Quality cost

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Quality cost

• By Dr. Lawrence Wong

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Quality costs

• Quality costs are all the costs incurred by a
  business to ensure that the total service it
  provide to customers conforms to the customers
  requirement
• First suggested by Quality experts Philip Crosby
• In his book Quality is Free introduced the
  concept of quality cost
• Quality is free
• It is not the quality that costs, but the lack of
  quality
• He estimated 30 of a companys expenditure are
  quality costs related

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Before 1950 - 1960s

• No special accounting procedure on quality cost
  was available
• Costs of quality were scattered
• Quality costs were a minority of expenditures
• It is only related to quality and inspection
  departments

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Quality related activities

• Costs are considered to be the efforts devoted to
  products that do not meet specification or which
  fail to meet customer satisfaction. These costs
  would not exist if the product has been made
  right in the first time.
• Quality-related activities are those which
  concerns with PAF
• Prevention
• Effects devoted to planning the quality system
• Appraisal
• Efforts to verify that quality is being obtained
• Failure
• Failures resulting from inadequate systems

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Prevention Costs

• Costs incurred in planning, implementing and
  maintaining a quality management system that is
  intended to ensure conformance to quality
  requirement.
• These costs are related to activities which
  concern keeping failure and appraisal costs at a
  minimum

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Examples of prevention Cost

• Application screening
• Capability studies
• Controlled storage
• Design review
• Equipment maintenance repair
• Field testing
• Fixture design and fabrication
• Forecasting
• Housekeeping

• Job descriptions
• Market analysis
• Pilot projects
• Procedure writing
• Prototype testing
• Procedure reviews
• Quality incentives
• Safety reviews
• Time and motion studies
• Survey
• Quality training
• Vendor evaluation and selection
• Personnel reviews

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Appraisal Costs

• Costs incurred in measuring and suiting design,
  product, components, and materials in order to
  establish the design of conformance with quality
  requirements.
• These costs are related to appraisal of the state
  of products and processes in order to assess
  whether or not the products/process satisfy given
  requirement

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Examples of appraisal cost

• Audit
• Document checking
• Drawing checking
• Equipment calibration
• Final inspection
• In-process inspection

• Laboratory test
• Personnel testing
• Procedure testing
• Prototype inspection
• Receiving inspection
• Shipping inspection

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Failure costs

• Costs are considered to be the efforts devoted to
  products that do not meet specification or which
  fail to meet customer satisfaction. These costs
  would not exist if the product has been made
  right in the first time.

• External failure cost
• Costs incurred when products fail to conform to
  quality requirements after transfer of ownership
  to the customer

• Internal failure cost
• Costs that arise where products, components, and
  materials fail to conform to quality requirements
  before transfer of ownership to the customer

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Examples of internal failure cost

• Accidents
• Accounting error corrections
• Employee turnover
• Engineering change
• Equipment downtime
• Excess interest expense
• Excess inventory
• Excess material handling
• Excess travel expense
• Failure review

• Obsolescence due to design changes
• Overpayments
• Premium freight
• Redesign
• Re-inspection
• Repair cost
• Re-testing
• Rework
• Scrap allowances
• Sorting

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Examples of external failure cost

• Bad debts
• Customer dissatisfaction
• Engineering change notice
• Equipment downtime
• Excess installation costs
• Excess interest expense
• Excess inventory
• Excess material handling
• Excess travel expense
• Failure travel expense
• Failure reviews
• Liability
• Loss of market share

• Obsolescence due to design changes
• Overpayments
• Penalties
• Premium freight
• Price concessions
• Price errors
• Re-calls
• Redesign
• Re-inspection
• Repair cost
• Restocking costs
• Re-testing
• Rework
• Scrap
• Sorting
• Warranty expense

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Quality cost relationship

Apparent optimum Defect level
Zone of indifference
prevention
prevention
Total
Failure
Apparent minimum Total quality cost
Appraisal
Low
High
Defect level
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Why calculate Quality Cost

• Quality Costs represent 10-20 of total costs
• Management will give special attention is quality
  is measured in monetary terms
• Quality costing is one of the tools
• to provide initial assessments and hard evidence
  that improvement is needed or had been made
• To monitor the effectiveness of quality
  improvement initiatives
• To be used in a generic term by senior
  management, shareholders and financial
  institutions, so that they can readily understand
  implication of quality the in term of money
• Cost of quality failure is calculated as a
  percentage of profit or annual turnover
• It is easy to understand
• By front-line operator
• By middle management

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Benefits of using quality costing

• Greater accuracy in the evaluation and
  forecasting of resource utilization
• Justification for investment in the prevention
  and appraisal of failures
• Ability to cost and compare performance across
  all departments functions and activities
• Identification and prioritization of activities,
  processes and departments in terms of corrective
  action, investment, or quality improvement
  initiatives

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Benefits of using quality costing (2)

• Ability to set cost-reduction targets and then to
  measure and report progress
• Ability to produce local data which improves
  understanding of resource utilization objectives
  and targets at all levels throughout the company
• Provision of data to support formal quality
  management system (including, especially those
  based upon the ISO9000)
• Enable decisions about quality to be made in an
  objective and systematic manner
• Promoting TQM and a company-wide quality
  improvement culture

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Difficulties in using Quality costing

• Management have not believed in the possibilities
  of improvement
• Quality costing is demanding
• It requires a lot of data of each activity
  related to quality
• Other limitations
• Does not resolve quality problems
• Does not provide specific actions
• susceptible to short-term mismanagement
• difficult to match effort and accomplishment
• susceptible to measurement errors
• may omit important or include inappropriate costs

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Steps in implementing quality cost

• Involve accountants right from the outset
• Decide purpose and objectives
• Decide how to deal with overheads
• Distinguish between basic work and quality
  related activities
• Collection data which offers the prospect of real
  gains
• Start by examining failure costs
• Evaluate the costs of inspection
• Analyze and use the data
• Collecting and reporting quality cost data

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Guideline to collecting and reporting

• Reporting cost considerations
• Standardized reporting format
• Clarify and simplicity in the presentation of
  data
• Effective communication at management, department
  and operator levels
• Inclusion of data in the companys overall cost
  reporting system
• Support from senior management
• The influence and involvement of senior
  management is vital in acting upon quality cost
  data
• If there is no pressure to reduce costs against
  targets set and monitored by management, then
  cost collection and reporting will gradually lose
  credibility, and an important weapon in the cause
  of company wide quality improvement will be lost

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Quality costs reduction

• It helps business to
• Satisfy the requirements of their customers.
• Makes the work of their employees more
  interesting.

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Summary

• Quality cost cannot eliminate the costs of
  non-conformance, it is only a tool to measure.
• Quality cost is measure of effectiveness and
  efficiency of a Quality Improvement Programme

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Case study

• Quality cost of software design department

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Examples of quality costs by software design
department

• List of Prevention costs
• Design procedures
• Setting specifications
• Quality function deployment
• Reliability analysis
• Design proving
• Design reviews

• List of Appraisal costs
• Design specification
• Pre-production / prototype trials
• Checking

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Examples of quality costs by design department

• List of Internal failure costs
• obsolete library / data
• insufficient / excessive data storage
• design changes
• Project overspend

• List of External failure costs
• software liability (i.e. penalty, delay of
  payment)
• Customer complaints
• Downgrading system performance
• Analysis of compliant from customer
• Orders lost