The-Cost-of-Quality.pptx

7/25/2019 The-Cost-of-Quality.pptx

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Total Quality Management

Total Quality Management - Spring2010 - IUG 1

Cost of Quality


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Understand Quality Costs

Understand quality costs enables you to Understand hidden costs Reduce and eliminate unnecessary cost

Prevent problems from happening Management responsibility to enable this

Quality costs are realand estimated at:

25% of costs in manufacturing

5% of costs in service industry

Quality costs can be categorised to enable better

understanding

2


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Why calculate Quality Cost

Management will gie special attention when !uality ismeasure" in monetary terms

Quality costing is one o# the tools

to proi"e initial assessments an" har" ei"ence thatimproement is nee"e" or ha" $een ma"e

To monitor the e%ectieness o# !uality improement

initiaties To $e use" in a generic term $y senior management&

sharehol"ers an" 'nancial institutions& so that they canrea"ily un"erstan" implication o# !uality in the term o#money

Cost o# !uality #ailure is calculate" as a percentage o#

pro't or annual turnoer It is easy to un"erstan"

(y #ront-line operator (y mi""le management

)Total Quality Management - Spring2010 - IUG


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(ene'ts o# using !uality costing

Greater accuracy in the ealuation an" #orecasting o#resource use

*usti'cation #or inestment in the preention an"appraisal o# #ailures

+$ility to cost an" compare per#ormance across all"epartments #unctions an" actiities

I"enti'cation an" prioriti,ation o# actiities&

processes an" "epartments in terms o# correctieaction& inestment& or !uality improement initiaties

Total Quality Management - Spring2010 - IUG


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(ene'ts o# using !uality costing .2/

+$ility to set cost-re"uction targets an" then to measurean" report progress

+$ility to pro"uce local "ata which improesun"erstan"ing o# resource utili,ation o$ecties an" targetsat all leels throughout the company

3roision o# "ata to support #ormal !uality managementsystem .inclu"ing& especially4 those $ase" upon theIS56000/

7na$le "ecisions a$out !uality to $e ma"e in an o$ectiean" systematic manner

3romoting TQM an" a company-wi"e !uality improementculture

8Total Quality Management - Spring2010 - IUG


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COST OF QUALITY

Quality costs are "e'ne" as costs associate" withnon-achieement o# pro"uct9serice !uality: In simpleterms& !uality cost is the cost o# poorpro"ucts9serices:

The cost o# poor !uality can a"" to other costs suchas "esign& pro"uction& maintenance& inspection& sales&etc: Quality costs cross "epartment $oun"aries $yinoling all actiities o# the organi,ation ; marTotal Quality Management - Spring2010 - IUG


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3hillip (: Cros$y .Quality isfree . . . )@

The system for causing quality is prevention, not

appraisal Quality is Free The performance standard must be Zero Defects,

not "thats close enough" The measurement of quality is the !rice of on#

conformance$ %ost of quality is only the measure of operational

performance &Quality is free$ 't(s not a gift, but it is free$ )hat

costs money are the unquality things ## all the

actions that involve not doing *obs right the first

time$+

Founders Point of View

Total Quality Management - Spring2010 - IUG


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Customers will seek

out the highest quality

product.

Customers will seek

out the highest quality

product.

Improved quality that exceeds

customer expectations will

generate more revenues that

exceed the cost of quality.

Improved quality that exceeds

customer expectations will

generate more revenues that

exceed the cost of quality.

Therefore,

quality is

free.

Therefore,quality is

free.

Total Quality Management.TQM/

ATotal Quality Management - Spring2010 - IUG


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Total Quality Management.TQM/

. !dwards "eming proposed that

improving quality reduces cost and

improves profita#ility.

. !dwards "eming proposed that

improving quality reduces cost and

improves profita#ility.

$uality can #e and should #e

improved continuously.

$uality can #e and should #e

improved continuously.

Quality

Total,eve

nues

-

%ost

evenues

%ost

.a/ !rofit

.a/ Quality



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Beturn on Quality .B5Q/

%rofit is maximi&ed at the

optimum quality level.

%rofit is maximi&ed at the

optimum quality level.The optimum quality level is always achieved

#efore maximum attaina#le profit is reached.

The optimum quality levelis always achieved

#efore maximum attaina#le profitis reached.

Quality

Total,eve

nues

-

%ost

evenues

%ost

.a/ !rofit

0ptimum Quality



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eigen$aum .5riginator o# DTotalQualityE concept/Fe'nition o# Quality costs .168>/

+ppraisal costs

3reention costsailure costs

Founders Point of View



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Cost o# Quality

Cost of Achievin !ood Quality Prevention costs

costs incurred durin "roduct desin

A""raisal costs costs of #easurin$ testin$ and analy%in

Cost of Poor Quality

Internal failure costs include scra"$ rewor&$ "rocess failure$

downti#e$ and "rice reductions

'(ternal failure costs include co#"laints$ returns$ warranty

clai#s$ lia)ility$ and lost sales



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3reention Costs

Quality planningcosts costs o# "eeloping

an" implementing!uality

managementprogram

3ro"uct-"esigncosts costs o# "esigning

pro"ucts with!ualitycharacteristics

3rocess costs costs epen"e" to

ma


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7amples o# preention Cost +pplication screening

Capa$ility stu"ies

Controlle" storage

Fesign reiew 7!uipment maintenance

H repair

iel" testing

iture "esign an"#a$rication

orecasting

ouse


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+ppraisal Costs

Inspection an" testing costs o# testing an" inspecting materials&

parts& an" pro"uct at arious stages an" atthe en" o# a process

Test e!uipment costs costs o# maintaining e!uipment use" in

testing !uality characteristics o# pro"ucts

5perator costs costs o# time spent $y operators to gather

"ata #or testing pro"uct !uality& to ma


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7amples o# appraisal cost +u"it

Focument chec


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Internal ailure Costs

Scrap costs costs o# poor-!uality

pro"ucts that must$e "iscar"e"&inclu"ing la$or&

material& an" in"irectcosts

Bewor< costs costs o# 'ing

"e#ectie pro"ucts tocon#orm to !uality

speci'cations3rocess #ailure

costs costs o# "etermining

why pro"uctionprocess is pro"ucingpoor-!uality pro"ucts

3rocess "owntimecosts

costs o# shutting"own pro"uctie

process to 'pro$lem

3rice-"owngra"ingcosts

costs o# "iscountingpoor-!uality pro"uctsKthat is& sellingpro"ucts assecon"s

1?Total Quality Management - Spring2010 - IUG


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7ternal ailure Costs

Customer complaintcosts costs o# inestigating

an" satis#actorilyrespon"ing to a

customer complaintresulting #rom a poor-!uality pro"uct

3ro"uct return costs costs o# han"ling an"

replacing poor-!uality

pro"ucts returne" $ycustomer

Warranty claims costs costs o# complying with

pro"uct warranties

3ro"uct lia$ilitycosts litigation costs

resulting #rompro"uct lia$ilityan" customerinury

Jost sales costs costs incurre"

$ecause customersare "issatis'e"

with poor !ualitypro"ucts an" "onot ma


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*efects$ Scra"$ +ewor&$ Ins"ection$+eturns$ ,arranty$ QualityAssurance

Prevention*esin +eview$ -ero *efectsProra#$ Su""lier Trainin$Su""lier 'valuation$S"eci.cation +eview$ Quality

Audits$ Preventive/aintenance$ 'nineerinChanes$ Product Lia)ility$Increased Overhead

A""raisalVendor Surveillance$ +eceivinIns"ection$ Product Acce"tance$Process Control$ Ins"ection La)or$Quality Control La)or$ Testin

'0ui"#ent Costs

'(ternal FailureConsu#er A1airs$ PurchaseChanes$ Service after Sales$Product Lia)ility$ Lost /ar&etShare *elivery *elay

Internal Failure*ownti#e$ 'nineerinChanes$ '(cess Inventory$

*is"osal Costs$ +einsertion


Cl i# i Q li


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Classi#ying QualityCosts



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Preventing Poor Quality (Comparison)

Failure Costs !nternal

"#ternalFailure Costs

Repair Costs

Repair Costs

Appraisal Costs

Appraisal Costs

Prevention Costs

Prevention Costs$

Before QualityCost

Alignment

AfterQualityCost

Alignment

Benefit


h


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Cost o# Quality .otherersion/1: Ji


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Cost o# Quality .otherersion/

2.These two main areas can $e split #urther as shown $elow:FI!U+' 425



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1-10-100+ule

$

$

$

$

$

$

$

$

$

$

1

10

100

Prevention

Correction

Failure



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The 46476477 rule6

Be:1 spent on preention will sae Bs:10 spent on appraisal

an" Bs:100 on #ailure costs:

One dollar s"ent on "revention will save 847 ona""raisal and 8477 on failure costs2

This rule helps one to prioriti,e epen"iture on preention&

which is sure to $ring in greater returns:

9The earlier you detect and "revent a defect the #oreyou can save2 If you catch a two cent resistor )eforeyou use it and throw it away$ you lose two Cents2 If youdon:t .nd it until it has )een soldered into a co#"uter

co#"onent$ it #ay cost 847 to re"air the "art2 If youdon:t catch the co#"onent until it is in the co#"uteruser:s hands$ the re"air will cost hundreds of dollars2Indeed$ if a 8;777 co#"uter has to )e re"aired in the.eld$ the e("ense #ay e(ceed the #anufacturin cost2Total Quality Management - Spring2010 - IUG


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FiNculties in using Quality costing

Management hae not $eliee" in the possi$ilities o# improement

Quality costing is "eman"ing

It re!uires a lot o# "ata o# each actiity relate" to !uality

5ther limitations

Foes not resole !uality pro$lems

Foes not proi"e speci'c actions

ulnera$le to short-term mismanagement

"iNcult to match e%ort an" accomplishment su$ect to measurement errors

may neglect important or inclu"e inappropriate costs

2?Total Quality Management - Spring2010 - IUG


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Steps in implementing !uality cost

1: Inole accountants right #rom the start

2: Feci"e purpose an" o$ecties

): Feci"e how to "eal with oerhea"s

: Fistinguish $etween $asic wor< an" !uality relate"actiities

8: Collection "ata which o%ers the prospect o# realgains

>: Start $y eamining #ailure costs

?: 7aluate the costs o# inspectionA: +naly,e an" use the "ata

6: Collecting an" reporting !uality cost "ata

2ATotal Quality Management - Spring2010 - IUG


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Preventing Poor Quality

$ould it not mae sense to prevent poor

quality products from happening&

Howcan this be done&

Whose responsibilityis this&



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How to Prevent Poor Quality

Prepare to measure costs of quality eterminecategories of quality costs

'reate measurement system that

captures categories of quality costs Assign responsibilityto collect data

(nalyse collected data

)0Total Quality Management - Spring2010 - IUG


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etermine Quality Cost Categories

Understandyour product

Understandyour process

Understand)here problems occur

etermineprecisely )hat goes )rong

etermine)hat costs represents eachproblem



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Creating ata Colle!tion "ystem

'reate measurement system

Attemptto harness e#isting financial

accounting system

#anipulatee#isting financial data

Colle!t !ostsas they occur

$hatever you do ensure costs areaccurate



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Assign Responsibility

Mae individuals at all levels responsible

for collecting quality cost data:

!f quality cost data is required thenmae it the responsibility of the person

)ho creates the cost to collect the

data

!f no one is responsible no one )ill bother

))Total Quality Management - Spring2010 - IUG


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Analyse Colle!ted ata

*ata on its o)n is useless +ou must have it analysed to be able to

e#tract meaning

*etermine )hat no)ledge you require *evelop an analysis system that provides

the no)ledge you require

)Total Quality Management - Spring2010 - IUG


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Use$ul Quality Cost %nowledge

$hat you need to no) is useful

$hat you do not need to no) is useless

,nly as for no)ledge you need to no) *emand that no)ledge is presented so

that it can be understood easily



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#anagement is Responsible

Management decides )hat to produce in

terms of Products -goods and . or

services/ Management assigns responsibilities to

produce products

Management is accountable for effectivelyusing resources to produce products

)>Total Quality Management - Spring2010 - IUG


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istory o# +ctiity-(ase" Costing

Term actiity-$ase" costing create" in 16?8 $y Fr:Bo$ert Oaplan

Besulte" #rom "issatis#action with tra"itional accountingcategories

I"enti'es actiities as the #un"amental cost o$ect o# anorgani,ation

Wi"ely use" in in"ustries .e:g: e"7& Teas InstrumentsP/

)?Total Quality Management - Spring2010 - IUG


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(ene'ts +ssociate" With +(CMore precise cost in#ormation

Improe" cost control an" management

Improe" insight into cost causation

(etter per#ormance measures

)ATotal Quality Management - Spring2010 - IUG


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Fe'nitions

+ctiity (ase" Costing.+(C/ is a metho"ology thatmeasures the cost an" per#ormance o# resources&actiities an" cost o$ects: Cost o$ects consumeactiities& an" actiities consume resources:

+ctiity (ase" Management.+(M/ is the $roa""iscipline that #ocuses on achieing customer alue

through the continuous management o# actiities:+(M "raws on +(C cost in#ormation an"per#ormance measurement as a maor .$ut not only/source o# in#ormation:



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The Jin< (etween Quality an"3ro"uctiity7%ectie !uality improement can $e

instrumental in increasing pro"uctiity an"re"ucing cost:

The cost o# achieing !uality improements an"increase" pro"uctiity is o#ten small:



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Summary Sli"e

The #ollowing Sli"es are #orun"erstan"ing only .su$ect toin"irect Questions/@ )?& )A& )6&

0

5ther sli"es are re!uire" an"

su$ects to any type o# Questions

T l Q li M S i

The-Cost-of-Quality.pptx

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