1. QUALITY COSTS/ COST OF QUALITY

2. 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

3. 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"

4. 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

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

6. 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

7. 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 .

8. 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

9. 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.

10. 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

11. 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

12. Cost of Quality

13. 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

14. 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

15. 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

16. 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

17. 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

20.  Traditional Management View vs. Six Sigma Philosophy

21. Cost of Quality as a Strategy for Improvement

22. “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

23. 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

24. 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

25. 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.

26. 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

27. 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

28. 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.

29. 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.

30. 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

31. 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.

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

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

34. 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.

35. 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”

36. 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

37. 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.

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

39. 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

40. 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)

41. 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 

42. "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.

43. 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