Quality And Costs

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INTRODUCTION

uantify the size of the quality problem to help justify an improvement effort, to

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EVOLUTION OF QUALITY AND COSTS

pecialists extended their studies, some surprises emerged:

rger than had been shown in the accounting ran in the range of 10 to 30 percent of sales or Some of these costs were visible, some of them

result of factory operation, the support operations were also major contributors

of poor quality. Such costs had been buried in the standards, but they were in fa

ble, there was no clear responsibility for action to reduce them, neither was ther

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EVOLUTION OF QUALITY AND COSTS

t.

ack and reduce the high costs of poor quality. To work effectively, the scoreboard

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EVOLUTION OF QUALITY AND COSTS

tant cost that is not measured is lost sales due to poor quality (this is called

n the quality movement:

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EVOLUTION OF QUALITY AND COSTS

ed by two results. First, the quality costs turn out

to be much higher than had b

of current customers—“customer defections”—and an inability to attract new cus

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EVOLUTION OF QUALITY AND COSTS

t of poor quality (and the other elements) leads to the development of a strategic

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CATEGORIES OF QUALITY COSTS

1 . Internal Failure Costs . •Failure to Meet Customer Requirements and Needs . üScrap. üRework. üLost or missing information. üFailure analysis. üScrap and rework—supplier. üOne hundred percent sorting inspection. üRe-inspection, retest. üChanging processes. üRedesign of hardware. üRedesign of software. üScrapping of obsolete product. üScrap in support operations. üRework in internal support operations. üDowngrading. •Cost of Inefficient Processes . üVariability of product characteristics. üUnplanned downtime of equipment. üInventory shrinkage. •

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CATEGORIES OF QUALITY COSTS

xternal Failure Costs . •Failure to Meet Customer Requirements and Needs . üWarranty charges. üComplaint adjustment. üReturned material. üAllowances. üPenalties due to poor quality. üRework on support operations. üRevenue losses in support operations. •Lost Opportunities for Sales Revenue . üCustomer defections. üNew customers lost because of quality. üNew customers lost because of lack of capability to meet customer ne •

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CATEGORIES OF QUALITY COSTS

. Appraisal Costs .

üIncoming inspection and test. üIn-process inspection and test. üFinal inspection and test. üDocument review. üBalancing. üProduct quality audits. üMaintaining accuracy of test equipment. üInspection and test materials and services. üEvaluation of stocks. •

QUALITY & COSTS

4 . Prevention Costs . üQuality planning. üNew-products review. üProcess planning. üProcess control. üQuality audits. üSupplier quality evaluation. üTraining.

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CATEGORIES OF QUALITY COSTS

apply in all cases. Clearly, the practitioner should choose a structure that suits

y-related costs but costs that are part of normal operating expenses and therefore

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CATEGORIES OF QUALITY COSTS

Failure Costs). due to poor quality. e to inability to meet quality requirements for products. to quality reasons. and systems including computer information systems. cause history shows that a certain level of defects is inevitable and allowances

rework during production. tandards for scrap and rework. ent capacity. fects and errors.

essive product variability. t operations. supplier’s company. to a large amount—sometimes three or four times the

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MAKING THE INITIAL COST STUDY

t making a study. The accountant responds that “the books are not kept that way.”

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MAKING THE INITIAL COST STUDY

ing quality cost concepts. partment, one product line, etc. ng function. in management support to make a full cost study. arties to identify the work activities that contribute to the cost of poor qualit

Clearly , the sequence must be tailored for each organization .

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MAKING THE INITIAL COST STUDY

Data Collection . 1. 2. 3. 4.

Established accounts. Analysis of ingredients of established accounts. Basic accounting documents. Estimates. a. Temporary records. b. Work sampling. c. Allocation of total resources. d. Unit cost data. e. Market research data.

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RETURN ON QUALITY

in costly equipment or facilities. The investment is mainly in analysis work.

numerical estimates on the ROQ can be evaluated (if necessary) using “sensitivity

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GAINING APPROVAL FOR THE QUALITY IMPROVEMENT PROGRAM

h fails because it does not remove the causes of defects; i.e., it is detection but

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GAINING APPROVAL FOR THE QUALITY IMPROVEMENT PROGRAM

ganized program to reduce qualityse costs in two, within a space of 5

to zero. rt of the return on quality, present y the improvement program.

vement in quality. the company to justify a broader program.

mportant tool is the Pareto analysis which distinguishes between the “vital few”

ing organization, problem selection, training, review of progress, and schedule.

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USING COST OF POOR QUALITY CONCEPT TO SUPPORT CONTINUING IMPROVEMENT

ement :

ant losses for an individual problem and the specific costs to be eliminated. tiveness of the remedies instituted on a specific project. on specific quality costs. or quality study. t projects by analyzing the full study using Pareto analysis and other techniques

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USING COST OF POOR QUALITY CONCEPT TO SUPPORT CONTINUING IMPROVEMENT

he model shows three curves:

ective. (Note that the vertical scale is cost per good unit of product. At 100 per

it of product.

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REPORTING ON THE COST OF POOR QUALITY

lemented to solve the problem. Regularly issued reports with a fixed format usual

ut to certain constructive uses. To create and maintain the scoreboard, however, re

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