NATIONAL UNIVERSITY OF SCIENCE

AND TECHNOLOGY

FACULTY OF INDUSTRIAL TECHNOLOGY

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING ENGINEERING

M Eng. Manufacturing Engineering and Operations Management

Quality Systems:

Cost of Quality as a Driver for Continuous Improvement

(Case Study – ZGB International Pvt Ltd)

Tendai T Ngwarati

Lindleen Mugwagwa

Daniel Maringa

Albet Mkandla

2012

1
Abstract
The firms in the textile industry have felt the pressures for tighter control measures on
quality. The pressure is being exerted both from within and outside the organisation.
Manufacturers Today, more than ever, change is essential to satisfying expectations however
that comes at a cost. Shareholders are also interested in seeing a high return on investment
thus management is constantly pressured to keep costs under control so that profits are
maximised. A failure to adapt to the competitive environment, is tantamount to giving away
the strategic advantage to other competitors.

The researchers are to focuses on cost of quality that the ZGB firm is currently facing, and
their impact on the business. The researchers would also recommended applicable quality
management system that can be could be used to address the issue of quality cost problems.
Currently there is no documented quality management system such that quality issues are not
addressed in a systematic way at the same time being controlled by production. In this paper
the researchers will also look looked at the effects of production controlling quality.
Due to the absence of a properly constituted quality department, the data on quality is hardly
analyzed or never analyzed. This robs the company of vital information that is not only used
in decision making but also knowing how the business is performing.
The research seeks sought to determine the quality cost for period January 2012 to September
2012 and also recommend recommended applicable systems to arrest the cost of quality. The
researchers would analyze of analysed rework reports, customer complaints etc. to determine
quality. Departmental analysis will also be was also used to determine to need for a quality
department.

i
List of Acronyms
COQ Cost of Quality
QC Quality Cost
P-A-F Preventive Appraisal Failure
RoQ Return on quality
COPQ Cost of Poor Quality
PDCA plan-do-check-act
ASQ American Society for Quality’s

List of Figures

List of Tables

ii
 Table of Contents
Abstract ....................................................................................................................................... i

List of Acronyms .......................................................................................................................ii

Table of Contents ..................................................................................................................... iii

Chapter 1 – Introduction ............................................................................................................ 4

1. Introduction ..................................................................................................................... 4

2. Report Structure .............................................................................................................. 7

Chapter 2 - Literature Review.................................................. Error! Bookmark not defined.

3. Introduction ................................................................... Error! Bookmark not defined.

Chapter 3 - Methodology ......................................................... Error! Bookmark not defined.

4. INTRODUCTION ........................................................ Error! Bookmark not defined.

Chapter 4 – Measurement of Quality Costs ............................. Error! Bookmark not defined.

4.1. Introduction ............................................................................................................... 36

4.2. Prevention costs......................................................... Error! Bookmark not defined.

4.3. Appraisal Activities ................................................... Error! Bookmark not defined.

4.4. Internal Failure Costs ................................................ Error! Bookmark not defined.

4.5. External Failure Costs ............................................... Error! Bookmark not defined.

iii
1 Chapter 1 – Introduction
Introduction
ZGB is a Textile Manufacturering firm based organization that manufactures grinding media
for mines, valves, slurry pumps and various spares and equipment for the mines and heavy
industries. Most of the products are produced from castings in either steels or cast irons.
Before production of castings a job card is issued detailing customer requirements. After the
casting process defects are then detected and the defective castings are reprocessed. Currently
a system of investigations and analysis of impact of reworks is not formerly documented. The
research seeks to use the cost of quality principle to enlighten management about quality cost
and their effects on the viability of the business. The cost of quality can be defined as the
expenditure incurred in defect prevention and appraisal activities plus the loss due to the
internal and external failure [ISO 8402: 1996]. In summary Cost of quality = cost of
conformance + cost of non-conformance.

Executive Summary
ZGB International is one of the foundry giants, which has managed to position itself as a
stable Foundry. Nonetheless, the negative macro variables are compromising its
functionality, which are: the indigenisation law and changes in technology. Despite these
prevailing challenges, the student has been exposed to the realities of the local industry as a
whole. The major tasks performed by the student were: Sales and Marketing, Preparation of
management reports, actively participated in some of statutory computations and production
process.

As a strategy to ensure goal attainment; ZGB international is chiefly urged to: eliminate the
bureaucratic structures and ensure flexibility in policy making and implementation. The
Company also recognizes and rewards excellent performance despite the global recession and
the financial challenges Zimbabwean firms are facing. On the other hand, the University is
encouraged to ensure close contacts with students on attachment electronically or physically
and to amend the courses it offers to be in line with industry expectations.

The professional programme have helped the student in that he had a chance to view the
organisation as whole and was able to analyse all departments and to comment on state of
affairs. As a student and a worker at ZGB International the student was able to demonstrate
what he can offer the organisation given the chance to be on top of the hierarchy.
4
Company Background
ZGB International is an entirely owned Zimbabwe Zimbabwe owned company which has
experienced phenomenal growth since its inception in 1904. The company which specializes
in iron and steel production is permanently situated in Gleneagles road, Willowvale industrial
area in Harare. It is head headed by the Executive managing director Mr Shami Kotecha. The
Directors of ZGB International are Umeshkumar Dwarkadas Kotecha and Dhirubhai
Maganlal Desai. Its sister companies are Africa Steel and Essar.

ZGB Corporate Philosophy

Mission Statement/ Vision Statement
Extend the market share of existing products and to develop as many products as possible in
service of mine and local industry in Zimbabwe with the view of substituting costly inputs.

ZGB International Values

 Customer satisfaction
 Reliability
 Honesty
 Integrity
Corporate Governance

ZGB International is cognisant of the need to exhibit impeccable integrity and

professionalism in the account of its business. To this end, the Company subscribes to sound
corporate governance practices. The Company acknowledges and upholds the seven basic
doctrines of good corporate governance as advocated in the King 11 Report on Corporate
Governance, namely:

 Discipline
 Transparency
 Independence
 Accountability
 Responsibility
 Fairness

5
Business
ZGB international work on a 24 hour break down service and provide a wide range of
products ranging from agricultural inputs, local industry inputs and mining products. Below
is an insight of the products offered.

Grinding Media
Chrome Cast Iron Balls – those are in five sizes from 25mm, 35mm, 40mm, 50mm and
60mm diameter. This type of ball is sand cast. This gives it a better abrasion resistance
property. Used with ball mills to grind owe.

Chilled steel balls- These came in the following sizes -60mm, 70mm, 80mm, 90mm, 100mm
and 120mm. These are made from arc furnaces and are preferred by Mines with big ball mills
as they can freely fall.

17% Chrome balls – these came in the range of 25mm-100mm and have a high chrome
content which make them very hard

Mills
Ball Mill- These came in different sizes and being measured in Diameter and length. This is
where grinding media is put to break down ore usually by mines.

Rod mill-they use the same mechanism for ball mill but differ in that it uses rods instead of
grinding media.

Pumps
Gate valve- These also range from 25mm – 500mm diameter. Customers like Zinwa, Dore &
Pitt and Kariba dam water works usually need these products.

Slurry pump- product normally used to drain water from drains and mad in city centres.
Typical customers which use this product are Harare water and Zinwa

Customers
ZGB’s cliental base is still sound due to the fact that its key customers support the country’s
strategic industries that is agriculture and mining. However with the land reform and
indigenisation law, the company is being affected resulting in fewer sales in mining and no
sell of stamp mill spares used in agriculture. Below is a sample of its existing clients and
suppliers.
6
Mines
Zimplats, Metalone group, ZMDC mines and Freda Rebecca mine to mention a few

Local Industry
Lafarge Cement, Mutare Board and doors, Cafca, Olivine Industries and More industries.

International Clients
ZGB international supply Laback with grinding media and Tuyeres to BCL South Africa. It
also supply Harvest Sea with engineering jobs

Suppliers
Super sands supply ZGB with Sand, Newmatic Tools supply machining tools and Boca gases
supply gas like co2 gas.

Competitors
Newman and Chaplin in Bulawayo, Midlands Metals, William Bain and Clarson and
Company are some of its competitors.

making.

1.0 Problem Statement

1. The motive is how to reduce quality cost and introduce a quality department that
will cater for quality issues for the organisation.
2. To
3. The impact of internal and external failures will be difficulty to resolve if the
quality issues are not resolved.

1.1 Paper Proposition

It is a general believe that cost of quality assessment will highlight all the quality cost and
preventive-appraisal-failure cost as they will be consider for future of the organization.

1.2 Objectives

1. To carry out an assessment for quality cost at a manufacturing company

2. To carry out a feasibility study of quality cost effects to ZGB International
7
 3. To carry out a preventive-appraisal-failure cost analyses at a manufacturing company.
4. To reduce quality cost and saves unnecessary external cost from costumers
5. To improve quality and quantity without trading off the two.

1.3 Justification

1.4 Scope of the Paper

The purpose of the Quality Cost Assessment is to raise awareness of the preventive-appraisal-
failure cost impacts associated with manufacturing processes, and to highlight the approaches
that the organization can take to avoid or minimize these impacts by adopting a suitable
Quality Management System.
Chapter 1 Provides a brief historical background for ZGB International, objectives of this
project, and problem statement.

Chapter 2 Provides the literature review on quality cost.

Chapter 3 Describes the methodology that was used in coming up with the paper and the
model used.

Chapter 4 The Preventive-Appraisal-Failure cost of the Organisation

Chapter 5 Results, Recommendations and Conclusion

Appendices

Reference

8
9
Chapter 2 Literature Review
Introduction
The purpose of having a literature review for Cost of Quality is to raise awareness of what is
supposed to be done in an organisation so as to achieved quality product. Cost of quality
impacts which whose are in the form of preventive cost, appraisal cost and failure cost are
considered in coming up with the final paper.

Evolution of Quality and Costs

During the 1950s, Juran (1951) expanded Quality and cost by introducing a numerous
quality-oriented staff departments. The heads of these new departments were faced with
“selling” their activities to the company managers. Because the main language of those
managers was money, the concept of studying quality-related costs provided the vocabulary
to communicate between the quality staff departments and the company managers.
Over the decades, as the staff quality specialists extended their studies, some surprises
emerged:
1. The quality-related costs were much larger than had been shown in the accounting reports.
For most companies, these costs ran in the range of 10 to 30 percent of sales or 25 to 40
percent of operating expenses. Some of these costs were visible, some of them were hidden.
2. The quality costs were not simply the result of factory operation, the support operations
were also major contributors.
3. The bulk of the costs were the result of poor quality. Such costs had been buried in the
standards, but they were in fact avoidable.
4. While these quality costs were avoidable, there was no clear responsibility for action to
reduce them, neither was there any structured approach for doing so.
Quality specialists used the data to help justify quality improvement proposals and to track
the cost data over time. Those early decades of experience led to some useful lessons learned.
Lessons Learned. These lessons, discussed below, can help us to formulate objectives for
tracking and analyzing the impact of quality on costs.
The Language of Money Is Essential. Money is the basic language of upper management.
Despite the prevalence of estimates, the figures provide upper managers with information
showing the overall size of the quality costs, their prevalence in areas beyond manufacture,
and the major areas for potential improvement.

10
Without the quality cost figures, the communication of such information to upper managers is
slower and less effective.
The Meaning of “Quality Costs.” The term “quality costs” has different meanings to
different people. Some equate “quality costs” with the costs of poor quality (mainly the costs
of finding and correcting defective work); others equate the term with the costs to attain
quality; still others use the term to mean the costs of running the Quality department. In this
handbook, the term “quality costs” means the cost of poor quality.
Quality Cost Measurement and Publication Does Not Solve Quality Problems. Some
organizations evaluate the cost of poor quality and publish it in the form of a scoreboard in
the belief that publication alone will stimulate the responsible managers to take action to
reduce the costs. These efforts have failed. The realities are that publication alone is not
enough. It makes no provision to identify projects, establish clear responsibilities, provide
resources to diagnose and remove causes of problems, or take other essential steps.
Scoreboards, if properly designed, can be a healthy stimulus to competition among
departments, plants, and divisions. To work effectively, the scoreboard must be supplemented
by a structured improvement program. In addition, scoreboards must be designed to take into
account inherent differences in operations among various organizational units. Otherwise,
comparisons made will become a source of friction.
Quality costs – definitions and typologies
According to quality expert Philip Crosby (1979), quality is free. What costs money is all the
actions that involve not doing things right the first time. According to Crosby, quality is
measured by the cost of quality, which is the expense of non-conformance –the cost of doing
things wrong. Joseph Juran’s (1951) concept of the cost of poor quality as “the sum of all
costs that would disappear if there were no quality problems” is similar to Crosby’s.
The most commonly accepted typology divides quality costs into prevention, appraisal,
internal failure, and external failure costs. This typology is often referred to as the PAF
(prevention, appraisal, and failure) and is one of “the most commonly used general cost of
quality model in the United States (Campanella, 1990), Great Britain (BSI 6143-2, 1990; BSI
6143-1, 1992), and based on the frequency of reference in the literature, world-wide (Plunkett
& Dale, 1986)” (Jeffery, 2003/2004). The PAF model traces back to the work of Feigenbaum
(1956). Campanella (1990) defines these costs as follows:
 Prevention costs are “the costs of all activities specifically designed to prevent poor
quality in products and services”
11
  Appraisal costs are “the costs associated with measuring, evaluating, or auditing
products or services to assure conformance to quality standards and performance
requirements”
 Internal failure costs are “the costs resulting from products or services not
conforming to requirements or customer/user needs (which) occur prior to delivery or
shipment [. . .] to the customer” and
 External failure costs are “the costs resulting from products or services not
conforming to requirements or customer/user needs (which) occur after delivery or
shipment of the product, and during or after furnishing of a service to the customer”
These costs occur when products or services fail to reach design quality standards but are not
detected until after transfer to the customer.
The basic suppositions of the P-A-F model are that investment in prevention and appraisal
activities will reduce failure costs, and that further investment in prevention activities will
reduce appraisal costs. Feigenbaum’s and Juran’s P-A-F scheme has been adopted by the
American Society for Quality Control in 1970 and the British Standard Institute (BS 6143
pt.2), and it is employed by most of the companies which use quality costing.

CoQ elements
In order to calculate total quality cost, the quality cost elements should be identified under the
categories of prevention, appraisal, internal failure and external failure costs. BS 6143: pt.2
(1990); see BS 6143: Part 2 (1990) and ASQC (1970) have identified a list of quality cost
elements under this categorization. These lists just act as a guideline for quality costing. On
the other hand, in order to identify CoQ elements, some organizations benchmark or borrow
elements from other companies, which have established CoQ programs. Nevertheless, most
quality experts suggest that CoQ programs should be tailor-made for each organization such
that they are integrated into a company’s organizational structure and accounting system
rather than just being borrowed.

CoQ metrics

CoQ measurement systems should contain good feedback metrics (indices) as well as a
mixture of global and detailed metrics. The latter actually represent the elements of CoQ and

12
how the performance of these elements is measured. Some examples of detailed metrics are
given in Table 2.1. Global quality metrics measure global performance; some examples are
also given in Table 2.1. Return on quality (RoQ), defined as the increase in profit divided by
the cost of the quality improvement program, is the most frequently mentioned global metric
in the context of CoQ. Otherwise, very little has been published on metrics for CoQ
Table 2.1 CoQ metric (indices)
Detailed metrics Global metrics
Cost of assets and materials RoQ= increase in profit/cost of quality improvement
Cost of preventive labor program
Cost of appraisal labor Quality rate = ([input - (quality defects + startup defects +
Cost of defects per 100 pieces rework)]/input
Cost of late deliveries Process quality = (available time - rework time)/available
Percent of repeat sales time
Time between service calls CoQf = external failure cost/total cost of
Number of non-conforming calls quality
Number of complaints received

2.5 Criticisms of COQ systems

Montgomery (1996) suggests that the principle purpose of a cost of quality (COQ) system is
cost reduction through identification of improvement opportunities. A number of companies
testify to the effectiveness of COQ systems in reducing costs.
Xerox, for example, claimed savings of $53 million in the first year of its COQ program
(Carr, 1995).
However, Montgomery (1996) also lists a number of reasons why many quality cost
programs fail:
(1) Using COQ information as a scorekeeping tool rather than as a driver for continual
improvement;
(2) Preoccupation with perfection in determining the COQ figures; and
(3) Underestimation of the depth and extent of commitment required to be made to
prevention.
Shepherd (1998) suggests that one of the setbacks to the application of COQ has been that
costs of failure are often based on costing variances which hide specific issues such as

13
increases in scrap rates by the standard being adjusted to allow for a greater usage level.
Johnson (1995, p. 87) found a number of quality practitioners who viewed COQ systems as
“administrative nightmares and as impediments to quality rather than as contributors to
quality”. Based on interviews with quality professionals, he attributes many COQ system
failures “to poor management planning, implementation, and follow-up” rather than to flaws
in the COQ concept itself.
Merino (1990), while finding no fault with the COQ concept, identifies difficulties in its
application. One problem he cites is inadequate cost accounting methods, which are unable to
deal effectively with an ever changing, highly automated manufacturing environment. He
suggests that one reason that prevention costs are usually the smallest category of COQ is
because outdated accounting systems are unable to provide management with the ability to
evaluate the profit results from prevention activities such as planning, designing and
communicating.
Dale and Plunkett (1999) point out the difficulties of applying COQ methodology outside of
manufacturing. It is easier to understand scrap and waste in tangible manufactured goods, but
less easy to understand wastage in service processes, which produce an intangible output.

2.6 Review of Quality Cost models

Allusions to quality costs first appeared in the 1930s in the work of Shewhart (1931) and to a
lesser extent Miner (1933) and Crocket (1935) (Giakatis et al., 2001). Formalization of the
concept of cost of quality developed out of the work of Joseph Juran (1951), Armand
Feigenbaum (1957), and Harold Freeman (1960). After Feigenbaum categorized quality costs
into prevention-appraisal-failure (PAF), the PAF scheme has been almost universally
accepted for quality costing. The American Society for Quality’s (ASQ) Quality Cost
Committee, established in 1961, worked to formalize the concept and to promote its use
(Bottorff, 1997). Crosby’s (1979) publication of Quality is free provided probably the biggest
boost to popularizing the Cost of Quality (CoQ) concept beyond the quality profession
(Beecroft, 2001).
These categories have been well accepted within the quality and accounting professions
(Atkinson et al., 1991; Riahi-Belkaoui, 1993; Jeffery, 2003/2004), and have been included in
international standards such as BS 6143 (Dale and Plunkett, 1999). However, in many
companies quality costs are not calculated explicitly but are simply absorbed into other
overheads (Shepherd, 2001).
14
Since Juran discussed the cost of quality, many researchers have proposed various
approaches to measuring Cost of Quality (CoQ). In this section, we will briefly review the
approaches to measuring CoQ. In agreement with the majority of previous researchers
present work classifies CoQ models into five discrete generic groups which are: P-A-F or
Crosby’s model, opportunity cost models, process cost models and ABC models. These
models are summarized in Table 2.2. Obviously, models within one group are not identical;
see comments in. Plunkett and Dale (1987) suggest that the most striking feature of their
literature review is the preoccupation with the prevention-appraisal-failure (P-A-F) model.
Indeed, most of the literature reviewed in the current paper report on the classical P-A-F
model. However, as Table 2.2 suggests, the P-A-F concept is not the only one, since other
models were found to be developed, discussed and used as well. This work classifies CoQ
models into four groups of generic models. These are: P-A-F or Crosby’s model, opportunity
cost models, process cost models and ABC (activity based costing) models. Obviously,
models within one group are not identical; as a matter of fact, they can differ quite
substantially and the suggested categorization only denotes the common underlying
principles.

Table 2.2 Generic CoQ models and cost categories

15
The failure costs in this scheme can be further classified into two subcategories: internal
failure and external failure costs. In general, these costs are described as follows and ASQ
recognizes these four categories of quality costs:
Prevention costs: These costs are associated with the design, implementation and
maintenance of the total quality management system. Prevention costs are planned and are
incurred before actual operation.
Appraisal costs: These costs are associated with the supplier’s and customer’s evaluation of
purchased materials, processes, intermediates, products and services to assure conformance
with the specified requirements.
Internal failure costs: These costs occur when the results of work fail to reach designed
quality standards and are detected before transfer to customer takes place.
External failure costs: These costs occur when products or services fail to reach design
quality standards but are not detected until after transfer to the customer.

16
Figure 2. Model for optimum quality costs, Frank (1999)
The process cost model pursues a continuous improvement policy on key processes within
the organization and innovates where appropriate, which in itself reflects both the kaizen
approach and Deming’s (1986) plan-do-check-act (PDCA) cycle. It can be applied to both
service and manufacturing industries, and can be used to improve a process stage with either
a high non-conformance cost by increasing preventative costs or with excessive conformance
costs. Quality problems and their causes can be determined more quickly than with the PAF
model. However, a complete accurate analysis of a company’s activities into interlinked
processes without duplication may be more time consuming than with the PAF model.

Crosby’s model
Crosby sees quality as “conformance to requirements” and therefore, defines the CoQ as the
sum of price of conformance (PoC) and price of non-conformance (PoNC). The price of
conformance is the cost involved in making certain that things are done right the first time,

17
which includes actual prevention and appraisal costs, and the price of non-conformance is the
money wasted when work fails to conform to customer requirements, usually calculated by
quantifying the cost of correcting, reworking or scrapping, which corresponds to actual
failure costs.

Quality Tools

There are seven tools that are used in quality improvement process. These tools are useful in
the identification of problems and establishment of measures for the improvement. These
tools are: Scatter diagram, check sheets, graph and charts, Histogram, Peroto Diagram, Cause
effect diagram and control charts

Figure 2.1 The structure of the process cost model

18
Cost of Poor Quality (COPQ)
Managers often find that focusing on the reduction of costs associated with poor quality or
failure costs the most direct approach to achieving high quality and also targets the most
consequential aspect of quality. Juran (1989) described the cost of poor quality as the cost
that exists because of quality problems and suggested that appraisal and failure costs are
usually much higher than prevention costs. Crosby (1984) estimated that the price of
nonconformance could represent 20 percent of sales by manufacturing companies and 35
percent of operating costs in service companies. Additionally, Crosby estimated that the price
of conformance in most well run companies represented 3-4 percent of sales. Since these
estimates of Juran and Crosby were made, advances in technology, global emphasis on
quality, the widespread application of ISO 9000, the proliferation of quality awards, and a
higher level of sophistication of quality techniques have reduced nonconformance costs
dramatically. Nevertheless, Defeo (2001) suggests that the total cost of poor quality could
represent as much as 15-25 percent of total operational costs. Dale and Plunkett (1999) have
reported that quality costs can represent 5-25% of annual sales. Finally, Feigenbaum (2001)
suggests that reducing nonconformance or failure costs could result in cost reductions
equivalent in value to as much as 10% of revenues.
The traditional cost of quality model is seen as inadequate by some researchers. Moen (1998)
identifies several shortcomings in traditional cost of quality models including:
- Cost based on internal cost accounting system that are primarily reactive and rely on
traditional accounting information which may not adequately identify and correctly specify
measurement for cost elements, or fail to reveal all costs, particularly intangible costs such
customer dissatisfaction or the impact of poor quality on the company reputation
- Improvement activities initiated primarily on identifiable measures that ignore hidden cost
structures including administrative costs
- Failure costs addressed under the Pareto principle, leaving minor problems unattended yet
still posing problems for the customer
- Prevention activities are difficult to define and price
- Appraisal activities with no optimal value, because their value depends on the purpose of
the appraisal and if an appraisal cost is incurred because of inadequate quality it is actually
part of failure cost (Moen, 1998)

19
Because of these shortcomings, Moen offers a customer and process focused PQC (poor
quality cost) model. The model is depicted in Figure 4. Of note in this model is the
classification of indirect poor quality costs. Customer costs are those costs incurred in
response to the customer such as warranty or adjustment costs and costs involved dealing
with the customer because of poor quality. Intangible costs are the consequence of customer
dissatisfaction such as lost sales and diminished reputation of the company or product.
Environmental costs are those costs incurred because of effects on the environment. In this
sense, negative environmental impact constitutes poor quality (Moen, 1998).

Figure 2. Customer and process focused cost of poor quality model

Harrington (1999) describes a model that also focuses on the impact of poor quality (Figure
5).
Harrington’s description of direct and indirect costs is similar to internal and external failure
costs. Harrington identifies five advantages of using a model of poor quality costs:
- Greater impact on management
- Employee awareness of the cost of poor quality
- Better return on the problem-solving effort
- Measurable impact of corrective action
- Simplified measure of the impact of poor quality

20
Indirect Poor Quality Cost
In Harrington’s model, indirect poor quality costs include the intangible costs of customer
dissatisfaction, loss of reputation, and resultant loss of sales. This structure of indirect quality
costs are supported by other researchers. Bhote (1995) argues the value of customer loyalty
and suggests that the loss of repeat sales from dissatisfied customers or the inability to win
new customers because of unfavorable word-of-mouth publicity is the most important yet
least known aspect of quality costs. He further argues that companies must somehow
understand their customer loyalty situation in order to make sound quality management
decisions. Defeo (2001) also recognizes the importance of customer loyalty as a hidden cost
of quality and the difficulty in calculating these costs. He suggests that failures that lead to
customer dissatisfaction are the most expensive to correct. Not only are customers lost due to
the quality problems and costs incurred to fix the problems, but additional costs are incurred
to regain lost customer confidence.

Hidden Costs
The cost of poor quality is fraught with hidden costs. Defeo (2001) suggests that the more
visible and easily measurable quality costs consume 4-5 percent of sales, yet the true cost of
poor quality that includes the difficult to measure and intangible costs such a additional
administrative costs and customer response to poor quality is much higher. Articulating the
importance of the cost of poor quality or quality loss, Giakatis, Enkawa, and Washatane
(2001) identified several types of hidden quality losses. Prevention and appraisal losses occur
if the attempt to initiate quality sustaining or improving efforts in the form of prevention and
appraisal activities are not successful. Manufacturing loss and design loss occur when a
company attempts to create a system compensation to reduce failure losses. Finally, “idle
loss” occurs when time spent on prevention, appraisal, or correction activities create an
operating loss due to delays or interruptions to operations.

21
Figure : Harrington’s Total Cost of Poor Quality Model
The costs of poor quality (COPQ) models offer a simplification of the quality-related cost
issue. By focusing on the elimination of poor quality, the other components of quality costs,
prevention and appraisal costs should diminish automatically. These models may also make
the quality cost structure easier to understand.
Recent surveys reflect a significant amount of confusion among managers with terms and
concepts associated with quality-related costs, suggesting that a simpler approach to the cost
of quality conundrum would be welcomed (Roden & Dale, 2000; Shah & Fitzroy, 1998).
Harrington’s model is arguably the most robust examined so far because it integrates
prevention, appraisal, and failure costs-making it consistent with the basic cost of quality
model, and it subsumes the attributes of the other models. However his model does not
identify the costs associated with quality improvement efforts.

22
Costs of Quality Improvement
The quality-related cost models examined to this point provide a description of the
relationship between the general costs associated with producing a quality product and the
costs associated with failing to produce a quality product. These models do not address the
costs associated with ordinary quality improvement activities such as employing a quality
improvement task force or more extraordinary quality improvement efforts such as a formal
Six-Sigma project.

These costs are in addition to normal quality management costs. They need to be identified
as such in order to be recognized as a decision variable in the decision process employed to
determine if the extraordinary quality improvement effort will be launched. Quality
improvement involves defining the problem or opportunity for improvement, measurement
and data collection, analysis, improvement planning, improvement implementation, and
control (Pande, Neuman, & Cavanagh 2002). Costs associated with the identification,
measurement, analysis, planning, and implementation activities of a quality improvement
effort would constitute the elements of a cost of quality improvement model that would be
adjunct to the existing quality-related cost structure model. These costs are different than the
cost elements identified previously in the other quality-related cost models.

Quality improvement costs would be the costs associated with activities such as assessing the
process for improvement opportunities, measuring the quality performance of the process,
designing and planning for quality improvement, implementation, and stabilization. From the
perspective of the cost of poor quality, quality improvement activities can be considered
failure cost reduction or nonconformance cost reduction costs. As such, they can be classified
as direct poor quality costs as identified in Harrington’s model. However, the specific
activities performed in the improvement process should be identified as discrete events to
make it easier to assign costs to the quality improvement activities.

An Extended Cost of Quality Model

Quality improvement activities can be integrated into any quality cost model. Figure 6 depicts
Harrington’s model modified to accommodate the costs associated with specific quality
improvement activities.

23
The specific activities normally associated with extraordinary quality improvement efforts are
integrated into the controllable quality cost component. Some routine appraisal efforts can be
used in the frontend analysis employed to assess and select a process for improvement. This
relationship is depicted by the connecting arrow between the appraisal component of
sustainment and the assessment component of improvement shown in Figure 6.
The advantage of this model is that it separates routine quality control and improvement costs
from exceptional efforts to improve quality such as Six-sigma. Since the quality improvement
activities are clearly defined, managers can easily determine costs associated with a specific
quality improvement effort. Managers can then determine the cost/benefit or ROI by
determining the net cost savings due to the successful application of the improvement in
response to the investment in the quality improvement efforts.

Figure : Extended Total Quality Cost of Quality Model

Quality system maturity typologies

24
Montgomery (1996) proposes a model for the evolution of a quality system. His model
defines the maturity of a quality system based upon the predominant tools used. An immature
quality system makes extensive use of acceptance sampling or end-of-line inspection. As the
quality system matures, acceptance sampling is displaced by process control. In a mature
quality system the primary tools used are design of experiments and process control.
Montgomery relates this evolution to the systematic reduction in process variation.
In 1994, Executive Improvement Solutions announced formation of the Quality System
Maturity Consortium (QSMC) to develop a maturity model defining quality system maturity
(Quality Progress, 1995). Currently, the most widely accepted maturity model is the one in
the ANSI/ISO/ASQ Q9004-2000 standard (American Society for Quality, 2000, p. 48). The
ISO Q9004-2000 standard provides a formal framework for classification of quality systems
based on performance maturity levels. These levels are shown in Table I. The document also
provides guidance for assessing the performance maturity level. This is the model used to
classify the quality systems of participants in this study.

Table 2 Maturity Level

Relationship between quality system maturity and quality cost distribution

The importance of tracking quality costs is accepted within the quality and accounting
disciplines (Chase, 1998; Wheldon and Ross, 1998, Viger and Anandarajan, 1999).
Conceptually, the correlation between the maturity of a quality system and the redistribution
of quality costs is well established. Some research has been conducted to determine the actual

25
effectiveness of COQ systems and the degree to which the redistribution of costs of quality
follows the conceptual model. Among the leading studies in this area is an exploratory
investigation performed by Ittner (1996). In hisstudy of 49 plants within 21 companies he
found that increases in expenditures for prevention and appraisal costs were associated with
reductions in failure costs in subsequent periods. However he also found that reductions in
prevention and appraisal costs were also associated with reductions in failure costs – “a
finding that is inconsistent with the traditional quality cost model” (p. 126). Ittner also found
evidence for reduced failure costs as a percentage of sales over the lives of the plants’ quality
programs.

Quality experts (Crosby, 1979; Evans and Lindsay, 1996; Montgomery, 1996; Mitra, 1998;
Sower et al., 1999; Yasin et al., 1999; Beecroft, 2001) have suggested that the distribution of
quality costs among these four categories changes as the quality system matures. An
immature quality system would be expected to have high total costs of quality (COQ) with
most of the expense occurring in the external and internal failure categories. As the system
matures, more of the expense occurs in the appraisal and internal failure categories while the
external failure costs decline. In a fully mature quality system, the largest category of
expenditure is prevention costs.

Older conceptual models show that there is an optimal level of quality that is below 100
percent conformance. At this optimal point total quality costs are minimized. The modern
conceptual model (Juran and Gryna, 1993; Shank and Govindarajan, 1994; Yasin et al., 1999)
rejects the idea of an “optimal point” below zero defects and suggests that increased
prevention expenditures on technologies such as factory automation make 100 percent
conformance economically feasible. As Deming (Walton, 1986) has said, zero defects (or 100
percent conformance) is a misguided goal without a method. The method behind the modern
conceptual model is the increased investment in prevention and appraisal activities that
improve the process and in turn drive failure costs toward zero.

Another form of total cost model relates the distribution of quality costs to the maturity of the
quality system (method) over time, as shown in Table. The modern conceptual model and
Table II are not in conflict, but are simply different representations of the same process.
According to the model in Table II, failure costs dominate in relatively immature quality
26
systems, but appraisal costs may be significant because of efforts to reduce external failure
costs. As the quality system matures, more money is invested in prevention and appraisal
activities. Because of lead times, total costs increase briefly before declining as the
prevention efforts bear fruit. The necessity for increased investment in prevention activities in
order to reduce internal and external failure costs has been documented by several authors
(Liebert, 1976; Blank and Solorzano, 1978; Campanella and Corcoran, 1983; Godfrey and
Pasewark, 1988). In mature quality systems, prevention and appraisal costs are larger relative
to failure costs but overall quality cost declines.

Usage of quality costing

Quality costing can be used as a lever to gain top management commitment to initiate an
improvement project. Top managers tend to be influenced by data expressed in monetary
terms rather than technical data such as defect rates. Their main area of interest can be
reflected as a strategic business objective in a company. Their commitment is decisive for the
success of a TQM initiative because many resources should be invested in quality
improvement projects Hwang & Aspinwall, (1996). In addition to providing a
communicating bridge between line and top management, quality costing can provide an
overall index for managers to evaluate and monitor the economics, effectiveness and
efficiency of quality activities in their organization. Quality costing integrates all the separate
quality activities into a total quality system. It forces the entire organization to examine the
performance of each quality activity in terms of costs. Moreover, quality costing can be used
as a starting point in setting up a quality system except where an organization already has
one.
It should be also noted that the usefulness of CoQ reporting does not have consensus in the
literature. Three noted authors on quality management (“gurus”), namely Deming, Crosby,
and Juran, each have a different attitude to CoQ reporting Oliver, (1999). Deming’s view is
that cost analysis for quality is a misguided waste of time and measuring quality costs to seek
optimum defect levels is evidence of failure to understand the problem. Crosby argues that
quality costs need to be measured, not for management control, but for the development of
“quality” thinking within the organization. The more popular approach is that of Juran who
advocates the measurement of costs on a periodic basis as a management control tool.

27
3.2 Implementation in manufacturing firms
Despite the interest of the academic community and the quality consultants in CoQ models,
the situation in the real world is different. The results of numerous industry surveys or
research studies, as summarized Schiffauerova & Thomson, (2006), confirm that CoQ is not a
widely used concept. Quality cost calculations are not common even among the recipients of
the Malcolm Baldridge National Quality Award which are Vaxevanidis, Krivokapic,
Stefanatos, Dasic, and Petropoulos, (2006). On the other hand, most examples confirm that
quality improvement and cost measurement processes bring about a huge reduction in a
company’s CoQ.

In a research concerning Australian manufacturing firms, Oliver (1999), it is indicated that of

the 136 respondents, 35 firms (25.7%) currently measure the cost of quality in some form.
Among the remaining 101 firms which did not measure cost of quality, 37 firms (27.2%)
indicated that they plan to implement a CoQ reporting system in the future, and a further 64
firms (47.1%) had no plans to implement CoQ reporting in the future.
In an earlier empirical research, Porter & Rayner (1992) studied twenty quality-oriented
manufacturing firms in the North of England. The survey revealed that only seven (35%) of
the sample made any attempt to monitor quality costs. Only “failure” or “tangible factory”
costs were recorded and all figures given appeared to involve an element of estimation.
Estimates ranged from 0.8% to 3% of turnover with a mean of 1.9 % of turnover. Six
companies estimated that such costs had fallen, in one case from 6.5 % to 1.75 % of turnover.
One firm claimed that failure costs had increased from 0.5% to 0.8% of turnover since
gaining certification. This had been caused by the adoption of tighter specifications, resulting
in more internal rejections.

In 1995 a similar research was performed in 250 companies, in the manufacturing sector,
having a minimum of 50 employees Kumar, and Brittain (1995). The situation concerning
CoQ was improved; 86 % of the companies responded, noted that they did not use BS 6143
standard, however, 78 % provided information about the perceived total cost of quality within
their company. It is also interesting to note that only 59 % of the companies stated that they
presented quality cost information at management review meetings.

28
In general, very few studies establish an effective empirical relationship among quality cost
components and quality. This is because it is very difficult to observe the quality data for a
particular industrial segment unless firms agree to provide the required data.
Carr & Ponoemon (1994) study the relationships among quality cost components by using 46
paper and pulp manufacturing mills in USA for a period of 48 months. They observe the
following relationships: internal failure is the most expensive and prevention is the least
expensive quality cost component, the combination of internal and external failure costs is
always higher than prevention and appraisal costs, and the quality reject rate decreases with
increased volume output. Moreover, this study suggests that only internal failure and external
failure costs have a statistically significant correlation with the level of quality. At the same
time, Bell et al. (1994) estimate that quality cost in the manufacturing industry is between 5
% and 25 % of sales.

In a recent report concerning a leading wire and cable company [26] results, partially in
agreement with Carr and Ponoemon (1994) were obtained: The research, initially, indicated
the statistically significant relationship between quality and the combination of appraisal and
prevention costs. The final results significantly indicated the following: (i) There is an inverse
relationship between appraisal cost plus prevention cost and failure cost; (ii) there is a direct
relationship between appraisal cost plus prevention cost and quality and (iii) there is an
inverse relationship between failure cost and quality.

Criticisms of COQ systems

Montgomery (1996) suggests that the principle purpose of a cost of quality (COQ) system is
cost reduction through identification of improvement opportunities. A number of companies
testify to the effectiveness of COQ systems in reducing costs. Xerox, for example, claimed
savings of $53 million in the first year of its COQ program (Carr, 1995).
However, Montgomery (1996) also lists a number of reasons why many quality cost
programs fail:
(1) Using COQ information as a scorekeeping tool rather than as a driver for continual
improvement;
(2) Preoccupation with perfection in determining the COQ figures; and
(3) Underestimation of the depth and extent of commitment required to be made to
prevention.
29
Shepherd (1998) suggests that one of the setbacks to the application of COQ has been that
costs of failure are often based on costing variances which hide specific issues such as
increases in scrap rates by the standard being adjusted to allow for a greater usage level.
Johnson (1995, p. 87) found a number of quality practitioners who viewed COQ systems as
“administrative nightmares and as impediments to quality rather than as contributors to
quality”. Based on interviews with quality professionals, he attributes many COQ system
failures “to poor management planning, implementation, and follow-up” rather than to flaws
in the COQ concept itself.]Merino (1990), while finding no fault with the COQ concept,
identifies difficulties in its application. One problem he cites is inadequate cost accounting
methods, which are unable to deal effectively with an ever changing, highly automated
manufacturing environment. He suggests that one reason that prevention costs are usually the
smallest category of COQ is because outdated accounting systems are unable to provide
management with the ability to evaluate the profit results from prevention activities such as
planning, designing and communicating.
Dale and Plunkett (1999) point out the difficulties of applying COQ methodology outside of
manufacturing. It is easier to understand scrap and waste in tangible manufactured goods, but
less easy to understand wastage in service processes, which produce an intangible output.

30
31
Chapter 3 Methodology
Introduction

The objective of this chapter was to come up with a method used for implementation of a
quality control system at ZGB International. The method imbedded in this final paper takes
us through the impacts of a Quality Cost which will also includes the formulation of a Quality
Department within the organization that will deal with these Quality costs. A methodology
for identifying areas of inefficient use of resources and poor management of quality, by
focusing on preventive, appraisal and failure cost was also included.

3.1 Quality Cost and Data Collection Methods

The aim of the Assessment phase was to collect data to evaluate the preventive, appraisal and
failure cost at ZGB International– especially in the areas selected as focus of this assessment
phase. The data classified into two categories was primary data and secondary data.
Primary data collected first time by direct observation, during plant operation visits and
during working hours, hence personal interviews with managers, superintendents, supervisor
and general workers of other department was carried out. Recorded information of the
organization was also useful and hence the researcher used information obtained from daily
working hours and their technical foreman service department. On the other hand, secondary
data obtained from existing records, publication and historical evidence of the company from
the company library and recordings was useful. Recorded information from published
books, journals, newspapers and internet was useful for the assessment of this
organization and outcome of this paper.

3.2 Sources of Quality and cost of Quality Model

Before the study quality costing (QC), the only cost that was collected are rework costs,
warranty costs, scrap costs. The researchers used the standard BS6143:1981 [x] as a model
element in the determination and allocation of cost elements. The table below shows the
categorisation of quality cost elements according to the BS6143[x].

32
Table 3.1 - BS6143 Cost Elements

Category BS6143 Element

Prevention A1 Quality control and process control Engineering

Cost A2 Design and development of quality control equipment.
A3 Quality planning by others.
A4 Production equipment for quality-maintenance and calibration
A5 Testing and inspection equipment- maintenance and calibration
A6 Supplier quality assurance
A7 Training
A8 Administration, Audit, improvement

Appraisal B1 Laboratory acceptance sampling

Costs B2 Inspection and testing
B3 In-process inspection (non-inspectors)
B4 Setup for inspection and testing
B5 Inspection and testing of materials
B6 Product quality Audits
B7 Review of testing and inspection data.
B8 On site performance testing
B9 Internal testing and release.
B11 Data processing ,inspection and test reports

Internal C1 Scrap
Failure C2 Rework and repairs
Costs C3 Trouble shooting , defect analysis
C4 Re-inspect and re-test
C5 Scrap and re-work (Supplier fault)
C6 Modification permits and concessions
C7 Down Grading

33
External D1 Complaints
Failure D2 Product Service Liability
Cost D3 Products Returned or recalled
D4 Returned material repair
D5 Warranty replacements

Data presentation and interpretation

The researcher is going to utilize techniques such as cause and effect diagrams, bar charts,
tables and pie charts in presenting and interpreting data. The above techniques have the
ability to provide methods for collecting, presenting and analysis and meaningfully interpret
data.

Cause and effect diagram- Ishikawa diagram

The cause and effect diagram is going to be used where causes will be based on certain
category such as the 6M’s (machine, method, materials, measurements, man and Mother
Nature), 4S’s (surrounding, supplier, system, skills) and 8M’s (price, promotion, people,
process ,place, plant, polices, procedures and product). This is going to help the researcher in
coming up with those causes that contribute to poor quality of products.

Pie charts

Pie charts are most frequently used to show proportions or share of occurrences but difficulty
to interpret for pie charts with more than six segments Morries, (1999) cited by Saunders et
al, (2003). As a result, the researcher is going to use them in such a way that it is easy to
interpret them for example using less than six segments.

Bar charts

Saunders et al, (2003) emphasize that for categorical and discrete data, bar charts are suitable
and that bar charts provide a more accurate representation and are used for most research
reports. In bar charts, rectangles are going to be used to present the given data. A bar chart
can be set up in different forms that are horizontal, vertical or component but the researcher is
going to use vertical bar charts to distinguish relative magnitudes as this is easier than the line
charts whose main objective is to distinguish trends.

34
3.7 Conclusion

In order to improve quality an organization must take into account the costs associated with
achieving quality since the objective of continuous improvement programs is not only to
meet customer requirements, but also to do it at the lowest cost.

35
Chapter 4 – Measurement of Quality Costs
Introduction
This chapter involved a more detailed study of each processing area and identification of

process inputs and outputs. The aim of the Assessment phase is to collect data to evaluate the

quality cost associated to each process/department within the organization.

Process analysis and problems identified

Figure 4.1 The casting process flow sheet

Problems Identified

The problems can be classified into the following categories:

1. Core making
 Poor surface finish
 Completely damaged core
2. Molding
 Misalignment of cope and drag box
3. Melting and pouring
36
  Short pouring
 Slag and sand inclusion

The process was analysed by considering each step in the casting process. This was done to
identify all the wastes in the shop floor .This helped to determine value adding and non value
adding activities carried out in the casting process at ZGB. The non value adding activities
are removed so as not to waste time and also to meet customer demand on time. There are
also some processes essential in the casting process which do not value to the final product
but have to be carried out and these are called required non value added activities.

Cause and effect diagram

Cause and effect Analysis is a technique for identifying all the possible causes associated
with a particular problem before narrowing down to the root causes which need to be
addressed. This is a valuable tool to show why an effect is happening. This is done by first
identifying the problem, and making sure that the problem is well defined and clear. A
brainstorming session was carried out to analyse the problems and come out with possible
causes of the problem. The possible reasons were categorized into Man , Machine, Method
and Material.

Figure 4.2 Cause and effect diagram for poor finish in core making

Method People

Improper filling of
Improper
sand
training

Incorrect Not setting the

proportion right sand

Poor surface
finish
Poor Quality of
sand

Poor quality of oil

Machinery Material

37
Figure 4.3 Cause and effect diagram for shift in moulding

Method People

Improper filling of
Improper
sand
training

Not setting the

right sand
Wet sand

Shift

Poor quality of
mould

Machinery Material

Figure 4.4 Cause and effect diagram for sand and slag inclusion in a mould

Method People

Pouring speed Poor house

keeping

Poor house
keeping

Slag inclusion

Gas explosion

Poor quality of oil

Gas explosion

Machinery Material

38
Figure 4.5 Cause and effect diagram for short pouring in metal pouring process

Method People

Improper
training

Pouring speed Urgency in work

Short pouring

Improper shank

Mould size

Machinery Material

Quality process inhibitors

Disillusioned by failure

Lack of results have led can lead employees to think that improvement initiatives are
inherently doomed for failure

Higher quality costs more

Most managers hold to a mindset that higher quality costs more. This mindset may be based
on the outmoded belief that the way to improve quality is to increase inspection so that fewer
defects escape to the customer. Higher quality in the sense of improved product features
(through product development) usually requires capital investment. In this sense it costs
more. However higher quality in the sense of lowering waste usually costs less.

Employee apprehensions: Going into quality improvement involves profound changes in a

company’s way of life. It adds new roles to the job descriptions and more work to the job
holders. To the employees, the most frightening effect of this profound set of changes is
threat to ebs. Reduction of waste reduces the need for redoing prior work and hence the
people engaged in the redoing Elimination of such jobs then becomes a threat to jobs of the
39
associated supervision therefore it comes as no surprise if the efforts to reduce waste face
resistance from the work force

Prevention costs
Prevention costs are made up of discrete elements carried out on a part time basis by people
from different departments as a result prevention costs are the most difficult category to
measure [B. Dale,1991]. Therefore prevention costs depend very much on estimates of
apportionment of time by personnel who do not usually record how they spend their time.
Table 4.1 the table below summarises the results of prevention cost.

Element Findings

A1a Quality engineering (Translating product design or customer quality requirements

into manufacturing quality controls of materials and process)

 This is estimated to be at least 1 hour per day. $220.00 per month.

A1b Process Engineering (Cost of implementing and maintaining quality plans and
procedures)

 There are no documented quality plans or procedures and no records

implemented plans.
A2 Design and development of quality measurement and control equipment.

 This function is hardly done, hence the cost is considered negligible.

A3 Quality planning by functions other than Quality control department.

 There is no quality control department, hence this function is handled by

other departments normally on inception of any new job and it is not done
systematically.
 The cost allocated for this is $20.00 /hr/job. The author will use this cost
using the total jobs done to date ($580.00 /month)
A4 Calibration and maintenance of production equipment used to evaluate quality:

 To date only the infrared thermometer has been calibrated in June at a cost
of $50.00
A5 Maintenance and Calibration of test and inspection equipment:

 To date only the Spectrometer has been calibrated in June at a cost of

$1500.00.
A6 Supplier Assurance:

 There is no cost of evaluating supplier, since this is not done.

A7 Quality training

40
  There are no documented training records on quality training.
A8 Administration, Audit, and improvement.

 There are no records of process audits for improvement purposes. Also

records of process performance are available but not analyses for
improvement.

Appraisal Activities
These are defined as the costs of assessing the quality achieved [B.G.DALE,p75]. The table
below summarises the findings of appraisal costs.

Table 4.2 the table below shows Appraisal Activities

Element Findings

B1 Laboratory acceptance testing (purchased production materials):

 Scrap metal is analysed visually on incoming.

 The time spent per batch is 0.5hrs, hence the cost per batch is estimated at
$5.00. Therefore the total cost for the period under review is $$720.00
B2 Inspection and testing (quality control department):

 There is no quality control department; inspection is done by senior

production personnel B3.
B3 In process inspection (Non quality control personnel):

 This cost is estimated to be apportion to four skilled production personnel

and estimated to be 2 hours per 8 hour shift, working at 22 working days
at a rate of 3.80/hr ($668.8 / month).
B4 Setup for testing and inspection:

 This cost is considered negligible considering the nature of operations.

B5 Inspection and test materials (Materials consumed or destroyed in the control of
quality).

 The cost under this category is very insignificant since there in no

destructive testing.
B6 Product Quality audits:

 This cost is estimated to 1hour’s time of the production foreman, therefore

the estimate cost for four foremen is $325.60/month
B7 Review of test and inspection data:

 This is estimated to be 0.5hrs per day of the production heads of

departments; therefore estimate for each month is $220.00.

41
B8 Field Performance testing (on site visits):

 This cost is fully recovered in costing of products that require this

exercise, therefore it is not applicable.
B9 Internal testing and release:

 This is done by production senior personnel. The estimated time per day
would be 0.5 hrs; therefore the estimated cost would be $83.60 per month.
B10 Evaluation of Site material :

 This cost is in applicable since all materials are at one location.

B11 Data processing inspection and test reports

 This cost is done by the laboratory and is estimated to be 1 hour of lab

senior man. The estimate value is $220.00 per month.

Internal Failure Costs

These are defined as the costs arising within the manufacturing organisation of the failure to
achieve the quality specified [B.G.DALE, p78]. The major items are reworks. The major cost
elements are as detailed in the table below.

Table 4.3 this table indicates internal failure costs

Element Findings

C1 Scrap costs:

 Girth gear $1059.00 January 2012.

 Girth gear $4368.66 January 2012.
 Crusher hummers $52.32 February 2012.
 Crusher tips $39.40 Feb 2012.
 Drive Unit $294.91 May 2012.
 Coupling $80.17 May 2012.
 Pinion $3933.57 May 2012.
 Cast gear $972.27 May 2012.
 Bearing $1285.92 May 2012.
 Bearing pedestal $185.91 June 2012.
 Valve Blank $35.46 June 2012.
 Trunnion bearing $4850.23 June 2012.
 Billet $630.00 July 2012.
 Shaft $1519.03 July 2012.

42
  Crane Wheels $2318.28 July 2012.
 Steel tyre (1) $3356.25 Sept 2012.
 Crane Wheels $1705.32 Sept 2012.
 Steel tyre(2) $3356.25 Sept 2012
 Roller $1947.86 Sept 2012.
C2 Re-work and Repair:

 Girth gear $2987.96 January 2012.

 Girth gear $5964.66 January 2012.
 Crusher hummers $73.19 February 2012.
 Crusher tips $53.32 Feb 2012.
 Drive Unit $294.91 May 2012.
 Coupling $132.61 May 2012.
 Pinion $4675.57 May 2012.
 Cast gear $1394 May 2012.
 Bearing $1370.48 May 2012.
 Bearing pedestal $219.28 June 2012.
 Valve Blank $78.26 June 2012.
 Trunnion bearing $6540.23 June 2012.
 Billet $649.41 July 2012.
 Shaft $1519.03 July 2012.
 Crane Wheels $3021.28 July 2012.
 Steel tyre (1) $11395.53 Sept 2012.
 Crane Wheels $2209.32 Sept 2012.
 Steel tyre(2) $11395.53 Sept 2012
 Roller $2523.86 Sept 2012.
C3 Trouble shooting (defect failure analysis) to determine cause: This task is done
by senior production personnel in conjunction with the laboratory department.
The value is estimated to be 6% cost of reworks.

C4 Re-inspection and retesting of reworks: This function is conducted by the

production senior personnel and is estimated to be 5% of the reworks.

C5 Scrap and Reworks (fault of supplier, downtime) :

 3 tonnes of poor quality coke $510.00 in March 2012.

 10 tonnes wet chromite sand; estimated lost time $5600.00 August 2012.
C6 Modifications, permits and concessions: Redesign of running systems and
modifications, this is estimated at 3% of reworks.

43
C7 Downgrading: The estimated cost of downgraded grinding media $1500 March
and $1800 May value for stores inventory.

External Failure Costs

These are the costs arising outside the manufacturing organisation of the failure to achieve
the quality specified after transfer to customers [B. G. Dale, p82], below is a summary of
external costs according to BS6143.

Table 4.4 this table shows external failure costs

Element Findings

D1 Complaints administration – these are mostly handled by the Sales and marketing
department together with the respective production department manager. The time spent
on administration of complaints is about 9% of time of the Sales Manager ($270.00 per
month).

D2 Product liability – The captured cost in accounts is $5600.00 (July 2012) NI-hard Bushes.

D3 Handling and accounting costs of products rejected or recalled – These are broken down
as follows. ($20-00 Sep 2012)

D4 Returned Material repairs - Returned jobs by customers:

 Returned stub shaft ($225, Sep 2012).

 Returned rollers ($3500, July 2012)

 Returned stub shaft ($225, June 2012).

D5 Warranty replacement – Cost of replacing products that have failed.

 2 pinions ($6570.69, January 2012)

 Blending Pot ($7275.10, March 2012)

 2 liners ($2401.91, May 2012)

 Bevel gear ($633.98, June 2012)

 Gland housing ( 1547.03, June 2012)

 Ash pot ($708.62, July 2012)

 Pinion gear ( $562.92, July 2012)

44
 Lever ($145.80 August 2012)

 Bushes ($450.00 August 2012)

45
Chapter 5 – Results
Introduction
This chapter summarises the findings of the previous chapters and also explaining the
observed patterns. It also includes the information obtained from January to December of the
recorded data during working hours and standard units from the obtained secondary gathered
data.

Summary of costs
The table below summarises the observed costs by category. From the table, 63% of COQ is
attributed to internal failure and 4.2% of sales revenue.

Table 5.1 – Summary of COQ by categories

COST CATEGORY AS COLLECTED % of COQ % of Turnover

Prevention 14,500.00 9% 0.6%
Appraisal 14,382.00 9% 0.6%
Internal Failure 105,179.98 63% 4.2%
External Failure 32,293.11 19% 1.3%
TOTAL 166,355.09 100% 6.6%

COQ Pie Chart

EXTERNAL PREVENTION COST
FAILURE COST 9%
19% APPRAISAL COST
9%

INTERNAL FAILURE
COST
63%

46
From the above table the COQ is estimated to be 6.6% of sales revenue. Experts estimate

(Semich, 1987) that the cost due to poor quality can range as high as 40% of total sales with

the industry average running close to 25% in manufacturing. Many feel that it should be only

about one-tenth of this amount, or about 2.5%.

According to [Dale and Plunkett, 1991] quality cost can represent 5% to 25% of total sales

revenue and can be as high as 35% in service industry. The graph below shows all the cost

elements ranked in descending order. As can be seen from the graph the three elements C2,

C1 and D5 constitute the bulk of the COQ. A detailed table of quality cost elements is shown

in Appendix A.

Fig xx – COQ Cost elements

The pie chart below illustrates that the elements Scrap (C1), Rework (C2) and Warranty (D5)

constitute 65% of the COQ.

47
 C4 C6 COQ Elements
2% 1%
C7 B9 B10
D1 A1B7 B11
B1
D3
A4
A2
A6
A7
A8
B2
B4
B5
B8
2% 1% 1%0% 0%
0%
B6 1% 1%
2%
D4 C3
2% 2%
A3 C2
3% 34%
D2
3%
B3
4%
C5
4%

A5
4% D5
C1
12%
19%

The table below shows the major three cost drivers of COQ namely scrap, rework and
warranty costs.

Table 5.2 COQ drivers

COST ELEMENT COST % OF TURNOVER

SCRAP (C1) 31,360.81 1%
REWORK (C2) 56,499.27 2%
WARANTY COST (D5) 20,296.11 1%
TOTAL 108,156.19 4%

48
Chapter 6 - Recommendations and conclusion
Introduction
This chapter concludes the assessed results from the previous chapter and some
recommendations are outlined, benefits of COQ to the organisation are also included.

Recommendations

In order to realize the benefits of this COQ Assessment that was carried out at ZGB
International. ZGB International should consider the following recommendations that were
outlined above by the Researchers.

COQ Assessment

After COQ was conducted at ZGB International, vast opportunities which if implemented can
lead to quality product output, savings in raw materials and production costs were outlined in
this document. Opportunities that require no capital injection should be given first priority
including those that require immediate attention. Those require capital injection should, be
given priority as outlined in the assessment result and recommendations.

After the COQ that was conducted at ZGB International, vast opportunities which if
implemented can lead to quality products output, savings in raw materials and production
costs were outlined in this document.

Quality Assurance and Quality Control

Quality assurance and Quality control can improve the performance and plant utilization at
ZGB International as exposed by the COQ that was done. It also improves quality of the
product, reduce exposure limits for external failure and internal failure can be achieved by
introduction/ selection of proper quality management system for the organisation. There is
also serious need to focus on improving the existing equipment by adopting proper quality/
maintenance strategies.

49
Implementation of Quality Department

Quality department approach to quality can be a powerful as it will push for a recommended
quality tool to be used for the organisation.

Quality department have a major role to this organization and if it uses the historical data
from the organisation as highlighted in this document the organization will gain the following

1. High quality products

2. high production rates
3. reduce down time and increase profits
4. increase employee moral
5. save money
The highlighted areas are specifically on the P-A-F model of analyses. The improvement of
P-A-F will also give the organization opportunity in using powerful quality management tool
which will give recognition to the organisation by both its suppliers and customers

1. To carry out an assessment for quality cost at a manufacturing company

2. To carry out a feasibility study of quality cost effects to ZGB International
3. To carry out a preventive-appraisal-failure cost analyses at a manufacturing company.
4. To reduce quality cost and saves unnecessary external cost from costumers
5. To improve systems by introducing a quality department that will develop a quality
management system for the organisation.

General recommendation
1. For the company to continuously satisfy customers it is important to keep up to date
information on customer’s complaints for it to be easy to make continuous
improvements in the quality of products.
2. Quality responsibility must be clearly defined to all employees.
3. Employees must be involved in quality planning to help reduce the number of defects
in the department.
4. There must be a quality plan for suppliers to safe guard the quality of incoming raw
materials.
5. All employees must be trained in quality concepts.

50
 6. There is need to first map customer’s specifications into technical specification and
listening to the voice of customers before production starts.
7. The company may implement ISO9001- 2008 as part of its Total Quality
Management (TQM) system to benefit from reduced P-A-F since continuous
improvement is at the heart of (TQM).
8. The concept of value engineering must be understood so as to realise what the product
is and the expectation of the customer relating to the product.

Benefits of COQ

 COQ can provide cost data for motivational purposes to employees. Many
organizations today are looking for ways to demonstrate the relationship of employee
efforts to the bottom line.
 COQ serves this purpose by portraying results in numbers to which members of a
development organization directly contribute.
 COQ can provide a basis for budgets to quality operations. When the tradeoffs
between quality and costs are clearly identified, a stronger rationale can be made for
budgeting the quality function. Rather than allocating the quality operation a
percentage of the total development budget, management can budget the quality
operation based on expected returns.
 COQ can be used to compare process improvements and identify the most cost
effective ones. It provides the basis for measuring and comparing the cost
effectiveness of all the quality improvements undertaken by an organization.
 COQ provides one measure of comparing the success of projects. Even within a given
organization, the software process may vary widely from one project to another. The
many factors, tangible and intangible, which characterize a project make it difficult to
compare projects.
 COQ can be measured within and across projects and provides a means of
comparison.
 COQ can be used to identify quality improvement candidates. Examination of the
COQ components often reveals higher quality costs in particular area. Analysis of the
causes of these costs can provide the basis for quality initiatives in development
processes.

51
  COQ can be used to reduce the quality costs by altering the process in a particular
project. Once the relationships and trade-offs among the

Conclusion
The application of the cost of quality approach in the foundry industry environment provides
a systematic, structured approach to the quality problem and identification of correction that
focuses on unfavourable variances in operational performances. The approach presented and
applied in this study, capitalizes on the system orientation of business organization,
continuous quality improvement techniques, proactive managerial actions, to achieve product
efficiency, customer satisfaction, and strategic effectiveness. As noted by Shepherd, there are
many undiscovered opportunities to convert quality and process improvements into bottom-
line benefits. However, the details of the assessment of missed quality objectives and means
for quantifying and implementing corrective actions were previously missing. The research
presented here provides a significant step toward overcoming these difficulties by providing a
systematic practical approach to addressing the cost of quality. For an organization to realize
the operational, strategic and customer-related benefits of the approach proposed here, it must
meet the following requirements and undertake the required changes.

(a) Organizational structure-related requirements and changes:

 Change organizational structure and culture in order to promote an open system

organizational structure without functional barriers.
 Promote the interaction between the organization and its environment.
 Promote a customer orientation based on the delivery of quality to customers
throughout the organization.
 Modify reward systems to reward quality and customer orientation rather than
quantity
 Establish strategic alliances with suppliers and vendors to promote input quality.

52
(b) Technical requirements and changes:

 Application of innovative techniques such as process analysis, process reengineering,

benchmarking, TQM, continuous quality improvement, root cause analysis, supply
chain analysis and time-based analysis
 Applications of statistical quality procedures and sampling procedures.
 Understanding the relationship between quality and cost
 Understanding the different definitions and dimensions of quality.

c) Informational requirements and changes:

 Establish a quality and cost-related information system and databases that connect the
entire organization by utilizing information technology, so it can operate as a total
system
 Link the organization to customers and supplies, so that can operate as an open
system.

53
References

1. Bottorff, D. (1997), “COQ systems: the right stuff”, Quality Progress, Vol. 30 No. 3, pp.
33-5.
2. British Standards Institute (1990), BS 6143-2: Guide to the Economics of Quality.
Prevention, Appraisal and Failure Model, British Standards Institute, London.
3. BS 6143: Part 1, Guide to the Economics of Quality: The Process Cost Model, British
Standards Institution, London, 1992.
4. BS 6143: Part 2, (1990) Guide to Economics of Quality: Prevention, Appraisal and
Failure Model, British Standards Institution, London,.
5. Campanella, J. (Ed.) (1990), Principles of Quality Costs, 2nd ed., ASQ Quality Press,
6. Milwaukee,
7. Crocket, H. (1935), “Quality, but just enough”, Factory Management and Maintenance,
Vol. 93,June, pp. 245-6.
8. Crosby, P. (1979), Quality is Free, McGraw-Hill, New York, NY
9. Feigenbaum, A. (1956), “Total quality control”, Harvard Business Review, Vol. 34 No.
6,pp. 93-101, (also reprinted in Sower, V., Motwani, J. and Savoie, M., Classic Readings
in Operations Management, Dryden Press, Fort Worth, TX, pp. 307-321).
10. Frank M. Gryna (1999) Distinguished Univ. Professor of Management, The Center for
Quality, College of Business, The University of Tampa, Tampa, FL (Section 8, Quality
and Costs; Section 18, Market Research and Marketing; Section 22, Operations)
11. Giakatis, G., Enkawa, T. and Washitani, K. (2001), “Hidden quality costs and the
distinction between quality cost and quality loss”, Total Quality Management, Vol. 12
No. 2,pp. 179-90.
12. ISO 8402: (1996) Quality Management and Quality Assurance( First revision)
13. ISO 10014 standard (2006)., Quality management - Guidelines for realizing financial and
economic benefits,
14. Juran, J. (1951), Quality Control Handbook, 1st ed., McGraw-Hill, New York, NY.
15. Miner, D. (1933), “What price quality?”, Product Engineering, August, pp. 300-2.
16. Porter, L.J. and Rayner, P. (1992), “Quality costing for total quality management”,
International Journal of Production Economics, Vol. 27, p.69
17. Plunkett, J. and Dale, B. (1986), “Quality costing: a summary of research findings”,
Quality Assurance, Vol. 12, pp. 40-3.

54
18. Plunkett, J. and Dale, B. (1991), “Quality costing: First Edition, Chapman and Hall, New
York, NY
19. Shewhart, W. (1931), Economic Control of Manufactured Product, D. Van Nostrand
Co.,New York, NY.
20. Shepherd, N. (1998), “Quality measurement and the competitive advantage”, Journal of
Strategic Performance Measurement, Vol. 2 No. 3, pp. 22-30.
21. Jeffery, A. (2003/2004), “Managing quality: modeling the cost of quality improvement”,
Southwest Business and Economics Journal, Vol. 12, pp. 25-36.
22. ASQC, Quality Costs - What and How, American Society for Quality Control, N. York,
1970.
23. G.H. Hwang, E.M. Aspinwall, Quality cost models and their application: a review, Total
Quality Management & Business Excellence, 7 (1996) 267-282.
24. J. Oliver, W. Qu, Cost of quality reporting: Some Australian evidence, International
Journal of Applied Quality Management, 2 (1999) 233-250.
25. L.P. Carr, L.A. Ponoemon, The behavior of quality costs: classifying the confusion,
Journal of Cost Management Practices, summer (1994) 26-34.
26. K. Kumar, J.C. Brittain, Cost of quality: evaluating the health of British manufacturing
Industry, The TQM Magazine, 7 (1995) 50-57.
27. N.M. Vaxevanidis, Z. Krivokapic, S. Stefanatos, P. Dasic, G. Petropoulos, An Overview
and a Comparison of ISO 9000:2000 Quality System Standards with related Automotive
ones (QS9000, ISO/Ts 16949) and TQM Models (MBNQA and EFQM), Annals of the
Faculty of Engineering Hunedoara, IV(2) (2006) 155-166.
28. Schiffauerova, V. Thomson, A review of research on cost of quality models and best
practices, International Journal of Quality & Reliability Management, 23 (2006) 647-669.
Rearrange this reference by alphabetical order

55
 Appendices
Appendix A – Summary of Preventive Costs
Cost
element Description Jan Feb Mar Apr May Jun Jul Aug Sep Total Source
Quality control
and process
A1 engineering 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 1,980.00 estimated
Design and
develop control
A2 equipment - - - - - - - - - -
Quality planning
A3 by others 580.00 580.00 580.00 580.00 580.00 580.00 580.00 580.00 580.00 5,220.00 estimated
Calibration of
production
A4 equipment 50.00 50.00 ACCOUNTS
Test and
inspection
(maintenance and
calibration of
A5 equipement) 1,500.00 ACCOUNTS
Supplier Quality
A6 assurance - - - - - - - - -

A7 Quality Training - - - - - - - - -
Administration
Audits and
A8 improvements - - - - - - - - - -

Total 800.00 800.00 800.00 800.00 800.00 2,350.00 800.00 800.00 800.00 7,250.00
56
 Appendix B – Summary of Appraisal Costs
Cost
Description Jan Feb Mar Apr May Jun Jul Aug Sep Total S
element
laboratory
Acceptance
B1 testing 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 80.00 720.00 es
Inspection
B2 and testing - - - - - - - - - -
Inprocess
inspection
(non
B3 inspectors) 668.80 668.80 668.80 668.80 668.80 668.80 668.80 668.80 668.80 6,019.20 es
Set up for
testing and
B4 inspection - - - - - - - - - -
Inspection
and testing
B5 materials - - - - - - - - - -
Product
quality
B6 audits 325.60 325.60 325.60 325.60 325.60 325.60 325.60 325.60 325.60 2,930.40 es
Review of
testing and
inspection
B7 data 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 1,980.00 es
On site
performance
B8 test - - - - - - - - - -
Internal test
B9 and release 83.60 83.60 83.60 83.60 83.60 83.60 83.60 83.60 83.60 752.40 es
57
 Evaluation
of materials
B10 and spares - - - - - - - - - -
Data
B11 processing 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 220.00 1,980.00 es
Total 1,598.00 1,598.00 1,598.00 1,598.00 1,598.00 1,598.00 1,598.00 1,598.00 1,598.00 14,382.00

58
 Appendix C – Summary of Internal Failure Costs
Cost
elemen
t Description Jan Feb Mar Apr May Jun Jul Aug Sep Total Source
Pastel
C1 Scrap 5,427.66 91.72 6,566.84 5,071.60 3,837.31 10,365.68 31,360.81 journals
Pastel
C2 reworks 8,952.62 126.51 7,868.41 6,837.77 5,189.72 27,524.24 56,499.27 journals
Troubleshootin
g
(defect/failure
C3 analysis) 537.16 7.59 - - 472.10 410.27 311.38 - 1,651.45 3,389.96 estimate
retesting and
C4 retesting 447.63 6.33 - - 393.42 341.89 259.49 - 1,376.21 2,824.96 estimate
Scrap and
rework(fault of
C5 supplier) 510.00 5,600.00 6,110.00 estimate
Modifications,
C6 concessions 268.58 3.80 - - 236.05 205.13 155.69 - 825.73 1,694.98 estimate
stores
C7 Down grading 1,500.00 1,800.00 3,300.00 inventory

12,866.6
Total 15,633.65 1,735.94 510.00 - 17,336.83 6 9,753.59 5,600.00 41,743.31 105,179.98

59
Appendix D – Summary of External Failure Cost
Cost
eleme Descriptio
nt n Jan Feb Mar Apr May Jun Jul Aug Sep Total Source
complaints
administra
D1 tion 270.00 270.00 270.00 270.00 270.00 270.00 270.00 270.00 270.00 2,430.00 estimated time
Product
service Montly Sales
D2 liability - - - - - - 5,600.00 - - 5,600.00 reports
Returned
product
handling
and Montly Sales
D3 accounting 20.00 20.00 reports
Returned
products Montly Sales
D4 repair 225.00 3,500.00 225.00 3,950.00 reports
Warranty
replaceme 6,570.6 7,275.1 2,401.9 2,181.0 20,296.1 Montly Sales
D5 nt 9 6 1 1 1,271.54 595.80 1 reports

6,840.6 7,545.1 2,671.9 2,676.0 10,641.5 32,296.1

Total 9 270.00 6 270.00 1 1 4 865.80 515.00 1

60
Preventive Quality Cost

The Chart below shows preventive costs

Preventive Costs
8,000.00

7,000.00

6,000.00

5,000.00
Cost

4,000.00

3,000.00

2,000.00

1,000.00

-
A1 A2 A3 A4 A5 A6 A7 A8
cost 1,980.00 - 5,220.00 50.00 7,250.00 - - -

61
Appraisal Quality Costs

Appraisal Quality Costs

7,000.00

6,000.00

5,000.00

4,000.00
Cost

3,000.00

2,000.00

1,000.00

-
B1 B2 B3 B4 B5 B6 B7 B8 B9 B10 B11
Series1 720.00 - 6,019.2 - - 2,930.4 1,980.0 - 752.40 - 1,980.0

62
Internal Quality Costs

Internal Quality Costs

60,000.00

50,000.00

40,000.00
COST

30,000.00

20,000.00

10,000.00

-
C1 C2 C3 C4 C5 C6 C7
Series1 31,360.81 56,499.27 3,389.96 2,824.96 6,110.00 1,694.98 3,300.00

63
External Failure Cost

External failure Cost

25,000.00

20,000.00

15,000.00
Cost

10,000.00

5,000.00

-
D1 D2 D3 D4 D5
Series1 2,430.00 5,600.00 20.00 3,950.00 20,296.11

Total Costs Graph

64
 Cost Element Value % of Total
A1 1,980.00 1.19%
A2 - 0.00%
A3 5,220.00 3.14%
A4 50.00 0.03%
A5 7,250.00 4.36%
A6 - 0.00%
A7 - 0.00%
A8 - 0.00%
B1 720.00 0.43%
B2 - 0.00%
B3 6,019.20 3.62%
B4 - 0.00%
B5 - 0.00%
B6 2,930.40 1.76%
B7 1,980.00 1.19%
B8 - 0.00%
B9 752.40 0.45%
B10 - 0.00%
B11 1,980.00 1.19%
C1 31,360.81 18.85%
C2 56,499.27 33.96%
C3 3,389.96 2.04%
C4 2,824.96 1.70%
C5 6,110.00 3.67%
C6 1,694.98 1.02%
C7 3,300.00 1.98%
D1 2,430.00 1.46%
D2 5,600.00 3.37%
D3 20.00 0.01%
D4 3,950.00 2.37%
D5 20,296.11 12.20%
total 166,358.09 100.00%

65