The Management &

Control of Quality

 Khana Lidya Monica (017)

 Khurrotul Aini (019)
 Artika Indahsari (023)
 Ranti Widyaastuti (450)
 Relevant Cost Analysis
 Financial information that is relevant to decisions regarding quality
consists of future costs (and income) which is different between
alternative decisions.
 we can also use the term avoidable costs since these are future
costs that can be avoided by choosing one decision alternative
over another.
 Long-term investments in quality are evaluated using the
discounted cash flow decision (DCF) model, such as the net
present value (NPV).
 Activity and process decisions are prime examples of quality-
related investments.

KHANA (017)
Cost-of-Quality (COQ) Reporting

 Cost of quality (COQ) is a comprehensive reporting framework for

classifying quality-related costs.
 Quality costs for many companies are essentially buried in the
company’s financial statements.
 An expansive view would define cost of quality as the cost of activities
associated with the prevention, identification, repair, and rectification of
poor quality, as well as opportunity costs from lost production and lost
sales as a result of poor quality.

KHANA (017)
Examples of Quality Costs, by Category

KHANA (017)
  Prevention costs are incurred to keep quality
defects from occurring.
 Quality training costs.
 Equipment maintenance costs.
 Supplier-assurance costs.
 Information systems costs.
 Product redesign and process improvement.

Quality circles.
Costs incurred to establish and operate quality control circles to identify quality
problems and to offer solutions to improve the quality of products and services.

KHANA (017)
 Appraisal Costs

 Appraisal (detection) costs are costs devoted to the

measurement and analysis of data to determine
conformity of outputs to specifications.
 Test and inspection cost
 Test equipment and instruments

KHANA (017)
 Internal failure costs are associated with
defective processes or defective products
found prior to delivery to customers.
 Costs of corrective action.
 Rework and (net) scrap costs.
 Process costs.
 Expediting costs.
 Reinspection and retest costs.
 Lost contributions due to increased demand on
constrained resources.

KHANA (017)
External Failure Costs
 External failure costs are costs related to
quality defects detected after unacceptable
products or services reach the customer
 Repair or replacement costs.
 Costs to handle customer complaints and
returns.
 Product recall and product liability costs.
 Lost sales and customer ill-will due to
defective outputs.
 Costs to restore reputation.

KHANA (017)
 Conformance and Nonconformance
Costs
 Costs of conformance are prevention costs and
appraisal costs.
 Costs of nonconformance are internal failure costs and
external failure costs.

KHANA (017)
 COQ REPORTS
Purpose:
 To make management aware of the magnitude of these
costs
 To motivate continuous improvement in COQ
 To provide a baseline against which the impact of quality
improvement investments can be measure

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 REPORT FORMAT
COQ Report  useful only if recipients understand, accept,
and can use the content of the report.
Each organization should select and design a reporting
system, that:
 Can be integrated into its information system
 Promotes the quality initiatives specified by top
management.

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 COST-OF-QUALITY MATRIX
A cost-of-quality matrix is a convenient and useful tool in reporting quality costs. With
columns identifying functions or departments across the value chain, and rows
delineating COQ categories, a cost-of-quality matrix enables each department,
function, process, or product line to identify and recognize the effects of its actions on
the total cost of quality and to pinpoint areas of improvement.

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 ILLUSTRATION OF A COQ REPORT
• Bally Company is a small midwestern manufacturing company with annual sales of
around $9 million.
• Operates in a highly competitive environment and has been experiencing increasing
pressures from new and existing competitors to raise quality and lower cost.
• The report shows that the external failure costs for items such as warranty claims,
customer dissatisfaction, and loss of market share accounted for 75 percent of the
total COQ in year 0 ($1,770,000 $2,360,000, or 22.13% 29.5%).
• To be more competitive and to increase market share, Bally began a corporatewide
three-year TQM process. The firm started with substantial increases in prevention and
appraisal expenditures.
• The investment started to pay off in year 2. Internal failure, external failure, and total
quality costs have all decreased. COQ reports over time can help document these
improvements. Artika 023
COST-OF-QUALITY (COQ) REPORT FOR BALLY COMPANY

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 COQ AND ACTIVITY-BASED COSTING (ABC)
 An ABC system is ideally suited to the preparation of COQ
reports.
 An ABC system identifies cost with activities and thus increases
the visibility of costs of quality. Costs of activities that are the
result of poor quality become clear to the organization.
 Traditional costing systems, in contrast, focus the cost reporting on
organizational functions such as production, sales, and
administration.
 An organization with a good ABC system in place needs only to
identify costs and activities relating to COQ and classify these
costs according to the COQ categories that the firm chooses to
use. Artika 023
NONFINANCIAL QUALITY INDICATORS

1. Internal Nonfinancial Quality Metrics

2. External (Customer Satisfaction) Quality Metrics
3. Role of Nonfinancial Performance Measures

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 INTERNAL NONFINANCIAL QUALITY METRICS
Organizations strive to specify internal dimensions of quality on which they
must focus in order to meet customer expectations.
Thus, we find the following examples of internal nonfinancial quality measures:
• Process yield (i.e., good output/total output).
• Productivity (i.e., ratio of acceptable outputs—goods or services—to resource
inputs).
• Percentage of first-pass yields (i.e., percentage of initial output meeting quality
standards).
• Number of defective parts produced (e.g., parts-per-million, ppm).
• Machine up-time (or, machine down-time).
• Trend in dollar amount of inventory held.
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• Employee turnover (e.g., number of employees who voluntarily leave the
company/total number of employees).
• Safety record (e.g., number of accidents per month, number of days since
last accident).
• Throughput (i.e., outputs—goods or services—produced and delivered to
customers).
• Production (manufacturing) lead time (i.e., difference between when an
order is received by manufacturing and when that order is completed).
• Cycle-time efficiency (i.e., ratio of time spent on value-added activities to
the sum of time spent on value-added and non-value-added activities; also
known as throughput time ratio or process cycle efficiency).
• Throughput efficiency (i.e., the ratio of throughput to resources used).
• New product (or service) development time.
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 EXTERNAL (CUSTOMER SATISFACTION) QUALITY METRICS
A comprehensive framework for managing and controlling quality
will include a set of external, as well as internal, quality measures.
These metrics are customer-based, as shown by the following
examples:
• Number of defective units shipped to customers as a percentage of
total units shipped.
• Number of customer complaints.
• Percentage of products that experience early or excessive failure.
• Delivery delays (e.g., difference between scheduled delivery date
and date requested by the customer).
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• On-time delivery rate (e.g., percentage of shipments made
on or before the scheduled delivery date).
• Market research information on customer preferences and
satisfaction with specific product features.
• Customer response time (CRT) i.e., the total lapse of time
between when a customer places an order and when the
customer actually receives the completed goods; this total
time can be broken down into three components: receipt
time; manufacturing lead time; and, delivery time.

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 22

Detecting & Correcting Poor Quality

Detecting Poor Quality

– Control Charts
– Statistical Control Charts

– Run Charts
Correcting Quality Problems
– Histograms
– Pareto Diagrams (Charts)
– “Cause-and-Effect” (“fishbone”) Diagrams
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Control Charts

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Control Charts (continued)

The circled observations are unacceptable, that is, they

suggest an out-of-control process. Management may want
to investigate the underlying causes of these observations
and take appropriate corrective action. Aini 019
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Histograms

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0
1 2 3 4 5 6
1 Quality of chocolate 2 Liqueur
3 Egg size 4 Blending speed
5 Blending duration 6 Improper refrigeration
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Pareto Diagram

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Cause-and-Effect Diagram

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 Cause and Effect Diagram
The Chocolate Mousse Quality Problem

Ranti 450
 LEAN MANUFACTURING
Purposes

Increase Profitability

Improve Decision Making

Reduce Inventory

Increase Product Flow and Product

Quality
Ranti 450
 Five Pinciple of Lean Manufacturing

Value
1 Value Stream
2 Pull and Flow
3 Empowerment
4 Perfection
5
Measures success Consists of all Pull production Measures Continuous
in terms of activities required means production performances in a improvement and
providing value to to create customer process is box score, with real elimination of non-
customer. value scheduled, Flow time information value-added
means runs transactions.
smoothly without
distraction,delays,
or jams

Ranti 450
 Lean Accounting

Ranti 450
The Strategic Role of Lean Manufacturing

Ranti 450