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Quality Costs
• Quality costs can be programmed, budgeted
measured and analyzed to help in attaining the
objectives for better quality and customer satisfaction
at less cost.

• Quality costs are defined as those costs associated

with the non achievement of product or service quality
as defined by the requirements established by the
organization and its contracts with customers and
society
• It is the cost of poor products or services

Cost of Quality
Operating Quality costs which the organization can have a
control consists of
• Prevention Costs – Cost of efforts for preventing failures
• Appraisal Costs – Cost of Inspection and testing

Non Operating Quality costs which the organization cannot have

a control
• Internal failure costs – Failure costs before delivery to
customer
• External failure costs – Failure costs due to rejection by
customers

Categories of Quality costs Preventive cost category

• Preventive cost category • Evaluation of Marketing/customer/user
• Appraisal cost category • Product/service/Design/Development
• Internal failure cost category • Purchasing
• External failure cost category • Operations (Manufacturing or service)
• Quality Administration

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Appraisal Cost Category Internal failure cost category

• Purchasing Appraisal costs • Product or service Design Failure Costs
• Operations (manufacturing or service) (Internal)
appraisal costs • Purchasing failure costs
• External Appraisal costs • Operations (Product or service) failure
• Review of test and inspection data costs (review, repair and scrap costs)
• Miscellaneous quality evaluations

External failure cost category Quality cost bases

• Complaint investigation of customer or user service • Quality cost per hour of direct labor
• Returned goods
• Retrofit and recall costs • Quality cost per rupee of production cost
• Warranty claims • Quality cost per rupee of net sales
• Liability costs
• Quality cost per unit of product
• Penalties
• Customer or user goodwill
• Lost sales

Cost of Quality

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Economics of Quality of Two Views of the Cost of Improved Quality

Conformance
Improve
Total Cost Prevention & Appraisal Cost quality

Optimum Total Cost

Increase Increase
appraisal costs process quality

Results: Quality Quality

Internal & External Failure Cost
Costs Costs

13 5-14

Traditional Quality Costs

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Cost of a Defect at Different Stages in the Process Product/Design Quality

Value to Customer
High
High

Costs
Cost/Value max

Cost to Customer
Low
Low
At In With The
Vendor Production Customer
Low Qo High
Stage in Process
Level of Product/Design Quality
5-12 5-5

Value = Quality / Cost

Typical Quality Cost Ratios

6σ QUALITY AND COST
Category Feigenbaum Juran & Gryna
• Six Sigma focuses on improving quality
Prevention costs 5% - 10% 0.5% - 5% (i.e., reduce waste) by helping
organizations produce products and
Detection/appraisal Costs 20% - 25% 10% - 50% services better, faster and cheaper.
Failure costs 65% - 70% Internal: 25% - 40%
External: 20% - 40% • Six Sigma identifies and eliminates costs
which provide no value to customers,
Total cost of quality 100% 100%
waste costs

5-13

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Cost of quality at various levels of Sigma

Visible and Hidden Costs of Quality

Visible costs •Scrap

Sigma Defect rate(PPM) Cost of quality Competitive level •Rework
•Warranty

6 3.4 <10%
World Hidden Costs
5 233 10-15% Class
• Conversion efficiency of materials
4 6210 15-20%
Industry • Inadequate resource utilization
3 66811 20-30% Average
• Excessive use of material

2 308770 30-40% • Cost of redesign and re-inspection

Non
Competitive • Cost of resolving customer problems
1 697672 >40%
• Lost customers / Goodwill

• High inventory

Cost of Quality and Six Sigma

Internal &
 is a measure of how
Prevention & much variation exists in a
External
Appraisal
Failure process
Costs
Costs
Costs

Old Belief
Old Belief
4 High Quality = High Cost

Quality
Internal & Prevention &
External Appraisal
Failure Costs Costs
Costs

New Belief 4
New Belief
5
High Quality = Low Cost
6

Quality

Quality costs Analysis Quality Improvement strategy

• Reduce failure costs by problem solving
• Invest in the right prevention activities
• Trend Analysis • Reduce appraisal costs where appropriate
• Pareto analysis and in a statistically sound manner
• Continuously evaluate and redirect the
prevention effort to gain further quality
improvement

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Translating needs into requirements – The Kano Model

Quality improvement Strategy
• Establish a project team
• Most projects are to be directed towards
reducing failure costs
• Prevent problem by improving employee
attitude
• Once improvement is achieved find out
scope for reducing appraisal costs

Translating needs into requirements – The Kano Model Translating needs into requirements – The Kano Model

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Translating needs into requirements – The Kano Model

Performance Measures
Objectives
• Establish baseline measures and reveal trends
• Determine which process to be improved
• Indicate process gains and losses
• Compare goals with actual performances
• Provide information for individual and team evaluation
• Provide information to make informed decisions
• Determine the overall performance of the organization

Criteria for selection of

Typical Measurements
measures
• Simple
• Human resources
• Few in number
• Customers • Developed by users
• Relevance to customer
• Production • Improvement
• Research and development • Cost
• Visible
• Suppliers • Timely
• Marketing/sales • Aligned
• Results
• Administration

Performance Measure Presentation

Strategic Measurement System Six Basic Techniques

• Time Series Graph

• Quality • Control chart
• Cost • Process Capability Index
• Flexibility • Taguchi Loss function
• Reliability • Cost of Poor Quality
• Innovation • Malcolm Baldrige National Quality Award