UNIVERSITI PUTRA MALAYSIA

APPLICATION OF COST OF QUALITY SYSTEM BY PROTON VENDORS

LIM JOO ENG

FK 2003 39

APPLICATION OF COST OF QUALITY SYSTEM BY PROTON VENDORS

By

LIMJOO ENG

Thesis Submitted to the School of Graduate Studies, Universiti Putra Malaysia in Fulfilment of the Requirement for the Degree of Master of

Science

March 2003

In delication to

my beloved husband, Michael Tan

and two loving sons, Ying Hong and Dao Hong

II

Abstract of thesis presented to the Senate ofUniversiti Putra Malaysia in fulfilment of the requirements for the degree of Master of Science

APPLICATION OF COST OF QUALITY SYSTEM BY PROTON VENDORS

By

LIMJOO ENG

March 2003

Chairman: Associate Professor Md. Yusof Ismail, Ir. Ph.D.

Faculty: Engineering

Globalization is one of the key trends in the business world today. When countries

around the globe open their markets upon the implementation of economic

integration which may include European Unification (EU) in Europe, North

American Free Trade Agreement (NAFT A) for North America, Asia Pacific

Economic Corporation (APEC) for Asia Pacific region, Asean Free Trade Area

(AFT A) for Asean countries, industries are now faced with new competition. To

survive in this global business arena, organizations must increase their

competitiveness not only in terms of cost, but it would also be driven by criteria

involving quality, reliability, delivery and technology competency. Often

companies respond to this highly dynamic business environment by implementing

total quality management (TQM). TQM approach focuses on process

improvement and the elimination of all forms of waste. One of the key and

effective tools to ensure the success adoption of TQM is cost of quality (COQ).

Cost of quality system translates quality problems into a common denominator -

money, a financial tenn that is what management sought of to indicate the

III

economic health of the organization. Whilst cost of quality is a common subject

and has been focus by organizations in the West, its concept is still fairly new to

the industries in Malaysia. In view of this and a list of recognized benefits after

instituting a COQ system, an industry survey by postal questionnaire has been

initiated to study and evaluate the application and use of the COQ program in

Proton vendors, the automotive manufacturing industry in Malaysia. A total of

1 54 vendors listed in the Proton Vendors' Directory 2000/2001 have been

selected as the target group for this survey. The methodology used in the survey is

described and the key results obtained are analyzed. The survey found that

majority of the automotive manufacturers in Malaysia are small and medium

enterprise. This reflects the government's policy to promote and encourage more

entrepreneurship in small and medium industry through the various assistance

program offered by the government agencies. The industry, generally, is aware of

the importance of quality issues, and management is committed to the quality

management system as most of them have achieved their certification of ISO

(International Standards Organization) standard. However the awareness and

understanding of COQ concepts are still lacking. In measuring COQ activities,

prevention cost appears to be the most focus area of measurement compared to

appraisal cost, internal and external failure cost. The survey showed a

considerable wide variation in the total cost of quality (TCOQ) figures. However,

one significant trend observed, the TCOQ presented by the industry is either very

low, at less than 5% or they are unable to provide any figures to the quality­

related expenditure. Finally the industry as a whole agreed that COQ is an

effective tool to improve their business performance and they strongly indicate

lV

there is need to develop a conceptual framework for the effective implementation

of COQ program.

v

Abstrak tesis yang dikemukakan kepada Senat Universiti Putra Malaysia sebagai memenuhi keperluan untuk Ijazah Master Sains

APLIKASI KUALITI KOS SISTEM DI GOLONGAN PEMBEKAL PROTON

Oleh

LIMJOO ENG

March 2003

Pengerusi: Profesor Madya Md. Yusof Ismail, Ir. Ph.D.

Fakulti: Kejuteraan

Globalisasi adalah salah satu kaedah utama dalam sektor perdagangan masa kini.

Apabila negara-negara di seluruh duma membuka pasaran terhadap perlaksanaan

ekonomi integrasi yang melibatkan Europe Unification (EU) di Eropah, North

American Free Trade Agreement (NAFTA) untuk Amerika Utara, Asia Pacific

Economic Corporation (APEC) untuk negara di lingkungan Asia Pacific and

Asean Free Trade Area (AFTA) untuk negara-negara di rantau Asia, industri masa

kini sebenarnya sedang berhadapan dengan persaingan baru. Untuk terus kekal di

dalam arena globalisasi perdagangan ini, sesebuah organisasi mestilah

meningkatkan daya saingan mereka bukan saja dari segi kos, tetapi termasuk juga

pelbagai kriteria yang melibatkan kualiti, daya ketahanan, penghantaran dan

saingan teknologi. Lazimnya, sesebuah syarikat akan menyahut kepada suasana

perdagangan berdinamik tinggi ini dengan melancarkan program pengurusan

kualiti keseluruhan atau dalam bahasa Inggeris 'total quality management

(TQM),. Pendekatan TQM memfokuskan kepada proses baik pulih dan

VI

penghapusan semua bentuk bahan buangan. Salah satu kunci dan cara yang

berkesan untuk memastikan kejayaan dari perlaksanaan TQM ialah kualiti kos,

atau 'cost of quality (COQ)' dalam bahasa Inggeris. Sistem kualiti kos ini akan

memindahkan masalah kualiti kepada ukuran biasa; iaitu wang di mana ianya

digunakan untuk menunjukkan keteguhan ekonomi sesebl:lah organisasi.

Walaupun sistem ini adalah perkara umum dan telah pun difokuskan oleh banyak

organisasi di Barat, perlaksanaannya kepada industri di Malaysia boleh dikatakan

masih awal. Sehubungan dengan ini dan juga merujukkan kepada senarai

kebaikan yang telah dikenal pasti selepas perlaksanaan sistem kualiti kos, satu

kajian industri melalui borang kaji selidik telah diikhtiarkan untuk mengkaji dan

menilai perlaksanaan program COQ di golongan pembekal Proton, industri

pembuatan automotif di Malaysia. Seramai 1 54 pembekal Proton yang nama

syarikatnya disenaraikan dalam 'Proton Vendors Directory 2000/20001 ' telah

dipilih sebagai kumpulan sasaran untuk kajian ini. Kaedah yang digunakan di

dalam kaji selidik dihuraikan dan hasil yang diperolehi juga di analisa secara

terperinci. Hasil kajian telah mendapatkan bahawa sebahagian besar daripada

pembekal komponen automotif di Malaysia adalah terdire dari golongan

usahawan kecil dan sederhana. Ia menggambarkan polisi kerajaan untuk

memupuk serta menggalakkan lebih banyak usahawan dalam industri kecil dan

sederhana melalui pelbagai program bantuan yang ditawarkan oleh agensi

kerajaan. Industri pembuatan kereta secara amnya sedar akan kepentingan isu

kualiti, dam pengurusan di syarikat mementingkan sistem pengurusan kualiti

dimana kebanyakannya telah mencapai sijil ISO. Walau bagaimanapun kesedaran

and pemahaman mereka terhadap konsep COQ masih kurang. Dalam

VlI

menjalankan pengukuran COQ, kos 'prevention' telah muncul sebagai kategori

kos yang paling diutamakan dibandingkan dengan kos 'appraisal', kos-kos

'internal' dan 'external failure'. Kajian juga menunjukkan bahawa nilai ukuran

kualiti kos keseluruahn di industri agak jauh berbeza. T etapi, satu corak yang

ketara telah diperhatikan, nilai kualiti kos keseluruhan yang d!pamerkan oleh

industri samada nilainya rendah" iaitu kurang dari 5% atau mereka langsung tidak

dapat menganggar nilai tersebut. Akhir sekali, industri ini secara keseluruhan

bersetuju bahawa COQ adalah satu teknik yang berkesan untuk meningkatkan

mutu perniagaan mereka. Mereka juga tegas memperkatakan tentang perlukan

pembangunan satu konsep rangka kerja untuk perlaksanaan program COQ yang

berkesan.

Vlll

ACKNOWLEDGEMENTS

Taking this opportunity, I wish to express my sincere appreciation and heartfelt

thanks to the following who have contributed in one way or the other and

supported me along the journey towards the achievement of this dissertation.

First and foremost in the list, my deepest gratitude is extended to my chief project

supervisor, Ir Dr Md. Yusof Ismail for providing me with his invaluable advice

and diligent guidance. I am grateful for the knowledge, sharing of experience,

insightful and valuable feedback that he has imparted to me during the course of

the project. A special acknowledgement to his contribution, careful analysis and

review the draft copy of the dissertation.

My sincere appreciation is extended to my two project co-supervisors, Dr Megat

Mohamad Hamdan Megat Ahmad and Dr Napsiah Ismail, for rendering me their

extremely useful suggestion, advise, recommendation and assistance. Thanks for

expending the time and effort to read and comment on my draft copy of

dissertation.

Many thanks to Puan Rosminah Hussin, my learning partner for her generous help

and sharing of numerous ideas throughout the progression of this project.

A word of thanks goes to my dearest husband, for showering me with lots of

support. Without his kind understanding, patient and continuous encouragement,

the path to this dissertation would be a lonely endeavour. Cooperation and

thoughtfulness extended by my two little sons are worth commending.

Finally, I wish to acknowledge my entire family members and friends, to whom

their names not stated I appreciate your help for making this dissertation a

success

IX

I certify that an Examination Committee on 12th March 2003 to conduct the final examination of Lim Joo Eng on her Master of Science thesis entitled "Application of Cost of Quality System By Proton Vendors" in accordance with Universiti Pertanian Malaysia (Higher Degree) Act 1980 and Universiti Pertanian Malaysia (Higher Degree) Regulation 1981. The Committee recommends that the candidate be awarded the relevant degree. Members of the Examination Committee for the candidate are as follow:

Rosnah Mohd YusutT, Ph.D Lecturer Faculty of Engineering, Universiti Putra Malaysia (Chariman)

Md. Yusof Ismail, Ir., Ph.D Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Member)

Megat Mohamad Hamdan Megat Ahmad, Ph.D. Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Member)

Napsiah Ismail, Ph.D Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Member)

HMA T ALI, Ph.D ProfessorlDep Dean School of Graduate Studies, Universiti Putra Malaysia

x

This Thesis submitted to the Senate of Universiti Putra Malaysia has been accepted as partial fulfilment of the requirements for the degree of Master of Science. The members of the Supervisory Committee are as follows.

Md. Yusof Ismail, Ir, Ph.D Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Chairman)

Megat Mohamad Hamdan Megat Ahmad, Ph.D. Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Member)

Napsiah Ismail, Ph.D Associate Professor Faculty of Engineering, Universiti Putra Malaysia (Member)

AINI IDERIS, Ph.D ProfessorlDean School of Graduate Studies, Universiti Putra Malaysia

Date tl 2 JUN 2003

Xl

DECLARATION

I hereby declare that the thesis is based on my original work except for quotation and citations which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other degree at UPM or other institutions.

Date: 1 8th April 2003

XII

TABLE OF CONTENTS

Page

DEDICATION II ABSTRACT III ABSTRAK VI ACKNOWLEDGEMENTS IX APPROVAL SHEETS X DECLARATION FORM xu LIST OF TABLES XVI LIST OF FIGURES xvn LIST OF ABBREVIATIONS/NOTATIONS/GLOSSARY OF TERMS XVlll

CHAPTER

1 . INTRODUCTION 1 1 . 1 General 1 1 .2 Research Need 3 1 .3 Research Objectives 6

2. LITERATURE REVIEW 7 2. 1 Introduction to Cost of Quality and Its History Development 7 2.2 Benefits, Implications and Pitfalls of a Cost of Quality System 9

2.2. 1 Benefits of a Cost of Quality System 1 0 2.2.2 Implications of a Cost of Quality System 12 2.2.3 Pitfalls of a Cost of Quality System 13 2.2.4 Do's and Don'ts of a Cost of Quality System 1 5

2.3 Cost of Quality Models 16 2.3 . 1 Prevention - Appraisal- Failure Model 16 2.3 .2 Process Model 22 2.3.3 Review of Quality Cost Model 24 2. 3.4 Other Approaches to Cost of Quality 28

2.4 Quality Standards and Quality Costs 33 2.4. 1 IS09000 and Quality Costs 33 2.4.2 QS9000 and Quality Costs 34 2.4.3 TQM and Quality Costs 3 5 2.4.4 VDA6.1 - the German Automotive Quality Standard 36

and Quality Costs 2.4.5 Future Directions 36

2.5 Definition of Quality Cost System 37 2.5 . 1 Quality Cost Categories 37 2.5.2 Quality Cost Elements 37 2.5.3 Quality Cost Bases 40

Xlll

2.6 Quality Cost Program 42 2.6. 1 Defining and Categorizing of Cost of Quality 43 2.6.2 Identifying Elements of Cost of Quality 44 2.6.3 Measuring and Collecting of Cost of Quality 47 2.6.4 Analyzing of Cost of Quality 52 2.6.5 Reporting of Cost of Quality 55 2.6.6 Reducing and Use of Cost of Quality 58 2.6.7 Cost-Related Quality System Surveys 59

3. METHODOLOGY 68 3.1 Survey Approach 68 3.2 Survey Procedures 70

3.2.1 Stage 1: Information Sourcing and Gathering 70 3.2.2 Stage 2: Decide on Survey Sample and Size 70 3.2.3 Stage 3: Develop the Questionnaire 70 3.2.4 Stage 4: Determine Survey Procedure 72 3.2.5 Stage 5: Data Collection and Analysis 73

4. RESULTS AND DISCUSSION 75 4.1 Analysis of Results 75

4. 1.1 Response Rate 75 4.1.2 Part 1: Company ProfilelBackground 76 4.1.3 Part 2: Some Information of Cost of Quality System 81

In Use 4.1.4 Part 3: Understanding of Cost of Quality Concepts 98 4.1.5 Part 4: Apportion of Major Cost of Quality Elements to 104

Different Categories of Cost 4. 1.6 Part 5: Assess of Attitude towards Cost of Quality 114

Measurement and the Needs of a Conceptual Framework to Assist In Effective Cost of Quality Program Implementation

5. CONCLUSIONS AND RECOMMENDATION 116 5. I General Issues 116 5.2 Summary of Main Points 117

5.2. 1 Current Practice, Some Application and Use of Cost of 117 Quality

5.2.2 Level of Awareness and Understanding of Cost of 119 Quality Concepts

S.2.3 Information of Quality Costs on Area of Focus, Estimated 120 Value of Quality Costs and Contributing Cost Factors In Quality-Related Expenditure

5.2.4 Assessing the Company's Attitudes Towards 121 The COQ Measurement

S.3 Recommendation for Scope of Future Work 122

XlV

REFERENCES

APPENDICES A Survey Questionnaire B Survey Results: Data and Analysis

BIODATA OF THE AUTHOR

124

132 142

162

xv

Table

4. 1

4.2

Rl

R2

R3

R4

R5

R6

B.7

R8

R9

RIO

Rll

R 12

R 13

LIST OF TABLES

Response rate of the survey

Apportion of COQ to P AF and any measure of COQ crosstabulation

Summary of responses to Part 1 - Company BackgroundlProfile

Summary of responses to Part 2 - Information of COQ system in use

Part 2 Q3: Is COQ established as one of the stated organizational goals for performance measure in the company's quality policy

Embark on TQM program and setting COQ as a performance measure crosstabulation

Part q Q4: Does your company monitor and measure the cost of quality activities

Embark on TQM program and any measure of COQ crosstabulation

Summary of responses to Part 3 - Understanding of COQ concepts

Part 3 Q 1: Understand of internal failure cost and understand of external failure cost and understand of appraisal cost and understand of prevention cost crosstabulation

Summary of responses to Part 4 - Apportion of major COQ items to different categories of cost

Summary of responses to Part 5 - Assess of altitudes towards COQ measurement and needs of a conceptual framework for implementation

The average of measured cost elements for different categories of cost

Most common measured of cost elements in descending order for different categories of cost

The average of cost value for different cost elements and in different categories of cost a) prevention, b) appraisal, c) internal failure and d) external failure cost

Page

75

85

142

143

146

146

147

147

149

149

150

153

154

155

160

XVI

LIST OF FIGURES

Figure Page

2.1 The P AF model - cost of quality categories 20

2.2 Juran's classic model of optimum quality cost 27

2.3 New model of optimum quality costs by Woft & Bechert 27

2.4 Cost of quality - tips of the iceberg 32

2.5 Assignments of cost elements to quality cost categories 46

2.6 Quality and cost relationship 56

3.1 Flowchart showing the survey methodology 69

4. 1 Percentage distribution of company category 77

4. 2 Percentage distribution of number of employee 78

4.3 Percentage distribution showing sector of industry 79

4. 4 Percentage distribution of companies that have apportion 84 the total COQ to P AF categories

4.5 Frequency distribution of percentage COQ to bases 87

4.6 Average of total measured elements in different categories of 106 cost

4. 7 The average quality cost value measured for different category 113 of cost

B 1 Percentage distribution showing COQ has been established as 146 one of the organizational goals

B.2 Percentage distribution of company measure the cost of quality 147 activities

B3 Apportion of a) prevention, b) appraisal, c) internal failure and 148 d) external failure cost as a percentage of total quality cost

B.4 The most common measured cost of quality elements in 156 descending order

XVII

LIST OF ABBREVIA TIONSINOTATION/GLOSSORY OF TERMS

Unless otherwise stated, the following symbols are used throughout the dissertation

ABC Activity-based costing

ASQC America Society for Quality Control

AlC

CIMA

COC

CONC

COQ

DIS

GAO

ISO

JIT

MAA

MNC

NPC

OBP

OEM

PAP

POC

PoC

PoNC

PPP

Account

Chartered Institute of Management Accountants

Cost of conformance

Cost of non-conformance

Cost of quality

Draft International Standard

Government Accounting Office

International Standard Organization

Just in time

Malaysia Automotive Association

Multinational Corporation

National Productivity Center

Operational business performance

Original equipment manufacturer

Prevention, appraisal and failure

Poor quality cost

Price of conformance

Price of non-conformance

Persatuan Pembekal Proton

xviii

PROTON

PSB

QA

QS90000

RM

SBP

SIRIM

SM!

SMIDEC

SPC

TCOQ

TQLF

TQM

U K

U S

VDA

VDP

Perusahaan Otomobil Nasional

Singapore Productivity and Standard Board

Quality assurance

Quality Standard 9000

Ringgit Malaysia

Strategic business performance

Standard Industrial Research Institute Malaysia

Small and medium industries

Small and Medium Industry Development Corporation

Statistical process control

Total cost of quality

Taguchi Quality Loss Function

Total quality management

United Kingdom

United States

Verband De Automobileindustries

Vendor development program

XIX

1.1 General

CHAPTERl

INTRODUCTION

Globalization is one of the key trends in business world today. W�th international

competition growing more intense and business operation costs continue to rise,

organizations around the world will find it increasingly difficult to compete on

price alone. Customers are consistently demanding higher quality while suppliers

strive to reduce operating cost to remain profitable. To survive in this highly

dynamic and competitive business environment, organizations must satisfy

customer with quality product and services and maintain cost competitiveness at

the price that represent the best value in the market.

Quality therefore has become an important strategic dimension and a key

competitive weapon that cannot be ignored. Often companies respond to the

changing environment and customers quality demand by implementing Total

Quality Management (TQM). TQM focuses on process improvement and the

elimination of all forms of waste. One of the key tools that could help

organizations to achieve this goal in TQM program is Cost of Quality (COQ).

Cost of quality, a tool advocated by both Feigenbaum and Crosby, is an essential

part of quality improvement program (Porter and Rayner; 1992; Goulden and

Rawlins, 1997). It presents quality program and activities in a way which

management understands - money, a common performance indicator that helps

1

managers to justify specific quality improvement efforts and formulate policy

concerning quality issues (Low and Henson, 1998). Cost of Quality provides a

mean to gauge the return on quality in an organization, and how this return

impacts the bottom line. It can serve as a useful platform to reduce business costs

and increase competitiveness both in domestic and export ma�ket (Primer on

Cost of Quality, 1998).

COQ is also a measure of company's performance with respect to the process by

which the product is produced or the service is delivered. An organization's

competitiveness is seriously eroded by the costs of correcting errors, redoing

thing and apologizing to customers. It is reported in survey studies by researchers

in various industries that the quality cost of these nonproductive activities has

been estimated to be as high as between 20 to 40 percent of an organization's

total sales revenue (Maycock and Shaw, 1994; Giakatis et al., 200 1). It was also

found that a well-planned and successful cost of quality program could reduce

the cost of quality significantly to 2.5% of total sales turnover (SuperviUe and

Gupta, 200 1; Ian, 1999; Kumar and Brittain, 1995).

In View of the significant reduction of poor quality costs, many positive

implication and potential benefits that cost of quality can bring to an

organization, a realistic estimation of quality cost is, therefore, an important

activity in implementing any TQM program.

2

1.2 Research Need

Despite a large volume of literatures written on the importance and principles of

cost of quality, only a minority of organizations uses the formal method of

quality cost. The literatures on quality (Mandal and Shah, 2002; Giakatis and

Rooney, 2000; Kumar and FitaRoy, 1998; Kumar and Brittain, 1 ?95; Porter and

Rayner, 1992) highlight that very few firms report quality cost and use these data

for management control purpose. Manufacturing organizations usually neglect

this aspect, and a large proportion of firms do not even collect and report quality

control cost systematically. Skepticism about its use and the real strengths still

continues.

Though cost of quality is still not widely adopted in organizations, its

implementation has started to bear fruit, in the form of higher level of awareness

on quality issues and significant reduction of cost of poor quality. Indeed, it has

now becoming a more common subject and focus particularly to the

organizations in the West. Singapore, via its government agency, Singapore

Productivity and Standards Board (PSB) has introduced a national program and

set aside S40million to assist organization in managing the COQ program

effectively (Primer on Costs of Quality, 1998; Harrington, 1999)

The application of cost of quality in the automotive industry showed that there

are quite a number of studies carried out in this sector of industry In Germany,

investigation showed that 10-35% of the electrical, machine and automotive

industry have implemented quality cost as an instrument for permanent control

(Vocht, 1989). Lascelles and Dale (1990) found that 42% of the finns under

surveyed claimed to measure quality cost in the automotive industry. Prickett and

Rapley (2001) found that the use of quality costing is particularly prevalent in the

manufacture of office machinery, data processing equipment and the

manufacture of motor vehicle and parts. In a case study reported py Giakatis and

Rooney (2000), cost of quality is used as a tool to trigger the process

improvement. Prevention-appraisal-failure is the approach used to categorize the

quality cost and provide infonnation for the improvement activities of the

organization. The result of the findings showed that the company has improved

its performance significantly. First, the response is faster in case of malfunction

and the time taken to detect a non-value added activity has also decreased.

Inefficiencies are identified and improvement measures are taken immediately

during the process analysis. Information provided is further used for future

improvement initiatives. Another benefit that has been achieved is that quality

has been promoted as a factor in the daily life of business as well as in the

strategic level. The bottom-up and top-down communications concerned quality

issues become easier.

Whilst cost of quality is gradually gaining its popularity and becoming a quality

initiative emphasized by organizations, its concept and the application is still

fairly new to the industries in Malaysia. A search of literature on the cost of

quality studies in Malaysian industries found there is an article reported by

Hamzah ( 1 997) on some observation on the issues of quality cost in construction

industry None has been found related to issues in the automotive industry.

4

In view of the significance and lists of benefits that COQ has brought to the

automotive industry in the West, a study on the application of cost of quality in

the Malaysia automotive manufacturing industry has been initiated.

Proton vendors have been selected to participate in this study as.it is the largest

car manufacturer in the country. Since its inception in 1985, it has been the

market leader and still enjoys a strong market share of 52.2% in the local vehicle

market (Malaysia Automotive Association, MAA, 2001). Proton has since

developed a wide base of strong and capable vendors under its Proton Vendor

Development Program (VDP). They are the component manufacturers and

supply hundreds of parts to Proton for its final assembly. It is also common that

vendors to Proton are also supplying parts to other local automotive assemblers

such as Perodua, Modenas, Inokam, Toyota, Honda, Nissan and others. Thus, to

study these groups of Proton vendors in a way is a fair representative of the

automotive industry in Malaysia.

This study should provide a useful insight into the present practice, the

application and use of quality cost system among the Proton vendors It helps to

draw management's attention and interest regarding the need for a cost of quality

program and use it as an integral part of a total quality system for managing and

improving work processes in the organization The study essentially will assist to

increase, propagate and entrench the concept and significance of cost of quality

throughout the industry

5