QUALITY COST. COSTS, PROFIT Quality costs involves all department; purchasing, design, etc.

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1 QUALITY COST Final analysis - value of QC / QA / TQM initiative and programmes based on ability to contribute to profits, Therefore, most effective performance measure is cost of poor quality Efficiency of any business measured in RM, $ (monetary value) Costs of poor quality can be found same as for cost of maintenance, production, design, inspection, etc. Measure, program, analyze and budget the cost of poor quality (COPQ) or (PONC) COSTS, PROFIT Quality costs involves all department; purchasing, design, etc. What is quality costs? Cost of poor quality are those costs associated with non-achievement of product/service quality defined by the requirements quality cost smy.utm 1

2 Quality cost - Used in pursuit of quality improvement, market share, customer satisfaction, and basic data for TQM High quality cost inefficient, ineffective management Quality Cost Program quantifies magnitude quality problem in mgmt. language ($); - 20% of sales dollars in manufacturing - 35% of sales dollars in service Develop Quality Cost Program - Identify opportunities for improvement - Justification for corrective action - Every sen saved profits Take care of the penny and penny will take care of itself!! Cost of Quality Principle advantage identify hidden costs which is not able to detect in operation Program comprehensive and not fire-fighting problem Real improvement occurs ROOT CAUSE OF PROBLEM identified and eliminated quality cost smy.utm 2

3 QUALITY COSTS CATEGORIES & ELEMENTS Prevention - Prevention achieved by examining experience gained form identification of specific causes of failures, and developing specific activities for incorporation into basic management system that make it difficult or impossible for error/failure to occur again - Cost incurred for planning, implementing & maintenance a quality system to ensure conformance to requirements - Design review, Quality Management system, Measuring Equipment Calibration Appraisal - Cost incurred to determine degree on conformance to quality requirements - Examples incoming inspection, source inspection, operations inspections, measuring equipment Failures; 1) Internal 2) External - Cost incurred when products/services, components, materials, fail to meet requirements 1) before, 2) after transfer of ownership to customer - Internal - purchasing errors, rework, repair, scrap, reappraisal, etc. - External - complaint investigation, returned goods, retrofit. Warranty costs, liability costs, etc quality cost smy.utm 3

4 Collection and Reporting Quality Data Baseline To relate quality costs to some aspect of business Typical bases Labor, production sales, unit Labor Quality cost per hour of direct labor or direct labor dollars Production Sales Quality cost per dollar of prod. Costs Prod. Costs Direct labor Direct material Overhead Quality cost per dollar of net sales - higher management decision - index poor for short term Unit Quality cost per unit ; e.g. boxes, kg of aluminum, meters of cloth good common product lines quality cost smy.utm 4

5 QUALITY COST REPORT - for control purposes - establish budget - variances measured - ANALYSIS 1) Trend analysis - by cost categories (P-A-F) - product - indices (baseline) - plants in the corporation 2) Pareto Analysis - categories - department - product lines, e.g. failure costs, warranty costs - quality cost smy.utm 5

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7 OPTIMUM COSTS Mgmt. wants to know optimum costs when analyzing quality costs (this is difficult to specify). Propose techniques; quality cost smy.utm 7

8 Technique #1 Make comparisons with other companies - difficult Technique #2 Optimize individual categories e.g. Failure costs optimized when no identifiable & profitable projects to reduce them Technique #3 - Analyze relationship bet. Cost categories - As Q (100% conformance), failure costs ~ 0, i.e. Prev. & Appr. costs - Combine TQ cost curves ; Q, Q. COSTS ( but 100% ~ costs infinity some people think) Perfection is achievable, if 99.9% conformance (i.e. 1 error in 1000); - 16,000 pieces of lost mail every hour, failed surgical operations each week, - 2 unsafe airplane landings at O Hare airport, - 22,000 wrong checks deduction, - 2 million dead/sick food poisoning each year, etc. quality cost smy.utm 8

9 QUALITY IMPROVEMENT STRATEGY All failures/problems has ROOT CAUSE Causes are preventable Prevention cheaper than cure Based on the three concepts, strategy used as follow; 1) Reduce failure costs by problem solving 2) Invest in the right prevention actions 3) Reduce appraisal costs where appropriate ~ statistically sound 4) Continuously evaluate & redirect prevention effort to gain further improvement quality cost smy.utm 9

10 MALCOLM BALRIDGE NATIONAL QUALITY AWARD (MBNQA) Annual award to recognise US organizations for performance excellence Public Law on August 1987 Award promotes 1. understanding of the requirements for performance excellence and competitiveness improvement 2. sharing of information on successful performance strategies, and benefits derived form those strategies 5 categories manufacturing, service, small business, health care, education Many organizations using the criteria as a techniques to measure their TQM effort on an annual (self) assessment basis quality cost smy.utm 10

11 Core values and concepts embodied in seven categories Categories further subdivide into examination items 19 items (always improving) Cost of Quality quality cost smy.utm 11

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