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Cost of quality

This document discusses cost of quality and provides definitions, categories, and models of quality costs. It defines cost of quality as the costs incurred to prevent, detect, and fix defects. Quality costs are divided into conformance costs (prevention and appraisal) and non-conformance costs (internal and external failure). Prevention costs aim to avoid defects, appraisal costs detect defects, and failure costs result from defects. The document also outlines the history of cost of quality analysis, gives examples to illustrate the categories, and presents a case study of a company's quality costs over four years that demonstrates how prevention costs can reduce total quality costs.

Health & Medicine◦
COST OF QUALITY  •Name- Siddhi Ramdas Bhosale  •First year M.pharm  Quality Assurance Department  •Roll no-QA03  •Shri D. D.Vispute College of Pharmacy and Research Centre, Panvel.  •Guide Name- Prof. Mukesh Patil 1
1. Introduction 2. Objective 3. History 4. What is “cost of quality” 5. Category of cost of quality 6. Cost of poor quality(COPQ) 7. Impact of TQM on COQ 8. Goal of COQ system 9. Benefit to minimize COQ CONTENTS 2 10. Steps in implementating quality cost 11. Models of cost of quality 12. Case study for COQ 13. summary
introduction The term “ COST OF QUALITY ”has different meanings to different people.  Some equate “Quality of cost’’ with the costs of poor quality (mainly the costs of finding and correcting defective work).  Costs of quality or quality costs does not mean the use of expensive or very highly quality materials to manufacture a product.  The term refers to the costs that are incurred to prevent, detect and remove the defects from the products. 3
Objective Of COQ 4  Indentify different form of cost of Quality  Indentify the Quality Cost Coat:- * Preventive Cost * Appraisal Cost  Indentify quality Failure Cost:- * Internal Failure Cost * External Failure Cost
HISTORY It was Joseph Juran who first discussed the cost of quality analysis, In 1951 in the first editions of “Quality control handbook”. And it was Armand Feigenbaum who identified four quality cost categories in 1956 in “Total Quality Control”in the Harvard Business Revies. The Quality Cost Committee was established by then ASQC in 1961. 5
WHAT IS COST OF QUALITY?  It is the term that is widely used and widely misunderstood.  The “COST OF QUALITY” is not the price of creating a quality product or service.  COQ is defined as methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality.  Cost of quality data show how profit is affected by quality. “Higher quality is less expensive to produce than lower quality” BY W. Edwards Deming. 6
WHAT IS COST OF QUALITY? Cost of quality= Cost of conformance+ cost of non- conformance  Cost of conformance is the cost incurred in ensuring that things are done right at the first time.  It is the cost of providing products or services as per the required standards, this can be termed as good amount spent (Preventive and appraisal costs)  Cost of non- conformance is cost incurred as a result of not doing things right the first time.  It is the failure cost associated with a process not being operated to the requirements.  This can be termed as unnecessary amount spent (Internal and external failure costs). 7
CATEGORY OF COST OF QUALITY Quality Costs Conformance Non- Conformance Prevention Appraisal External Failure Internal Failure 8
CATEGORY OF COST OF QUALITY 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. ACTIVITIES ASSOCIATED WITH PREVENTION COSTS  Market Research  Quality planning: It includes the cost associated with creating the entire quality plan, communication of quality plans to all the employees.  Field Trails 9
CATEGORY OF COST OF QUALITY APPRAISAL COSTS  Appraisal costs are spent to detect defects to assure conformance to quality standards. It is the cost expenditure on inspection and testing. ACTIVITIES ASSOCIATED WITH APPRAISAL COSTS  Inspection/test of purchased material.  In- process and final inspection/test.  Product, process or service audits. 10
CATEGORY OF COST OF QUALITY EXTERNAL FAILURE COSTS  These are the costs incurred after the product is dispatched to the consumer.  It may include the cost to the business of providing a bad service or product and this may also result cancellation of order.  These costs also would disappear if there were no deficiencies. ACTIVITIES ASSOCIATED EITH EXTERNAL FAILURE COSTS  Warranty charges  Recalling of the product due some reasons such as safety health accidents etc. 11
CATEGORY OF COST OF QUALITY INTERNAL FAILURE COSTS  These are the failure costs occurring prior to delivery or shipment of the product or the furnishing of a service to the customer.  These are the costs that would disappear if no defect is found in the product before dispatching. ACTIVITY ASSOCIATED WITH INTERNAL FAILURE COSTS  Cost of rework,scarp,defectives,waste etc.  Cost of re-inspection, re-tests to verify the performance analysis.  Cost of 100% inspection. 12
Cost of poor quality(COPQ)  “How much is it costing our organization by not doing a good job on quality?” Thus we will term “Cost of poor quality”. It is the costs associated with providing poor quality products or services.  The obvious and visible costs are a small portion of the overall COPQ. The bottom of the iceberg represents the majority of COPQ and are not easily identified and quantified. 13
IMPACT OF TQM ON COSTS  TQM is primarily aim to improve the quality of product, higher costumer satisfaction and better working environment . The most dramatic impact of TQM is on reduction of quality cost which directly affect the profitability.  This is demonstrated by the results of TQM program in Xerox corp. The change in various of quality cost before and after launching TQM by Xerox crop is shown here. 14
NEED OF COQ  COQ can be used to identify quality improvement candidates.  COQ provides one measure of comparing the success of projects.  COQ can provide cost data for motivational purpose Money is the language of management you need to show them the numbers- Crosby 15
GOAL OF COQ SYSTEM  The goal of using COQ is to increase prevention activities in order to eliminate internal and external failures and to reduce appraisal activities. Goal of COQ System Facilitating Quality Efforts That Leads To Cost Reduction Elimination of Failure Costs Reduction in Appraisal Costs Investments in Prevention Activities Investments in Quality Assurance Strategies 16
BENEFITES TO MINIMIZE COST OF QUALITY DECREASES  Defects  Overall costs  Returned complaints  Customer complaints  Owner and Management stress  Decrease legal costs INCREASES  Sales  Profit  Capacity  Customer Satisfaction  Market Share  Competitive Edge  Employee Satisfaction 17
STEPS IN IMPLEMENTING QUALITY COSTS •Review the literature on quality cost or consult other in similar who are using the same tool. •Select one organizational unit of the company to serve as a pilot site , This unit may be one plant , one large department ,one product line etc. •Discuss the objectives of the study with the key people in the organization. •Collect whatever cost data are conveniently available from the accounting system and use this information to gain management support to make a full cost study. •Make a proposal to management for full study . The proposed should provide for a task force of all concerned parties to identify the work activities that contribute 18
STEPS IN IMPLEMENTING QUALITY COSTS •Publish a draft of the categories defining the cost of poor quality. •Finalize the definition and secure management approval. •Secure agreement on responsibility for data collection and report preparation. •Collect and summarize the data . Ideally, this should be done by Accounting. •Present the cost results to management along with the results of a demonstration quality improvement project (if available) . Request authorization to proceed with a broader company wide program of measuring the costs and pursuing projects. 19
MODELS OF COST OF QUALITY GENERIC MODEL COST/ACTIVITY CATEGORIES P-A-F MODELS PREVENTION+APPRAISAL+FAILURE CROSBY’S MODEL PREVENTION+APPRAISAL+FAILURE+OPPO RTUNITY Opportunity or intangible cost models Conformance + non-conformance Conformance + non-conformance + opportunity Tangibles + intangibles P-A-F (failure cost includes opportunity cost) Process cost models Conformance + non-conformance ABC Models Value-added + non-value-added 20
CASE STUDY : H&S MOTORS  The H&S motor company produces small motors for use in lawnmowers and garden equipment. The company instituted a quality improvement in 1999 and has recorded the following quality cot data and accounting measures for 4 years. Quality costs YEAR 1999 2000 2001 2002 Prevention 27,000 28,500 74,600 1,12,300 Appraisal 1,55,000 1,70,300 1,13,400 1,07,000 Internal Failure 3,86,400 4,69,200 3,47,800 2,19,100 External Failure 2,42,000 1,92,200 1,03,500 1,06,000 Total $ 810,400 $ 860,000 $ 639,300 $ 544,400 Sales $ 4,360,000 $ 4,450,000 $ 5,050,000 $ 5,190,000 21
KEY POINTS OF STUDY  Approximately 75% of H&S total quality costs are a result of internal and external failures.  In 2000 company spent more money on product monitoring and inspection that resulted into high appraisal cost.  With this strategy H&S was able to identify more defective items, resulting in an apparent increase in internal failure cost and lower failure cost.  In year 2001 & 2002 company spend more money on prevention activities i.e. Training of employees, redesigning the production process and planning how to build in product quality etc.  Prevention costs increases by more than300%during the4 year period resulted into decrease in overall quality costs. 22
Key points to study The H&S company also desired to develop index numbers using quality costs as a proportional of sales. Quality index no for1999 sale is: =(810,400/4,360,000)*100=18.58 and similar for other years. These index no’s alone provide little insight into the effectiveness of the quality management program: however as a standard to make comparison over the time they can be useful. Year Quality Sales Index 1999 18.58 2000 19.32 2001 12.66 2002 10.49 23
Is Cost related to Prevention of Non- Conformance? Is Cost related to Evaluating the Conformance? Is Cost related to Non-Conformance? Is Non- Conformance found prior to Shipment? No No No Not a Quality Cost Yes Yes Yes Ye s External Failure Internal Failure Prevention Appraisal 24
Reference 25  Juran Quality Control Handbook ,5th edition , Page no-28-35.  http://en.wikipedia.org/wiki/Qualitycost  N.M ,Vaxevanidis, A. Mourlas, G. Petropoulhttps://www.google.com/url?client=internal-element- cse&cx=000668167878999901774:xojir1s89u6&q=http://www.ij qr.net/journal/v3- n1/4.pdf&sa=U&ved=2ahUKEwiwi5jhpdrvAhUwzjgGHWdpD1c 4ARAWMAB6BAgAEAE&usg=AOvVaw0QPAIOPO2PrPA4JOFj bmTbos. www.ijqr.net › journal › 4.pdf  https://www.google.com/url?client=internal-element- cse&cx=000668167878999901774:xojir1s89u6&q=https://asq.o rg/quality-resources/cost-of- quality&sa=U&ved=2ahUKEwjh0J69pdrvAhWJ4zgGHcHTDqM QFjAAegQIABAB&usg=AOvVaw3ZYykSC2UKbhsqhFWz_-k9
26 Thank you