COST OF QUALITY

A tree
that reaches past your embrace
grows from one small seed.

A structure
over nine stories high begins with a
handful of earth.

A journey
of a thousand miles starts with a
single step.

There are no
shortcuts to any
place worth
going.

Outline to be delivered
Basic overview of quality and its importance
in todays competitive business
Quality cost concepts
Quality cost system definitions
Quality cost measurement
Quality cost program implementation
Use of quality costs
Quality improvement and quality cost
reduction

Creating
Customer
Value

Exceeding
customer
expectations

Employee
Empowerment

Not just doing

it well but
learning to do
it better

What is Cost of Quality??????

Quality is measured by the cost of

quality which is the expense of of non
conformance the cost of
doing things wrong.

Vs

Evolution Of H. J. Harrington's PoorQuality Cost Model

In 1950s, Feigenbaum, VP (GE), developed &
implemented "Cost of Quality" concept throughout
GE.
divided Cost Of Quality into following 2 categories & 4
sub categories:
o Costs of Control
o Prevention costs
o Appraisal costs

o Costs of failure of control

o Internal defect costs
o External defect costs

Poor Quality Cost

1964, IBM published its first report included poor-quality cost for internal
component mfg, subassembly, final
assembly, final machine test, system
test, & first 12 months at customer
location for 1620 system. called
Q-100 Report
During following months, report- expanded
to cover many other IBM systems.

COST OF QUALITY DEFINED

Quality costs -costs incurred because poor quality MAY or
DOES NOT exist.
cost of not meeting customers requirements- cost of doing
things wrong
All activities carried out that are not needed directly to
support departmental (quality) objectives - cost of quality.
At 3M quality cost equals cost minus no failure cost.
That is, cost of quality is difference b/w actual cost of
making & selling products & services & cost if there were
no failures during manufacture or use no possibility of
failure.

COST OF QUALITY
Control Costs
prevention
appraisal

Failure Costs
internal
external

COQ includes those costs associated with

definition, creation, & control of quality as

well as evaluation & feedback of conformance
with quality, reliability & safety requirements,
& those costs associated with consequences of
failure to meet requirements both within
factory & in hands of customer.

Quality is Free
For average company, the cost of
quality is about 25% of total sales
cost of prevention is a fraction of cost
of fixing mistakes after they made
Investments in prevention can
drastically reduce total cost of quality

These Two Main Areas Can Be Split Further As Shown Below:

Types of Quality Costs

Cost of Compliance
Preventive costs - prevent product defects
Appraisal costs - monitor & compensate when
prevention fails

Cost of Non-compliance
Failure costs
Internal losses - scrap, rework
External losses - warranty work, customer
complaint departments, litigation, product
recalls

four segments of quality costs:

A. PREVENTION. covers avoiding defects (poka yoke),
planning, preparation, training, preventative maintenance
& evaluation.
B. APPRAISAL. area covers finding defects by inspection
(poka yoke), audit, calibration, test & measurement.
C. INTERNAL FAILURE. covers costs borne by
organization itself such as scrap, rework, redesign,
modifications, corrective action, down time, concessions &
overtime.
D. EXTERNAL FAILURE. covers costs borne by
customer such as equipment failure, down time, warranty,
administrative cost in dealing with failure & loss of
goodwill.

Cost of Quality
Prevention costs
build it right the first time

Appraisal costs
inspection and testing

Internal failure costs

scrap and rework

External failure costs

warranty claims, recalls, lost business

Total Quality cost, is a combination of

prevention, appraisal & failure. Reducing
any of these reduces total. key to minimum
cost, is striking correct balance b/w three.
Clearly prevention reduces both appraisal
and failure costs, -eventually cost of
prevention itself starts to increase total cost
& so must be controlled & set at an
effective level.

Cost of Quality
Prevention
quality planning
process control
data acquisition and
analysis
training and personnel
development
design verification
quality system
development and
management
quality reporting
improvement projects

Appraisal
test and inspection of
incoming material
lab-based acceptance
sampling
in-line inspection and testing
setup for test and inspection
test/inspection equipment
and supplies
quality audits
quality endorsements (ISO,
MBNQA)
field testing
test/inspection equipment
maintenance

Cost of Quality
Internal

scrap
rework
retest
downtown
yield losses
disposition
engineering analysis
tracking and reporting
expediting

External
customer complaints
warranty costs
service and repair
expense
product liability
recall expense and
management
returned material
processing
credit allowance
loss of goodwill

COMPARATIVE COST OF QUALITY

Most
costly

The customer
finds defects
in delivered
parts/ services

Less
costly

The manufacturer
Or service org.
Finds & corrects
defects internally

Least
costly

The companys quality

mgmt system is
designated, planned,
& organized for
defect prevention &
continuous quality
improvement.

QUALITY COST CONCEPTS

represent difference b/w actual cost of product/
service & what reduced cost would be if there
were no possibility of substandard service, failure
of products, or defects in their manufacture.
interrelationship of quality, schedule & cost w/o
attention to contrary is likely to be unbalanced in
favor of schedule & cost- & often unwittingly at
expense of quality.
imbalance continue to exist as long as real cost of
quality remains hidden among total costs.

MEASURING THE COST

OF QUALITY

Measuring cost of quality

Like all things there is a price to pay for quality. total

cost can be split into two fundamental areas:
a. Non Conformance. area covers price paid by not
having quality systems or a quality product. Examples

(1) Rework. Doing job over again because it wasn't

right first time.
(2) Scrap. Throwing away results of your work
because it is not up to required standard.
(3) Waiting. Time wasted whilst waiting for other
people.
(4) Down Time. Not being able to do your job because
a machine is broken.

Measuring cost of quality

b. Conformance. Conformance is an aim of quality
assurance. achieved at a price. Examples :
(1) Documentation. Writing work instructions,
technical instructions and producing paperwork.
(2) Training. On the job training, quality training, etc.
(3) Auditing. Internal, external .
(4) Planning. Prevention, do right thing first time
(5) Inspection. Vehicles, equipment, buildings &
people.