Quality of Design and Conformance In this section Wayne J.

Morse provides a distinction between the terms quality of design and quality of conformance. Quality of design represents the planned quality of a product. Examples of this type of quality include specifications for product life and reliability. The term quality of conformance represents the degree of correspondence between the customers actual experience with a product and the products designed quality. The product should conform to certain design specifications requested by the customer. Types of Quality Costs This section discusses the different types of quality costs that exist. First, Morse provides a broad definition for quality costs. He says that these costs are incurred as a result of actual quality not conforming to designed quality. A second point Morse makes is in regards to the trade-off between cost and quality. He says that there is no trade-off between the cost and quality of conformance, only between the cost and quality of design. For example, a product that is more efficient than another product will cost more. However, once that design specification is in place, there are costs associated with ensuring that the specification is met. Finally, Morse discusses two types of quality costs related to the quality of conformance. One type is the costs incurred because poor quality of conformance can exist. This type of cost includes prevention costs and appraisal costs. Prevention costs involve the costs of planning and designing the production process to ensure conformance. Appraisal costs are the cost of testing and inspecting both the materials and the finished product. The other type of quality cost deals with the costs incurred because poor quality of conformance does exist. This type of cost includes internal and external failure costs. Internal failure costs involve such things as the cost of rework on defective items and

the cost of downtime due to failed products and materials. External failure costs represent the costs of warranty service and replacement and the cost of product liability. Economics of Quality Costs This section illustrates the relationship between the different types of quality costs. Specifically, Morse explains that there is an inverse relationship between prevention and appraisal costs and internal and external failure costs (See Exhibit 1). Therefore, spending money on prevention can reduce the costs of internal and external failure. This relationship works in the other direction as well. If less is spent on prevention, then more failure costs will be incurred.

In addition, the author points out another relationship between the two main types of costs. If a company spends little money on prevention, it is likely that the company will have low internal failure costs and high external failure costs. This is due to the fact that "all defects are going out the door" (p. 17). This means that goods are leaving

the factory in bad condition, but the company is not realizing this before they leave. Therefore, the customer gets a bad product, which, in turn, leads to external failure costs for the company. This is where inspection, as a part of prevention, is an important tool. A main point of this section is that prevention is the key to overcoming quality problems. It is better to spend money on prevention and appraisal, than to face internal and external failure costs. Purpose of a Quality Cost System In this section Morse states the ultimate purpose of a quality cost system. He says that this purpose is for there to be "some systematic means of planning and controlling quality costs" (p.18). This is achieved by creating and analyzing quality cost reports. The article discusses several uses for these reports that change as this quality cost system is in use. One use is when the system is first implemented. It provides some enlightenment to management as to the magnitude of their quality costs. Second, these initial reports may indicate that a change needs to be made due to a maldistribution of quality costs. For example, there may be relatively high failure costs and low prevention costs. This would indicate a need to increase spending on prevention. In addition, budgets can be made once the quality cost information has been accumulated over several periods. In this case predictions would have to be made by management based on certain criteria for the specific types of costs. Finally, these reports can lead to the establishment of goals for the reduction of quality costs. Limitations of Quality Cost Information In this section the author discusses some problems associated with quality cost reports. He notes that, in general, these reports are too aggregated to be of use in making specific decisions. He then names five major problems with quality cost reports. These problems include the following (p. 19): 1. Much of the information is subjective. 2. Important costs are omitted from the report. 3. Overhead cost assignments to scrap and rework may be imprecise. 4. Variations in activity may reduce the comparability of quality costs from

different periods. 5. Effort and accomplishment are probably not matched in a single reporting period. Implementing a Quality Cost System This section lists and explains ten steps that are involved in successfully establishing and implementing a quality cost system. The steps are as follows (p. 19) : 1. Obtain management commitment and support. 2. Establish a quality cost team. 3. Obtain the cooperation and support of users and information sources. 4. Operationally define quality costs (to limit the scope of the system). 5. Identify specific quality costs. 6. Determine sources of quality cost information. 7. Set up a code system and forms to accumulate information. 8. Design quality cost reports. 9. Accumulate information. 10. Distribute reports. Conclusion To sum it up, quality cost systems have proved more useful than not in many businesses in both the short-run and the long-run. Quality assurance programs help companies avoid the extensive quality costs involved with manufactured products. They also aid companies in improving their overall competitive position.

Cost of Quality (COQ)

"The cost of quality." Its a term that's widely used and widely misunderstood. The "cost of quality" isn't the price of creating a quality product or service. It's the cost of NOT creating a quality product or service. Every time work is redone, the cost of quality increases. Obvious examples include:

The reworking of a manufactured item. The retesting of an assembly. The rebuilding of a tool.

The correction of a bank statement. The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant.

In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality.

Total Quality Costs

As the figure below shows, quality costs are the total of the cost incurred by:

Investing in the prevention of nonconformance to requirements. Appraising a product or service for conformance to requirements. Failing to meet requirements.

Quality Costsgeneral description

Prevention Costs The costs of all activities specifically designed to prevent poor quality in products or services. Examples are the costs of:

New product review Quality planning Supplier capability surveys Process capability evaluations Quality improvement team meetings Quality improvement projects Quality education and training

Appraisal Costs The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements. These include the costs of:

Incoming and source inspection/test of purchased material In-process and final inspection/test Product, process or service audits Calibration of measuring and test equipment Associated supplies and materials

Failure Costs

The costs resulting from products or services not conforming to requirements or customer/user needs. Failure costs are divided into internal and external failure categories. Internal Failure Costs Failure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples are the costs of:

Scrap Rework Re-inspection Re-testing Material review Downgrading

External Failure Costs Failure costs occurring after delivery or shipment of the product and during or after furnishing of a service to the customer. Examples are the costs of:

Processing customer complaints Customer returns Warranty claims Product recalls

Total Quality Costs: The sum of the above costs. This represents the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products or defects in their manufacture.

Internal Failure Costs

Internal failure costs come from deficiencies discovered before delivery. These include all the costs associated with the failure (nonconformities) to meet the needs of your external and internal customers. This failure cost is one of the 4 key components of quality costs.

Examples of Internal Failure Costs :

Scrap: The labor, material, and (usually) overhead that created the defective product. The item cannot be economically repaired. The titles are numerous scrap, spoilage, defectives, etc.

Rework: The cost to correct the defective material or errors in service products.

Lost or missing information: The cost to retrieve this expected information.

Failure analysis: The cost analyzing nonconforming goods or services to determine the root causes.

Supplier scrap and rework: Scrap and rework costs due to nonconforming product received from suppliers. This includes the costs to the buyer of resolving the supplier quality problems.

100% sorting inspection: The cost of completing 100% inspection to sort defective units from good units.

Retest: The cost to retest products after rework or other revision.

Changing processes: The cost of modifying the manufacturing or service processes to correct the deficiencies.

Redesign of hardware: The cost to change designs of hardware to correct the issues.

Redesign of software: The internal cost to changing software designs.

Scrapping of obsolete product: The cost of disposing scrap.

Scrap in support operations: Costs from defective items in indirect operations.

Rework in internal support operations: Costs from correcting defective items in indirect operations.

Downgrading: The cost difference between the normal selling price and the reduced price due to quality reasons.

Variability of product characteristics: Rework losses that occur with conforming product (e.g.,overfill of packages due to variability of filling and measuring equipment).

Unplanned downtime of equipment: Loss of capacity of equipment due to failures.

Inventory shrinkage: Loss costs due to the difference between actual and recorded inventory quantity.

Non-value-added activities: Cost due to redundant operations, sorting inspections, and other non-value added activities. A value-added activity increases the usefulness of a product to the customer; a non-value-added activity does not.

After reviewing internal failure costs, see here to calculate total cost of quality.

External Failure Costs

External Failure Costs come from costs associated with defects that are found after the customer receives the product or service. These costs included lost opportunities for sales revenue. Lost sales revenue costs would disappear if there were no deficiencies.

External Costs Classifications

Warranty charges: The costs involved in replacing or making repairs to products that are still within the warranty period.

Complaint adjustment: The costs of investigation and adjustment of justified complaints from the defective product or installation.

Returned material: The dollars associated with the receipt and replacement of defective product received from the field.

Allowances: The costs of concessions made to customers due to substandard products accepted by the customer. Customer chose to use the product as is.

Penalties due to poor quality: This can apply to goods or services delivered late or too early.

Rework on support operations: Correcting errors on billing and other external processes.

Revenue losses in support operations: An example is the failure to collect receivables from some customers.

Lost Opportunities for sales revenue: Profit margin on current revenue lost due to customers who switch for reasons of quality. This includes canceled contracts due to poor quality. Also includes lost of new customers:

External Failure Costs is one of four components of Cost of Quality