quality costs analysis - uoh.edu.sauoh.edu.sa/facultymembers/en/m.aichouni/documents/qem...

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Adapted From : MANAGING FOR QUALITY AND PERFORMANCE EXCELLENCE, 7e, © 2008 Thomson Higher Education Publishing 1

QEM 511 - Total Quality Management

Mohamed Aichouni

Professor of Quality Engineering, Hail University

http://faculty.uoh.edu.sa/m.aichouni/

Master Program on Quality Engineering and Management

LECTURE 05

QUALITY COSTS ANALYSIS

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Cost of Quality

Cost of poor quality (COPQ): The costs associated with providing poor quality products or services.

Costs of quality or quality costs does not mean the use of expensive or very highly quality materials to manufacture a product.

The term refers to the costs that are incurred to prevent, detect and remove defects from products.

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Cost of Poor Quality 3 .PPT

Managers and workers speak the language of things but Senior leaders speak the language of money...

…COPQ allows us to translate the things into money.

Cost of Poor Quality

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Costs of Quality

Cost of quality is a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures.

This allows an organization to determine the potential savings to be gained by implementing process improvement initiatives.

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Components

Conformance

$Non-

Conformance

$

$

Quality Costs : Concept


Traditional Cost of Poor Quality

(4-5% of Sales)

When quality costs are initially determined, the categories included are the visible ones as (iceberg model).

Waste

Testing Costs

Rework

Customer Returns

Inspection CostsRejects

Recalls

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Cost of Poor Quality – Iceberg Model

Late Paperwork High CostsPricing orBilling Errors

Excessive FieldServices Expenses

Incorrectly CompletedSales OrderLack of Follow-up

on Current ProgramsExcessiveEmployee Turnover Planning Delays Excess Inventory

ExcessiveSystem CostsOverdue Receivables

ComplaintHandling

Unused Capacity

Time withDissatisfied Customer

Excessive Overtime

Waste

Testing Costs

Rework

Customer Returns

Inspection CostsRejects

Recalls

Development Cost of Failed Product Hidden COPQ: The costs incurred to deal with these chronic problems

Premium Freight Costs

Customer Allowances

COPQ rangesfrom 15-25% of Sales

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Categories of Costs of Quality

Quality-related activities that incur costs may be divided into:

prevention costs,

appraisal costs,

and internal failure costs and

external failure costs.

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I want my money back!

Cost of Quality (COQ)

Prevention AppraisalInternal Failure

ExternalFailure

$$


COPQ OverviewDefinitions

All activities and processes that do not meet agreed performance and/or expected outcomes

Costs that would disappear if every task were always performed without deficiency

Actual Cost - Minimum Cost = COPQ

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Prevention Costs

Quality Planning

Training and Education

Process Definition, Job Descriptions

Technical Manuals

Customer Surveys

Detailed Product Engineering

Early Approval of Product

Specifications

Process Capability Studies

Preventive Maintenance

Supplier Qualification

Housekeeping

Zero-Defect Program

Prevention costs are incurred to prevent or avoid quality problems.

These costs are associated with the design, implementation, and maintenance of the quality management system.

They are planned and incurred before actual operation, and they may include:


Appraisal Costs

Examples:

Test and Inspection

Process Controls

Train QA Personnel

Product Audits and Quality Systems Audits

Customer Satisfaction Surveys and Audits

Prototype Inspection

Accumulating Cost Data

Supplier Certification

Employee Surveys

Security and safety Checks

Appraisal costs are associated with measuring and monitoring activities related to quality.

These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications.

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Internal Failure Costs Substandard Product

Scrap or Rework

Redesign/Engineering Change

Process Modifications

Payroll Errors

All Expediting Costs

Off-Spec/Waiver

Abandoned Programs

Supplier Problems

– Scrap and rework

– Late deliveries

– Excess inventory

Equipment Downtime

Accidents, Injuries

Absenteeism

Missed Schedule Cost

Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer.

These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer.

They may include:


External Failure Costs Product Recall

Handling Complaints

Customer ServiceCaused by Errors

Products Returned

Analysis of Returns

Evaluation of Field Stock

Late Payments andBad Debts

Lawsuits

Reports

– Sales and service

– Returns and allowances

– FailureLost Sales Because of Customer Dissatisfaction!

External failure costs are incurred to remedy defects discovered by customers.

These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer.

They may include:

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The Hidden Organization

“Theoretical Cycle Time: The back-to-back process timerequired for a single unit to complete all stages of a taskwithout waiting, stopping, or setups.”

ProductStep1

Step2

Floor Space Floor Space

Floor Space

Value AddedNon-Value Added

Philip R. Thomas, Competitiveness Through Total Cycle Time. McGraw-Hill (1990)

The Hidden Factory

Analyze

Fix

Test

Analyze

Fix

Test

Sigma

6 sigma

5 sigma

4 sigma

3 sigma

2 sigma

Cost

<10% of sales

10-15% of sales

15-20% of sales

20-30% of sales

30-40% of sales

The Six Sigma Approach of Cost of Quality

The traditional view would be to conclude that if a company wants to reduce defects and by this reduce the cost of poor quality, the cost of good quality would have to be increased, meaning higher investments in any kind of checking, testing, evaluation, training of operators, etc.

Following the Six Sigma philosophy, however, of building quality into process, service and products and doing things right the first time, the increase of the cost of good quality, while striving for zero defect performance, can be smoothed if processes get better.

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Sigma

6 sigma

5 sigma

4 sigma

3 sigma

2 sigma

Cost

<10% of sales

10-15% of sales

15-20% of sales

20-30% of sales

30-40% of sales


Sigma

6 sigma

5 sigma

4 sigma

3 sigma

2 sigma

Cost

<10% of sales

10-15% of sales

15-20% of sales

20-30% of sales

30-40% of sales


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Approaches used for Quality Cost Analysis

Quality Costs Reporting

Trend Analysis

Pareto Analysis

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Approaches used for Quality Cost Analysis


Advantages of Using Quality Costs for Management

Advantages

Reducing the cost of poor quality is one of the best ways to increase a company's profit.

Provides manageable entity and a single overview of quality.

Aligns quality and goals.

Prioritizes problems and provides a means to measure change/improvement.

Provides a means to correctly distribute controllable quality cost for maximum profits.

Promotes the effective use of resources.

Provides incentives for doing the job right every time.

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Customer Satisfaction Measurement using Quality Tools

https://www.youtube.com/watch?v=ZWiV6DcGs9s

Conclusion

"Quality begins with education and ends with education",

K. Ishikawa (1990).

Master Program on Quality Engineering and Management

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