Cost Of Quality 2009

INTRODUCTION

“Quality Costs represent the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products, or defects in their manufacturers.” Improving quality is considered by many to be the best way to enhance customer satisfaction, to reduce manufacturing costs and to increase productivity. Any serious attempt to improve quality must take into account the costs associated with achieving quality, since nowadays it does not suffice to meet customer requirements, it must be done at the lowest possible cost as well. This can only happen by reducing the costs needed to achieve quality, and the reduction of these costs is only possible if they are identified and measured. The identification itself is not straightforward because there is no general agreement on a single broad definition of quality costs. However, CoQ is usually understood as the sum of conformance plus non-conformance costs, where cost of conformance is the price paid for prevention of poor quality (for example, inspection and quality appraisal) and cost of nonconformance is the cost of poor quality caused by product and service failure (for example, rework and returns). According to Dale and Plunkett (1995), it is now widely accepted that quality costs are the costs incurred in the design, implementation, operation and maintenance of a quality management system, the cost of resources committed to continuous improvement, the costs of system, product and service failures, and all
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Cost Of Quality 2009

other necessary costs and non-value added activities required to achieve a quality product or service. Measuring and reporting these costs should be considered a critical issue for any manager who aims to achieve competitiveness in today’s markets. CoQ analysis links improvement actions with associated costs and customer expectations, and this is seen as the coupling of reduced costs and increased benefits for quality improvement. Therefore, a realistic estimate of CoQ and improvement benefits, which is the tradeoff between the level of conformance and non-conformance costs, should be considered an essential element of any quality initiative, and thus, a crucial issue for any manager. A number of organizations are now seeking both information on the theoretical background of quality related costs as well as practical evidence about the implementation of quality costing systems So Cost of Quality is commonly referred to as the “cost of doing things wrong”. Every time a business makes a mistake it costs money to make the mistake and then correct it. For example may be a video game wasn’t published correctly on a CD/DVD and so there could be a direct cost of fixing that and an indirect cost of missing a marketing window. In his book, Quality is Free; Crosby suggests the cost is 10% to 15% of revenue. Mr. Vorley and Tickle in their book, Quality Management, suggested the figure is 5% to 25% of revenue. An incredible figure in terms of wasted revenue wherever it falls for a business. If we take the 15% figure as EA (monopoly in video games) has lower material scrap costs, for example, and to leave a little to the imagination, what’s the estimated Cost of Quality for EA? Revenue was reported as $2.95b for 2006 and $442.6m a year were their replacement costs just for quality reasons. "Highest quality is lowest cost" is a Japanese manufacturing aphorism based on the premise that the highest quality manufacturer will earn a
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Cost Of Quality 2009

reputation that makes buyers prefer, price being reasonably similar, to buy its goods. This means that the manufacturer will produce more than its competitors, and thus will both have economies of scale and be able to accept a lower profit per unit—thus the highest quality goods will have a lower cost by driving other goods from the market. The production of higher quality goods can also reduce quality costs. From the purchaser's point of view the highest quality goods will have the fewest problems, and the cost of dealing with a problem far outweighs the extra purchase cost.
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Cost Of Quality 2009

COST OF QUALITY MODELS
There are several methods that can be used to collect, categorize and measure quality costs.

P-A-F METHOD

The traditional P-A-F method suggested by Juran (1951) and Feigenbaum (1956) classifies quality costs into prevention, appraisal and failure costs. Prevention costs are associated with actions taken to ensure that a process provides quality products and services, appraisal costs are associated with measuring the level of quality attained by the process, and failure costs are incurred to correct quality in products and services before (internal) or after (external) delivery to the customer. 1. Prevention Costs are those associated with preventing defects before they happen. This is a proactive approach to defect prevention rather than defect correction and removes the idea of quality efforts essentially being reactive in efforts to "put out fires." Prevention costs involve investments aimed at getting work done right the first time and preventing quality problems from ever coming up, as far as it is possible. It is long-term strategy adopted by the organization for the continuous improvement in their processes. The elimination of the rework goes hand in hand with increase in quality, and decreases in schedule and cost; this is the fastest, cheapest, and highest approach to building software. They include:v Staff Training v Requirement Analysis v Fault-Tolerant Design v Defensive Programming v Usability Analysis v Clear Specification v Accurate internal communication
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They may be summarized as:v Design review v Code inspection v Glass box testing v Black box testing v Training testers v Test automation v Usability Testing v Pre-release out-of-box testing by customer service staff v Calibration cost v Laboratory expenses 3. Failure costs are divided into – A. testing. Internal Failure Costs: Failure costs occurring prior to delivery or shipment of the product. Examples are the costs of: v Scraps and rejects v Repair and Rework v Downtime v Bug fixes v Wasted in-house user time v Wasted tester time v Wasted marketer time UBS Page 5 . software design reviews. These techniques help organization to increase in quality with lesser cost. Examples of appraisal costs include code inspections. Internal failure costs and B. of finishing of a service to the customer. Failure Costs: The cost resulting from products or services not conforming to requirements or needs of the customer. External failure costs. Appraisal Costs include cost incurred in detecting the error.Cost Of Quality 2009 2. Appraisal techniques are used for the verification and validation.

UBS Page 6 . failure of products or defects in their manufacture.Cost Of Quality 2009 v v v v v v Wasted advertisements Direct cost of late shipment Opportunity cost of late shipment Retesting Material review Sales and discounts for inferior products External Failure Costs: Failure costs occurring after delivery of shipment of the product and during or after furnishing of a service to the customer. Examples are the costs of: v Warranty costs v Off warranty repairs and replacement v Customer complaints v Product liability v Transportation losses v Technical support calls v Preparation of support answer books v Refunds and replacement with updated product v Lost sales v PR work to soften drafts of harsh reviews v Lost customer goodwill v Costs imposed by law v Customer returns Total Quality Costs: It is the sum of the above costs. It represents the difference between the annual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service.

and therefore. Figure 1: Classical view on the left and the modern view on the right 0% QUALITY LEVEL 100 % (0 % good) 0% QUALITY LEVEL 100 % (100 % defective) (100 % defective) (0 % good) Conformance Cost Prevention Cost Appraisal Cost Non-Conformance Cost Internal Failure Cost External Failure UBS Page 7 .Cost Of Quality 2009 CROSBY’S MODEL The cost categories of Crosby’s model (Crosby. 1979). defines the cost of quality as the sum of price of conformance and price of non-conformance (Crosby. 1979) are similar to the PA-F scheme. The price of conformance is the cost involved in making certain that things are done right the first time and the price of non-conformance is the money wasted when work fails to conform to customer requirements. Crosby sees quality as “conformance to requirements”.

materials. Cost area · · Examples Materials scrapped or junked Labor and burden on product scrapped or junked Labor. These are costs that can be only estimated such as profits not earned because of lost customers and reduction in revenue owing to non-conformance. and burden necessary to effect repairs on salvageable product Extra operations added because of presence of defectives Burden arising from excess production capacity necessitated by defectives Excess inspection costs Investigation of causes of defects Discount on seconds Customer complaints Charges to quality guarantee account Delays and stoppages caused by defectives Customer good will Loss in morale due to friction between departments Page 8 · Tangible costs— factory accounts · · · · Tangible costs— sales accounts · · · · Intangible costs · · UBS .Cost Of Quality 2009 OPPORTUNITY AND INTANGIBLE COSTS Several references propose CoQ models that include the additional category of intangible costs. The importance of opportunity and intangible costs for quality costing has been describe a less formal method based on collecting quality costs by department.

The use of a process cost model is suggested as a preferred method for quality costing within total quality management (TQM) as it recognizes the importance of process cost measurement and ownership. it can be determined whether high non-conformance costs show the requirement for further expenditure on failure prevention activities or whether excessive conformance costs indicate the need for a process redesign. Process cost is the total cost of conformance and non-conformance for a particular process.Cost Of Quality 2009 TEAM APPROACH METHOD Another recently proposed CoQ methodology is a method based on a team approach. However. and presents a more integrated approach to quality than a P-A-F model. Moreover. the process cost model is not in widespread use. whereas cost of non-conformance is the failure cost associated with the process not being executed to the required standard. The cost of conformance is the actual process cost of producing products and services first time to the required standard by a given specified process. the quality cost categorization is simpler and some researchers argue that it is also more relevant than the P-A-F scheme. in which the aim is to identify the costs associated with things that have gone wrong in a process (Robison. UBS Page 9 . it represents quality cost systems that focus on process rather than products or services. Accordingly. PROCESS COST MODEL Another formal quality costing approach is the process cost model. These costs can be measured at any step of the process. Also analysts place emphasis on the cost of each process rather than on an arbitrarily defined cost of quality under a P-A-F model. which was developed by Ross (1977) and first used for quality costing by Marsh (1989). The process model has wider application in that it facilitates the collection and analysis of quality costs for both direct and indirect functions. 1997).

Thus. and benefits resulting from improved quality are not measured . The longterm goal of ABC systems is to eliminate non-value added activities and to continuously improve processes. traditional cost accounting establishes cost accounts by the categories of expenses instead of activities.Although most CoQ measurement methods are activity/process oriented. There is no consensus method on how to allocate overheads to CoQ elements and no adequate method to trace quality costs to their sources. activities and quality so that no defects are produced. helps to manage quality costs more effectively. quantify and allocate quality costs among products.They do not provide appropriate quality related data. It is an alternative approach that can be used to identify.Cost Of Quality 2009 ACTIVITY BASE QUALITY MODEL Existing accounting systems are usually considered as poorly fitted for generating reports on quality measurements . and therefore. accurate costs for various cost objects are achieved by tracing resource costs to their respective activities and the cost of activities to cost objects. The ABC approach is actually not a CoQ model. Under ABC. An activity-based costing (ABC) model was developed by Cooper and Kaplan to solve this problem. UBS Page 10 . many CoQ elements need to be estimated or collected by other methods.

Cost Of Quality 2009 No matter which quality costing approach is used. a realistic estimate of CoQ. should be considered an essential element of any quality initiative and a crucial issue for any manager. thus allowing targeted action for reducing quality costs and increasing quality improvement benefits. Therefore. UBS Page 11 . which is the appropriate tradeoff between the levels of conformance and non-conformance costs. A number of organizations are now seeking both theoretical advice and practical evidence about quality related costs and the implementation of quality costing systems. the main idea behind the CoQ analysis is the linking of improvement activities with associated costs and customer expectations.

Then in the development process.” Requirements must be clearly stated so that people involved can clearly understand that. which is complex and varies from one industry to another. Quality gurus have given definitions that cover the meaning of quality. measurements are taken continually to determine conformance to those requirements. Each of these elements is a quality characteristic and they can be categories into two types that is quality of design and quality of conformance." Quality is something. Some of them have been considered as the starting point to define quality. “Quality is the conformance to requirements. Since the different customer may use the products in different ways. Quality needs to be model on the basis of customer need. for example the definitions given by Philip Crosby and Joseph M. The non-conformance will be treated as absence of quality (or defect).” Customer requirements and expectations involves whether the products or service fit for their uses. system requirements etc. it represents the wise choice of many alternatives.Cost Of Quality 2009 QUALITY As stated by Will A. it means that products must possess multiple elements of fitness for use. industrial goals. Foster. The experts disagree both on the definition of quality and how to achieve it. it is always the result of high intention. context of the market. Quality has many layers. Even the experts could not agree on single definition for the quality. sincere effort. intelligent direction and skilful execution. "Quality is never an accident. Or “Quality of a good is its Fitness for use. and no universal definition will apply in every case. UBS Page 12 . Juran.

Quality management therefore uses quality assurance and control of processes as well as products to achieve more consistent quality. ISO 9001. 9002 and 9003. Quality management can be considered to have three main components: 1. but also the means to achieve it. production or service delivery.Cost Of Quality 2009 QUALITY MANAGEMENT It is a method for ensuring that all the activities necessary to design. comprising of the ISO 9001. These were the ISO 9000. Quality improvement. and the organizations previously holding these standards need to do a UBS Page 13 . The International Organization for Standardization (ISO) created the Quality Management System (QMS) standards in 1987. Since December 2003. based on the type of activity or process: designing. The last revision was in the year 2000 and the series was called ISO 9000:2000 series. Quality control 2. The standards have been regularly reviewed every few years by the International Organization for Standardization. Quality Management is all activities of the overall management function that determine the quality policy. However the ISO 9002 and 9003 standards were integrated and one single certifiable standard was created under ISO 9001:2000. develop and implement a product or service are effective and efficient with respect to the system and its performance. objectives and responsibilities and implement them by means such as quality control and quality improvements within a quality system. ISO 9002 and ISO 9003which all were 1987 series of standards comprising which were applicable in different types of industries. Quality management is focused not only on product quality. The version in 1994 and was called the ISO 9000:1994 series. Quality assurance 3. ISO 9002 and 9003 standards are not valid.

The ISO 9004:2000 document gives guidelines for performance improvement over and above the basic standard (i. meant for the food industry.Cost Of Quality 2009 transition from the old to the new standards. ISO 9000 standards do not certify the quality of the product or service. ISO has a number of standards that support quality management. ISO 9001:2000). ISO 22000. Recently the International Organization for Standardization released a new standard. similar to and based upon the measurement framework for process assessment. UBS Page 14 . The Software Engineering Institute has its own process assessment and improvement methods. one group describes processes (including ISO 12207. ISO 15288) and another describes process assessment and improvement ISO 15504. The Quality Management System standards created by ISO are meant to certify the processes and the system of an organization and not the product or service itself. called CMMi (Capability Maturity Model integrated) and IDEAL respectively.e. This standard provides a measurement framework for improved quality management. It gives one single integrated standard for the food industry and is expected to become more popular in the coming years in such industry. This standard covers the values and principles of ISO 9000 and the HACCP standards.

process control) Direct poorquality costs Controllable poor-quality cost Prevention Education and training cost Performing capability analyses Conducting design reviews Appraisal cost Test and inspection Supplier acceptance sampling Page 15 UBS . COPQ was popularized by IBM quality expert H. audits. processes. James Harrington in his 1987 book “Poor Quality Costs. are defined as costs that would disappear if systems. Harrington adopted the name "poor quality costs" to emphasize the belief that investment in detection and prevention of product failures is more than offset by the savings in reductions in product failures.” COPQ is a refinement of the concept of quality costs. inspection. In the 1960s. IBM undertook an effort to study its own quality costs and tailored the concept for its own use. and products were perfect. Cost element Examples Quality planning (for test. While Feigenbaum's term "quality costs" is technically accurate.Cost Of Quality 2009 COST OF POOR QUALITY (COPQ) Cost of poor quality (COPQ) or poor quality costs (PQC). it's easy for the uninitiated to jump to the conclusion that better quality products cost more to produce.

automated test equipment (but not equipment used to make the product) Resultant poor-quality cost External error cost Equipment poor-quality cost UBS Page 16 . voltmeters.Cost Of Quality 2009 Auditing processes In-process scrap and rework Troubleshooting and repairing Design changes Internal error cost Additional inventory required to support poor process yields and rejected lots Re-inspection and retest of reworked items Downgrading Sales returns and allowances Service level agreement penalties Complaint handling Field service labor and parts costs incurred due to warranty obligations Micrometers.

Cost Of Quality 2009 Loss of productivity due to product or service downtime Travel costs and time spent to return defective product Repair costs after warranty period Backup product or service to cover failure periods Customer-dissatisfaction cost Loss-of-reputation cost Dissatisfaction shared by word of mouth Customer perception of firm Customer-incurred cost Indirect poorquality costs UBS Page 17 .

We budget for the cost of the QA staff and their tools. and other parts of their jobs. Failure Costs of Quality are the ones that happen to us. These costs (often called the “Cost of Poor Quality”) are the ones that are caused by defects in our work products. We explicitly plan for certain appraisal activities. But Appraisal Costs aren’t even the biggest part of our Cost of Quality. The bottom line is that the people we most need to have focusing on the next product–the future of our company–are stuck processing an endless stream of bug reports. and then reworking designs and code to correct them. the time they spend and the resources they use doing test planning. Although we may try to minimize those costs by putting less expensive people on the line.Cost Of Quality 2009 COST OF QUALITY: TWO COMPONENTS We tend to think of Quality Assurance as a necessary evil. UBS Page 18 . What we often overlook is that the cost of quality has two distinct components: Appraisal Costs and Failure Costs. testing. we find that our most experienced (and most expensive) developers end up being sucked into the fray on the most challenging and elusive of the defects. Failure Costs have an insidious way of sneaking up on us in the form of costs that we don’t immediately see as Costs of Quality. Appraisal Costs of Quality are the ones we tend to focus on because we have direct control over them. Failure Cost: Busted Budget The single largest Failure Cost of Quality is the effort that our developers spend investigating and diagnosing defects. and we decide when we have done enough of them. Let’s look at a few of those. They are variable costs that are hard to predict. and are the more significant portion of our Cost of Quality.

) We will defer many of the problems until the next release. Sometimes we blame the testers.Cost Of Quality 2009 These costs are so significant that we routinely engage in triage of problem reports. (This can cause a firestorm of protest from QA or from Marketing. The company ends up paying the cost one way or the other. That is why so many of us can identify with the statement made by a recent client of mine who said. and it is never seen again. fixing the problem next week or next release. Failure Cost: Slipped Schedule Developers seem to be lousy estimators. Software is sucked into test. We simply hold it back until we decide that the cost of not shipping the software has exceeded the cost of shipping a defective product. there is a reasonable workaround. or letting customer support deal with it does not get rid of the failure cost. No matter how long they say a project will take. it escapes!” Of course. it only defers it until later. But if you could gain insight into why schedules slip. We decide that a few of the defects must be fixed immediately. “We don’t release software. “We delivered the UBS Page 19 . Others can wait till later. they still can’t deliver on time! This is a common frustration. Testing is like a big black hole.) The vast majority of us no longer expect to fix all known defects before releasing our software. the most common cause of schedule problems is defects. you might be surprised at the most common cause. (After all. so it won’t cause the customers too much trouble. even if we double the schedule. we will choose to ignore some defects. While there are times when technical challenges or gross underestimates are to blame. (Maybe next week we’ll have time to fix them. and the ensuing negotiations waste even more of everyone’s effort as we sort it all out.) Finally.

Cost Of Quality 2009 software to QA on schedule. More often that not. This cycle continues for a much longer time than anyone would like. In fact a significant portion of them will continue for as long as the product is in use. we often find that defects simply prevent it. the definition of “reasonable quality” is a matter of great debate. But the cost of support is not limited to the support group. starting the cycle all over again. some people will think we waited too long. Even when the testing can be completed. defect fixes introduce new defects into the system. defects prevent test suites from being completed. the backlog of defects that are being fixed requires continual re-testing. the Failure Costs associated with it are not over. Failure Cost: Costly Customers Once the product has been released. and others will fear the consequences of the remaining defects. then they move forward–until the next blocking defect is encountered. We must hold the product back until we can reach some reasonable quality level. and it is the defective software that is holding the schedule up. Every time a customer reports a new defect. When the fixed software is available. No matter when we finally release. QA first re-tests to be sure the defect was fixed. Of course. And of course too often. but they are holding up the release!” But QA is only finding defects. While delivering the software on time is critically important. Let’s face it: The reason we want to force our customers to upgrade is to stop the hemorrhaging of support costs! Most of the effort in our customer support group is spent helping customers to deal with all of the defects we shipped to them. Testing is halted until the defects that block execution can be removed. a developer must investigate it and UBS Page 20 .

it only defers it. tarnished reputation in the market. The biggest Failure Costs are nearly impossible to quantify. QA must test the fix to be sure it works and it did not cause unforeseen problems. It is easy to see why the research shows that the cost of the average defect found by the customer is 50 to 100 times higher than those found in-house. Placate them with “ingenious” work-around. But those who don’t go that far are still unlikely to encourage others to buy your products. Defer shipping promised features while you are correcting defects. The customers who dump your product in favor of your competitor’s immediately erode your market share. For those defects that are deemed to be significant. and your market share will continue to erode.Cost Of Quality 2009 diagnose the problem. Continually tell them “it will be fixed in the next version”. UBS Page 21 . Failure Cost: Meager Market Alienating customers is easy. The developer must rework the design or code or develop a patch. Ship lots of defects for customers to find. it must be installed at the customer site to fix their particular problems. Deliver the product late. and finally. Fixing the defect in the next release does not avoid the cost. loss of customer good will. the costs can be staggering. and loss of product momentum. while aggravating the customer.

UBS Page 22 . a company can substantially reduce if not eliminate the appraisal costs. The productivity measures described in the next section are more useful in motivating workers to achieve both quality and productivity. TQC begins with the design and engineering of the product. Standard cost variance such as the materials price variance and labor efficiency variance tend to emphasize price and quantity rather than quality and should not be used to reward employees. but the reduction in other quality costs can be substantial. Therefore teams specializing in quality inspection become unnecessary. With suppliers delivering highquality parts and materials. who argue that the reduction of failure costs due to improved quality outweigh additional prevention and appraisal costs. Total quality control is sometimes referred to as total quality management (TQM) because a completely new orientation must be taken by management to make TQC successful. The phrase quality is free given by Philip Crosby is commonly advocated by proponents of TQC. Designing a product to be resistant to workmanship defects may not be incrementally more costly than the present design process. New performance measures that reinforce quality improvements must be initiated. TQC is often associated with just-in-time (JIT) manufacturing. Under JIT each worker is trained to be a quality inspector.Cost Of Quality 2009 TOTAL QUALITY CONTROL Total quality control (TQC) is a management process based on the belief that quality costs are minimized with zero defects.

this one argues against that strategy. UBS Page 23 . They are listed roughly in order from most effective to least effective (in terms of both time and cost per defect removed). that you should keep a tight reign on the controllable costs and hope for the best with the others. Every defect you can remove in a more timely way represents hours or days (or weeks!) of schedule saved. But it also infers that you may not want to cut them too deeply.Cost Of Quality 2009 REDUCING THE FAILURE COST OF QUALITY Conventional wisdom would tell us that when you have some costs you can directly control (Appraisal Costs) and others that you cannot (Failure Costs). Every defect that you can remove more economically than you currently do represents money on your company’s bottom line. The key is to find more efficient methods to detect and remove defects. and every useful feature that you do ship is priceless good will that builds your reputation in the marketplace. Beside each is the word “Appraisal” or “Failure”. Every defect that you avoid shipping to you customer. Defect Removal Activities This is a list of the various methods that different organizations use to remove defects from their software. Like most paragraphs that begin with a statement about “conventional wisdom”. All of your Failure costs (every dollar of them) are caused by a finite number of defects in your software. This is not to say that you should allow your Appraisal Costs to run wild. indicating how most of the effort involved in that activity would be classified. The fact is that you can exercise indirect control over your organization’s Failure Costs by appropriately managing the Appraisal Costs.

Many of the above methods will be discussed in future articles on this site. Rather than continuing to make it your main defect removal mechanism. you can begin to reduce your total cost of quality by moving your defect removal activities up toward the top of this list. UBS Page 24 . inspections and unit testing. you would do better to use it to gage of the effectiveness of your earlier defect removal activities like reviews. but it is still a necessary part of your development lifecycle. In the mean time.Cost Of Quality 2009 Activity v Personal Reviews (PSP reviews) v Software Inspections (Fagan Inspections) v Peer Reviews v Compiling v Unit Testing v Beta Testing v System Testing (and performance & other testing) v Acceptance Testing v Walkthroughs Cost of Quality Appraisal Appraisal Appraisal Failure Failure Failure Failure Failure Appraisal Effectiveness Testing is a relatively ineffective way to remove defects.

Had the manufacturer or service organization found the defects. prevention and appraisal costs were portrayed as rising asymptotically as defect-free levels were achieved there is increasing evidence that the processes of improvement and new loss prevention are themselves subject to increasing cost effectiveness. Recent successes have resulted in revisions to the classic model of optimum quality costs. The most costly condition occurs when a customer finds defects. testing and checking. UBS Page 25 . and automated inspection and testing have reduced the human error of appraisal. the most desirable condition. The goal of any quality cost system. testing. obviously. Had the manufacturer or service organization found the defects. which is. Previously. and checking.Cost Of Quality 2009 GOAL OF COST OF QUALITY The most costly condition occurs when a customer finds defects. These developments have resulted in an ability to achieve perfection at finite costs. defects and their resulting costs would have been minimized. while robotics and other forms of automation have reduced human error during production. through much inspection. a less costly condition would have resulted? If the manufacturing or service organization's quality program had been geared toward defect prevention and continuous quality improvement. therefore. the most desirable condition. If the manufacturing or service organization’s quality program had been geared toward defect prevention and continuous quality improvement. defects and their resulting costs would have been minimized—obviously. through much inspection. a less costly condition would have resulted. is to facilitate quality improvement efforts that will lead to operating cost reduction opportunities. New technology has reduced inherent failure rates of materials and products.

In a practical sense. 3. as failure costs are reduced. they are examined for root causes and eliminated through corrective action. The knowledge gained from this improvement can then be applied.Cost Of Quality 2009 The strategy for using quality costs is quite simple: 1. This strategy is based on the premise that v For each failure there is a root cause. appraisal efforts can also be reduced in a statistically sound manner. Usually. As straightforward as this approach may appear. Take direct attack on failure costs in an attempt to drive them to zero. and (4) continuously evaluate and redirect prevention efforts to gain further improvement. the nearer to product or service use by the customer—the more expensive it is to correct. real quality costs can be measured and then reduced through the proper analysis of cause and effect. 2. Reduce appraisal costs according to results achieved. Elimination of root causes means permanent removal. v Causes are preventable. v Prevention is always cheaper. through prevention activities or disciplines. to all new work. it cannot work unless there is first a basic quality measurement system that clearly identifies the correctable elements of performance failures which represent the UBS Page 26 . Invest in the "right" prevention activities to bring about improvement. The further along in the operating process that a failure is discovered—that is. As failures are revealed through appraisal actions or customer complaints.

Such a system is designed to use the data from inspections. This measurement is a basic and important part of quality management. and customer complaints as a measure of company performance and a source of determining cost reduction projects.Cost Of Quality 2009 best potential for cost improvement. quality audits. the value of clearly identifying and using quality costs should be obvious. UBS Page 27 . The potential for improvement can be determined by a system of accurate and dependable quality cost measurement and analysis. Since every dollar of quality cost saved can have a positive effect on profits. quality performance levels can be improved. By minimizing quality costs. tests. process control measurements or evaluations.

giving them a competitive edge in a more and more competitive environment. group of companies together with their Indian partner. The core team of the factory has been trained in Germany for 6 months and the sales engineers have been UBS Page 28 . material. OHSAS-18001 & ISO-9001 Certified Company About The Company: In August' 2000 Delhi based Sigma Corporation. application engineering and production to India to support their Indian customers with state of the art seals. ISO-14001. since it is the 28th country and the 46th factory to manufacture the sealing range of their products. Freudenberg Germany & NOK Japan formed a joint venture company. This joint venture in India is closing one of the last gaps in the international set up of the Freudenberg NOK Group of Companies. the Freudenberg & NOK. having more than 30 years experience in other group companies worldwide. LTD. Sigma Freudenberg NOK Pvt. Freudenberg & NOK will support the company with all know how available and guarantee the implementation with a full time Technical Director from Germany. Sigma will bring the latest technology in design. Being the unchallenged market leader in sealing technology.Cost Of Quality 2009 COMPANY REFERRED SIGMA FREUDENBERG NOK PVT. Ltd. (An Indo German Japanese Joint Venture) .Established in 1964 World leader in sealing technology TS-16949. (SFN) to manufacture the Freudenberg & NOK range of seals in India and to act as a sole marketing arm of both partners for their products manufactured worldwide in India.

UBS Page 29 . Our success. Access to all R&D centres within the group leads to the best and most economical solutions for the Indian customers. Sigma Freudenberg NOK (SFN) will be able to offer a unique range of seals for every kind of application in the Engineering Industry. The involvement of Sigma Freudenberg NOK from the first design step onwards gives the customer. are powerful indicators of our ability to meet the challenges of the market with close customer focus. along with ongoing organization streamlining and continuous improvement measures.Cost Of Quality 2009 intensively trained by experienced design Engineers from Freudenberg & NOK. access to the worldwide knowhow of the Freudenberg & NOK group. whereas the management expertise of the Sigma Group ensures the best possible implementation of the Freudenberg & NOK know how and technology in the Indian Company. Sigma Freudenberg NOK is actively participating globally to continuously improve its performance in all business areas by adopting "GROWTTH" as its key strategy. Production started in November 2001 and will continue to increase over the next years. Together with the trading business.

000 5.000 3.54% Page 30 .396 3. assembly and disassembly at the customer’s end Recall from field Chargeable subsequent expenditures at the customer’s. sorting tests. costs of travelling. after process interruption Costs of warranty claims – less insurance payments.000 357 Lacs 3.11.750 12. special examination.097 5.954 2.63.000 17. e.A. e. Costs resulting from extra transport under responsibility of FDS Salary of Q.083 Prevention Cost Quality System Audit Cost Calibration Cost Supplier Development Cost Total Prevention Cost Production Value % of Production Value UBS 9. Total Internal Cost External Quality Cost Scrapping of returned goods Rework of returned goods Costs of inspection and testing. Dept.280 9. etc. non-chargeable stoppage.) Internal Quality Cost Costs related to scrap Rework Cost Unplanned sorting inspection Repeat inspections and tests Waste – Discrepancies in quantities (Inventory Correction) Special Tests (Problem examination) Costs resulting from customer complaints which will not be compensated. if applicable Travel expenses and expense allowances Costs of special inspection and testing Product liability insurance premiums Total External Cost 12.083 7.Cost Of Quality 2009 Cost Of Quality(Rs.39.19.g. rework.g.197 7.

Sector-73.Cost Of Quality 2009 Customers: ABB Harig Rane TRW ABI Showa Tech Hindustan Hydraulics Simpsons Ashok Leyland Int. : 987266288 UBS Page 31 . Combuston UT Bosch Knorr Voltas BHEL Komatzu Vickers Bajaj Tempo L & T Veljan Brakes India LML Wipro Delphi Automotive Systems Lincon Hellious Dantal Mahindra & Mahindra Eicher New Holland Escorts Oscar Hegglunds Royal Enfield Contact at: Head Off. Phase-VII. Industrial Area. Mohali-160055(India) Contact person: Mr. & Plant B-70. Ajay Gupta (Senior Executive Finance & Accounts) Mobile No.

from concept to completion. Gilard is also certified for ISO14001:2004 and OHSAS 18001:1996 Gilard is an ISO 9001:2000 and TS16949:2002 certified Company and is also certified for ISO 14001:2004 & OHSAS 18001:1999. Today Gilard is a Design responsible Company and also assists its customers in research and develops products for them. Over a period of time Gilard built up its strength in Re engineering of components and manufacturing import substitution components. Denso and Visteon UBS Page 32 . instrumentation.) About the Company: Gilard Electronics is an ISO-9001:2000 and ISO/TS 16949:2002 certified company. in 1987 the organization diversified into the manufacture of components for the Automobile companies and are now considered the most preferred source for the same. entertainment and defense. it later enhanced its range to electronic components for telecom. Bosch. 4-40 Crore Approx. Based on its strength. This was made possible with an infrastructure backed by a very strong Tool room and Design. All certifications have been done by the UL (Underwriters Laboratory) of USA. Set up in 1961 as a Radio components manufacturing company.Cost Of Quality 2009 GILARD ELECTRONICS PVT. Gilard has the honor of being a supplier to the First 4 AutoElectrical Companies of the world : Delphi. A Buyer-Company with ISO 9001 Certification Established in 1962 Number of Employees: 101 to 500 People Turnover: US$ 1-10 Million (or Rs. LTD.

Solenoid Valve. it is the other way round. you may have to carry out rework on them to make it of acceptable quality. Selector Switches. Worse. v When you cannot produce. v Understanding the cost of quality concept shatters the general perception or paradigm that higher quality requires higher costs. Flasher. v Rework means: literally doing it all over again and that may cost almost twice as much of the cost of first time right product. quality saves. 2-Wheeler Switches. Wiper Covers. Snap Action / Micro Switches. Relays and Relay Sockets. Rework is Expensive services given are first time right and are with zero defects. It is the cost of not making a quality product or service. v Therefore.Cost Of Quality 2009 Products: Toggle switches. Resistors. quality is free. Rocker Switches. Receptacles / Power Outlet. Moulded Products Quality Costs: Definition v Also termed as cost of quality (COQ) v COQ should not be misunderstood as the cost of making a quality product or service. First Time Right Saves. Cold Start of Diesel Engines. right the first time. Tractor Switches. Connectors. it will be a reworked product/service that can never match the quality of first time right one since rework is usually done using a less capable process ( not using the process which is used UBS Page 33 v The quality cost is barest minimum when the goods produced or . Or it is the cost that an organization will have to suffer due to poor quality product/service. Fuel Gauge Float Assembly. Switches for Trucks. In fact. AC Switches. Buses LCVs.

Appraisal Costs v The costs of assessing the quality achieved. v The costs of quality planning. supplier quality capability evaluation. v The costs of all the efforts to keep defects from occurring at all. Prevention costs 2. process capability improvement. Internal failure costs 2. v The costs of detecting defects through inspection/audit and test procedures and sifting out defects from OK products. Appraisal costs Costs of non conformance (Cost of failure of control): It has two components: 1. new product quality review etc. in process inspection. UBS Page 34 . quality enhancement projects. quality training and development. External failure costs Prevention Costs v The costs of any action taken to investigate.Cost Of Quality 2009 for normal manufacturing line and which has better process capability). Components of Costs of Quality Costs of conformance (Cost of control): It has two components: 1. prevent or reduce defects and failures. v The costs of inspection of bought out materials at the source or in-coming point in the organization.

reinspection/re-testing.Cost Of Quality 2009 final product inspection. returned goods. calibration of inspection/test instruments and equipment etc. free replacements for defective goods. UBS Page 35 . lost existing and prospective customers. v The costs of defects identified internally and then. v The costs of lost lead times/cycle times and delayed delivery to customers. downgrading the produced items fetching lower price/lower image. v The costs of scrapping/discarding. Internal Failure Costs v The costs arising within the manufacturing organization of failure to achieve quality specified (before transfer of ownership to the customer). recalls. v The costs associated with the defects that actually reach customers and field failures. rejecting/scrapping or reworking on the defective items. External Failure Costs v The costs arising outside the organization of failure to achieve quality specified (after the transfer of ownership to the customer). processing of warranty claims/customer complaints etc. rework/repair. v The costs of lost goodwill and image.

What's the inference? It says clearly that if you invest wisely $1 in prevention costs. quality is not only free. Net savings: $1109. it saves. internal failure costs and external failure costs which total up to $1110. UBS Page 36 .Cost Of Quality 2009 Proportions of Costs The estimates of proportion of these four quality costs are given below: v Preventive costs: $1 v Appraisal costs: $10 (if you are not interested in investing $1 on preventive costs) v Internal failure costs: $100 (if you are not interested in investing $1 on preventive costs) v External failure costs: $1000 (if you are not interested in investing $1 on preventive costs) Quality is Free. Invest $1 in establishing quality systems and save $1110. you can avoid/eliminate the appraisal costs. Quality Saves Look at the proportions of costs carefully. So.

Cost Of Quality 2009 Cost of Quality Particulars Internal Quality Cost Costs related to scrap Waste-Discrepancies in quantities (Inventory Correction) Salary of Quality Department Man Days Salary Rework Cost Unplanned Sorting Inspection Repeat Inspection and Test Estimated Cost of Rejected Piece Cost of Consumables Costs resulting from customer complaints 3476542 548767 127656 298563 23987 312543 265432 234198 765490 Amount External Quality Cost Scrapping of Returned goods Rework of Returned goods Travel Expenses and expense allowances Costs of Special Inspection and Testing Product liability and insurance premium 467519 4126743 65789 61867 Prevention Cost Supplier Development Cost TOTAL Production value Percent of production value 35000 10810096 381982190 2.83 UBS Page 37 .

UBS Page 38 . set and review the environmental objectives and targets. The capacity. Jay Bharat Maruti limited. was incorporated in 1987 as a Joint Venture with Maruti Suzuki India Limited (MSIL). Keeping pace with the steep rise in demand and quality of passenger cars and the fierce competition from the entry of international auto majors in the country. axles and fuel neck fillers to the existing capabilities of sheet metal components and welded modules. JBML added capabilities to produce exhaust systems. The world-class manufacturing capabilities include imported and indigenous press lines. welded sub-assemblies and exhaust systems for automotive applications.Cost Of Quality 2009 JAY BHARAT MARUTI LTD. was expanded in 1991-92 and in 1993-94. a Public limited company. Jay Bharat Maruti Ltd. With several awards to its credit and support of its partners the company stands posed atop a launch pad to the future fully geared to meet new challenges and is destined to touch new heights in excellence. 2) Meet all applicable environmental legislations. The capacities were further expanded in 1996-97. JBML had to continually expand its manufacturing capacity and capability. To this end. A new plant was set up in 1995-96. (JBML). we shall endeavor to: 1) Develop and maintain an environmental management system and continually monitor. regulations and customer requirements. engaged in manufacturing of sheet metal components. robotic welding lines as well as plating and painting facilities. therefore. re-affirms its commitment to minimize the adverse impacts of its operations on the environment. 2001-02 and 2002-03.

4) Minimize / prevent air.' 09 4040 00 0 Jul.' 09 Jan.' 09 Dec.' 09 Oct. noise and land pollution generated from our activities.' 10 Mar. water.' 09 Sep.' 10 Feb.' 09 Nov. 5) Maintain a system for hazard waste management.Cost Of Quality 2009 3) Conserve natural resources and energy by constantly seeking to reduce their consumption or wastage and maximize their recycle / reuse.' 09 4198 00 0 May' 09 4817 00 875 Jun.' 10 1931 9 4391 19 3211 2 5146 88 9796 4137 96 9675 4747 75 1064 0 . Cost of poor Quality (09-10) Month Descripti on Cost of Rejection Cost of Rework & Warranty Cost of Consumabl es Total Apr.'0 9 4651 00 0 0 Aug.

'09 Dec.'10 Feb. 100000 0 Apr.'09 Nov.'09 Sep.'09 May'09 Jun.'10 419800 481700 404000 465100 0 875 0 9796 0 9675 0 10640 0 0 0 0 0 0 0 19319 32112 Cost of Rejection Cost of Rework & Warranty Cost of Consumables Total 439119 514688 413796 474775 10640 UBS Page 39 .'09 Jul.'09 Oct.'09 Jan.'10 Mar.'09 Aug.1064 0 0 0 0 0 0 0 0 600000 500000 400000 300000 200000 Cost of Poor Quality (09-10) Rs.

has seen it flourish to become the leader in manufacturing with business lines that focuses on: v Design. Was founded in 1978 with a vision to emerge a global supplier of metal based fabricator of a wide range of product. v Design. A step-by-step methodology for quality assurance is followed to ensure that quality driven products are effectively packaged and shipped to customer in a timely manner resulting in zero defect deliveries consistently over the last several years. baggage handling systems and public seating systems for the aviation sector.Cost Of Quality 2009 GILCO EXPORT LTD. best methods for checking product defects and regular quality audits. UBS Page 40 . The company’s commitment to the highest standard of quality and its ability to innovate over three decades. v Design. manufacture and implementation of conveyer system. Gilco Quality The quality of products at Gilco Exports Ltd. is determined by stringent processes and systems that ensure highest standards of quality from early stages of production. error profiling and proofing. The company’s quality department ensures that these processes support standard. v Design. manufacture and export of retail solutions and store fixtures. in the procurement of raw material. manufacture and export of Wrought iron furniture. manufacture and export of metal based agriculture equipment and accessories. Corporate Profile Gilco Export Ltd.

50.3 6.0 3.9 2.Cost Of Quality 2009 Current month cost (Rs.8 7.8 11.3 3.000 150000 180000 120000 60000 5.000 and 60000 30000 100000 50000 2.3 3.40.5 9.000 60000 30000 50000 1.10.) Prevention cost Quality training Reliability engineering Pilot studies System Development Total Prevention Appraisal Costs Material Inspection Supplies Inspection Reliability Testing Total Appraisal Internal failure Costs Scrap Repair Rework Downtime Total Internal Costs External Failure Costs Off warranty repairs replacements Customer Complaints Product Liability Transportation Losses Total External Failure 20000 100000 50000 80000 2.000 Percentage Total (%) 1.2 16.8 3.40.9 33.3 25.3 5.5 3.9 .

40.000 100 UBS Page 41 .5 3.9 Total Quality Costs 11.2.3 24.0 6.

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