CHAPTER 6 COSTS OF THE POOR QUALITY. Page No. 6.1 Quality Defined Evolution of the Quality functions

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1 CHAPTER 6 COSTS OF THE POOR QUALITY Page No. 6.1 Quality Defined Evolution of the Quality functions Importance of cross-functional cooperation in 21st century organizations Cost of Quality Failure Costs Hidden Costs Appraisal Costs Preventive Costs 6.5 The ICEBERG Model References 167

2 Chapter 6 COST OF THE POOR QUALITY. 6:1. QUALITY DEFINED: Broadly quality has been defined as: 1. Fitness for use (Juran)(ref.4). The components are said to possess good quality, if they work well in the equipment for which they are meant. Quality is a relative term, generally used with reference to the end use of a product. For example, the gear used in the sugarcane juice-extracting machine may not possess good surface finish, tolerance and accuracy as compared with the one used in the headstock of a lathe. Yet, it may be considered as having good quality. 2. Grade Quality is the distinguishing feature or grade of the product in appearance, performance, life, reliability, taste, odour and maintainability etc. These are generally called as quality characteristics. 3. Degree of preference Quality is the degree to which a specified product is preferred over competing products of equivalent grade. This is based on comparative tests by customers and is normally called customer preference. 4. Degree of excellence Quality is a measure of the degree of general excellence of the product.

3 5. Conformity to requirements (Philip Crosby ref 2.) Conformity of requirements is concerned with how well a product conforms to design and other specification. A short definition that is widely accepted today is: Quality is customer satisfaction. Ref-3 According to Deming, Quality should be aimed at fulfilling the need of the consumer, present and future. Low Quality Levels Average quality levels achieved by Indian manufacturing firms would rule them out of competition in most world markets. In the automotive ancillary industry example, quality levels achieved by Indian firms are still at PPM levels, whereas most global players are aiming for sub-100 PPM levels. In a recent survey conducted by KPMG, poor product development capabilities and inadequate quality levels were cited among the key factors that adversely affect Indian exports. This also leads to the Made in India brand having a poor image abroad. There are many more barriers that affect manufacturing in India, and we shall not dwelve into all of them in detail. However, the following factors also merit mention: 1. Lack of focus on process efficiencies and IT. 2. Lack of co-ordination among government, research institutes and academia. In summary, there are several factors that need to be addressed for Indian manufacturing to grow and realize its potential. These factors encompass initiatives to be taken at the government, industry and individual firm levels. A co-ordinated effort across all concerned

4 agencies would be required to achieve this. manufacturing Landscape in India According to Skaria2 1995, global automobile manufacturers reject one component out of every 10,000. in India, one out of every 100 is trashed. He estimates that out of the country s Rs. 1,20,000 crore of industrial production on , a staggering Rs. 6,000 crores or 5% of the country s products were defective. He added that more rejects meant that consumers compensated companies for defective goods by paying higher prices. Little wonders that Indian products and services were judged poorly on the price quality equation. Quality gurus caution companies that quality is not conformance to internal quality standards, but to the parameters set by the customers. Unless and until companies are able to ensure that every product or service they design, manufacture, market and deliver meet customer specifications, they will not be successful. Therefore listening to customers at the heart of the quality process become extremely necessary (Ref.-2;Skaria2, 1995). There are Indian companies which have formal systems for listening to the customers, and which are also implementing quality systems religiously. However, India needs a quality revolution if it is to improve on product performance and service delivery across the board. 6:2 EVOLUTION OF THE QUALITY FUNCTIONS: Quality function started as inspection of a product at the end of a production line to ensure that the product was manufactured as per the design. It was initially by an inspector who was probably an experienced operator who continued to report to the production supervisor. The function was mainly testing or inspection and the system of achieving quality was appraisal. The inspector only measured quality and reported the results.

5 The wisdom of entrusting the supervision of inspection to the supervisor responsible for production was soon questioned. This led to the inspection being handled by a supervisor independent of production reporting directly to the on the Works Manager. The supervisor of inspection had the authority to take action based on the results of inspection. By approving what met the requirements and rejecting what failed to do so, he controlled the quality of products. Thus the function was inspection and control. This phase can be called quality Control The system was still appraisal only. With the spread of Statistical Quality Control (SQC) tools, developed mostly by Dr. W. Shewart, inspection become more scientific. It was also realized that controlling a process while the product is being manufactured is more effective that testing the products at the end of the line. This the action moved from the end of the line to on-line. This also signified the start of the system of prevention for achieving quality. This phase is generally known as Quality Assurance

6 Table no 6.1 : Process of Evolution of the Quality Function Phase Quality Measurement Quality Control Quality Assurance Total Quality Management Scope Products Materials, Products Materials, Products, Production. Materials, Products, All Processes Processes Area of action End of line End of line On line Before the beginning System Appraisal Appraisal Appraisal Prevention Prevention Appraisal Function Inspection Inspection Inspection Plan, Control, Control Analysis Improve and Audit Status Operator Supervisor Manager General Manager/Vice President Reporting Production Supervisor Works Manager General Manager Managing Director/President The final step in the evolution was Total Quality Management (TQM) The TQM philosophy stresses a systematic, integrated, consistent, organization wide perspective involving everyone and all processes. It focuses primarily on total satisfaction of both internal and external customers and seeks continual improvement of all systems and processes.

7 Thus the five pillars of TQM are: 1. Product 2. Process 3. System 4. People 5. Leadership 6:3 IMPORTANCE OF CROSS FUNCTIONAL COOPERATION IN 21 ST CENTURY ORGANIZATIONS An organization is organized by vertical functions, such as: 1. R & D 2. Production 3. Laboratory 4. Finance 5. Sales 6. Administration Through such functional organization, responsibilities are delegated and profit goals pursued. These are generally perceived as Management Goals. To survive in the 21 st century, the organization needs not only enhanced profits but also continual improvement in such areas as: 1. Customer satisfaction 2. Customer service 3. Quality assurance 4. Cost control 5. Productivity 6. Timely delivery 7. New Product development 8. Employee education

8 These goals call for cross functional efforts cutting horizontally across the whole organization. Top Management or Quality Assurance Department alone cannot achieve these cross - functional Goals. All the functional departments have to be involved. Cross functional cooperation is, therefore a major requirement for an organization to achieve continual improvement. Many top managers say that: their company s mission is to provide quality products to satisfy/delight their customers. Yet, how high should quality stand in the hierarchy of various corporate goals? The organization has many goals to pursue, such as: Maximizing shareholder s profits Providing employment to the employees Producing goods or services to satisfy customer s needs and Serving the community in which it works On the internal side, line managers and staff are also responsible for carrying out the missions of their respective departments, such as engineering, production, marketing and administration. Where should quality be placed among these (sometimes) conflicting external and internal goals? The hierarchy of various Management goals versus cross functional goals was clearly described by Shigeru Aoki, Sr. M.D., as Toyota s corporate philosophy: The ultimate goals of a company is to make profits. Assuming that this is self evident, the next super-ordinate goals of the company should be such cross functional goals as quality, cost, and scheduling (quality and delivery). If these cross

9 functional goals are realized, profits will follow,therefore, we should regard all the other management functions as existing to serve the three super-ordinate goals of: a) Quality: Product Quality Service Quality b) Cost c) Scheduling Production Quantity Timely Delivery 6:4 COST OF QUALITY: The effective cost component of a product or service; that is attributable to quality aspects can be called as cost of quality. The costs of quality are: Failure costs Hidden costs Appraisal costs Prevention costs 6.4:1 Failure Costs: a) Internal failure costs: These are costs resulting from defects, before delivery of an organization s product or service. Typical examples are: - Costs of labour, material, machines hours, lost in scrapped items,

10 - Cost of rework/reassembly - Cost of re-testing and re-inspection - Cost of machine downtime - Cost of corrective actions - Cost of failing to meet delivery schedule b) External failure costs: These are costs on defects that an organization incurs after delivery of its products or service to customers. Typical examples are: - Cost of attending to customer complaints and repairs (service costs) - Cost of replacement - Cost of warranty - Cost of returned goods - Cost of product recalls - Consequential damages or losses/ cost of legal liabilities arising out of guarantee of product liability. - Cost of loss of consumer goodwill - Cost of loss of sales due to the publicity of failures 6.4:2 Hidden Costs: Hidden costs are another form of cost of internal and external failures. Typical examples are: Potential lost sales Cost of redesign due to quality reasons Cost of changing manufacturing processes due to the inability to meet quality requirements Cost of software changes due to defects Extra manufacturing costs due to defects Scrap not reported

11 Excess process costs 6.4:3 Appraisal Costs: These are the costs of determining the degree of conformance to quality requirements. Typical examples are Cost of inwards, in process and final inspection Cost of destructive test losses, if any Cost of preparation of reports of audits Cost of maintenance and calibration of test instrumentation and facilities Cost of administrative machinery and organization for inspection, testing and appraisal. Product review cost Process control cost Quality engineering cost Field evaluation cost 6.4:4 Preventive Costs: These are the costs of preventing errors / minimizing failures in an organization. Typical examples are: Cost of acquiring quality related and analyzing for prevention Cost of pilot production Cost of engineering quality at design stage Cost of quality planning Cost of product review analysis Cost of process control and design of process control systems Research and testing costs aimed at quality assurance and quality enhancement Cost of training for quality Trouble shooting and failure analysis

12 Costs of planned adjustments, repairs and replacements on process machinery Cost of preventive maintenance Administrative costs of systems and staff * The cost of appraisal and cost of prevention are called cost of conformance. * The other costs are called cost of non conformance

13 6.5 THE ICEBERG MODEL intro.( ref.4 )(Fig.no.6.2) Cost of Poor Quality Elements (The iceberg Model) Escapes Extra Inspection Scrap Warranty Visible 2-3% of Sales Rework Repair Hidden? Engineering Changes Recurring Service Bulletins Recurring Engineering Notices Extra Setups Non-Visible 5-9% of Sales Lost Sales Lost Credibility Lost Customer Loyalty Late Delivery charges Excess Inventory Long Cycle Times Supplier Quality Non-Contractual Warranty Expediting Costs Scrap, rework, and repair were visible costs avoided by solving the problems discussed. Long cycle times, late delivery charges, and excess inventory are also improved, but are more difficult to quantify.

14 6.6 References 1) The World Competitiveness Report 1995 How Competitive is India Inc.? Business Today. Oct pp ) Skaria. G 1995, The Total Quality Imperative Business Today. Vol. 4 No. 1, pp ) Vishwanathan. A, 1994 Caring for Customer Business Today. Vol. 3 No. 19, pp ) BT-IMRB 1995 Perception of Quality. Business Today. Vol. 4 No. 1, pp. 40.