I was proud of some of the B pictures we made, but a lot of them were pretty poor. They were movies the studio didn’t want good, they just wanted ‘em Thursday. Ronald Reagan

This is because of an increase in the: Cost of quality because of intensification in the use of technology Sophistication of end-users in their consideration of life cycle costs Use of quality cost data internally to make quality management related decisions

The definitions provided in standards such as BS 4778, BS 6143 (Guide to the economics of quality - 1992) or ISO 9000 illustrate that there is no universal consensus upon just what constitutes quality costs Traditionally, costs of quality (COQ), have been considered as the cost of running a quality assurance system (complete or in development), with perhaps the inclusion of other costs, such as - scrap and warranty costs Present day thinking, by experienced quality practitioners, tend towards accepting that quality costs are incurred in the design, implementation, maintenance and improvement of a quality practice, technique or applied system

12.6 Failure costs - internal BS 4778 - Part 2 classifies quality costs into the following: 12.3 Quality related costs The expenditure incurred in defect prevention and appraisal activities plus the losses due to internal and external failure 12.4 Prevention costs The cost of any action taken to investigate, prevent or reduce defects and failures. Prevention costs can include the cost of planning, setting up and maintaining the quality control system, process design, product and service design and employee training schemes 12.5 Appraisal costs The cost of assessing the quality achieved. Appraisal costs can include the cost of inspecting, testing, etc. carried out during and on completion of manufacture of product or service 12.6 Failure costs - internal The costs arising within the manufacturing processes of the organization of the failure to achieve specified quality. This can include the cost of scrap, rework and re-inspection 12.7 Failure costs - external The costs arising from outside the manufacturing organization of the failure to achieve quality specified. The term can include the costs of claims against warranty, replacement and consequential losses of custom and goodwill

Cost Cost of Control Cost of Failure to Control Prevention Appraisal (Conformance) Cost Cost of Failure to Control (Non-Conformance) External Failure Internal Failure Figure 3.1

Quality costing appeals to top management as its language is in tangible terms regarding financial entities Using quality costs in this way, for developing and encouraging quality improvement, will substantiate the application of TQM philosophies and practices and help support such quality initiatives

This is the point where minimum total quality costs and failure and appraisal/prevention are in line This means that utilising Juran’s quality cost model suggests that the optimum quality costs level actually includes the possibly of tolerating defective product resulting from a process

Cost/Non-Defective Unit Produced Total Quality Costs Cost/Non-Defective Unit Produced Failure Costs Cost of Appraisal/Prevention 100% Defective 100% Non-Defective Based on Juran’s Quality Control Handbook, McGraw-Hill,1979 Figure 3.2

In the average UK organisation the analysis of quality related costs are: 65% failure costs 30% appraisal costs 5% prevention costs Costs may be in the range of 4 - 20% of sales turnover

There is a price to pay for any built-in quality found in the output of an organization’s production processes Measuring quality costs will help a manager quantify quality related costs in management terms and this leads to a positive organisational performance strategy Performances across a wide spectrum of quality related activities need to be measured and this will provide a foundation for internal quality cost comparisons between departments, processes, production outputs and the breadth of any services provision

Cost of Conformance Quality (COC) is the understanding by management through realistic cost data of the savings that can be made by introducing quality practices Campenella (1999) breaks those costs down in terms of the following equation: Cquality=Cconformance+Cnon-conformance

Cost of Conformance (COC) Conformance quality is an aim of many quality mechanisms. However, this aim is achieved at a price. Examples of these are: (1) Documentation - Writing work-technical instructions and producing administrative effort (2) Training - On the job training, quality training, etc. (3) Auditing – Internal and external (4) Planning - Prevention (5) Inspection - Equipment, machines, facilities/buildings, vehicles and people

Cost of Non-Conformance (CONC) This area covers the price paid by not having quality systems or a quality product. Examples of this are: (1) Rework – Producing the part or service again because it wasn't right the first time (2) Scrap - Discarding the results of production work because it was assessed not to be to the required standard (3) Waiting - Time wasted whilst waiting for other parts/process outputs/people (4) Down Time - Not being able to accomplish production output because a piece of equipment or machine has an unplanned maintenance problem which restricts or stops a production process temporarily

This can be seen as: The extra material needed to be supplied to accommodate this extra wastage The extra manpower costs of labour and perhaps overtime The opportunity cost of working on a part the second time round or in the case of a scrapped item, on a completely new part Possible delays in the ultimate shipment of the order Increased machine maintenance and repair costs Increased risk of machine breakdown Reduced production capacity resulting from the need to over-produce in order to manufacture a given quantity of production items

Category Sub-Metric Prevention Costs Appraisal Costs Table 3.1 Quality engineering Audits of the effectiveness of the quality system Statistical process control activities Supervision of prevention activities Quality data gathering, analysis, and reporting Quality improvement projects and analysis of outcomes Technical support provided to suppliers Quality training Quality circles Appraisal Costs Test and inspection of incoming materials Test and inspection of in-process goods Final product testing and inspection Maintenance of test equipment Supplies used in testing and inspection Supervision of testing and inspection activities Field testing and appraisal at customer site Table 3.1

Internal Failure Costs Category Sub-Metric Internal Failure Costs Net cost of scrap and spoilage Re-work labour and overheads Re-inspection of reworked products Retesting of re-worked products Process downtime caused by quality problems Disposal of defective products Procedure development and analysis of the cause of defects in production Re-entering data because of data keying errors External Failure Costs Cost of field servicing and handling complaints Warranty repairs and replacements Repairs and replacements beyond the warranty period Product recalls Liability arising from defective products Returns and allowances arising from quality problems Lost sales arising from a reputation for poor quality Table 3.1

Producer: external failure costs Customer/Client: failure costs These are the category of costs experienced by some producers of defective product These are the category of costs experienced by customers who purchases a defective product Lost sales Warranty costs Support communications Investigation of customer complaints Refunds and product recalls Replacement/shipping of new product Public Relations performances Lost customer goodwill Legal Liability costs Insurance costs Government investigations Support costs Producer complaint costs Wasted time Lost business Embarrassment Cost of replacing/repairing product Cost of finding a new supplier Costs associated with new buying process Table 3.2

All products/markets/services have life-cycles The cost of the product/service should not just be limited to the cost at purchase. It should also include the cost of maintenance and the consequent running cost of the product Designing a product that lowers the overall life-cycle cost may mean that the initial cost may be higher than originally anticipated, but the consumer and society as a whole would benefit in the long run

Over the longer term, an organisational cost accounting system that is designed to track quality-related costs can be a fundamentally important management tool Organisations undertaking appropriate cost data analysis and its consequent cost oriented decision-making will benefit enormously in terms of cost management Surveys conducted by Roche (1981) and Duncalf and Dale (1985), suggested that only about one-third of the companies studied actually collected quality related cost data These findings further suggests that less than 40% of companies collect and analyse quality cost data in a systematic manner. When quality costs are measured the costs most targeted were those for cost of scrap, rework and any warranty claims

Stage One Stage Two Stage Three Stage Four Ambiguity Modelling Clarification Comprehension Reflects lack of quality related data about cost management Relates to a an organisational need to develop and use quality cost related data Top management assesses the outcomes of using and relying on quality cost data Top management builds on modelling and clarification stages about using quality cost data to reinforce future quality cost developments Figure 3.3

One key decision that needs to be made at the design stage of the deployment of any quality related project is whether financial services should be involved from the very beginning Financial services should be included as a partner in the quantification of the quality design parameters of a process as well as in the deployment design

Table 3.3 Cost of Quality Investment Analysis Oh’s Plant Criteria No Formal Testing Manual Testing Machine Testing Testing and Repair Staff 10,000 8000 Buildings 6,000 Tools 1000 5000 Power 800 1200 Investment Amount $17,800.00 $20,200.00 Table 3.3

Table 3.3 Criteria No Formal Testing Manual Testing Machine Testing Design Development Defect Analysis 25 Defect Fix Cost $550.00 (Internal Failure Cost) Repair 75 115 $0.00 $15,750.00 $24,150.00 Table 3.3

Table 3.3 Total Cost of Quality Criteria No Formal Testing Manual Testing Machine Testing Customer Analysis Defect Reported 125 50 10 Defect Fix Cost $123,750.00 $49,500.00 $9,900.00 (External Failure Cost) Cost of Quality Conformance Costs $0.00 $17,800.00 $20,200.00 Non-conformance Costs $124,300.00 $65,800.00 $34,600.00 Total Cost of Quality $83,600.00 $54,800.00 Table 3.3