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Quality-Cost Analysis

By: Mahendra Singh Central University of Jharkhand, Ranchi

Quality Cost: - It is represented by the costs encountered in: - preventing - finding - correcting the defective work - warranty & rework - It represents the basis through which investment in quality projects can be actually evaluated in terms of cost improvement, profit enhancement…. - Quality Costs have an impact through the entire life cycle of the product, it does not stop at the shipping phase - They represent in general a significant amount - It is affected (reduced) by Total Quality Control.
- A little bit of History: - “Gold in the Mine” concept - This concept triggered a better understanding of: - 1. The company‟s accounting system - 2. The identification of all the quality related costs - 3. The idea of an „optimum‟ for quality costs.

◦ History: One of its first advocates was quality theorist: Joseph Juran. ◦ The objective of quality cost analysis is to minimize the total cost of quality across the life of a product (therefore. to reduce the quality costs) ◦ Quality cost analysis is a standard part of traditional quality control . Generally. it is more meaningful to talk about time intervals and about absolute dollar amounts. Quality Cost Analysis: ◦ The process that consists in comparing and examining the individual quality cost item to each other and to the total so that appropriate action could be taken.

coding errors ◦ Appraisal Costs (Ac):  Costs associated with revealing the poor quality  Testing   Design reviews are somewhere in the middle ◦ Failure Costs (Fc):  Internal Failure Costs  Costs encountered before the product was shipped to the customer  Example: fixing bugs  External Failure Costs  Costs encountered after product was shipped to the customer  Example: patching a released product and distributing the patch Total Cost of Quality = Pc + Ac +Fc .Manufacturing Context   Quality Costs (sometimes overlap) ◦ Prevention Costs (Pc):  Costs associated with preventing poor quality.  examples: design errors.

Process cost models: Cost of conformance + Cost of non-conformance .2006). Crosby‟s model: Cost of conformance+ Cost of non-conformance 3. Opportunity or intangible cost models: [Prevention costs+ Appraisal costs + Failure costs+ Opportunity costs] / [Cost of conformance+ Cost of nonconformance+ Opportunity costs] / [Tangibles + intangibles] 4. P-A-F models: Prevention costs+ Appraisal costs+ Failure costs 2. 1.COQ Models COQ models are classified into four groups (Schiffauerova and Thomson.

Total quality costs are minimized to the point where the cost of prevention plus appraisal equals the cost of failure. there is an inverse relationship between prevention and appraisal effort and failure cost.Optimum quality cost model  The traditional model detailed by Brown and Kane (1984) has got widespread acceptance. sometimes referred to as the optimum point . and the location of the minimum point on the total quality cost curve. The total quality cost curve represents the sum of the other two curves. The optimum conformance to quality or defect level is where the increasing costs of the prevention and appraisal curve converges with the curve of decreasing failure costs.

Model of optimum quality cost .

Prevention Costs   The costs encountered in the activities preventing poor quality. Examples: ◦ ◦ ◦ ◦ Staff training Early Prototyping/Requirements analysis Clear Specification/unambiguous documentation Evaluation of the development tools that will be used  Interesting features: ◦ The costs are distributed to almost all the groups involved in the product development. Any group that might not be affected? ◦ Defensive programming? .

enabling debugging information you can use to diagnose the problem. redirecting users to a backup server. This way: ◦ problems that might otherwise go unnoticed are detected ◦ small errors that might turn into disasters are caught ◦ a lot of debugging and maintenance could be saved. notifies you when anticipated failures occur.  . and performs damage-control actions you have specified-.such as stopping program execution.Defensive Programming  Defensive programming is the practice of anticipating where failures can occur and then creating an infrastructure that tests for errors.

part prevention .Appraisal Costs: The Costs encountered in the activities aimed at revealing quality problems.  Examples:  ◦ ◦ ◦ ◦  Glass box testing Black box testing Code inspections Test automation Interesting issues: ◦ What about design review?  Part appraisal.

so it is recommended not to be used especially the first times the organization is try to implement the quality-cost analysis.Internal Failure The Costs encountered before the product distribution to the customers. .  Examples  ◦ Fixing bugs ◦ Regression testing  Interesting issues: ◦ What about cost of delays and of lost opportunity? ◦ Like: Direct and Opportunity cost of late shipment and Wasted advertisements  These are costs borne by the groups outside the product development  Might give birth to controversy.

 Examples:  ◦ ◦ ◦ ◦ Investigation of customer complaints Refunds and recalls Lost sales Coding/testing/shipping of updated product  Can this always be done? ◦ All costs imposed by law  Interesting issues: ◦ What about cost of high turnover or cost of lost pride?  Hard to estimate .External Failure Costs encountered after the product has already been shipped to the customers.

 .Benefits The goal is to reach minimum quality costs at the desired outgoing quality level.  It‟s a feed-back mechanism: quality costs data is used by the management to make decisions that will impact the quality costs.  Applications of Quality Costs ◦ Measurement Tool:  Quality costs provide comparative measurements for evaluating quality programs versus the value of the results achieved ◦ Process-Quality Analysis Tool  Quality costs can serve effectively as an analysis tool and point out where the problems are ◦ Programming Tool  Quality costs determine how the available resources to be divided ◦ Predictive Tool  Quality costs can also be used to evaluate and assure performance in relation to the goals and objectives of the organization.

Risks  Implementation Risks ◦ Not being realistic and trying to achieve too much too soon. especially the first few times the company is trying to implement the quality-costs analysis  Other risks: ◦ Looking only from the point of view of the company. ◦ Controversial costs should be left aside. not looking at the customer‟s costs ◦ Might result in other types of risk:  Customer Dissatisfaction  Litigation .

and projects or processes that how a high return on quality (Return on Quality = (Dollar Cost of Quality Savings/Dollar Cost of Implementation) x 100 ) 7. Statistical analysis such as regression analysis. 6. Results are also communicated widely. to move towards the optimum cost of quality. 4. phasing as appropriate. Projects are analyzed for their impact on cost of quality. Pareto analysis.How To Use the Quality cost Analysis Tool: 1. A plan is then defined to modify the current process. and consistent with previous definitions and implementations. data is analyzed for trends and opportunities.. After confirming that the data is accurate and comprehensive or representative. correlations. indexes. is utilized to formulate conclusions about the present state and recommendations. . Improvements are measured and evaluated for effectiveness. Cost of quality data can be either collected on a sampling basis or on        a continuous basis. and a continuous improvement cycle is implemented. 3. 5. In some cases utilizing tools such as modeling can predict the optimum cost of quality and the process design or improvement necessary for achieving the optimum can be defined. 2. etc.

Ford Pinto litigation Benefits and Costs Relating to Fuel Leakage Associated with the Static Rollover Test Portion of FMVSS 208 Benefits Savings — 180 burn deaths.000. $11 per truck Total Cost — 11. Costs Sales — 11 million cars.000 x ($11) + 1. $67.$11 per car. 180 serious burn injuries. $700 per vehicle Total Benefit — 180 x ($200. . 1. Unit Cost -.5 million light trucks.000 per injury.000) + 2100 x ($700) = $49.5 million.000) + 180 x ($67.$200. 2100 burned vehicles Unit Cost -.000 x ($11) = $137 million.500.000 per death.

 However. . these costs might not be easily estimated  ◦ It ends up costing Ford way more ◦ Motors Corp vs Johnston  When calculating the trade-off between several factors (costs one of them) it is important for the companies to realize and take into account the customer‟s costs.Ford Pinto Quality-cost analysis looks at the costs from only the companies‟ perspective.

Another look at External Failure Costs   Borne by seller ◦ Given in the previous slide Borne by buyer ◦ ◦ ◦ ◦ ◦ Death / Injury Embarrassment Might affect their customers Cost of tech support Cost of replacing product .

They believe in “Our business is different.Why are the companies reluctant to implement quality-costs analysis?      Skepticism .” Mediocre quality is still saleable. there are many advocates and agendas. The confusion in language—the belief that “higher quality costs more. some companies have tried and failed or they are aware of other companies that tried and failed They don‟t know whom to trust.” .

◦ ISO 9000: The quality management system standards. Certification to the ISO 9000 will solve all their issues related to quality performance. which are based on the eight quality management principles:  Principle 1 Customer focus  Principle 2 Leadership  Principle 3 Involvement of people  Principle 4 Process approach  Principle 5 System approach to management  Principle 6 Continual improvement  Principle 7 Factual approach to decision making  Principle 8 Mutually beneficial supplier relationships .