Agenda Return homework Reliability Solve problems: Cost of Quality Week 14 Return homework Reliability Solve problems: Chapter 10 - 6, 10 Cost of Quality Chapter 12 - 7 Discuss final exam Week 15 Assignment Complete final exam Present exam results

Question: What are costs of quality? Task: Create your list of quality costs and share with the class. What is the relationship between quality and productivity? Cost of Quality

Cost of Quality Chapter Eleven Cost of Quality 11/11/2018

Quality cost A quality cost is considered to be any cost that the company would not have incurred if the quality of the product or service were perfect. Cost of Quality

Quality costs Total quality costs are the sum of prevention costs, appraisal costs, and internal and external failure costs. Cost of Quality

Quality costs increase over time Liability costs Failure found by customer Field repair costs Failure Costs Failure found at installation Failure found at final inspection Failure found at onset of manufacture Failure found during design phase Prevention Costs Time when failure found Cost of Quality

Hidden Costs of Poor Quality 11/11/2018 Hidden Costs of Poor Quality Reprocessing Customer returns Rejects Warranty expenses Lost sales Loss of goodwill Overtime to correct errors Process downtime Extra inventory Delays Extra process capacity Premium freight costs Extra inventory Cost of Quality Cost of Quality

Non-financial Measure 11/11/2018 Balanced Score Card TQM Element Financial Measure Non-financial Measure Customer satisfaction External failure cost. Field service expense. Results of customer satisfaction survey. On-time delivery. Number of customer complaints. Internal performance Appraisal cost. Internal failure cost. Prevention cost. Defect rates Yields Lead times Idle capacity Unscheduled machine downtime Cost of Quality Cost of Quality

Traditional Model Total quality costs Failure costs Cost per good unit of product Cost of appraisal plus prevention 0% Quality of conformance 100%

Emerging COQ Model Total quality costs Failure costs Cost per good 11/11/2018 Emerging COQ Model Total quality costs Failure costs Cost per good unit of product Cost of appraisal plus prevention Greater emphasis placed on prevention and appraisal. It assumes appraisal and prevention costs to be relatively fixed over time. Model does not encourage tradeoffs. Total cost is NOT minimized at less than 100% conformance. 0% Quality of conformance 100% Cost of Quality

11/11/2018 COQ as motivator Companies under TQM do not focus on quality cost minimization. Quality improvement projects tend to focus on zero defects or defect reduction to the six-sigma level. Companies under TQM do not focus on quality cost minimization, specially if it occurs at less than 100% conformance. Cost of quality numbers tend to be “soft,” in particular those used to estimate external failure cost. Cost of Quality

The 1-10-100 Rule Prevention Correction Failure $ 1 10 $ $ 100 $ $ 11/11/2018 The 1-10-100 Rule Prevention $ 1 Correction 10 $ Failure $ 100 $ The earlier you detect and prevent a defect the more you can save. If you catch a defective 2 cent resistor before is used, you loose two cents. If you find after is solder into a computer component, it may cost $10 to repair the part. If you don’t catch it until it reaches the customer’s hands, the repair will cost hundreds of dollars. Indeed, for a $5000 computer, a field repair may exceed the manufacturing cost. $ Cost of Quality

COQ Theme Costs are not incurred or allocated, but rather caused. Cost information does not solve quality problems, nor does it suggest specific solutions. Problems are solved by tracing the cause of a quality deficiency.