WHAT IS DEFECT ? Price of Non-Conformance

WHAT DO YOU THINK ABOUT? 1.Missing the key input product 2.Getting the wrong information from buyer 3.Passing the incomplete and inaccurate information to vendors (factories) 4.Lack of communication during the product development in Pre-Production and production dept. 5.Delay in reply during the materialization of enquiries to orders. 6.Non-availability of product specification 7.Not checking the product as per agreed specifications. 8.Not sharing the customer specification to vendors (factories) 9.Communicating the wrong production status of product 10.Do not forecast any delay during production and accordingly do not update the buyer. 11.No need to optimize the resources 12.Fire everyone from QC deptt. to avoid inspection.

QUALITY COSTS  The term “Quality Costs” is associated solely with defective product a) the costs of making defective products b) the costs of finding defective products c) the costs of repairing defective products d) the costs of avoiding defects  Cost of Quality is generally known as the sum of costs incurred to prevent non-conformances and the costs incurred when non- conformance in products and system occurs.

CATEOGIRES OF COST OF QUALITY COST OF QUALITY Cost of Non-Conformance Cost of Poor Quality Cost of Conformance External Failure Costs Internal Failure Costs Appraisal Costs Prevention Costs

COST OF CONFORMANCE  The cost of doing things right the first time.  The cost of Prevention and Appraisal.  The cost incurred in efforts to maintain and improve quality.

COST OF CONFORMANCE The cost incurred in order to maintain or improve quality. 1.PREVENTION COSTS 2.APPRAISAL COSTS

PREVENTION COSTS  Costs of all activities associated with reducing / preventing failures or improving quality.  There are the costs of any action taken to investigate, prevent or reduce the risk of non-conformity or defect.

EXAMPLES OF PREVENTION COSTS  Quality Training  Vendor Assurance / Rating  Quality Improvement Programs  Planning and Writing of Procedures and Instructions.  Collection, Analysis and Reporting of Quality Data  Design Review/New-Product Review  Design Qualification Tests  Quality Planning  Marketing Surveys/Research  Contract Review  Process Validation  Preventive Maintenance  SPC/Process Control  QA functions and salaries  Improvement Projects

APPRAISAL COSTS  Costs of all activities associated with measuring, evaluating or auditing the conformance of product to quality requirements.  Costs of all activities incurred to discover the condition of the product, mainly during the “first time though”.  These are the costs of evaluating the achievement of quality requirements including the cost of verification and control performed at any stage of the quality loop.

EXAMPLES OF APPRAISAL COSTS  In-coming Inspection  In-process Inspection  Final Testing and Inspection  Production Trials  Field Performance Tests  Calibration  Laboratory Expenses  Third Party Product Cost  Review of Test and Inspection Data  Certification Cost  Product and Service Quality Audits  Qualification of Supplier product  QC Function Salaries and Expenditure

COST OF NON-CONFORMANCE  The costs of internal and external failures.  The cost resulting from products or services not conforming to customer/user requirements.  The cost incurved as a result of things not being done right the first time.

COST OF NON-CONFORMANCE The costs incurred due to non-conformance in product or service prior and after shipment 1.INTERNAL FAILURE COSTS 2.EXTERNAL FAILURE COSTS

INTERNAL FAILURE COSTS  These are costs which would disappear if no defects existed in the product prior to shipment to the customer.  The costs resulting from failing to conform to specified requirement prior to delivery of product or the furnishing of a customer to the customers.  These are the costs arising within the organization due to non- conformity or defects at any style of the Quality loop.

EXAMPLES OF INTERNAL FAILURE COSTS  Rework  Scrape/Rejects  Downtime  Sub-contractors Faults  Replacement of Purchase Materials  Defect/Failure Analysis  Re-inspection and Re-testing  Down grading  Accidents  In proper Invoicing  Disposition Costs  Yield Losses  Excessive Inventory Costs  Overtime Costs Due to Poor Planning  Product/Service Design Failure  Corrective Actions and Redesign

EXTERNAL FAILURE COSTS  These costs resulting from failing to conform to specified requirements after the delivery.  These costs also would disappear if there were no defects.  These are the costs arising after delivery to the customer due to non-conformities.

EXAMPLES OF EXTERNAL FAILURE COSTS  Complaints  Warranty Claims  Bad Debt  Returned Material  Concessions / Quality rebate  Loss of sale  Product liability  Penalties  Loss of Customer/user good will (Administration Costs)  Field repairs/reworks  Overdue Accounts receivable  Equipment failure at customer end

MODEL FOR OPTIMUM QUALITY COSTS: COST PER GOOD UNIT OF PRODUCT QUALITY OF CONFORMANCE, %0100 COSTS OF APPRAISAL PLUS PREVENTION FAILURE COSTS TOTAL QUALITY COSTS TO oo TO oo (a) TRADITIONAL PROCESSES

MODEL FOR OPTIMUM QUALITY COSTS: COST PER GOOD UNIT OF PRODUCT QUALITY OF CONFORMANCE, %0100 COSTS OF APPRAISAL PLUS PREVENTION FAILURE COSTS TOTAL QUALITY COSTS (b) EMERGING PROCESSES

OPTIMUM SEGMENT OF QUALITY COST MODEL Zone of ImprovementZone of IndifferenceZone of High Appraisal ProjectsCosts Failure Costs > 70%Failure Cost ~ 50%Failure Costs < 40% Prevention 50% Find Break ThroughIf no ProfitableStudy Cost Per Defect Projects; PursueProjects can be Found,Detected, Verify Validity of Shift Emphasis to ControlStandards; Reduce Inspection; Try Audit of Decisions TOTAL QUALITY COSTS OPTIMUM 100% DefectiveQuality of Conformance 100% Good

QUALITY COSTS DATA SOURCES 1. Established accounts 2. Analysis of ingredients of established accounts 3. Basic accounting documents 4. Estimates a)Temporary records b)Work sampling c)Allocation d)Standard cost data e)Opinion of knowledgeable persons

QUANTIFICATION OF COST OF QUALITY (COQ) Step 1: Source of COC and CONC Data Production Records QC Records Operation Records Accounting Records Step 2: Develop and Formulate Accounting Basis Step 3: Executive Costing of COQ Items Whole Account This method requires gathering existing financial data from company accounts. If accounts are set up to capture costs, such as training and rework, information from the accounts can be used to measure COQ. Unit Pricing This method is effective when a defect or problem is recurring. To use defect pricing, simply multiply the cost of one defective unit by number of defective units.

QUANTIFICATION OF COST OF QUALITY (COQ) Whole Person This method is used when people are employed is recurring. To use purpose of working on or handling defects. Labour / Resource Claiming This method involves calculating actual expenditure on a specific activity, such as the amount of time spent by an employee performing a task or the amount of financial outlay for a one-time expense. This information might come from time sheet, vouchers or any other method for determining exactly how much was spent.

INTREPRETATION AND PRESENTATION TO MANAGEMENT  Quality Costs as a percent of Sales =Total Quality Costsx 100 Net Sales  Quality Costs Compared to Profit =Total Quality Costsx 100 Net Profit  Quality Costs compared to the magnitude of current problems in terms of a) number of employees b) number of inventory items. c) space

INTREPRETATION AND PRESENTATION TO MANAGEMENT  Quality Costs as a percent of Manufacturing Costs =Total Quality Costsx 100 Total manufacturing Costs

EXERCISE NO. 2

SAMPLE COST OF QUALITY SHEET

TREND ANALYSIS ACTUAL CoQ x x  o x o  x xxxx  o x o x o x o x Prevention Cost Appraisal Cost Total CoQ Internal Failure Cost External Failure Cost Month Rs.

TREND ANALYSIS CoQ as %age of Sales x x  o x o  x xxxx  o x o x o x o x Prevention Cost Appraisal Cost Total CoQ Internal Failure Cost External Failure Cost Months %age of Sales