cost of quality-presentation
TRANSCRIPT
(COQ)
RAMJAN Sheik
RAMDOO Krish
RAMRUTTON Natasha
RAMKALAWON Avinash
RAMPERSAD Mitilesh
PRESENTED BY:
COST OF QUALITY
COST CATEGORIES
COLLECTION SYSTEM DESIGN
QUALITY COST BASES
ANALYSIS
PROGRAM IMPLEMENTATION
OBJECTIVES
Performance measurement is how
organizations, whether public or private
measure the quality of their activities and
services.
Cost of Poor Quality- a technique for
measuring Performance Measures.
INTRODUCTION
First appearance in 1930
1951- Dr Feigenbaum and Dr Juran give a new
dimension of the concept
1979- Crosby find that many organization spend about 15 to 20% of sales on quality cost
EVOLUTION OF COQ
According to Dale and Plunkett (1995), quality costs
refers to all necessary costs and non-value added
activities required to achieve a quality product or
service.
COQ is usually understood as the sum of
conformance plus nonconformance costs,
(Schiffauerova, 2006)
COST OF QUALITY (CoQ)
Quality costs mainly are used by management in order to be aware of:
1) Quality Improvement
2) Customer Satisfaction
3) Profit enhancement
Understanding quality cost enables management to be aware of hidden costs.
COST OF QUALITY AS A MANAGEMENT
TECHNIQUE
3) Profit enhancement
Source: Cookins 2010, Measuring the Cost of Quality for Management
HIDDEN COST
Source: Krishnan 2006 . pp.84
IMPORTANCE OF CoQ
To identify the global optimum for a
process
Quality along with the cost responds to
time and is flexible
The quality concept continues to evolve
Used as a measuring tool
External failure costs are less relevant to
services than to manufacturing
Internal failure costs might not be as
evident in services as in manufacturing
Internal failure costs tend to be lower in
service organizations
CoQ: SERVICE V/S MANUFACTURING ORGANIZATION
Year 1989: saved the company $53 million
Year 1990: saved the company $77 million
Year 1991: saved the company $20 million
COQ concentrates on tasks that have high
opportunity costs and makes those tasks more
efficient
QUALITY COST: XEROX’s case
COST CATEGORIES
PREVENTION COST
The cost of any action taken to investigate, prevent or reduce the risk of a non-conformity
INTERNAL FAILURE COST
The costs arising within the organization due to non-conformities or defects
APPRAISAL COST
The costs associated with measuring, checking, or evaluating products or services to assure conformance to quality requirements
EXTERNAL FAILURE COST
The costs arising after delivery of product or service to the customer due to non-conformities or defects
Cost Of ConformanceCost Of Non Conformance
Prevention cost is achieved by examining
closely the total of the lessons learnt or the
experience gained
Developing and integrating activities into
the management systems making it difficult
for the same errors to occur again
Cost of Good Quality: 1. PREVENTION COST
1. PREVENTION COST (Con’d)
1. PREVENTION COST (Con’d)
1. PREVENTION COST (Con’d)
1. PREVENTION COST (Con’d)
1. PREVENTION COST (Con’d)
The appraisal costs of poor quality have
been defined to include all costs incurred in
the planned conduct of product or service
appraisals to determine compliance to
requirements
Cost of Good Quality: 2. APPRAISAL COST
2. APPRAISAL COST (Con’d)
2. APPRAISAL COST (Con’d)
2. APPRAISAL COST (Con’d)
2. APPRAISAL COST (Con’d)
2. APPRAISAL COST (Con’d)
Internal Failure Cost refers to those costs associated with
defects that are found prior to transfer of the product to the
customer (Krishnan 2006). For ex:
Scrap;
Rework;
Material review;
Trouble shooting and retest;
Customer service
Cost of Poor Quality: 3. INTERNAL FAILURE COST
3. Internal Failure Cost (Con’d)3. Internal Failure Cost (Con’d)
3. Internal Failure Cost (Con’d)3. Internal Failure Cost (Con’d)
Purchased items are not
conformant to the requirements
due to degradation or
depreciation of the item
Sub-elements are purchased
material reject disposition
costs, supplier corrective
actions, rework of the supplier
rejects, etc
A significant portion of
overall quality costs
Sub-elements are: material
review, corrective action
costs, operations rework,
internal failure labour
losses, equipment repair,
etc
Costs associated with defects that are found after product is shipped to the customer (Krishnan 2006).
common examples of the external failure costs are:
Customer incurred cost; Customer dissatisfaction cost; Loss of reputation; and Lost opportunity cost
Cost of Poor Quality: 4. EXTERNAL FAILURE COST
4. EXTERNAL FAILURE COST (Con’d)
According to Besterfield et al., (2006), external failure cost is
divided into eight elements:
Complaint investigations of customer or user service
Returned goods
Retrofit and recall costs
Warranty claims
Liability Costs
Penalties
Customer or User Goodwill
Lost sales
THE 1- 10- 100 RULE
Ross (2009) pp.
Crosby’s Model
Crosby (1979) sees quality as conformance to
requirements
The price of conformance:
Actual Prevention and Appraisal Cost
Price of non-conformance:
Failure Costs
QUALITY COST MODEL
Opportunity Cost or Intangible costs’
models
Emphasizes the role of intangible cost
within the overall quality cost scheme
Intangible or opportunity losses cost is
incorporated into a typical P-A-F model.
QUALITY COST MODEL (Con”d)
Process cost model
Recognizes the importance of process cost measurement
and ownership
Total of the cost of conformance and the cost of
nonconformance
The use of a process cost model is suggested as a
preferred method for quality costing within TQM
The model pursues a continuous improvement policy on
key processes
QUALITY COST MODEL (Con”d)
ABC Model
Uses the two-stage procedure to achieve the
accurate costs of various cost objects
Early ABC systems focus on the accurate
assignment of overhead costs to products
A two-dimensional model of ABC was proposed
by Tsai (1998)
QUALITY COST MODEL (Con’d)
ABC MODEL (Con’d)
Vaxevanidis and Petropoulos (2008) pp 279
The system requires the close
interaction of the Quality and
Accounting departments
Some quality costs data cross departmental lines
Insignificant costs of poor quality may be difficult
to determine
COLLECTION SYSYTEM DESIGN
Quality Dept
Accounting Dept
ACCOUNTING SYSTEMtime sheets,
Schedules,
Minutes of meetings,
Expense reports,
Purchase orders,
Rework reports,
Scrap report,
Debit and credit memos,
Quality costs provide little information
Vary due to factors such as production volume or
seasonality
Measurement base sensitive to change must be
chosen which is compared to quality cost to obtain an
index
Index numbers are used to measure prices, costs or
other numerical quantities
QUALITY COST BASES
QUALITY COST BASES (Con’d)
FOR EXAMPLE :
Cost index in quarter t
= costs in quarter t x 100
Base period cost
QUALITY COST BASES (Con’d)
1.1. LabourLabour
2.2. ProductionProduction
3.3. SalesSales
4.4. UnitUnit
HOW TO START A QUALITY COST AUDIT
QUALITY COST AUDIT (Con’d)
Howard (2005) proposed a fourteen steps
approach to cost of quality
The decisive stage is to prepare the report after
the audit, communicating its results or getting buy-
in for the necessary changes
QUALITY COST AUDIT (Con’d)STEP 1STEP 1
Choose the audit team
QUALITY COST AUDIT (Con’d)
STEP 2STEP 2Choose the process
STEP 3STEP 3Communicate the audit plan
QUALITY COST AUDIT (Con’d)
STEP 4STEP 4Choose people working on the process to assist
with the audit
STEP 5STEP 5Agree a mission, set a schedule and identify any
training needed
STEP 6STEP 6Define and map the process
QUALITY COST AUDIT (Con’d)
STEP 7STEP 7Prepare to calculate Quality costs
What is cost of quality?
Definition of each category of cost should be written and distributed to all users
QUALITY COST AUDIT (Con’d)
STEP 8STEP 8
Determine the causes of Quality costs
STEP 9STEP 9
Interview staff
STEP 10STEP 10
Allocate costs
STEP 11STEP 11
Prepare the assessment reports
QUALITY COST AUDIT (Con’d)
STEP 12STEP 12
Prepare the audit report
STEP 13STEP 13
Share the findings and take action
STEP 14STEP 14
Develop a cycle of improvement
Morse (1983):
Systematic means of achieving planning and
controlling quality costs
Provides some enlightment to management
To reduce the misdistribution of quality costs
Goals for the reduction of quality costs
PURPOSE OF QUALITY COST SYSTEM
LMorse (1983):
Information is subjective
Important costs are omitted from the report
Overhead costs may be imprecise
Variation in activity
LIMITATION OF QUALITY COST INFORMATION
QUALITY COST REPORT
VENTURA COMPANY QUALITY COST
REPORT (Con’d)
Quality Cost Analysis is the process that
consists in comparing and examining the
individual quality cost item to each other and
to the total so that appropriate action could be
taken
QUALITY COST ANALYSIS
QUALITY COST ANALYSIS (Con’d)
Main Analysis Technique
Trend Analysis
Pareto Analysis
Comparative Analysis between the level of the
costs from the present and from the past.
Besterfield et al., 2006
Trend analysis can be made from cost categories
and subcategories, on products, on the
measurement scale, by plants within a corporation,
departments, and work-centres
1.TREND ANALYSIS
1.TREND ANALYSIS (Con’d) By Cost Category
1.TREND ANALYSIS (Con’d) By Index
1.TREND ANALYSIS (Con’d) By Product
1.TREND ANALYSIS (Con’d) Within a Category
1.TREND ANALYSIS (Con’d) Short Run Trend Analysis Graph
Pareto analysis is a classical technique for ranking
the problems or activities after their importance
founded Vilfredo Pareto
A small number of problems or
activities usually have caused larger proportion of
the troubles or consequences
called 80-20% principle
2. PARETO ANALYSIS
PARETO ANALYSIS (Con’d)By Category Vital Few
Useful Many
PARETO ANALYSIS (Con’d)By Element
In line with Besterfield et al., (2006) there are three
techniques to find out about optimum costs
To make comparisons with other
organizations
To optimize the individual categories
To analyze the relationships among the
cost categories
OPTIMIZING COST
OPTIMIZING COST (Con’d)Optimum Quality Cost
The idea of a quality improvement
strategy is that each failure has a root
cause, causes are preventable, and
prevention is cheaper
Projected teams is established to take corrective
actions after a problem has been identified with
the use of various analysis techniques
QUALITY IMPROVEMENT STRATEGY
QUALITY IMPROVEMENT STRATEGY (Con’d)
2 types of problems when projected team is
established
1. Firstly, problems which need to be dealt with
little or no help from other departments
2. Problems which need to be handled with full
co-ordination from the various departments in
the organization.
Most of the quality improvement projects will be
directed toward reducing failure costs
Failures which are detected at the beginning of
operations are less costly than failures detected at the
end of the operations or by customers and are also
cheaper to correct
The project team must concentrate on finding the root
cause of the problem
REDUCING FAILURE COST
REDUCING FAILURE COST (Con’d)
Once the cause has been determined, the project
team can concentrate on developing the corrective
action
Follow-up activities are conducted to ensure that
the corrective action was effective in solving the
problem
cost saving is calculated
Appraisal cost are non –valued added as they do
not change the quality of the product delivered
As failure costs are reduced, most likely the need
for appraisal activities will be reduced
The project team should review the entire
appraisal activity to determine its effectiveness
REDUCING APPRAISAL COST
REDUCING APPRAISAL COST (Con’d)
Typical question that the project team might investigate:
Is 100% inspection necessary or would statistical process
control work more efficiently and effectively?
Can inspection stations be combined, relocated, or
eliminated?
Are inspection methods the most efficient?
Could the inspection and test activity be automated?
Could data be more efficiently collected, reported and
analyzed using the computer?
The most effective way to manage quality cost is to
avoid having defects in the first place
Prevention activities are related to employee attitudes
and to formal techniques to eliminate problems in the
product cycle
Companies employs many technique to prevent
defects for eg.SPC, Quality engineering, training and
a variety of tools from TQM
PREVENTION OF QUALITY COST
With reference to Besterfield et al., (2006) the
program implementation is divided into six steps
STEP 1STEP 1
Determine if the program can be beneficial to the
organization
STEP 2STEP 2
Management Commitment
PROGRAM IMPLEMENTATION
PROGRAM IMPLEMENTATION (Con’d)
STEP 3STEP 3
Pretesting
STEP 4STEP 4
Train and educate the personnel
STEP 5STEP 5
Revise the accounting procedures in order to
accommodate the quality cost system
PROGRAM IMPLEMENTATION (Con’d)
STEP 6STEP 6
Expand the quality cost system in the entire
organization
There is by no means a uniform view of
what is meant by quality cost and what
should be included under the quality
cost umbrella.” (Barrie Dale and James
Plunkett, 1991 “Quality Costing”)
CONCLUSION