International Journal of Quality & Reliability Management

A cost of quality decision support model for lean manufacturing: activity-based costing
application
Amir H. Khataie, Akif A. Bulgak,
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Amir H. Khataie, Akif A. Bulgak, (2013) "A cost of quality decision support model for lean manufacturing:
activity‐based costing application", International Journal of Quality & Reliability Management, Vol. 30 Issue:
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QUALITY PAPER A COQ DSM

for lean
A cost of quality decision support manufacturing
model for lean manufacturing:
751
activity-based costing application
Received 19 January 2011
Amir H. Khataie and Akif A. Bulgak Revised 20 February 2013
Department of Mechanical and Industrial Engineering, Accepted 1 March 2013
Concordia University, Montreal, Canada
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Abstract
Purpose – The purpose of this article is to introduce a novel cost of quality (COQ) decision support
model (DSM), which can help management to track the effect of changing each incorporated value
added (VA) and non-value added (NVA) activity on each other’s cost as well as on the quality costs in
real time.
Design/methodology/approach – System dynamics (SD) is used as the modelling tool due to its
dynamic characteristic and its advantages; such as the possibility of integrating qualitative factors
and defining learning loops. In order to enhance the performance of the model, activity-based costing
(ABC) cost structure has been integrated.
Findings – Lean manufacturing (LM) focuses on the methodologies and approaches that can help an
enterprise to reduce the waste factors in its processes. Few studies have proven the capability of ABC
in providing valuable cost information for LM implementation due to its activity-oriented nature. This
study is another step towards showing the advantages of ABC in controlling the COQ via using a
novel SD modelling methodology.
Originality/value – The model can guide management to establish an LM-oriented quality policy
and control the incorporated costs effectively.
Keywords Lean manufacturing, Activity-based costing, Cost of quality, System dynamics,
Decision support model, Lean production, Activity based costs
Paper type Research paper

1. Introduction
Lean manufacturing (LM) can be defined as a management philosophy combined with
a set of processes and methodologies which can eradicate and minimize the waste from
the production processes. At the beginning of the twenty-first century the critical
success factors in any businesses environment are identifying the activities which do
not create value and removing them from the process of manufacturing or providing
service. In fact, LM implementation integrates the customer desires and needs into the
core of the business. Lean has a confirmed positive effect on all the aspects of
production costs, including the quality costs.
Cost of quality (COQ) is defined as the expenditure incurred by the producer, by the
user and by the community, associated with the quality of a product or a service International Journal of Quality &
(British Standard Institute (BSI), 1991). According to the BSI definition, the related Reliability Management
Vol. 30 No. 7, 2013
pp. 751-764
q Emerald Group Publishing Limited
This research has been supported in part by the Natural Sciences and Engineering Research 0265-671X
Council of Canada (NSERC). DOI 10.1108/IJQRM-Jan-2011-0016
 IJQRM quality costs are the expenditures incurred in defect prevention activities, appraisal
30,7 activities, and losses and activities due to internal and external failures. Strategically,
LM philosophy maintains the idea of continuous improvement as the main quality
improvement strategy. The significant issues are:
. How it should be implemented at an operational level?
.
How we can identify the cost effect of each value added (VA) and non-value
752 added (NVA) quality improvement activities?
.
How we can measure the effect of the improvements applied into the process?

The difficulty of defining a quality cost system is explained by Roden and Dale (2001).
There are different approaches which can be used in identifying and measuring the
costs involved in the quality process. Johnson (1995) emphasizes on the importance of
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COQ estimation. Inaccurate cost estimation can result in establishing inappropriate

quality programs. On the other hand, correct COQ information can be used to identify
corrective actions, to present solid information in dollar value to management, and to
evaluate the success of the quality program.
The review study presented by Schiffauerova and Thomson (2006) categorizes
the quality cost estimation methodologies based on the different cost accounting
information systems. According to their survey the most common methodology
applied is the classic prevention-appraisal-failure (PAF) systems. The main issue is to
identify which cost accounting information system should be used as a background of
the COQ system. In a wider scope, it is vital to have a cost accounting information
system that can effectively support the LM needs.
The traditional cost accounting (TCA) is a transaction-oriented approach, but a LM
process requires an activity-oriented cost information. Some studies have discussed the
concept of lean accounting by emphasizing on the importance of adjusting the cost
accounting and management systems in a way to support LM policy effectively,
e.g. Toomey (1994), Kennedy and Huntzinger (2005) and Wang and Yuan (2009). Ittner
(1999) linked the difficulty of not identifying an appropriate quality improvement
strategy with the lack of adequate techniques to determine the financial consequence of
poor quality performance. He suggested activity-based costing (ABC) as a powerful
means for quantifying the financial impact of poor quality performance.
ABC is a relatively new managerial and cost accounting approach that was
originally introduced by Copper and Kaplan in 1988. ABC estimates the
product/service costs by assigning the cost to the activities involved in the creation
process. Activity can be defined as any discrete task that should be taken to create any
product/service. Each activity’s cost is measured by a cost driver which is a factor that
causes an activity’s cost.
Cooper and Kaplan (1991) proposed a cost hierarchy for the overhead costs involved
in the manufacturing process. According to their approach, the overhead costs are
distributed among unit, batch, product, and facility-level homogenous cost pools. The
four different cost pools are defined as follows:
(1) Unit-level activities (e.g. machining time, direct labor) costs that vary directly
with the number of units produced.
(2) Batch-level activities (e.g. material handling, setup) costs which are invoked
whenever a batch is processed.
 (3) Product-level activities (e.g. process engineering, design) costs which come into A COQ DSM
play whenever a particular product is produced. for lean
(4) Facility-level sustaining activities costs (e.g. rent, maintenance, and facility manufacturing
management).

This approach enhances the level of understanding about the overhead costs behavior.
This also helps ABC to be used as a powerful supporting tool for LM because of its 753
activity-oriented nature which distinguishes and evaluates the VA and NVA cost of
activities. However, most of the presented COQ models have been developed based on
the TCA system (Schiffauerova and Thomson, 2006).
Tsai (1998) stated that TCA does not provide the COQ information that is needed for
cost accounting. This is because of TCA’s is based on categorizing expenses, instead of
activities. Therefore, he adopted ABC homogenous cost structure presented by Cooper
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and Kaplan into the COQ estimation process. Traditionally ABC categorizes the
quality costs according to the famous PAF approach into four different homogenous
costs pools; prevention, appraisal, internal failure, and external failure. He splits the
PAF homogenous cost pools into different activities such as machining rework,
warranty repairs, and inspection. This approach has the advantage of estimating the
COQ more precisely by using more detailed and activity-oriented cost structure. It also
facilitates the LM policy implementation because it allows the possibility of
distinguishing the VA from the NVA activities’ cost involved in the quality process.
The purpose of this study is developing a simulation-based; system dynamics (SD),
decision support model (DSM) to assist management to control the COQ. The applied
activity-oriented modeling approach distinguishes between VA activities and NVA
activities. The model works as a tool to track the effect of the changes of COQ
elements (e.g. prevention cost, failure cost) on the other quality costs and on the
manufacturing-related activity costs elements at the end of each period of time.
The remainder of this article is organized as follows: the generic SD modeling
approach is discussed in Section 2. Subsequently, Section 3 incorporates a specific
illustrative example to validate the model and to show its advantages. The paper
conclusion and the possible model improvements and future works are discussed in the
last section.

2. Modeling approach
SD has been used as a modeling tool. The SD fundamental idea is to use the power of
simulation to foresee and examine how systems respond dynamically to the changes.
SD has the ability to update the system variables after each simulation run. Thus, the
next run occurring in the system will be based on the updated variables. Based on the
study presented by Tako and Robinson (2009), the differences between SD and discrete
event simulation (DES) are the following.
The discrete event simulation approach has the following characteristics:
.
Specific entities are assigned to each simulation run and can be tracked to
determine what happens to them throughout the simulation.
.
The system state changes occur at discrete units of time.
.
The models are stochastic in nature, incorporating randomness by using
statistical distributions.
 IJQRM .
The model structure consists of a network of queues and activities.
30,7 .
Mostly applied for tactical level problems.

In contrast, SD characteristics are:

.
Specific entities cannot be followed throughout the system.
754
.
The system state and variables can change continuously at small segments of
time.
.
The models are generally deterministic (stochastic features rarely used) and
variables usually represent average values.
.
The model structure consists of a system of stocks and flows.
.
Useful for strategic level problems.
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SD has been applied to a variety of problems. Sterman (2000) presented different

successful applications of SD in automobile leasing, order management, project
management, and health industry. SD has also been applied to COQ problems. Burgess
(1996) developed a SD model to evaluate the quality strategy at a production unit with
a single process where defective and non-defective products are produced. He indicated
that if the time horizon is infinite, or above a particular cut off value, spending on
quality prevention is always justifiable. Kiani et al. (2009) used SD to evaluate the effect
of PAF cost factors on each other and on total COQ. The results show that increasing
both prevention and appraisal costs simultaneously has a stronger effect on decreasing
the failure costs and total COQ.
Although the discussed literature have demonstrated some significant findings on
the usage of SD in controlling COQ, applying a generic PAF cost structure diminishes
the validity of the results. This study applies COQ structure, as indicated in Tsai
(1998), and SD as a modeling tool to develop a novel LM-oriented DSM that controls the
quality costs. The model developed can help management to establish the quality
control policy which minimizes the COQ based on the updated costs. It also helps to
distinguish and control the NVA quality activities’ cost. Subsequently, a causal loop
diagram (CLD) is presented in this section as a first model development step in SD.
A CLD consists of variables by arrows denoting the causal influences among the
variables (Sterman, 2000). In fact, CLD represents the model general structure and
identifies the main feedback loops and variables relations. CLD can also be used as a
guideline for model improvement and modification process. For the COQ problem,
CLD is represented in two distinct parts. The first part shows the effect of each COQ
element on the other costs, as well as other quality costs. The cost elements have been
given from Tsai (1998). The second part shows how the products share the activity
resources and how the model updates the activity pool rates costs after each run. The
activity-based CLD for COQ analysis is shown in Figure 1.
According to the first part of CLD, the model can estimate the relevant quality cost
and other production costs of each appointed quality policy. The “number of tests”
variable represents the effect of chosen quality policy. The model incorporates four
different types of quality costs:
(1) rework cost;
(2) maintenance cost;
 number of units A COQ DSM
+ direct material cost
machining cost for lean
+
+ machine hours manufacturing
scheduling cost + rework cost
package cost + of quality
+ + cost
+ + +
+
number of batches
755
material handling + rework machine
cost hours
+ + +
+ maintenance cost
+ number of reworks +
number of moves +
warranty repair
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set-up cost machine hours

+ inspection cost
+ + +
warranty repair
number of set-ups
+ – + cost
number of Figure 1.
warranty repairs CLD – detailed
+
of cost elements
number of tests

(3) inspection cost; and

(4) warranty repair cost.

The model also includes some other costs such as, scheduling cost, material handling
cost, and set-up cost which could be changed because of changes in the COQ
components. For example, having more reworks or warranty repairs will increase the
complexity of the scheduling process and increase the number of set-ups and moves;
hence, the scheduling, set-up, and material handling costs increase, respectively.
Therefore, the changes in COQ elements may add to the other company’s production
relevant expenses. Other production-related costs such as direct material and
packaging costs are also incorporated into the model.
The part two of the CLD, Figure 2, shows the relevant causal relations which
have the responsibility of updating the pool rates. According to the defined loops
“product A – activity cost rate ! total activity cost ! activity pool rate” and
“product B – activity cost rate ! total activity cost ! activity pool rate” the pool
rates are updated after each simulation run by applying the ABC cost estimation
approach.
In order to adjust the pool rates, the activity pool rate at the end of each period is
equal to total activity cost until that period, divided by the total activity consumption
of that period. The total activity consumption is equal to the summation of that activity
consumption from different products. Likewise, the total activity cost is equal to the
summation of activity cost of different products. The cost of each specific activity for
each product is equal to the multiplication of the activity pool rate and the activity cost
driver consumption ratio. The CLD also shows how the model can estimate the
consumption ratio of each product from each activity.
 IJQRM product A-activity
+ product A-activity
30,7 cost rate
consumption ratio
+

756 + activity pool rate +

+ –
total activity cost total activity
consumption
+
+
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+
Figure 2. product B-activity
CLD – updating pool rates product B-activity + consumption ratio
cost rate

3. Illustrative example
The main purpose of the DSM presented is to monitor and evaluate the cost of appointed
quality policy approach in a 12-month period. The quality policy is integrated into the
model through “inspection policy” variables. The inspection policy can be assigned
based on the management preference and the company’s quality policy for each type of
product separately. Generally, more tests results in higher prevention costs and lower
failure costs. In order to validate the presented approach, an illustrative example is
borrowed from Tsai (1998).
According to the case study, the company manufactures two types of product,
A and B models. The goal is to find the best quality policy which minimizes the COQ
and other production relevant NVA activity costs. ABC has been used to estimate the
product manufacturing costs. The production cost is equal to the summation of all the
activity costs, VA and NVA, and direct materials cost. The direct materials cost
per unit for product type A and type B is $9.50 and $7.50, respectively. The cost of each
activity, including quality-related activities, are assigned to each type of product
manufactured based on nine different activity cost pools named, machining (VA),
package (VA), maintenance (VA/COQ), inspection (NVA/COQ), rework (NVA/COQ),
warranty repair (NVA/COQ), set-up (NVA), material handling (NVA), and scheduling
(Gray). The Gray activities are those activities which could be considered among either
group of VA or NVA activities. The initial activity pool rates and relevant cost drivers
are presented in Table I.
Integrating ABC cost structure adds the possibility of distinguishing between VA
and NVA activities to the model. Hence, the model is able to find the best quality policy
that minimizes the relevant production and quality costs as well as maximizes the ratio
of VA activities cost over production costs. Using SD as a modeling tool gives the
possibility of adjusting the activity pool rates after each period of time. Thus, under the
applied dynamic cost monitoring and estimation approach each period activity costs
are estimated more precisely. The SD model developed in this study is presented in
four parts. We used similar legends discussed in Sterman (2000) for modeling
purposes, Figure 3.
 A COQ DSM
Activity cost pool Activity cost driver Initial activity cost pool rate ($/activity cost driver)
for lean
Machining Machine hours 29.06 ($/machine hours) manufacturing
Package No. of units 240 ($/no. of units)
Maintenance Machine hours 2.4 ($/machine hours)
Inspection No. of tests 2.6 ($/no. of tests)
Rework No. of reworks 14.72 ($/no. of reworks) 757
Warranty repair No. of warranty repairs 100 ($/no. of warranty repairs)
Set-up No. of set-ups 240 ($/no. of set-ups) Table I.
Material handling No. of moves 42 ($/no. of moves) Applied ABC cost
Scheduling No. of batches 8 ($/no. of batches) structure
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Stock
Inflow Outflow

Figure 3.
SD model diagramming
notation
auxiliary variable

The SD model structure, normally, contains three groups of variables:

(1) level variables;
(2) rate variables; and
(3) auxiliary variables.

The “in” and “out” flows link the variables. The level or stock variables are symbolized
by a rectangle. This type of variables corresponds to the status of under examined
elements, in this study they refer to the amount of product or money, in the system at
any period of time. A combination of all the integrated level variables status at a
particular time defines the system status at that time.
The other group of variables is called rate variables, shown like valve shape in
Figure 3. The rate variables control the pace of change, outflow and inflow, for the level
variables. In fact, they define how the level variables would be changed. The other
group is the auxiliary variables, which are indicated in the model by clear boxes. The
existence of these variables makes the model easy to understand.
The source and sink nodes, represented by clouds, are showing flows to/from the
external boundary of the model. In fact, these variables are defining the boundary of
the model. The other variables are called shadow variables. The shadow variables
denoted in between single left and right-pointing angle quotes. These variables are
representing the links between different parts of the model.
The models are coded in VENSIM software environment. VENSIM is one of the
most powerful and comprehensive SD simulation software that has the function to
perform optimization and Monte-Carlo simulation. Each simulation run has been made
in a couple of seconds on a 3.00 GHz Pentium-4 processor with 1 GB of RAM.
The DSM is developed in four parts linked to each other with the shadow variables.
The first part, Figure 4, is estimating the manufacturing costs of product type A.
 IJQRM <machining activity
Product A-
Machining Cost
Product A-
30,7 pool rate>
product A-direct
Machining Cost Rate product A-machine
material cost per unit hours per unit
product A-
Product A-
machine hours
Product A-Direct Maintenance Cost
Product A-
Material Cost Product A-Direct product A-rework Maintenance Cost Rate
Material Cost Rate machine hours <maintenance
product A - average activity pool rate>
758 <package activity
pool rate>
machine hours per rework
product A-internal
product A-average machine
hours per warranty repair
failure rate product A-warranty
Product A- repair machine hours Product A-
Package Cost product A-number Rework Cost
Product A-
of reworks Product A-Rework
Package Cost Rate <rework activity
Cost Rate
product A- product A- pool rate>
Product A-Total number of tests product A-required
inspection policy
Number of Units number of tests per unit
Product A-
Production Rate Product A-
Inspection Cost
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Product A- Product A-
product A-
Scheduling Cost Product A- Inspection Cost Rate
warranty repair rate <inspection activity
Scheduling Cost Rate
pool rate>
<scheduling activity product A-number of product A-number of
number of batches
pool rate> product A-number warranty repairs reworks per unit
per rework
of batches
product A-number Product A-Warranty
number of batches per
of moves Product z-Warranty Repair Cost
product A-number of warranty repair
moves per batch product A- Repair Cost Rate
batch size product A-number product A-number of <warranty repair
of setups setups per batch activity pool rate>
Figure 4. Product A-Material
Handling Cost Product A-Material Product A-Setup
Product type A Handling Cost Rate <material handling Product A-Setup
Cost

cost estimation activity pool rate> Cost Rate

<setup activity
pool rate>

As it was mentioned before, the manufacturing cost is equal to the summation of nine
different cost pools and direct material costs. The cumulative amount of each
manufacturing cost components at the end of a particular period is estimated through a
stock variable, symbolized by a rectangle. Each manufacturing cost stock variables are
being adjusted by the relevant cost rates. The cost rates could be a function of the
production rate, failure rate, and/or inspection rate. The total production amount can
be tracked through the stock variable of “total number of units”.
The second part of the model, Figure 5, is responsible for estimating the
manufacturing cost components for the product type B, which is structured similar to the
first part of the model. Tsai (1998) assumed the average failure rate of 0.19 and 0.09 for
the products types A and B, respectively. In this study it is assumed that the internal
failure rates are randomly generated based on the normal distributions of N(0.09, 0.025)
and N(0.19, 0.025) for product type A and B, respectively. A similar approach has been
used of the warranty repair rates. Accordingly, the warranty repair rate for product type
A is randomly generated based on the normal distribution of N(0.09, 0.025) and for
product type B is based on N(0.03, 0.025). All the other required operations parameters,
discussed in the first and second parts of SD model are displayed in Table II.
The third part of the model is responsible for adjusting the pool rates. As it was
mentioned in the previous section, the model is able to correct the pool rates after each
simulation run. Hence, the new cost estimation factors will always be adjusted based on
the system understanding and learning from these costs in the previous runs (periods).
For instance, the summations of “product A number setups” and “product B number
of set-ups” give the total number of setups. On the other hand the relevant set-up costs are
estimated based on the number of set-ups. According to the ABC accounting approach,
the pool rate is equal to the total activity costs divided by the total activity consumption.
 <machining activity
pool rate> Product B- A COQ DSM
Machining Cost

product B-direct
Product B-
Machining Cost Rate
<maintenance
product B-machine activity pool rate>
for lean
material cost per unit
product B-
hours per unit manufacturing
Product B-Direct machine hours Product B-
Material Cost Product B-Direct Maintenance Cost
product B-rework Product B-
Material Cost Rate machine hours Maintenance Cost Rate
<package activity product B-average machine
pool rate> product B-
internal failure rate
product B-average
machine hours per rework
product B-warranty
hours per warranty repair 759
Product B-
Package Cost repair machine hours
Product B- Product B-
Package Cost Rate product B-number Rework Cost
of reworks Product B-Rework
Cost Rate <rework activity
product B- product B-
Product B-Total inspection policy pool rate>
number of tests product B-required
Number of Units
Product B- number of test per unit
Production Rate
Product B- Product B-
Inspection Cost
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Scheduling Cost Product B- Product B-

<scheduling activity Scheduling Cost Rate Inspection Cost Rate
pool rate> product B- <inspection activity
<number of batches warranty repair rate product B-number of <warranty repair pool rate>
per rework> warranty repairs activity pool rate>
product B- product B-number
batch size of batches Product B-Warranty
product B-number of
reworks per unit Product B-Warranty Repair Cost
product B number of product B-number
moves per batch of moves product B-number product B-number of Repair Cost Rate
<number of batches per of setups setups per batch
warranty repair>
Product B-Material Product B-Setup Figure 5.
Handling Cost Product B-Material
Handling Cost Rate
Product B-Setup Cost Product type B
Cost Rate
<material handling
<setup activity cost estimation
activity pool rate>
pool rate>

Product A Product B

Production rate (unit/month) 225 350

Batch size 13 44
Machine hours per unit 0.55 0.28
Number of set-ups per batch 0.33 0.25
Average machine hours per warranty repair 18.78 11.27 Table II.
Average machine hours per rework 20.08 14.94 Operational parameters
Required number of tests per unit 2 1 for each type of products

Relatively, the set-up activity pool rate in each period is equal to the total setup cost
divided by the total number of setups in the previous periods.
Part 4 of the model, Figure 7, incorporates the applied financial performance
indicators such as, total production cost, ratio of VA activities cost to product cost, and
VA and NVA-related quality activities costs. The DSM objective is to find the best
quality policy considering the ratio of VA activities cost to the total production cost, as
a lean process performance indicator, and the other relevant factors such as number of
warranty repairs to indicate customer satisfaction level. As mentioned before, the most
suitable quality policy is presented in the model with the “inspection policy” variables
indicated in Figures 4-7.
In order to find the best inspection policy, the VENSIM optimization tool is used.
The DSM can set the inspection policy according to the different objective functions
and constraints. In order to analyze the impact the following two scenarios are
implemented.
 IJQRM <Product B-
inspection activity
pool rate
total inspection
cost
<Product A-
Inspection Cost>
Total Manufacturing <product A-
30,7 Manufacturing Machine
Hours-Consumption Ratio
Machine Hours Machining Cost> number of tests>
Total Number of Tests <Product B-
Number of Tests- Inspection Cost>
total machining
<product B- Consumption Ratio
machining activity cost
<product A- pool rate number of tests> <product A-number of
warranty repairs> <Product B
machine hours> <product B- <Product B- <Product A- -Warranty Repair
<product A-warranty machine hours> Maintenance Cost>Machining Cost> Total Number of Warranty Cost>
repair machine hours> Repairs
Number of Warranty
760 Total Machine Hours-
Total Machine Hours
total maintenance <product B-number of
Repairs-Consumption
Ratio
warranty repair
total warranty
repair cost <Product A
-Warranty Repair
Consumption Ratio warranty repairs>
cost activity pool rate Cost>
<product B-warranty
repair machine hours> <product A-
<product B-rework number of setups> <Product A-
maintenance activity <Product A- Setup Cost>
<product A-rework machine hours> pool rate Total Number of
machine hours> Maintenance Cost> <Product B-
<Product B- Number of Setups- Setups
Rework Cost> <Product A- <product B- Consumption Ratio Setup Cost>
<product A-number
of reworks> Rework Cost> number of setups>
Total Number of setup activity total setup cost
Reworks total rework cost <product B- pool rate
Number of Reworks- <Product A-Material
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Consumption Ratio number of moves> Handling Cost>

<product B-number rework activity Total Number of
<Product A- Moves
of reworks> Scheduling Cost> pool rate Number of Moves- <Product B-Material
Consumption Ratio Handling Cost>
<Product B- <product A-
Scheduling Cost> total scheduling total material
<product A-number number of moves> material handling handling cost
Figure 6. of batches>
Total Number of
cost
<Product A-Total
activity pool rate
total number of <Product A-
Activity pool rates <product B-number Number of Batches-
Batches
scheduling activity
Number of Units> units total package cost Package Cost>
of batches> Consumption Ratio
adjustment pool rate
<Product B-Total package activity
<Product B-
Number of Units> Package Cost>
pool rate

Scenario 1
In the first step, the model looks for the best inspection policy which maximizes the two
lean performance indicators of “product A – value added cost/product cost” and
“product B – value added cost/product cost”. The ratio indicates the company success
in lean strategy implementation. It is assumed that there is no constraint regarding the
financial resource availability. The DSM proposes zero level inspection policy for both
products. Relatively, the total quality costs of $42,514.00 and $37,505.00 will be
incurred in a 12-month-production period for products A and B, respectively.

Scenario 2
In the second scenario, the customer satisfaction level is considered as an additional factor
for establishing the inspection policy. Thus, the inspection level is selected based on
maximizing the ratio of value added cost to product cost and minimizing the number of
warranty repairs simultaneously. The number of warranty repairs represents the customer
satisfaction level. Both, maximizing the lean performance indicator and minimizing the
number of warranty repairs, are equally important for the company. Therefore, the
preference coefficients are equal to 1. Similar to the previous scenario there is no limitation
on the financial resources availability. Opposite to the previous case; the DSM sets the
inspection policy of 100 percent for both products. As a result the total quality costs of
$82,926.00 and $65,020.00 will be incurred in 12-month period for product A and product B,
respectively. Table III is presenting a quick comparison between the two scenarios.
The model appoints zero and 100 percent inspection policy based on the lean indicator
and customer satisfaction level, respectively. This supports the idea of Deming who also
recommended the use of either zero or 100 percent inspection policy (Burgess, 1996). The
100 percent inspection policy will increase the COQ but it will yield to better customer
satisfaction as a result of less number of external failures. The model estimates that the
total number of warranty repairs with zero level inspection policy will be 273 and
278 units for product A and B. These amounts will be decreased to 218 and 252 for the
 <Product A-
Setup Cost>
A COQ DSM
<Product A-Material
<Product A-Direct
Material Cost>
<Product A-
Scheduling Cost> product A-cost of
Handling Cost> for lean
non-value added activities manufacturing
product A-total <Product A-Total
product cost Number of Units>
product A-value added <Product A-
cost/production cost
product A-product <Product A-
<Product A- Warranty Repair
Cost>
761
Inspection Cost>
cost per unit Rework Cost>

product A-cost of
product A-cost of
quality per unit
value added activities

total production product A-cost of

cost <Product A- quality
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Maintenance Cost>
<Product A- <Product A-
Package Cost> Machining Cost>

<Product B-
<Product B- <Product B-Material
Scheduling Cost>
Setup Cost> Handling Cost>

<Product B-Direct
Material Cost> product B-total product B-cost of
product cost non-value added
activities
<Product B-Total
Number of Units>
<Product B
product B-product
product B-value added <Product B- -Warranty Repair
cost per unit <Product B-
cost/product cost Rework Cost> Cost>
Inspection Cost>
product B-cost of
product B-cost of quality per unit
value added activities
Figure 7.
<Product B- product B-cost of Financial performance
<Product B- quality
Package Cost> <Product B-
Maintenance Cost>
measurements
Machining Cost>

Importance of measurement
factors
Product value Number of Number of warranty COQ of each
added cost/ warranty Inspection repairs product ($)
product cost repairs level (%) A B A B

Lean
oriented 1 N/A 0 273 278 42,514.00 37,505.00
Customer Table III.
oriented 1 1 100 218 252 82,926.00 65,020.00 Scenario comparison

100 percent level inspection policy. The question is if the company should try to increase
the lean performance indicator or try to minimize its external failure costs, although the
latter option involves increasing the cost of NVA activities.
As a solution to this question, the DSM can verify the correlation between the
inspection policy and the lean performance indicator. The VENSIM sensitive analysis
 IJQRM tool is used in order to evaluate the effect of the selected quality policy variation
30,7 on the ratio of “value added cost/product cost” for each product. The inspection
percentages are generated randomly following the standard normal distribution, N (0, 1),
with a maximum of 1 and a minimum of 0 for both products. In order to insure that all
the inspection percentage values are generated, 10,000 simulation runs were produced.
The sensitivity graphs of the lean policy indicators for product A and B are shown
762 in Figure 8 and 9, respectively. The close-up of the graphs is made to illustrate the
variability that exists within the results. Accordingly, the results indicate that there is
a low level of correlation between the selected inspection policy and the indicators.
Therefore, the 100 percent inspection policy should be appointed; although applying it
requires an increase in the NVA activities costs, this increase does not significantly
affect unfavorably the success of LM strategy.
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4. Conclusion
This study introduced a new decision support modeling approach for evaluating the
COQ of an appointed quality control strategy using SD. The model builds on the ABC
0.8923
"product A-value added

0.8698
cost/product cost"

0.8473

0.8248

Figure 8.
Product A lean strategy 0.8023
0 3 6 9 12
performance indicator
variation Time (Month)

0.928
"product B-value added

0.906
cost/product cost"

0.884

0.862

Figure 9.
Product B lean strategy 0.84
0 3 6 9 12
performance indicator
variation Time (Month)
 advantages as a precise accounting and cost measurement approach. Integrating ABC A COQ DSM
cost structure into the DSM enhances the model sensitivity to the cost changes and for lean
improves the accuracy of the decision. The presented approach shows how ABC
creates harmony in the information between the financial and operational variables manufacturing
during the decision-making processes. This fact has been also highlighted at the study
of Manalo and Manalo (2010).
ABC, as a relatively new cost accounting approach, can provide useful information to 763
distinguish the value added from non-value added activities costs. This introduces ABC as
a lean accounting approach that can help to analyze each process from LM perspective.
The numerical result exemplifies the ability of the DSM developed as a supporting tool for
the LM policy implementation by choosing the correct quality inspection policy,
considering the LM performance indicator and customer satisfaction level.
The result generated by the SD model indicated the quality control strategy of
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100 percent inspection level if considering the customer satisfaction as a

decision-making criteria, and 0 percent inspection level when customer satisfaction
is not the only core decision criteria. In the next step, the sensitivity analysis on the
variation of lean performance indicator demonstrated the fact that there is a low
correlation between the application of a more rigid prevention quality policy and LM
strategy implementation performance. The low correlation can justify appointing the
100 percent inspection quality strategy although it has a negative impact on the LM
performance indicator, VA activity cost to product cost. We should also take note that
the model did not consider any financial or operational constraints.
Moreover, one possibility of future research is incorporating relevant operational
and financial constraints into the model. For instance, the model can analyze a scenario
where limited financial resources are available for implementing an advanced quality
policy. Incorporating the operational resource capacity constraints into the model can
make it more realistic and will add the possibility of integrating the idle capacity costs
into the model. Ramudhin et al. (2008) integrated the COQ into mathematical modeling
of a supply network with the purpose of reducing the likelihood of defects; hence it
decreases the possibility of additional cost which might had occurred because of taking
corrective actions at the supply chain level. Hence, the model can be expanded to
supply chain management level by integrating the COQ of processes that are controlled
by the other supply chain members.

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About the authors

Dr Amir H. Khataie obtained his B.Sc. degree in Industrial Engineering in 2005 from Amir Kabir
University of Technology (Tehran Polytechnic). Consequently, he received his M.Eng. degree
in Engineering Management from the University of Ottawa in August 2007 and PhD from
Concordia University in April 2011 with the speciality in supply chain performance
management. Currently he is working at Canada Post Corporation in the department of
Logistics and Network Design. Amir H. Khataie’s research preferences are within hybrid hard
and soft OR modeling approach and its application in supply chain management and business
performance management.
Dr Akif A. Bulgak is a Professor at the Department of Mechanical and Industrial Engineering at
Concordia University and a Professional Engineer (P.Eng.). He obtained his B.Sc. degree from
Istanbul Technical University and his MSc and PhD degrees from the University of
Wisconsin-Madison, USA, all in industrial engineering. Dr Bulgak has 25 years of experience in
the field and his expertise include process modelling, analysis, and improvement of
manufacturing/service systems, performance optimization, quality and productivity improvement,
lean and Six Sigma, simulation and mathematical programming. Dr Bulgak has taught numerous
courses and published a large number of scientific articles in the aforementioned areas. Akif A. Bulgak
is the corresponding author and can be contacted at: bulgak@encs.concordia.ca

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