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Day3 Cost of Quality

The document discusses the concept of the cost of quality (COQ), which includes costs associated with ensuring quality and the costs incurred from poor quality. It highlights the importance of understanding COQ for management, as poor quality can account for 15% to 40% of business costs and emphasizes the benefits of preventive and appraisal costs. The document concludes that improving quality reduces the cost of poor quality, ultimately leading to increased profitability.

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biyani.anand1
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6 views20 pages

Day3 Cost of Quality

The document discusses the concept of the cost of quality (COQ), which includes costs associated with ensuring quality and the costs incurred from poor quality. It highlights the importance of understanding COQ for management, as poor quality can account for 15% to 40% of business costs and emphasizes the benefits of preventive and appraisal costs. The document concludes that improving quality reduces the cost of poor quality, ultimately leading to increased profitability.

Uploaded by

biyani.anand1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 20

Welcome Back

Cost of quality
What is the cost of quality?

• The cost of ensuring that the job is done right, the


cost of not doing the job right.

Cost of conformance – Cost of Non-Conformance


(Prevention & Appraisal) (Internal & External defects)
Is Quality Costly ?
Customerswill
Customers willseek
seek Improvedquality
qualitythat
thatexceeds
exceeds
Improved
outthe
out thehighest
highestquality
quality customerexpectations
expectationswill
will
customer
product.
product. generatemore
morerevenues
revenuesthat
that
generate
exceedthe
exceed thecost
costofofquality.
quality.

Therefore,
Therefore,
quality is
quality is
“free”.
“free”.
5
W.
W.Edwards
EdwardsDeming
Demingproposed
proposed
that
thatimproving
improvingquality
qualityreduces
reduces
cost Quality
Qualitycan
canbe
beand
andshould
shouldbe
costand
andimproves
improvesprofitability.
profitability. be
improved
improvedcontinuously.
continuously.

Revenues

Max Profit

Cost

Max Quality

6
Why do we need to know COQ?

• This tool speaks in the language of management $$$$

• Research shows that cost of poor quality can range from


15 % to 40 % of the business costs
• It can prioritize quality improvement actions

• Cost of quality data shows how profit is affected by quality

• It helps identify the redundant activities


Hidden Failure
Costs
Scrap Rework
Warrant
y

Engineering
time
Management
time
Shop and field downtime
Increased
inventory
Decreased
capacity
Customer
dissatisfaction
Lost
sales
Lost customer
trust
Preventive costs:

Preventive costs are the cost of all activities specifically


designed to prevent poor quality product or service.

These costs are incurred to keep appraisal and failure


costs at minimum.
Examples of preventive costs:

• Process Capability studies


• Market surveys
• Pilot scale projects and testing
• Procedure writing
• Vendor evaluation and testing
• Training and education
• Quality improvement projects
• Customer survey
• House keeping
• Design review
Appraisal costs:

These are the costs associated with measuring,


evaluating or auditing product or service to assure
conformance to standard or performance requirement.
Examples of Appraisal costs:

• Internal audits
• Incoming material inspection
• Laboratory testing
• Calibration costs
• In process material inspection
• Equipment calibration
• Procedure evaluation
• Final product inspection (Samples)
• Automated testing tools
COPQ
Internal failure cost

These are the costs incurred when product or service fail


to meet quality requirements prior to the transfer of
ownership to the customer.
Examples of internal failure costs:

• Rework
• Scrap
• Overtime
• Downtime
• Excess inventory
• Excess material handling
• Redesign
• Retesting
• 100% sorting inspection
• Scrap & rework - supplier
External failure cost
These are the costs incurred by a business due to failure
of product or service at the customer end. These costs
results into warranty claims and loss of reputation.
Examples of external failure costs:

• Warranty costs
• Customer dissatisfaction
• Loss of market share
• Price concession
• Premium freight
• Product recalls
• Time spent to resolve customer complaints
• Restocking costs
• Other penalties
1-10-100 Rule

1
Prevention

10
$ $
Correction
$ $
100

Failure $
$
$
$
$
$
Case study: H&S motors
The H&S motor company produces small motors for use in lawnmowers and
garden equipment. The company instituted a quality improvement program in
1999 and has recorded the following quality cost data and accounting measures
for 4 years.

The company wants to assess its quality assurance program and develop
quality index using sales basis for the 4 year period.
Conclusion:
When the cost of achieving good quality
increases; cost of poor quality decreases
automatically.
Preventing Poor Quality (Comparison)

Prevention Costs

Benefit
Appraisal Costs

$ Repair Costs Prevention Costs

Failure Costs Appraisal Costs


• Internal Repair Costs
• External
Failure Costs

Before After Quality


Quality Cost Cost
Alignment Alignment
20

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