COST OF QUALITY

Try to understand:

1.Cost of quality
2. Defects classification and
3. Quality cost grid

Cost of quality by Jayant Choudhary 1

 Understanding Quality cost:
• Understand quality costs enables you to

– Understand hidden costs

– Reduce and eliminate unnecessary cost

• Prevent problems from happening

• Management responsibility to enable this
• Quality costs are real and estimated at:

– 25% of costs in manufacturing

– 35% of costs in service industry

• Quality costs can be categorised to enable better understanding

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 Why to calculate quality cost ?
Management will give special attention when quality is measured in
monetary terms

Quality costing is one of the tools

• to provide initial assessments and hard evidence that improvement is

needed or had been made
• To monitor the effectiveness of quality improvement initiatives
• To be used in a generic term by senior management, shareholders and
financial institutions, so that they can readily understand implication of
quality in the term of money
• Cost of quality failure is calculated as a percentage of profit or annual
turnover
• It is easy to understand
By front-line operator
By middle management

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 Benefits of using Quality costing:

1. Greater accuracy in the evaluation and forecasting of resource use

2. Justification for investment in the prevention and appraisal of

failures

3. Ability to cost and compare performance across all departments

functions and activities

4. Identification and prioritization of activities, processes and

departments in terms of corrective action, investment, or quality
improvement initiatives

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 Cost of Quality :
 Quality costs are defined as costs associated with non-achievement of
product/service quality. In simple terms, quality cost is the cost of poor
products/services.

 The cost of poor quality can add to other costs such as design, production,
maintenance, inspection, sales, etc. Quality costs cross department
boundaries by involving all activities of the organization – marketing,
purchasing, design, manufacturing, service, etc.

 The price of nonconformance (Philip Crosby) or the cost of poor quality

(Joseph Juran), the term 'Cost of Quality', refers to the costs associated
with providing poor quality product or service.

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 • Phillip B. Crosby (Quality is free . . . ):
• The system for causing quality is prevention, not appraisal –
Quality is Free
• The performance standard must be Zero Defects, not "that's
close enough"
• The measurement of quality is the Price of Non-
conformance.
• Cost of quality is only the measure of operational
performance
• “Quality is free. It’s not a gift, but it is free. What costs
money are the inferior things -- all the actions that involve
not doing jobs right the first time.”

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TYPES OF QUALITY COST:

Given by Feigenbaum (Originator of ‘Total Quality’

concept)

There are basically three types of quality cost:

1. Prevention Cost

2. Appraisal Cost and

3. Failures cost ( internal & external )

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 Prevention Costs
 Quality planning costs
 costs of developing and
implementing quality
management program
 Product-design costs
 costs of designing products
with quality characteristics
 Process costs
 costs expended to make sure
productive process
conforms to quality
specifications
Cost of quality by Jayant Choudhary
 Training costs
 costs of developing and
putting on quality training
programs for employees and
management
 Information costs
 costs of acquiring and
maintaining data related to
quality, and development of
reports on quality
performance
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 Examples of prevention Cost

o Application screening o Job descriptions

o Capability studies o Market analysis
o Controlled storage
o Pilot projects
o Design review
o Procedure writing
o Prototype testing
o Equipment maintenance &
o Procedure reviews
repair
o Quality incentives
o Field testing o Safety reviews
o Fixture design and fabrication o Time and motion studies
o Forecasting o Survey
o Housekeeping o Quality training
o salesperson evaluation and selection
o Personnel reviews

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 Appraisal Costs

Inspection and testing

 costs of testing and inspecting materials, parts, and product at
various stages and at the end of a process

Test equipment costs

 costs of maintaining equipment used in testing quality
characteristics of products

Operator costs
 costs of time spent by operators to gather data for testing product
quality, to make equipment adjustments to maintain quality, and to
stop work to assess quality

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 Examples of appraisal cost

 Audit  Laboratory test

 Document checking  Personnel testing
 Diagram checking  Procedure testing
 Equipment calibration  Prototype inspection
 Final inspection  Receiving inspection
 In-process inspection  Shipping inspection

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 Internal Failure Costs

 Scrap costs  Process downtime costs

 costs of poor-quality
products that must be
 costs of shutting down
discarded, including labor, productive process to fix
material, and indirect costs problem
 Rework costs  Price-downgrading costs
 costs of fixing defective
products to conform to
 costs of discounting poor-
quality specifications quality products—that is,
 Process failure costs selling products as
 costs of determining why “seconds”
production process is
producing poor-quality
products

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 External Failure Costs

 Customer complaint costs  Product liability costs

 costs of investigating and
 litigation costs resulting
satisfactorily responding to a from product liability
customer complaint resulting
from a poor-quality product and customer injury
 Product return costs  Lost sales costs
 costs of handling and replacing  costs incurred because
poor-quality products returned customers are
by customer dissatisfied with poor
 Warranty claims costs quality products and do
 costs of complying with product not make additional
warranties purchases

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 Summarised as:

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 1-10-100 Rule

1
Prevention

10
Correction
100

Failure

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 The 1:10:100 rule:
 Re.1 spent on prevention will save Rs.10 spent on appraisal and Rs.100 on
failure costs.

 One dollar spent on prevention will save $10 on appraisal and $100 on
failure costs.

 This rule helps one to prioritize expenditure on prevention, which is sure to

bring in greater returns.

 “The earlier you detect and prevent a defect the more you can save. If you
catch a Rs. 2 resistor before you use it and throw it away, you lose Rs. 2. If
you don’t find it until it has been soldered into a computer component, it
may cost Rs.10 to repair the part. If you don’t catch the component until it is
in the computer user’s hands, the repair will cost hundreds of rupees. Indeed,
if a Rs.50000 computer has to be repaired in the field, the expense may
exceed the manufacturing cost.”

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 Difficulties in using Quality costing

 Management have not believed in the possibilities of improvement

 Quality costing is demanding

◦ It requires a lot of data of each activity related to quality

 Other limitations

◦ Does not resolve quality problems

◦ Does not provide specific actions
◦ vulnerable to short-term mismanagement
◦ difficult to match effort and accomplishment
◦ subject to measurement errors
◦ may neglect important or include inappropriate costs

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 Steps in implementing quality cost

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

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 Determine Quality Cost Categories

1. Understand your product

2. Understand your process
3. Understand where problems occur
4. Determine precisely what goes wrong
5. Determine what costs represents each problem

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 Quality Management Maturity Grid

Five stages of an organization’s maturity

Six measurement categories

 Management understanding and attitude
 Quality organization status
 Problem handling
 Cost of quality as a percent of sales
 Quality improvement actions
 Characteristic statement

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Cost of quality by Jayant Choudhary 21
 Maturity Grid Stage I: Uncertainty

 Quality is the responsibility of the quality department

 Quality is hidden within manufacturing or engineering; no inspection

 Problems are fought as they occur.

 The cost of quality is unknown. In reality it is about 20%.

 There are no organized quality improvement activities.

 “We don’t know why we have problems with quality.”

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 Maturity Grid Stage II: Awakening

 While quality management may be valuable, the organization is not

willing to commit resources.

 A quality leader is appointed, but the emphasis is on appraisal and

moving the product.

 Teams address major problems, but long-range solutions are not

solicited.
 The cost of quality is reported at 3%, but is actually 18%.

 Activities are limited to short-range, motivational efforts.

 “Why do we always have problems with quality?”

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 Maturity Grid Stage III: Enlightenment

 Management adopts a supportive and helpful stance.

 Quality is elevated to a functional level equivalent to engineering,

marketing, etc.
 Problems are resolved openly and in an orderly way.

 The cost of quality is reported as 8%, though it is really about 12% of

sales.
 The fourteen-step quality improvement program is implemented.

 “We are identifying and resolving our problems.”

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 Maturity Grid Stage IV: Wisdom

 Top management participates in and understands quality.

 The quality manager is an officer of the company.

 Problems are identified in early development.

 The cost of quality is reported as 6.5%. It may be 8%.

 The quality improvement program is continual and accompanied by

follow-up training.
 “Defect prevention is a routine part of our operation.”

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 Maturity Grid Stage V: Certainty

 Quality is an essential part of the organization.

 A quality manager serves on the board of directors.

 Problems are prevented.

 The cost of quality is reported as 2.5%, which is what it really is.

 Quality improvement is normal and continual.

 “We know why we do not have problems with quality.”

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 QUESTIONS ?

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