Chapter 2

Cost of Quality

BPC2113/BPN2013-Quality Management

Faculty of Industrial Management

Universiti Malaysia Pahang
26300 Gambang, Pahang Darul Makmur
Tel: +609 549 2166 Fax: +609 549 2167
www.fim.ump.edu.my
Learning Outcomes

 Understand the concept of quality costs.

 Differentiate between visible and hidden costs.
 Explain types of quality costs.
 Quantify quality costs.
Maximizing
Profit?
What to do?
 PRICE
PRICE PRICE
PROFI PROFI
PROFI
T T
T

COST COST
COST

Profit = (Price – Costs) x Volume

Three possible ways of maximizing profit:
1. Increase price  Price is determined by the markets, difficult to compete.
2. Increase volume  Difficult because of the existence of competitors.
3. Reduce costs  This is what manufacturers should do.
(1) Profit = Price – Costs
(2) Price = Profit + Costs
What is the difference between (1) & (2)?
 Case 1: Space Shuttle
Challenger (1986)
Broke apart 73 seconds
after it lifts-off.

Cause: small o-ring seal failure.

Human Loss: 7 people died

Financial Loss: Over $1 Billion
Case 2: Toyota HQ Recalled 9 Million Cars
(2009)

Cause:
Problematic floor mat & defective brakes leading to unintended acceleration.

Human loss: 52 died, 38 injured.

Financial loss: $5.5 Billion
Case 3: BP’s Deepwater Horizon Drilling Rig Explosion (2010)
Cause:
Weak cement around the well. Human loss: 11 people died
To save money, contractor did Financial loss to BP: $10 Billion
not properly test the cement. Environmental loss: Inestimable
 us e di sa s t e r !
p le e r r or m ay ca
Very s i m
 All the three cases tell us…

The disasters happened, because of breaking the cardinal quality rule:

Customer-based organization
Understand your internal & external customers
COPQ typically amounts
to 5-30% of gross sales?
Quality Cost
Any cost incurred in order to ensure the
perfect quality of product/service.

It is a portion of the operating costs

caused by low quality of
product/service.

It includes the costs associated with the

prevention of poor quality.
Quality Cost
It would disappear if every activity is
performed without defects every time.

Benefits of defect free

• Faster cycle times

• Decreased production costs • Lower total cost
• More competitive
• Lower warranty costs
pricing
• Less wasted material • Higher company
• Reduced scrap / rework costs revenue
Quality Cost
Examples of Quality
Cost
Redesigning a faulty component that never worked right.
Reworking a shock absorber after it was completely manufactured.
Retesting a computer chip that was tested incorrectly.
Repurchasing because of non-conforming materials.
Replacing a shirt the dry cleaner lost.
Examples of Quality Cos
Returning a meal to the kitchen
because the meat was overcooked.
Retrieving lost baggage.
Responding to a customer’s
complaint.
Responding to warranty claim.
Types of Quality Costs
Prevention Costs
Costs of performing activities to prevent poor quality in
products/services.

Examples: process design reviews, education &

training, supplier selection & capability reviews, and
process capability reviews.

Prevention efforts determine the root causes of

problems, & eliminate them at the source. So,
reoccurrences do not happen.
Appraisal Costs

Associated with measuring, evaluating or auditing

products/services to ensure that they conform to specifications.

Examples: Inspection of incoming materials, WIP, & final goods;

material reviews; calibration of measurement; & testing
equipment.
Appraisal activities are necessary in an environment where quality
problems (product, process, or service) are found.
Failure Costs
Incurred when the completed product or service does not conform
to customer requirements.

Internal Failure
Before product is shipped or service is
provided to customers.
(e.g., scrap, rework, reject)

External Failure
After product is shipped or service is provided to
customers.
(e.g., warranty claims, customer complains, product
recall
1-10-100 Rule
Prevention
Costs
$ Appraisal Costs

Failure Costs
Intangible Costs

The hidden costs associated with providing a non-conforming product or

service to a customer. It involves the company’s image.

Can be greater than tangible quality costs.

Thus, must not be overlooked or disregarded.

Example: Lost of customer loyalty, lost of sales, rush delivery

costs, complain investigation costs, etc.
Total Quality Costs
Total Quality Costs = Prevention + Appraisal + Failure +
Intangible

Once quantified, quality costs enhance decision making; which projects

will allow for the greatest return on investment, and which projects are
most effective at lowering quality costs.

Quality costs should be considered for the purpose of improvement.

This is what we have to do!
Curve of Total Quality Cost
Shifting the Quality Cost
Emerging Quality Cost Curve
Faculty of Industrial Management
Universiti Malaysia Pahang
26300 Gambang, Pahang Darul Makmur
Tel: +609 549 2166 Fax: +609 549 2167
www.fim.ump.edu.my