D. Summers Chap 12 Cost of Quality Slides

Costs of Quality
Chapter 12
Costs of Quality
 Quality is about keeping your promise.
Quality, 5th ed. © 2010 Pearson Higher Education,

Donna C. S. Summers Upper Saddle River, NJ 07458. • All Rights Reserved.
2
Costs of Quality
 What are quality costs?

 A quality cost is considered to be any cost that a
company incurs in order to ensure that the quality
of the product or service is perfect.
 Quality costs are the portion of the operating costs
brought about by providing a product or service that does
not conform to performance standards. Quality costs are
also the costs associated with the prevention of poor
quality.

3
Costs of Quality
 Cost of Quality = Cost of Waste = Price of

Non-conformance (Crosby)
 The money that you waste by not doing it right the
first time.
 Cost of waste is typically 20-30% of total costs

4
Costs of Quality
 Quality costs increase as the faulty product or

service reaches the customer.

5
Quality costs increase over time
Liability costs
Failure Costs
Failure found by customer

Field repair costs
Failure found at installation
Failure found at final inspection

Failure found at onset of manufacture
Failure found during design phase
Prevention Costs
Time when failure found

6
Hidden Costs of Poor Quality
Reprocessing
Customer returns
Rejects
Warranty expenses
Lost sales Loss of goodwill

Overtime to correct errors
Process downtime
Extra inventory Delays
Premium freight costs Extra process capacity
Extra inventory

7
Costs of Quality
Types of Quality Costs (two classification)
 Conformance - Conformance is an aim of quality assurance. This aim is achieved at a price.
 Prevention Costs
 Appraisal Costs
 Non Conformance - This area covers the price paid by not having quality systems or a quality
product.
 Failure Costs (Internal & External)
 Intangible Costs

8
Costs of Quality
 Prevention Costs - The money that you invest to
enable you to do it right the first time.
 Prevention costs are those costs that occur when a
company is performing activities designed to

prevent poor quality in products or service.
 Analyzing requirements
 Planning for quality
 Process control
 Quality audits
 Conducting supplier evaluations
 Attending training

Quality, 5th ed.
Consulting © 2010 Pearson Higher Education,
9
Costs of Quality
 Appraisal Costs
 Appraisal costs are the costs associated with
measuring, evaluating, or auditing products or
services to make sure that they conform to
specifications or requirements
 Inspecting
 Testing
 Monitoring
 Auditing software/hardware processes
 Maintaining test machines/equipment

10
Costs of Quality
 Failure Costs
 Failure costs occur when the completed product or
service does not conform to customer requirements

11
Costs of Quality
 Failure Costs
 Internal Failure Costs
Those costs associated with product non-conformities
or service failures found before the product is shipped
or the service is provided to the customer.
 Scrap
 Rework
 Failure analysis
 Re-inspection and retest
 Expediting
 Time away from development or manufacturing
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Costs of Quality
 Failure Costs
 External Failure Costs
 Those costs that occur when a nonconforming product or
service reaches the customer.
 Paying warranty costs
 Providing a help desk
 Non billable consulting time
 Cancelled licenses or orders
 Making allowances

13
Costs of Quality
 Intangible Costs
 Intangible costs are the hidden costs associated with
providing a nonconforming product or service to a
customer. They involve the company’s image.
 Intangible costs: difficult to measure and hence
monitor & control, proxy measures/sometimes
hidden e.g. Cost of lost goodwill/loss of brand
image

14
Preventing Poor Quality (Comparison)
Prevention Costs
Benefit
Appraisal Costs
R Repair Costs Prevention Costs
Failure Costs Appraisal Costs

• Internal Repair Costs
• External
Failure Costs
Before Quality After Quality

Cost Cost
Alignment Alignment
Quality, 5th ed.
Donna C. S. Summers 15
1
© 2010 Pearson Higher Education,
Upper Saddle River, NJ 07458. • All Rights Reserved.
Costs of Quality
Hours or Units Wasted R per Time Unit or R/year Cost of

Process Description of Waste per time unit Unit of Waste Calculation Waste

16
Costs of Quality
 Uncovering waste in your life:

 What causes me to waste time?
 What are the tasks where requirements are not
clear?
 What problems are dropped on me that waste time?

17
Costs of Quality
 Quality Cost Measurement System

 By quantifying quality costs, all individuals
producing a product or service understand what it
will cost if quality suffers.
 A quality-cost measurement system should be
designed to keep track of the different types of
quality costs so that they can be eliminated through
root cause analysis.

18
Costs of Quality
 Utilizing Quality Costs for Decision Making

 Quality costs can be used as justification for actions
taken to improve the product or service.
 Quality costs drive lean improvement.

19
Costs of Quality
 Real Tools for Real Life
 Uncovering Quality Costs

 Costs of Quality Reduced by Problem-Solving Process

 Using Process Maps
Steps in implementing quality cost (E.g):

1. Involve accountants right from the start
2. Decide purpose and objectives
3. Decide how to deal with overheads
4. Distinguish between basic work and quality related activities
5. Collection data which offers the prospect of real gains
6. Start by examining failure costs
7. Evaluate the costs of inspection
8. Analyze and use the data
9. Collecting and reporting quality cost data

20
Costs of Quality
 You plan and manage quality the same way you

plan and manage your finances.
 Joseph Juran

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Costs of Quality example

22
Costs of Quality example
Failure costs are almost 50% of the total costs. This

indicates that there is still ample opportunity for improving
quality by investing more in prevention and appraisal
activities.

23

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Costs of Quality

 Quality is about keeping your promise.

Quality, 5th ed. © 2010 Pearson Higher Education,

 What are quality costs?

Quality, 5th ed. © 2010 Pearson Higher Education,

 Cost of Quality = Cost of Waste = Price of

Quality, 5th ed. © 2010 Pearson Higher Education,

 Quality costs increase as the faulty product or

Quality, 5th ed. © 2010 Pearson Higher Education,

Failure found by customer

Failure found at installation

Failure found at final inspection

Time when failure found

Quality, 5th ed. © 2010 Pearson Higher Education,

Lost sales Loss of goodwill

Premium freight costs Extra process capacity

Quality, 5th ed. © 2010 Pearson Higher Education,

Quality, 5th ed. © 2010 Pearson Higher Education,

company is performing activities designed to

Quality, 5th ed. © 2010 Pearson Higher Education,

Quality, 5th ed. © 2010 Pearson Higher Education,

Quality, 5th ed. © 2010 Pearson Higher Education,

Quality, 5th ed. © 2010 Pearson Higher Education,

R Repair Costs Prevention Costs

Failure Costs Appraisal Costs

Before Quality After Quality

Hours or Units Wasted R per Time Unit or R/year Cost of

Quality, 5th ed. © 2010 Pearson Higher Education,

 Uncovering waste in your life:

Quality, 5th ed. © 2010 Pearson Higher Education,

 Quality Cost Measurement System

Quality, 5th ed. © 2010 Pearson Higher Education,

 Utilizing Quality Costs for Decision Making

Quality, 5th ed. © 2010 Pearson Higher Education,

 Real Tools for Real Life

 Real Tools for Real Life

Steps in implementing quality cost (E.g):

Quality, 5th ed. © 2010 Pearson Higher Education,

 You plan and manage quality the same way you

Quality, 5th ed. © 2010 Pearson Higher Education,

Quality, 5th ed. © 2010 Pearson Higher Education,

Failure costs are almost 50% of the total costs. This

Quality, 5th ed. © 2010 Pearson Higher Education,

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