CECE FICCI Quality Costs & Profit Chapter no.2

CECE FICCI Many people think that quality costs money and adversely effects profits. But these costs are the costs of doing it wrong first time. Quality in the long run results in increased profitability.

CECE FICCI Quality, Cost and Profit relationship. For example if we design the product right first time, build it right first time - we save all the costs of redesign, rework, scrap, resetting, repair, warranty work etc.

CECE FICCI Quality and Profit : Paradigm * A Paradigm is a mind set. QUALITY COS T PROFIT

CECE FICCI QUALITY & PROFIT - PARADIGM SHIFT. COS T QUALITY PROFI T

CECE FICCI 1.Higher production due to improved cycletime and reduced errors and defects 2.Increased use of machine and resources. 3.Improved material use from reduced scrap and rejects 4.Increased use of personnel resources 5.Lower level of asset investments required to support operations. 6.Lower service and support costs for eliminated waste, rework and non value added activities. QUALITY Higher productivityIncreased profitability due to : Larger sales Lower production costs Faster turnover

CECE FICCI Quality and Profit 4 4 If the organization does not offer high quality product or service, it will soon go out of business. But just having high quality will not be enough, because your competitors will also have the high quality. To win, companies will need to offer high quality for a lower price than their competitors.This requires organizations to identify and reduce their quality costs High Quality Lower price

CECE FICCI Quality Costs Quality costs are all those costs that arise from not performing a task the right way the first time.

CECE FICCI Categories of Quality Costs 1. Prevention Costs 2. Appraisal Costs 3. Internal Failure Costs 4. External Failure Costs. 1. Prevention Costs 2. Appraisal Costs 3. Internal Failure Costs 4. External Failure Costs.

CECE FICCI Prevention Costs ã ã Prevention costs are associated with design, implementation, maintenance, and planning prior to actual operation in order to avoid defects from happening. ã ã The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures ( internal and external ).The motto is “Prevention rather than appraisal”. ã ã Prevention costs are associated with design, implementation, maintenance, and planning prior to actual operation in order to avoid defects from happening. ã ã The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures ( internal and external ).The motto is “Prevention rather than appraisal”.

CECE FICCI Activities associated with Prevention costs ã ã Market research ã ã Quality training programmes. ã ã Contract review ã ã Design review ã ã Field trials ã ã Supplier evaluation ã ã Process plan review ã ã Process capability review ã ã Design and manufacture of jigs and fixtures ã ã Preventive maintenance ã ã Engineering changes for easy producibility ã ã Market research ã ã Quality training programmes. ã ã Contract review ã ã Design review ã ã Field trials ã ã Supplier evaluation ã ã Process plan review ã ã Process capability review ã ã Design and manufacture of jigs and fixtures ã ã Preventive maintenance ã ã Engineering changes for easy producibility

CECE FICCI Appraisal costs ã ã Appraisal costs are spent to detect defects to assure conformance to quality standards. Appraisal cost activities sums up to the “cost of checking if things are correct”.The appraisal costs are focused on the discovery of defects rather than prevention of defects

CECE FICCI Activities associated with Appraisal costs ã ã Proto type testing ã ã Vendor surveillance ã ã Incoming material inspection ã ã Process inspection/control ã ã Final inspection ã ã Laboratory testing / measurement ã ã Depreciation cost for measuring ã ã Quality audits. ã ã Proto type testing ã ã Vendor surveillance ã ã Incoming material inspection ã ã Process inspection/control ã ã Final inspection ã ã Laboratory testing / measurement ã ã Depreciation cost for measuring ã ã Quality audits.

CECE FICCI Internal failure costs ã ã Internal failure costs occurs when results of work fail to reach designated quality standards, and are detected before transfer to the customer takes place.

CECE FICCI Activities associated with Internal failure costs ã ã Design changes/ corrective action ã ã Scrap due to design changes ã ã Excess inventory ã ã Rectification / reject disposition of purchased material ã ã Rework/rejection in manufacturing ã ã Downgrading of end product ã ã Downtime of plant & machinery ã ã Trouble-shooting & investigation of defects ã ã Design changes/ corrective action ã ã Scrap due to design changes ã ã Excess inventory ã ã Rectification / reject disposition of purchased material ã ã Rework/rejection in manufacturing ã ã Downgrading of end product ã ã Downtime of plant & machinery ã ã Trouble-shooting & investigation of defects

CECE FICCI External failure costs ã ã External failure costs occur when the product or service from a process fails to reach designated quality standards, and is not detected until after transfer to the customer.

CECE FICCI Activities associated with External failure costs ã ã Processing / investigation of customer complaint ã ã Repair/replacement of sold goods ã ã Warranty claims ã ã Product liability & litigation costs ã ã Interest charges on delayed payment due to quality problems ã ã Loss of customer goodwill & sales. ã ã Processing / investigation of customer complaint ã ã Repair/replacement of sold goods ã ã Warranty claims ã ã Product liability & litigation costs ã ã Interest charges on delayed payment due to quality problems ã ã Loss of customer goodwill & sales.

CECE FICCI Size of four categories of quality costs. ã ã The organizations which do not follow TQM,there is less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs. ã ã Various studies have shown that quality cost in manufacturing companies the world over range from 20 % to 30 % of turnover and in the case of service companies it can go up to 40 % as illustrated in graph on the next slide. ã ã The organizations which do not follow TQM,there is less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs. ã ã Various studies have shown that quality cost in manufacturing companies the world over range from 20 % to 30 % of turnover and in the case of service companies it can go up to 40 % as illustrated in graph on the next slide.

CECE FICCI Size of various quality cost elements Preventive 1% Appraisal 4-6% Internal Failure 10-12% External Failure 10-15% The total quality costs % of turnover. Quality costs in % of sales

CECE FICCI Impact of TQM on costs. ã ã TQM is primarily aimed to improve the quality of the product, higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly effect the profitability. ã ã This is demonstrated by the results of TQM programme in Xerox Corp. The change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide. ã ã TQM is primarily aimed to improve the quality of the product, higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly effect the profitability. ã ã This is demonstrated by the results of TQM programme in Xerox Corp. The change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide.

CECE FICCI Impact of TQM on costs. Internal Failure Appraisal Prevention % of sales An example from Xerox Corp. Before TQMAfter TQM

CECE FICCI Rule Rs Prevention Correction Failure Cost of rectifying defect Stages

CECE FICCI Scrap Rework Warranty costs Hidden Costs Visible costs Excessive use of material High inventory Low plant utilization Cost of redesign and re inspection Cost of resolving customer problems Cost associated with poor quality of purchased material Cost of non value adding activities Opportunity cost of lost customers