QUALITY COSTS/ COST OF QUALITY

Cost of uality Dr. E. Deming Running a company by profit alone is like driving a car by looking in the rear view mirror. It tells you where you’ve been, not where you are going! Dr. E. Deming

Cost of uality Goal The goal of a Cost of Quality system is to: Facilitate Quality Improvements that leads to operating cost reduction Opportunities. ASQC, "Principles of Quality Costs"

Cost of uality Definition The cost difference between present operation and the possible operation of a business with all systems and employees at 100% performance. or The difference between actual revenues and what revenues could be if all customers were always satisfied, that is , No Unhappy Customers. LDC 10/88

Cost of uality A Performance Measurement. Cost of Quality is Not: An Exact Cost. A Performance Measurement.

Cost of uality Measurement of a Company’s Health Financial Data 50 40 30 20 10 5 % Sales Operation Costs Material Costs Overhead Costs Gen. & Admin. Costs Percentage of Sales Dollar Factory Data Defect Reports Labor Hours Recode/Redesign Customer Complaints

Similar to a Tachometer Cost of uality MPH 50 1000 2000 3000 4000 5000 35 75 RPM 3 O 1 2 4 5 R FUEL E . . . . . F .

Similar to a Tachometer Cost of uality Sales $100K 5% 10% 15% 20% 25% $50K $150K COQ 3 O 1 2 4 5 R RESORCES E . . . . . F . COQ LDC 11/88

The Iceberg Model of Cost of Quality Many of the costs of quality are hidden and difficult to identify by formal measurement systems. The iceberg model is very often used to illustrate this matter: Only a minority of the costs of poor and good quality are obvious – appear above the surface of the water. But there is a huge potential for reducing costs under the water. Identifying and improving these costs will significantly reduce the costs of doing business.

STRATEGY Detection or prevention ? Manufacturing cycle designed for detection Manufacturing cycle designed for prevention Production Production Inspection Correction Rejection Packing Packing Scrap For the same out put : More area, Equipment, personnel, raw materials, time and other resources

Why Use Cost of Quality Processes? To provide a benchmark against which improvement can be measured over time   To measure RESULTS of the quality management system (QMS) rather than its activities   To provide a link between business objectives and the QMS To provide a dollar-based report card on quality improvement efforts To provide an effective tool to identify, prioritize and select quality improvement projects

Cost of Quality

Cost of Quality Prevention costs Appraisal costs build it right the first time Appraisal costs inspection and testing Internal failure costs scrap and rework External failure costs warranty claims, recalls, lost business

Four Categories of Quality Costs Category 1: Prevention Costs These costs are incurred in the process of trying to prevent defects and errors from occurring. planning the quality control process training Educating designing the product for quality designing the production system for quality preventive maintenance

Four Categories of Quality Costs Category 2: Appraisal Costs These are the costs of determining the current quality of the production system. measuring and testing parts and materials running test labs acquiring testing equipment conducting statistical process control receiving inspection reporting on quality

Four Categories of Quality Costs Category 3: Internal Cost of Defects These costs are incurred when defects and errors are found before shipment or delivery to the customer. labor and materials that are scrapped engineering change notices reworking and retesting to correct defects lost profits on downgraded products lost yield expediting

Four Categories of Quality Costs Category 4: External Cost of Defects These are the costs of trying correct defects and errors after receipt by the customer. quick response to complaints adjustments to correct the problem lost goodwill recalls to correct for other customers warranties and insurance settlements of lawsuits

 Traditional Management View vs. Six Sigma Philosophy

Cost of Quality as a Strategy for Improvement

“Quality is Free” For the average company, the cost of quality is about 25% of total sales The cost of prevention is a fraction of the cost of fixing mistakes after they are made Investments in prevention can drastically reduce the total cost of quality "Quality is free. It’s not a gift, but it’s free. The ‘unquality’ things are what cost money." -- Philip B. Crosby

Cost of uality Element Decision Flow YES NO PREVENTION APPRAISAL Is Cost related to Prevention of Non- Conformance ? Evaluating the Conformance ? Non-conformance Is Non-Conformance found prior to Shipment ? YES NO PREVENTION APPRAISAL INTERNAL FAILURE EXTERNAL FAILURE Not a Quality Cost

Cost of uality Examples of Elements PREVENTION Quality planning Supplier evaluation New product review Error proofing Capability evaluations Quality improvement team meetings Quality improvement projects Quality education and training APPRAISAL Checking and testing purchased goods and services In-process and final inspection/test Field testing Product, process or service audits Calibration of measuring and test equipment INTERNAL FAILURE Rework Delays Re-designing Shortages Failure analysis Re-testing Downgrading Downtime Lack of flexibility and adaptability EXTERNAL FAILURE Complaints Repairing goods and redoing services Warranties Customers’ bad will Losses due to sales reductions Environmental costs LDC 10/88

Corrective Action vs Failure Cost of uality Corrective Action is paid for Once, Whereas Failure to take corrective action may be paid for over and over again.

Strategy Premise Cost of uality The Strategy is based on the premise that: For each failure there is a root cause. Causes are preventable. Prevention is always cheaper. ACQC, Principles of Quality Costs, 1986

Strategy for using Quality Costs Cost of uality Strategy for using Quality Costs Take direct attack on FAILURE costs, try to drive to zero $. Invest in the "right" PREVENTION activities to bring about improvements. Reduce APPRAISAL costs according to results achieved. Continuously evaluate and redirect PREVENTION efforts to gain further improvement. ASQC, Principles of Quality Costs, 1986

Cost of uality Recipe for Success 1. 2. 3. 5. 4. 1. Educate & Develop: Management & Employee Support 2. Collect, Analyse and Report Cost of Quality Data 3. Involve & Support Corrective Action Teams (CAT) 4. Implement Changes recommended by CAT 5. Go to Step #2 (expand data items collected) 1. 2. 3. 5. 4.

Quality Costs In 1956 Armand Feigenbaum argued that total quality control ultimately results in a reduction in overall costs and a redistribution of those costs from failure and appraisal categories to prevention costs. In the 1970’s Phillip Crosby joined his voice to this message by saying “quality is measured by the cost of quality…the cost of doing things wrong.” A sound quality cost system is an essential element in a modern quality system.

Cost of Quality History COQ as a Percentage of Sales Start COQ 25 % o 20 f Prev. Appr. In. Fail. Ex. Fail. COQ Sales 15 S a 10 l e 5 s 1/98 3/98 1/99 3/99 1/00 3/00 Quarters

Quality Cost Re-Distribution Prevention Costs 2%;Appraisal Costs 20%;Internal Failure Costs 60%; External Failure Costs 18%; Total Quality Costs 100% This distribution might be indicative of a quality system that attempts to inspect quality into a product rather than build quality in. The result is high costs for inspection, scrap and rework, and customer returns/warranty work Prevention Costs 20%; Appraisal Costs 15%;Internal Failure Costs 50%; External Failure Costs 15%; Total Quality Costs 100% The initial impact of increasing expenditures on prevention might manifest as an increase in total quality costs--the apparent reduction in internal and external failure costs is a result of an increase in total expenditures. Prevention Costs 25%;Appraisal Costs 15%;Internal Failure Costs 40%; External Failure Costs 20%;Total Quality Costs 100% As prevention activities begin to have an effect total quality costs decrease. There is less need for inspection; there is less scrap and rework, but there is still a lot of old product in the field, so external failure costs may not decline. Prevention Costs 40%;Appraisal Costs 20%;InternalFailure Costs 35%; External Failure Costs 5%;Total Quality Costs 100% After sufficient time for prevention activities to manifest throughout the supply chain, total quality costs decrease dramatically. Furthermore, the distribution of those costs is significantly changed.

Cost of uality NORMAL DISTRIBUTION Appraisal Prevention Internal Failures External Total Sales Cost of Quality% TOTAL SALES C O Q $$$

OPTIMUM DISTRIBUTION Cost of uality Appraisal Cost of Quality% Prevention Internal Failures TOTAL SALES External Failures C O Q $$$

Taguchi’s Loss Function Taguchi Method is a statistical method developed by GENICHI TAGUCHI to improve quality of manufactured goods. The philosophy of off-line quality control. Innovations in the design of experiments.

Taguchi Loss Function Definition Taguchi defines Quality as “the loss imparted by the product to society from the time the product is shipped.” LOSS = Cost to operate, Failure to function, maintenance and repair cost, customer dis -satisfaction, poor design. Product to be produced “being within specification”

Taguchi’s Vs Traditional Approach Taguch’s Traditional When a product moves from its Target will cause the loss even if the product lies or not within Limits There is Good or Bad Products only as per Limits

Taguchi’s Quadratic Quality Loss Function Quality Loss Occurs when a product deviates from target or nominal value. Deviation Grows, then Loss increases. Taguchi’s U-shaped loss Function Curve.

Taguchi’s U-shaped loss Function Curve. Taguchi loss Fn Scrap or Rework Cost. Loss Measured characteristic LTL Nominal UTL

Where L (x) = Loss Function, Formula to find Taguchi’s Loss Fn Taguchi uses Quadratic Equation to determine loss Curve L (x) = k (x-N)² Where L (x) = Loss Function, k = C/d² = Constant of proportionality, where C – Loss associated with sp limit d - Deviation of specification from target value x = Quality Features of selected product, N = Nominal Value of the product and (x-N) = Tolerance

Problem A part dimension on a power tool is specified as 32.25±0.25.Company records show±0.25 exceeded & 75% of the returned fo replacement. Cost of replacement is Rs.12,500.Determine k & QLF. Solution : Expected Cost of repair C = 0.75(12500) = Rs 9,375 k = C/d²= 9375/(90.25)² = Rs 1,50,000 QLF =L (x) 1,50,00(x-N)

SOFTWARE SECTOR Examples of Quality Costs Associated with Software Products Prevention Appraisal Staff training  Requirements analysis  Early prototyping  Fault-tolerant design  Defensive programming  Usability analysis  Clear specification  Accurate internal documentation  Evaluation of the reliability of development tools Design review  Code inspection  Glass box testing  Black box testing  Training testers  Beta testing  Test automation  Usability testing  Pre-release testing by customer service staff  Internal Failure External Failure Bug fixes  Regression testing  Wasted in-house user time  Wasted tester time  Wasted writer time  Wasted marketer time  Wasted advertisements  Direct cost of late shipment Opportunity cost of late shipment  Technical support calls  Investigation of customer complaints  Refunds and recalls  Coding / testing of interim bug fix releases  Shipping of updated product  Added expense of supporting multiple versions PR work to soften drafts of harsh reviews  Lost sales, Lost customer goodwill  Discounts to resellers Warranty costs, Liability costs  All other costs imposed by law 

"loss to society" caused by poor quality. L1: costs of rework, warranties, scrap, inspection costs and other visible internal and external failure costs L2:chronic, routine problems that are easy to ignore and frequent, unthinking corrections that aren't captured by accounting systems. L3:includes costs related to lost income that may result in immediate loss of market share or goodwill as well as long-term market effects. L4:losses incurred by customers like costs include early replacements (for example, light bulbs that last only a few thousand hours), incompatibilities with other equipment or software, items that are unnecessarily difficult to repair and other defects in design or workmanship for which customers end up paying. L5: the socioeconomic costs, losses that affect a community due to inadequate processes or products of companies, organizations or governments They include products that can't easily be recycled and are harmful to the environment; manufacturing wastes that poison the air, land and water; and products with harmful side effects.

Comparison of External Failure Costs Borne by the Buyer and the Seller Customer: failure costs These are the types of costs absorbed by the customer who buys a defective product.  Wasted time  Lost data  Lost business  Embarrassment  Frustrated employees quit  Demos or presentations to potential customers fail because of the software  Failure when attempting other tasks that can only be done once  Cost of replacing product  Cost of reconfiguring the system  Cost of recovery software  Cost of tech support  Injury / death