The Impact of Costs of Quality: A Simulation Approach
Mohamed K. Omar1, H. K. Sim2, Sharmeeni Murugan1and M. R. Muhamad1
1
Faculty of Manufacturing Engineering, Technical University Malaysia (UTeM), Melaka, Malaysia
2
Faculty of Engineering & Technology, Multimedia University (MMU), Melaka, Malaysia
(mkhaled@utem.edu.my, hksim@mmu.edu.my, mohdrazali@utem.edu.my)
Abstract - In this research an analytical model developed by
Son and Hsu to compute the cost of quality was improved to
include the acceptance sampling costs associated with
inspection of incoming materials. The modified model was
then used to carry out comprehensive simulation work that
investigated a set of quality control strategies practiced by
the manufacturing community. The results indicate that
measuring and understanding cost of quality is very
important. Moreover, the results show that some of the
quality control strategies have a significant impact on cost of
quality.
Keywords – Cost of quality, simulation, quality control
strategies decisions
I. INTRODUCTION
Product quality is one of the important and critical
factors for achieving competitiveness. But quality comes
with cost, and this leads to the fact that measuring and
reporting cost of quality is very important. One must
stress the fact that the objective of understanding and
measuring cost of quality is not just to reduce the costs,
but to ensure that the costs associated with quality are the
right kind of costs that maximizes benefits. In the
literature, one can classifies costs of quality models into
four groups of generic models. These are: P-A-F model,
opportunity cost models, process cost models and ABC
(activity based costing) models. Feighenbaum [1]
categorized operating quality costs into two major
components: cost of control and cost of failure of control.
Cost of control includes appraisal and preventive costs
and cost of failure includes internal and external costs.
Chavez and Beruvides [2] incorporate opportunity loss
into traditional P-A-F quality expenses. According to
them, opportunity losses are: underutilization of installed
capacity, inadequate material handling and poor delivery
of service. They express costs of quality as revenue lost
and profit not earned. The process costs model developed
by Ross [3] and first used for quality cost by Marsh [4]. It
focuses on process rather than products or service and it
defines process cost as the total cots of conformance and
non-conformance for a particular process. The active-
based costing (ABC) was developed by Cooper and
Kaplan [5].Under this approach, accurate costs for various
costs objects are achieved by tracing resource costs to
their respective activities and the cost of activities to cost
objects. This paper takes a special interest in the cost
978-1-4244-4870-8/09/$26.00 ©2009 IEEE
model and the process described by Son and Hsu [6].
Their model was modified and a simulation model was
developed as detailed in the next sections of this paper.
II. THE QUALITY COST MODEL
In this section, we briefly explain the model developed by
Son and Hsu [6] and the way that it was modified to be
suitable for this research work.
A. Notations
t sampling interval
n sample size per sampling
 average number of assignable cause per hour
d1 mean time spent to identify an assignable cause
d2 mean time spent to correct an assignable cause
g time required to sample a product
to time inspection of the acceptance sampling
cas cost of investigating acceptance sampling
 probability of process in control state 2
 Probability of process in control state 2
 time taken for assignable cause to occurs
T1 in control period
T2 time period until the assignable is detected for the
first time
T3 time required to investigate the true alarm
T4 time to correct the assignable cause
A Description of the model
Son and Hsu [6] considered a small manufacturing
system which consists of a machining area (sampling
inspection) and a final inspection area (100%
inspection).However; they assume that 100% inspection
is not always possible. They explained that a complete
check of a component part may require the part removal
from the fixture; the removal makes it difficult to realign
the part to its original position. Therefore, they assume
that sampling inspection is assumed for component parts
(in-process inspection), and 100% inspection for finished
parts (final inspection). In their modeling, first they
calculate the cycle time, and then quality cost (prevention
and failure) per cost was determined. In the next section,
equations for all components are stated, obviously,
readers interested in the detail steps of deriving these
equations should referred to the original article.
B Cycle Time Calculations
The assignable cause occurs according to the Poisson
process with mean rate . The period of the process is in
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control is represented by T1. T1 follows an exponential
distribution with mean 1/
The expected length of a cycle;
E(Tc) = E(T1) + E(T2) + E(T3) + E(T4) (1)
Which can be obtained using equation 2
= 1/ + (t + t/(1-)-) + (gn + d1) + d2 (2)
C Prevention Cost per Cycle
There are three types of prevention costs that occurs
at the machining area during a cycle of time. The first cost
is associated with inspection works and denoted as (Cp1),
the second cost is representing the cost of investigating
the false alarms (Cp2), and the third cost is associated with
adjusting the assignable cause (Cp3). Then, the expected
prevention cost per cycle (Cp) can be determined by
summing up these three components as in equation 3.
E(Cp) = E(Cp1) +E(Cp2) + E(Cp3) (3)
D Failure Cost per Cycle
The failure cost has three components; the first
component is the cost of rework per cycle (Cf1), the
second component is the scrap cost per cycle (Cf2) and the
third component is the external failure cost during a cycle
of time (Cf3). Then, the expected failure cost per cycle
(CF) can be determined by summing up these three
components as in equation 4.
E (CF) = E(Cf1) + E(Cf2) + E(Cf3) (4)
E Acceptance Sample Cost Per Cycle
Costs associated with sampling inspections prior
entering the manufacturing system are not considered in
the model developed by Son and Hsu [6]. Our idea
consists of the fact that companies often receive a
shipment of material from a supplier and need to ascertain
that the quality of the shipment. If it impractical to inspect
every item in the shipment, then a sampling plan is the (n,
c) is used. In this plan, n items are chosen (without
replacement) from a batch of shipped material. If c or
fewer of the sample items are defective, then the batch is
accepted; otherwise, the batch is rejected. Therefore, there
will be a cost incurred during inspection of the sample
before entering the manufacturing system. The expected
number of samples entering the manufacturing system is
n whereas to is representing the time taken to inspect the
sample. Let (CaS) be the cost of investigating acceptance
sampling during a cycle of time. Then the expected cost
associated with this activity is given by equation 5
E (CA) = Casnto (5)
Hence, the total cost of quality can be represented by
summing up all the cost components (1) through (5) and
is presented by equation 6.
E (CQ) = E(CP) + E(CF) + E(CA) (6)
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Where E(CP) is representing the prevention cost, E(CF) is
representing the failure costs and E(CA) is representing
the acceptance sampling costs.
III. TH PROBLEM AND SOLUTION
METHODOLOGY
Unlike the single stage problem considered by Son
and Hsu [6], we consider a manufacturing system that
consists of two stages. Moreover, rather than representing
the appraisal cost by a single component (in-process
inspection), we thought it is more appropriate to include
the incoming inspection (acceptance sampling plan)
which practiced by the manufacturing community. So the
problem can be described as: a manufacturing system that
consists of two stages, incoming raw materials inspection
carried out according to some quality plan and as a result
an element of appraisal cost in incurred prior to the
commencement of the production activity. Once orders
are realized by the company, raw materials are brought
into the shop floor and at this stage; preventive and failure
costs are incurred. In order to investigate the cost of
quality for this manufacturing system, we have adopted
the four strategies for inspection and removal of
defectives across a range of detection rates reported by
Gardner et.al [7]. The strategies are summarized
The strategies are summarized as:
1-Inspection and removal of defectives based on
acceptance sampling prior to assembly points.
2-Inspection and removal of defectives at completion of
finished product only.
3-Inspection and removal of defectives prior to assembly
points.
4-Inspection and removal of defectives following every
operation
Using the cost model developed earlier with its three
components, a simulation model was developed for the
two stage process. @Risk spreadsheet simulation software
package was used to develop the model and carryout all
the simulation works.
IV. EXPERIMENT DESIGN
In designing the experiments, we thought it would be
a good idea to consider inspection time as the main factor
for calculating cost of quality. In real-life manufacturing
systems, one of the most import factor that production
line managers pay attention to is the cycle time and many
times, quality control activity were sacrificed to keep a
desired cycle time. Therefore, we have decided to use
fraction detection rate to every operation in our
manufacturing system. The fractions of detection rate are
divided into five categories: 0.001, 0.005, 0.010 and
0.100. Every trail will run for 10000 times of simulation
runs, (see Table 1) Therefore, there will be twenty
combinations of strategies and detection rate. It is worth
 Proceedings of the 2009 IEEE IEEM

nothing that when designing the experiment for the
sampling acceptance, we have assumed that the company
would receives a batch of 10,000 items which require be
assembled using processes one and two. Moreover, we
have assumed that the company quality engineers have
developed a quality plan which is the (n, c) system. For
example, in process one, a sample of 90 items will be
inspected and the entire 10000 items will be rejected if 0,
1, 2, 3, 4, or 5 defective items are found in the sample,
otherwise, the batch is rejected. On the other hand, for
process 2, a sample of 40 items will be inspected and the
entire batch will be accepted if 0, 1, 2, or 3 defects are
found, otherwise, the batch will be rejected. Therefore,
the idea here is to set the Acceptable Quality level (AQL)
equal to 1% and the Lot Tolerance Percentage Defective
(LTPD) equal to 5% and then carry out the simulation
works to calculate the costs associated with quality when
a set of management strategies which were explained
earlier. Moreover, since verification of the simulation
model is an important issue that has to be done, we have
used the data provided by Son and Hsu [6] and run the
simulation model without the acceptance inspection cost
component and then compared the results provided by
Son and Hsu [6] analytical method and that obtained by
the simulation model. Both results exactly matched and
that indicates that the simulation model is free from any
illogical errors.
resulted from considering each of the four strategies and
treating process one and two independently from each
other.
The results in Table 2 reveal that adopting the
strategy that calls for carrying out quality works only at
the end of process (third row for process one and ninth
row for process 2) have produced the largest cost of
quality for each process when compared with other
quality strategies. This finding is expected since
undetected quality problems will increase the rework and
scraps which will cause the failure cost to increase.
Moreover, the results in table 2 indicate that the
inspection time has a significantly impact on cost of
quality for all of the four strategies considered. For
example, in the case of process one and when considering
the strategy to conduct quality control upon completion of
finished product, increasing the fraction detection rate
from 0.001 to 0.1 will reduce the cost of quality by about
26 times for process one and about 3.6 times for process
two. It is true to conclude that increasing the time window
for quality control activities will increase the cycle time, a
problem that many production line managers strive very
hard to avoid. However, the consequences of reducing
detection time have a significant impact of failure costs.
TABLE 2 Cost of Quality for process 1 and 2

TABLE 1 Experiment design for Simulation Run Cost of Quality for process 2
Inspection Fraction Detection Rate per Operation
Inspection and Fraction Detection per Operation and defective 0.001 0.005 0.01 0.05 0.1
defective removal 0.001 0.005 0.01 0.05 0.1 removal
strategies strategies
Acceptance sampling 10000 10000 10000 10000 10000 Acceptance
run run run run run sampling 1295.07 312.57 180.31 72.41 49.41
Completion of finish 10000 10000 10000 10000 10000 Completion 1298.23 313.25 180.66 72.49 49.42
product run run run run run of finish
Prior to assembly 10000 10000 10000 10000 10000 product
run run run run run Prior to 1072.03 265.28 159.31 65.60 49.33
Following every 10000 10000 10000 10000 10000 assembly
operation run run run run run Following 922.97 227.84 134.27 57.93 41.66
every
operation
Cost of Quality for process 2
V. RESULTS AND DISCUSSIONS Inspection Fraction Detection Rate per Operation
and defective 0.001 0.005 0.01 0.05 0.1
When considering the manufacturing system removal
described in this research, and since simulation as a tool strategies
Acceptance
allows the user to create different scenarios that can be sampling 3,550.00 1,824.78 1,471.26 1,151.72 974.50
used to investigate cost of quality, we thought it would be Completion 3558.95 1829.28 1474.85 1154.48 976.81
a good idea to create there simulation scenarios for the of finish
case considered here. The first scenario is to consider product
Prior to 3073.71 1577.40 1271.42 994.84 841.87
process one alone, the second scenario is to consider
assembly
process two and the third scenario is to consider the two Following 3062.25 1574.73 1269.92 994.40 841.60
processes combined. For each scenario, the four strategies every
were used to investigate the impact of each decision on operation
cost of quality. A two-fold rational for such thought: first,
more insights can be revealed and secondly, it allows the To provide a graphical illustration of the behavior of
user to check for model consistency. Model results cost of quality with the detection rates for processes 1 and
consistency is important factor in simulation works when 2, we have created figures 1 and 2 at the end of this paper.
the user lacks a real application to carryout model It is very clear from figures 1 and 2 that cost of quality is
validation activities. Table 2 shows the cost of quality that it its maximum value when the detection time is zero, and

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 Proceedings of the 2009 IEEE IEEM

then steadily decreased as the window for inspection
increases.
Considering simulation scenario three that calls for
combining the two processes provides a near situation to
what is happening in real-life industry. In this case, one
has to determine the possible quality strategies
combinations that could be considered for simulation
runs. If we let R be the possible strategies combination
outcome, then we would have:
Secondly, failure costs are very large and managers
should completely avoid these costs since there is no
tradeoff that exists with these costs. Another important
issue is the fact that using simulation to measure and
understand cost of quality will provide managers with
opportunity to rank their process in terms of cost of
quality and the cost consequences that resulted from
adopting a specific set of strategies .

R = Si, j (8)
VI. CONCLUSIONS
Where
i = A strategy in process 1 i = 1, 2, 3, 4
In this paper, an analytical model reported in the
j = A strategy in process 2 j = 1, 2, 3, 4
literature for cost of quality computations was
`
considered and modified to include an important
Table 3 shows all possible quality strategies
component of cost of quality. The model is then used to
combinations with their respective cost at each selected
develop a simulation model for a two-stage
fraction detection rate for each operation.
manufacturing system. Moreover, quality control
strategies common in the manufacturing community
TABLE 3 Total Cost of Quality for process 1
were used in the simulation works to investigate their
Inspection Fraction Detection Rate per Operation
impact on cost of quality. The results indicate that some
and 0.001 0.005 0.01 0.05 0.1
of these practiced strategies when combined with the
defective detection periods will significantly increase cost of
removal quality. Furthermore, the results indicate simulation
strategies
S1,1
works can be used to understand and measure cost of
4,845.07 2,137.34 1,651.57 1,224.13 1,023.91
S1,2
quality. An interesting venue for further research is to
4,854.02 2,141.85 1,655.16 1,226.89 1,026.21
S1,3
use simulation to investigate a real-industrial application
4,368.78 1,889.97 1,451.73 1,067.25 891.27
S1,4
to investigate the cost of quality; the authors are
4,357.32 1,887.30 1,450.23 1,066.82 891.01
S2,1 4,848.23 2,138.03 1,651.92 1,224.21 1,023.93
currently considering such idea.
S2,2 4,857.18 2,142.53 1,655.51 1,226.97 1,026.23
S2,3 4,371.95 1,890.65 1,452.08 1,067.32 891.30
S2,4 4,360.48 1,887.98 1,450.58 1,066.89 891.03 REFERENCES
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There are many important management implications
illustrated in all the examples presented in this paper.
First, quality costs are very large when quality activities
time window is sacrificed to reduce the total cycle time.

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Total cost of quality versus the detection rate per operation

$1,400,000.00
Total cost of quality

$1,200,000.00

$1,000,000.00
1. Acceptance sampling

$800,000.00 2. Completion of finished

product
$600,000.00 3. Prior to assembly

$400,000.00 4. Following every operation

$200,000.00

$0.00
0 0.05 0.1 0.15
Detection rate per operation

FIGURE 1 Cost of quality for process 1

Total cost of quality versus detection rate per

operation
$4,000,000.00

$3,500,000.00
Total cost of quality

$3,000,000.00
1. Acceptance sampling
$2,500,000.00
2. Completion of finished
product
$2,000,000.00
3. Prior to assembly
$1,500,000.00
4. Following every operation
$1,000,000.00

$500,000.00

$0.00
0 0.02 0.04 0.06 0.08 0.1 0.12
Detection rate per operation

FIGURE 2 Cost of quality for process 2

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