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Quality Cost Analysis for a Cement Industry:

A Case Study
Lamiaa Ayach#1, Abdellah Anouar#2 and Miloud Bouziri#3
#
Faculty of Sciences &Technologies, Hassan 1 University Settat Morocco
1l.ayach@uhp.ac.ma
2a.anouar@uhp.ac.ma
3m.bouziri@uhp.ac.ma

Abstract─ In a global competitive market, meeting of the most effective management tool for
customers’ requirements is not enough for gathering and analyzing the expenses in
organizations that are striving for success and maintaining quality in a manufacturing process
and also the non-value added expenses [1].
welfare. Another goal has to be meet which is the cost
challenge. Enterprises need to offer highest quality at In spite of the academic interest on the subject,
the lowest price. To achieve this, organizations must
only minorities of industries are found practicing
the COQ management and many industrial
identify potential sources of savings by making an
managers ignore the importance of related
effective control of manufacturing costs. Since methodology for organizational improvements.
quality costs constitute a significant part of these
2. Literature review
costs, it becomes an imperative for companies to
track, quantify and rationalize quality related costs Quality is widely recognized as a crucial key to
survive and thrive in the global marketplace. If it
by developing a measurement system adapted to
is managed properly, it will not only guarantee the
their activities. Most companies, however, are
effectiveness of the organization but also increase
unaware of the quantum of their quality cost and its efficiency and boost its profits by reducing
therefore underestimate it. In this context, appears costs.
the need to present quality cost as an effective tool of To implement successfully a quality improvement
highlighting deficiencies in the system by giving an program, it is necessarily to check the merit of
insight to the huge impact of quality cost on the each improvement activity proposed and choose
bottom line as well as on the financial position of the the optimal ones that lead to highest quality with
the lowest possible cost, which is only possible if
organization. This paper presents a case study
quality-related costs are identified, measured and
conducted in a cement industry that gives awareness
reported.
and guidance to what requires attention of top
Quality costing is therefore an important tool that
management.
assists companies to improve quality of
Keywords─ Quality costing system, manufacturing products/services while making savings; it is
costs, non-quality, bottom line, top management. regarded as an essential indicator/metric for
measuring quality performance for the entire
1. Introduction
supply chain.
To grow and compete successfully in a fiercely
competitive market, organizations must measure In a broader sense, we can define the quality cost
and control all components of manufacturing as monetary measure that shows the expenses
costs by making a strong control of the utilization allocated by an organization in achieving and
of process resources. maintaining good quality as well as the wastage
and losses incurred in managing the poor quality.
Knowing and determining the sources of losses
allows to managers to properly identify the areas That concept was first presented by Joseph M.
of improvement, to better justify the investments Juran in the first edition of the “Quality Control
to be made and evaluate the return on investment Handbook” published in 1951.He defined the
ROI. quality cost as all costs in the organization that
shouldn’t exist if things were done the first time.
The cost of quality analysis is considered as one
He demonstrated the important link between
______________________________________________________________
International Journal of Supply Chain Management
IJSCM, ISSN: 2050-7399 (Online), 2051-3771 (Print)
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financial position of an organization & quality quality into two categories: cost of conformance
costs and proved that an optimum quality level and the cost of non-conformance.
exists.
The cost of conformance is the money spend by
The concept was expanded on by Armand an organization to avoid poor quality and includes
Feigenbaum in 1956 in his book “Total Quality prevention and appraisal costs while cost of non-
Control” when he developed the 4 quality cost conformance are the money wasted on poor
categories that are commonly referred to today quality and includes internal and external failure
(Prevention, appraisal internal & external failures costs.
cost). He believed that the quality costs on
average amount between 25 to 30% of annual
 Intangible / opportunity cost model
sales [2]. Intangible costs are costs that can be only
estimated. For example profit not earned losses in
He affirmed that so much extra work is performed
productivity, customer goodwill or drops in
in correcting mistakes wish cost companies a lot
employee morale. While these costs do not have a
and that there is effectively a “hidden plant”
firm value, managers often attempt to estimate the
within any factory.
impact of the intangible costs
In 1979, Philip Crosby introduced a new concept
in his book “Quality is free”. He stated that doing  Process cost model :
things wrong costs more than doing things right The process cost model is a model developed by
the first time (cost of rework, scrap...).A good Ross in 1977 and first used for quality costing by
quality system payback its cost and make saving Marsh in 1989.This model focuses on process
returns. Quality pay back more benefits than its rather than products; it is based on gathering costs
costs thus quality is free. of conformance COC and non-conformance
Since then, the Cost of Quality concept has been CONC of each process in the supply chain.
continuously developed and several researches  ABC cost model :
were carried out in this regard such as Plunkett
and Dale (1987), Sandoval-Chavez and Beruvides ABC cost model is a costing approach that was
(1998), Krishnan et al. (2000), Chiadamrong developed by Cooper and Kaplan of Harvard
(2003) and many others. Business School in 1980. This model allows
assigning costs according to objects (departments,
3. Quality cost models services, products, etc.), and based on activities
Despite the development of several modern COQ performed for each object. More specifically, the
models since Juran's work, the most used ones assignment of costs through ABC occurs in two
are: the Prevention - Appraisal - Failure (PAF) stages: firstly resource costs are assigned to
Model, Crosby’s Model, the Process Cost Model activities, and then costs of activities will be
(PCM), Opportunity Cost model, and ABC model. traced to cost objects.

 PAF model: COQ models can be compared based on their

categories, principle and orientation. Table 1
The more popular used one is the PAF model illustrates these differences.
developed by Feigenbaum (1956) which
distinguish quality costs into Prevention,
Appraisal and Failure categories.
Prevention costs are associated with activities
taken to prevent poor quality, appraisal costs
represent the activities taken to control the level
of quality attained by the process, and failure
costs are costs that results from poor quality.

 Crosby’s Model :
Crosby sees quality as “conformance to
requirement” and therefore classifies the cost of
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Table.1- Quality cost elements of the burning process

Model Orientation Principle Cost categories
PAF Model Activity-oriented  The basic supposition is that prevention +
investment in prevention and appraisal + failure
appraisal activities will reduce failure
costs
 Not suitable for some branch
activity
Crosby's model Activity-oriented Similar to the P-A-F model with conformance + non-
different terminology conformance
Opportunity or Intangible costs An expended model that consider prevention +
intangible cost and cost of losing the losing opportunities / profits appraisal + failure +
models opportunities not earned in addition to the opportunity
oriented prevention, appraisal and failure
categories
Process cost Process-oriented  This model recognizes the conformance + non-
models importance of process cost conformance
measurement
 Presents a more integrated
approach to quality than a P-A-F
model
ABC Model Activity-oriented/ An activity-oriented for the cost value-added + non-
focus on assignment view and process- value-added
assigning cost to oriented for the process view
each activity
 How much profit the organization is losing
Indeed there is no uniform quality model and what through poor quality?
should be included under the umbrella of costs of
quality [3]. Consequently every organization should  Is the only use of usual KPI helps to make optimal
implement its own model and determine quality costs prioritization of improvement activities?
components that are suitable to its needs and  How much the improvement activities
situation. implemented reduce losses incurred by internal
4. Case study: Cement industry inefficiencies and if there is a return on
investment?
4.1. Profile of the organization  On what basis the company allocates budget of the
The Case study was conducted within a cement quality program?
industry; the company is already certified ISO
9001:2008 and preparing for the transition to ISO
4.2. Study intent and methodology
9001:2015. The main objectives of the study are as follows:

Despite the fact that there is a great interest in

 Identify, measure and quantify quality cost of a
manufacturer company and highlight the financial
reducing costs given the atrocious competition of the
wastage due to non-quality on the overall quality
cement sector. Company A (we keep the company
cost as well as on the organizational bottom line;
name confidential and we refer to it as company A)
doesn't measure, reduce and optimize cost of quality.  Recognize the importance of the quality cost
metric as an improvement driver and a financial
However, it stated that quality related costs are indicator for reducing costs and increasing the
systematically reduced through the continuous profit of organizations.
improvement activities implemented.
Quality cost analysis can be realized on the
To prioritize these activities, company A uses usual organization, department or on a process. For this
key performance indicators and metrics such as % study, we have chosen to make the analysis on “The
breakdown, % energy consuming, rate flow etc. burning process” since it constitutes 87% of the total
The main issues that arise are: manufacturing cost. Accordingly any reduction of
that cost will influence positively the overall quality
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cost as well as the organizational bottom line. these costs. Moreover, some costs are not
quantifiable; they can only be estimated which makes
The methodology adopted is to develop a specific list
the analysis of quality costs to be a subjective one [4]
of quality cost elements which are adapted to the
process studied and are relevant to the organization, Data related to prevention appraisal and external
after the elements have been agreed by organization failure costs were communicated by the financial and
specialists the next step is to collect the data from quality department while the internal failures costs
different sources, quantify them and putting a cost on required calculation that occurs in two stages: Firstly,
each element identified. the quantification of losses and then the assignment
of cost of each item.
After that, a Pareto analysis should be applied so as to
find critical costs which are responsible for major To calculate the losses, it was necessary first to
expenses on quality costs, analyze the root causes of update some nominal values in order to get more
the losses and finally identify improvement area and accurate results. For this reason, it was required to
suggest remedial solutions in order to reduce quality make a statistical analysis of the data of 4 successive
costs and improve the efficiency of the company. years considering each equipment and product
separately.
4.3. Data collection & categorization
For example, the statistical analyze of electricity
During this step, a specific list of quality cost
consumption of kiln 1 shows that 95% CI for μ is
elements based on PAF model was developed. The
between (31,637; 33,010) which means 7kWh/ton of
elements of conformance and non-conformance cost
difference than nominal value fixed by the
identified are listed in table 2.
organization. The summary report of kWh analysis of
Table.2- Quality cost elements of the burning process kiln 1 is presented in figure 1.
Quality Training
Prevention
Conformance costs

Quality administration Summary Report for KWH/T Kiln 1

Anderson-Darling Normality Test
Internal quality audits A-Squared
P-Value
102,34
<0,005

Preventive production Mean

StDev
32,324
11,027
Variance 121,586

Inspection & test equipment

Appraisal

Skewness 14,572
Kurtosis 331,171
N 993
Minimum 1,662
1st Quartile 27,609
Median 33,053
3rd Quartile 35,376
Maximum 295,656
95% Confidence Interval for Mean

Rework 0 50 100 150 200 250 300 31,637 33,010

95% Confidence Interval for Median
Internal failure

30,626 33,756
Heat over-consumption 95% Confidence Interval for StDev
Non-conformance costs

10,562 11,534

Power over-consumption
Machine breakdown 95% Confidence Intervals

Mean

Water over-consumption Median

Downgrading 30,5 31,0 31,5 32,0 32,5 33,0 33,5

Returned good
External failure

(Since the company A sells Figure 1: Summary report for kWh/T of kiln 1
clinker to other firms, we can After that, it was necessary to determine the
consider the clinker returned as calculation formula to quantify each internal failures
an external failure of that item. The formulas are listed in table 3.
process)
It is recommended to establish a consistent measuring
system with the involvement of various departments.
The data related to costs was gathered form different
sources, the main are: the general and analytical
accounting, technical reports, and administrative
documents.
This may seem like an easy step at first, but
measurement are not always obvious; when it comes
to establish the total quality costs there are some
difficulties related to the fact that the accounting
system is not conceived in such way to highlight
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Table.3- Formula of calculation of internal failure Components

Breakdown To calculate this cost, each breakdown of the period studied should be
analyzed separately
= ∑ (Breakdown maintenance cost + Loss sales)
Downgrading The accounting is done for each production batch
= ∑ [(Real flow rate per hour - Nominal flow rate)* Planned production time
(hrs.)] * Energy cost per ton
Rework The calculation is made for all batches that failed to meet
(Unburnt clinker is established specifications.
used to produce low = Losses due to the management and the storage of unburnt clinker
quality cement)
Power over- The accounting is done for each production batch
consumption = (Real power consumption per ton - Nominal power consumption per ton)*
tonnage produced* cost of kWh
Heat over- The accounting is done for each production batch
consumption = (Real heat Consumption per ton - Nominal heat consumption per ton taking
into account the raw mixture)* tonnage produced * Cost of Mj
Water over- This item is calculated per day taking into consideration the tonnage
consumption produced
=(Real water consumption - Nominal water consumption)* Cost of m3 of
water
Costs related to the burning process of 12 months (1year) are presented in the following table:
Table.4- Quality cost of the burning process
Cost category Value (KDH) Percentage %

Prevention Training costs 46,0 0,02%

Quality administration 4500,0 2,32%

Internal quality audits 250,0 0,13%

Preventive production 6000,0 3,09%

Total prevention cost 10796,0 5,56%

Appraisal Inspection & test equipment 54000,0 27,83%

Total appraisal cost 54000,0 27,83%

Internal failure Breakdown 87751,4 45,22%

Downgrading 15808,3 8,15%

Rework 6903,8 3,56%

Electricity over-consumption 10092,0 5,20%

Heat over-consumption 8501,9 4,38%

Water over-consumption 26,3 0,01%

Total internal failure cost 129083,7 66,53%

External failure Returned goods 157,8 0,08%

Total external failure cost 157,8 0,08%

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4.4. Data analysis & discussion of findings

The distribution of different categories is shown in
the figure 2. It has been found that the internal
failure cost is higher than the other costs with
66.5%. The appraisal cost was found to be 27.8%
and the prevention cost was 5. 6%.The lowest
quality cost is external failure cost with just 0.1%.
This result shows the quantum and the impact of
internal failure cost on the quality costs specifically
and on the bottom line in general. This gives a clear
picture to quality management to focus on that
component. Figure 3: Pareto analysis of Quality costs
Since internal failures cost constitutes 66.5% of the
External
failures, total quality cost it was necessary to make a Pareto
Prevention
0.1% analysis of that component (figure 4). The Pareto
, 5.6%
shows that the breakdowns and downgrading are
found responsible of 80.2% of the internal failures
Appraisal,
Internal 27.8%
cost.
failures,
66.5%

Figure 2: Distribution of quality cost categories

The bar char in the figure 3 illustrates a Pareto
analysis of all identified costs components in the
burning process of 12 months. The Pareto shows
that out of the 12 elements gathered, only few items
found responsible of considerable part of the total
quality cost.
The chart confirms that more than 80% of the total Figure 4: Pareto analysis of failures costs
quality cost comes from three major causes. It is
found that breakdown (45.2%), the inspection & 4.5. Improvement actions &
test equipment (27.8%) and the downgrading
Recommendations
(8.1%) are the critical elements. This gives the Several Root Cause Analysis sessions were held to
orientation to quality management to emphasis investigate events that caused the major losses.
more on these items to assess the overall quality Every employee has received basic training in the
cost. It also highlights the huge impact of the relevant techniques needed for these sessions. The
internal failures on the bottom line and points out solutions and recommendations generated are
the gold mine of improvements. described as bellow:
A systematic monitoring and root cause analysis of
these top priority cost elements will provide a clear
focus on the areas where the quality improvement
activities to be strengthened and by eliminating
these losses, the organization can improve its profit
margin.
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Table.5- Optimization actions of total quality cost of the burning process

Critical items Optimization actions Benefits

Inspection  Improving quality control by  Perform an effective and efficient
determining the critical points of control control and thus reduce the cost
 Setting up quality costing metrics and related to failures.
add it to usual used KPI
 Implementation of a quality
improvement program based on the
analysis of the new KPI
 Schedule quarterly management reviews
to track progress of improvement action
and their impact.
Breakdown  Schedule sufficient duration and devote  Increase efficiency and
an adequate budget to perform all effectiveness of the annual
necessary maintenance work in the annual maintenance shutdown
maintenance shutdown  Increase machine availability/
 Program problem-solving meetings to productivity and meet market
develop corrective and preventive actions demand
for all significant quality incidents  Improve employees skills thus
 Training staff in quality tools such as 5 their performance and that of the
why, fishbone analysis, process mapping company
etc.
Downgrading  Improve performance of crushers and  Decrease production losses due
grinders by making a study of events that to low speed
impact their availability (The downgrading
is due to breakdown of upstream machines)
Heat  Enhance the utilization of alternative  Enhance the utilization of
consumption fuel in the combustion; alternative fuel and therefore reduce
 Find the optimal combination of expenses related to heat
combustion components that can produce consumption
more energy and release less greenhouse  Reduce greenhouse gas
gas emissions emissions
Power  Program operational hours taking into  Reduce expenses related to
consumption account constraints of the peak and off- electricity
peak hours(Linear program)
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[4] Oana Staiculescu, "A new vision of quality cost:

5. Conclusion an essential optimization tool for managerial
To gain a competitive advantage, organization accounting", Procedia-Social behavioral sciences
must constantly strive to lower their costs in order 62(2012) 1276-1280, 2012.
to offer competitive prices, as well as improving .
quality of their products/services to meet
consumer requirements. To achieve this,
organizations need to invest in implementing a
COQ system suitable with their branch of activity,
environment, needs and situation.
Besides, it is an imperative to develop an adapted
method for identification and measurement of
quality costs, and set up a key performance
indicator dashboard and reporting system including
COQ metrics to communicate performance in term
of quality costing.
A study was conducted in a manufacturing firm
with regard to highlight the importance of COQ as a
driver of improvement. The study findings points
up the fact that internal failures cost constitutes
66.5% of the total quality cost, external failures cost
is 0.1%, prevention cost is 5.6% and appraisal cost
is 27.8% %.
A Pareto analysis was carried out to determine
critical quality costs. It has been found that
breakdowns, downgrading and inspection are more
prominent and requires to be reduced or eliminated
by understanding root causes and setting up
remedial solutions.
Using this tool the company can justify investment
in prevention activities to top management since
failures costs are tied to prevention. It also helps to
show the quantum of losses and realize the value of
prevention and the return on investment.

References

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"Hidden costs of quality: Measurement &
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[2] Neyestani B., “Quality Costing Technique: An
Appropriate Financial Indicator for Reducing
Costs and Improving Quality in the
Organizations”, March 2017
[3] Rathindra Nath De, "Quality Costing: An Efficient
Tool for Quality Improvement Measurement",
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