame %nputs

utputs%

?utputs%

@

Inputs%

abor

#apital

4

Inputs%

abor

#apital

3


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Tecnical 1fficiencyo!e utput e;e! %nputs

&e#'ni#ally Effi#ient Comination %(

utputs%

@

utputs%

@

Inputs%

abor

#apital

3

Inputs%

abor

#apital


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Tecnical 1fficiency

&e#'ni#ally Effi#ient Comination %%(

f the two combinations that produce the same output!

the least costly combination would be chosen.

f the two combinations that produce the same output!

the least costly combination would be chosen.

utputs%

@

Inputs%

abor

#apital


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Partial Productivity Measurement: Measuringproductivity for one input at a ti"e%

+artial Measure = Output-nput

Operational Productivity Measure: +artial "easure!here both input and output are expressed in

physical ter"s%

*inancial Productivity Measure: +artial "easure!here both input and output are expressed indollars%

Partial Productivity easurementPartial Productivity easurementPartial Productivity easurementPartial Productivity easurement


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Profile measurementprovides a

series or a vector of separate anddistinct partial operational measures.


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!ofile !odu#ti"ity easu!es

Example 1(

The productivity of both labor labor and materials

moves in the same direction%

2003 2004Eumber of motors produced 12>!>>> 1A>!>>>

abor hours used 4>!>>> 3C!A>>

aterials used ,lbs.- 1!2>>!>>> 1!42@!AC1

Partial Productivity (atiosPartial Productivity (atios

2>>3 Profile 2>>4 Profile2>>3 Profile 2>>4 Profile

abor productivity ratio 3.>>> 4.>>>

aterial productivity ratio >.1>> >.1>A

1A>!>>>/3C!A>>1A>!>>>/3C!A>>1A>!>>>/1!42@!AC11A>!>>>/1!42@!AC1


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!ofile !odu#ti"ity easu!es

Example 2(

#ssume the same data as xample 1 except the material

used is 1!C>>!>>> pounds.

2003 2004Eumber of motors produced 12>!>>> 1A>!>>>


aterials used ,lbs.- 1!2>>!>>> 1!C>>!>>>

Partial Productivity (atios

2>>3 Profile 2>>4 Profile

abor productivity ratio 3.>>> 4.>>>

aterial productivity ratio >.1>> >.>@@

1A>!>>>/3C!A>>1A>!>>>/3C!A>>1A>!>>>/1!C>>!>>>1A>!>>>/1!C>>!>>>


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!ofit-:in)ed !odu#ti"ity

easu!ement


easu!ement

Profit+)in!age Rule: 'or the current period! calculate

the cost of the inputs that would have been used in the

absence of any productivity chan"e! and compare this

cost with the cost of the inputs actually used. The

difference in costs is the amount by which profits

chan"ed because of productivity chan"es.

To compute te inputs tat 2ould ave &een usedPQ., use te follo2ing formula:

PQ " Current Output3ase+Period Productivity Ratio


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1#ample:1#ample: 5un!ul provided te follo2ing data:

%667%667 %664%664

Eumber of motors produced 12>!>>> 1A>!>>>


aterials used ,lbs.- 1!2>>!>>> 1!C>>!>>>

9nit sellin" price ,motors- 7A> 74@5a"es per labor hour 711 712

0ost per pound of material 72 73


easu!ement


easu!ement

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easu!ement


easu!ement

P* ,labor- : 1A>!>>>/3 : A>!>>> hrs.

P* ,materials- : 1A>!>>>/>.1>> : 1!A>>!>>> lbs.

0ost of labor% ,A>!>>> x 712- 7 ?>>!>>>

0ost of materials% ,1!A>>!>>> x 73- 4!A>>!>>>

Total P* cost 7A!1>>!>>>

0ost of labor% ,3C!A>> x 712- 7 4A>!>>>

0ost of materials% ,1!C>>!>>> x 73- A!1>>!>>>

Total current cost 7A!AA>!>>>

The actual cost of inputs%

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easu!ement


easu!ement

Profitlined effect : Total P* cost Total current cost

: 7A!1>>!>>> F 7A!AA>!>>>

: 74A>!>>> decrease in profits

Te net effect of te process cange 2as

unfavora&le( Profits declined $486,666&ecause of productivity canges(

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!i#e-e#o"e!y Component

The difference between the total profit chan"e and the

profitlined productivity chan"e is called theprice+recovery component+

2>>4 2>>3 )ifference

(evenues 7C!2>>!>>> 7?!>>>!>>> 7 1!2>>!>>>0ost of inputs A!AA>!>>> 2!@4>!>>> 2!C1>!>>>

Profit 71!?A>!>>> 73!1?>!>>> 71!A1>!>>>

!i#e !e#o"e!y : Profit chan"e F Profitlined productivity chan"e: 71!A1>!>>> F 74A>!>>>

: 71!>?>!>>>

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TOPIC 4 - Quality Costs & Productivity Latest 2