COST OF QUALITY

QUALITY IS FREE

PGL-INTERNAL TRAINING MATERIAL 1

 COST OF QUALITY
What is Quality?
A Quality product or service is one that
conforms to customer expectations.

• Specifications meet customer expectations

• Design meets specifications
• Product meets Design

PGL-INTERNAL TRAINING MATERIAL 2

 COST OF QUALITY
Dimensions of Quality
Performance How consistently and well a product functions

Aesthetics The appearance of tangible products (style, beauty)

Measures the ease of maintaining and/or repairing the

Serviceability product
Characteristics of a product that differentiate
Features functionally similar products

Reliability The probability that the product or service will perform

its intended function for a specified length of time

Durability The length of time a product functions

of time

Quality of A measure of how a product meets its specification

conformance
Fitness for use The suitability of the product for carrying out its
advertised function
PGL-INTERNAL TRAINING MATERIAL 3
 COST OF QUALITY

Cost of quality refers to the sum of costs

incurred to prevent non-conformance from
happening and the costs incurred when non-
conformance in products and system occurs
which is commonly known as cost of poor
quality

PGL-INTERNAL TRAINING MATERIAL 4

 COST OF QUALITY
Understand Quality Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this

• Quality costs are real and estimated at:

– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to enable better
understanding
PGL-INTERNAL TRAINING MATERIAL 5
 COST OF QUALITY
Why calculate quality by cost
Management will give special attention when quality is measured in monetary
terms
To monitor the effectiveness of quality improvement initiatives
To be used in a generic term by senior management, shareholders and
financial institutions, so that they can readily understand implication of
quality in the term of money
Cost of quality failure is calculated as a percentage of profit or annual turnover
It is easy to understand
By front-line operator
By middle management

It helps the organization to evaluate the effectiveness

and results of its quality programs in real terms and
also helps in cost-benefit analysis for future investments
in quality programs
PGL-INTERNAL TRAINING MATERIAL 6
 COST OF QUALITY
Understand Quality Costs
Total quality costs
= (Costs for ensuring Good Quality) +
(Costs for removing the Poor Quality)

PGL-INTERNAL TRAINING MATERIAL 7

 COST OF QUALITY
Definition of Quality cost
• Cost of Achieving Good Quality
– Prevention costs
• costs incurred during product and process design
– Appraisal costs
• costs of measuring, testing, and analyzing
• Cost of Poor Quality
– Internal failure costs
• include scrap, rework, process failure, downtime, and price
reductions
– External failure costs
• include complaints, returns, warranty claims, liability, and lost sales

PGL-INTERNAL TRAINING MATERIAL 8

 COST OF QUALITY
Prevention Cost
Preventive costs are the cost of all activities
specifically designed to prevent poor quality
product or service.
These costs are incurred to keep appraisal and
failure costs at minimum.

PGL-INTERNAL TRAINING MATERIAL 9

 COST OF QUALITY
Prevention Cost
• Quality planning costs • Training costs
– costs of developing and – costs of developing and
implementing quality putting on quality training
management program programs for employees
• Product-design costs and management
– costs of designing • Information costs
products with quality
characteristics – costs of acquiring and
maintaining data related
• Process costs to quality, and
– costs expended to make development of reports
sure productive process on quality performance
conforms to quality
specifications

PGL-INTERNAL TRAINING MATERIAL 10

 COST OF QUALITY
Examples of Prevention Cost
 Application screening  Market analysis
 Capability studies  Pilot projects
 Controlled storage  Procedure writing
 Design review  Prototype testing
 Procedure reviews
 Equipment maintenance
& repair  Quality incentives
 Safety reviews
 Field testing
 Time and motion studies
 Fixture design and
 Survey
fabrication
 Quality training
 Forecasting
 Personnel reviews
 Housekeeping

PGL-INTERNAL TRAINING MATERIAL 11

 COST OF QUALITY
Appraisal Cost

• Those costs incurred because poor quality

products might exist
• If these costs are necessary then the process is
flawed and management is guilty

PGL-INTERNAL TRAINING MATERIAL 12

 COST OF QUALITY
Appraisal Cost

• Inspection and testing

– costs of testing and inspecting materials, parts, and product at
various stages and at the end of a process
• Test equipment costs
– costs of maintaining equipment used in testing quality
characteristics of products
• Operator costs
– costs of time spent by operators to gather data for testing
product quality, to make equipment adjustments to maintain
quality, and to stop work to assess quality

PGL-INTERNAL TRAINING MATERIAL 13

 COST OF QUALITY
Examples of Appraisal Cost
• Audit
• Document checking
• Diagram checking
• Equipment calibration
• Final inspection
• In-process inspection
• Laboratory test
• Personnel testing
• Procedure testing
• Prototype inspection
• Receiving inspection
• Shipping inspection

PGL-INTERNAL TRAINING MATERIAL 14

 COST OF QUALITY
Internal failure Cost
• Those costs incurred if poor quality products
do exist and receive further processing
• If this occurs then the previous processing is
wasted cost

PGL-INTERNAL TRAINING MATERIAL 15

 COST OF QUALITY
Internal failure Cost
• Scrap costs • Process downtime costs
– costs of poor-quality
products that must be – costs of shutting down
discarded, including productive process to fix
labor, material, and problem
indirect costs
• Price-downgrading costs
• Rework costs
– costs of fixing defective – costs of discounting poor-
products to conform to quality products—that is,
quality specifications selling products as
• Process failure costs “seconds”
– costs of determining why
production process is
producing poor-quality
products

PGL-INTERNAL TRAINING MATERIAL 16

 COST OF QUALITY
Examples of Internal failure Cost
• Rework
• Scrap
• Overtime
• Downtime
• Excess inventory
• Excess material handling
• Redesign
• Downgrading
• Retesting
• 100% sorting inspection
• Scrap & rework - supplier

PGL-INTERNAL TRAINING MATERIAL 17

 COST OF QUALITY
External failure Cost

These are the costs incurred by a business due to

failure of product or service at the customer end.
These costs results into warranty claims and loss
of reputation.

PGL-INTERNAL TRAINING MATERIAL 18

 COST OF QUALITY
External failure Cost
• Customer complaint costs
– costs of investigating and
satisfactorily responding to a
customer complaint resulting
from a poor-quality product
• Product return costs
– costs of handling and
replacing poor-quality
products returned by
customer
• Warranty claims costs
– costs of complying with
product warranties
PGL-INTERNAL TRAINING MATERIAL
• Product liability costs
– litigation costs
resulting from product
liability and customer
injury
• Lost sales costs
– costs incurred because
customers are
dissatisfied with poor
quality products and
do not make additional
purchases
19
 COST OF QUALITY
Examples of External failure Cost

• Warranty costs
• Customer dissatisfaction
• Loss of market share
• Price concession
• Premium freight
• Product recalls
• Time spent to resolve customer complaints
• Restocking costs
• Other penalties

PGL-INTERNAL TRAINING MATERIAL 20

 COST OF QUALITY
Cost fall as prevention activities
increase

PGL-INTERNAL TRAINING MATERIAL 21

 COST OF QUALITY
Preventing poor quality cost (Comparison)
Prevention Costs

Benefit
Appraisal Costs

$ Repair Costs Prevention Costs

Failure Costs Appraisal Costs

• Internal Repair Costs
• External
Failure Costs

Before Quality After Quality

Cost Cost
Alignment Alignment
PGL-INTERNAL TRAINING MATERIAL 22
 COST OF QUALITY
Examples of quality cost elements
10-15%
Quality costs in % of sales

The total quality 10-12%

costs 25-35 %
of turnover.

4-6%

1%

Preventive Appraisal Internal External

Failure
PGL-INTERNAL TRAINING MATERIAL Failure 23
 COST OF QUALITY
Visible and hidden costs
Visible costs
•Scrap
•Rework
•Warranty costs

Hidden Costs
•Conversion efficiency of materials
•Inadequate resource utilization
•Excessive use of material
•Cost of Redesign and re-inspection
•Cost of resolving customer problems
•High inventory
•Lost customer / Goodwill
•Expediting costs
•Excessive overtime
•Excessive travel expense
•Employee turnover

PGL-INTERNAL TRAINING MATERIAL 24

 COST OF QUALITY
The 1:10:100 rule:
 Re.1 spent on prevention will save Rs.10 spent on
appraisal and Rs.100 on failure costs.

 This rule helps one to prioritize expenditure on

prevention, which is sure to bring in greater returns.
1
Prevention
Rs 10
Correction
Rs
100
Rs
Failure
Rs
Rs

PGL-INTERNAL TRAINING MATERIAL 25

 COST OF QUALITY
Erroneous assumptions on quality
 Quality means goodness,
elegance
 Quality is intangible, not
measurable
 The “economics of quality”
are prohibitive, not relevant
 Quality problems originate
with the workers
 Quality is the responsibility of
the quality department
PGL-INTERNAL TRAINING MATERIAL
 Quality is conformance to
requirements
 Quality is measured by the cost
of nonconformance
 It is cheaper to do things right
the first time
 Most problems start in
planning and development
 Quality is shared by every
function and department
26
 COST OF QUALITY
Why quality is free?

PGL-INTERNAL TRAINING MATERIAL 27

 COST OF QUALITY
How to make quality is free
• Implement quality program that can save more money
than it costs to implement.
• Profitability is best accomplished by preventing defects
and there by reducing the cost of poor quality.
• Optimize prevention and appraisal costs.
• The quality measures help preventing defects so do not
minimize but optimize.
• The poor quality removal costs benefit none , so try to
eliminate them by strengthening the good quality
measures if poor quality removal becomes essential
execute them in an efficient way.

PGL-INTERNAL TRAINING MATERIAL 28

 COST OF QUALITY
How to make quality is free
Many think that quality costs money and adversely
affects profits. But these costs are the costs of
doing it wrong first time .
Quality in the long run results in increased
profitability.
FOR EXAMPLE IF WE DESIGN THE PRODUCT RIGHT FIRST TIME,
BUILD IT RIGHT FIRST TIME - WE SAVE ALL THE COSTS OF
REDESIGN, REWORK, SCRAP, RESETTING, REPAIR, WARRANTY
WORK ETC.

Quality is Free
PGL-INTERNAL TRAINING MATERIAL 29
 COST OF QUALITY
Steps for quality improvement

•Quality Costing Approach

•Failure, appraisal and prevention approach.

•Process Cost Approach

•Collects data for a process rather than a product.
•Costs are divided into cost of conformity and cost of nonconformity.

•Quality Loss Approach

•Collects data on many of the “hidden” costs.

PGL-INTERNAL TRAINING MATERIAL 30

 Functional area
Controller COPQ
Software COPQ
Plant administration COPQ
Purchasing COPQ
Marketing COPQ
Personnel COPQ
Industrial engineering COPQ
COST OF QUALITY Controllable COPQ Resultant COPQ
Timecard reviews Billing errors
Capital equipment reviews Incorrect accounting entries
Invoicing reviews Payroll errors
Crashes
Design reviews
Deadlocks
Code reviews
Incorrect outputs
Disclosure of trade secrets
Security
Facilities redesign
Facility inspection and testing
Overstaffing/understaffing
Machine maintenance training
Equipment downtime/idle time
Vendor reviews
Line-down cost
Periodic vendor surveys
Excessive inventory due to suppliers
Follow-up on delivery dates
Premium freight cost
Strike built-in costs
Sales material review
Overstock
Marketing forecast
Loss of market share
Customer surveys
Incorrect order entry
Sales training
Prescreening applications
Absenteeism
Appraisal reviews
Turnover
Exit interviews
Grievances
Attendance tracking
Packaging evaluations OSHA fines
Layout reviews Shipping damage
OSHA reports PGL-INTERNAL TRAINING MATERIAL Redoing layout 31
Inspection of contract work Paying contractors for poor work
COST OF QUALITY

PGL-INTERNAL TRAINING MATERIAL 32