Quality cost analysis

Quality costs: The costs that are associated with preventing, finding, and
correcting defective work are Quality Costs. Normally, these costs are running
at 20% 30% of sales.
Many of these costs can be significantly reduced or completely avoided. One of
the key functions of a Quality Analysis / Engineer is the reduction of the total
cost of quality associated with a product / service.
Below are the main Quality Costs:
-Prevention Costs
- Appraisal Costs
- Failure Costs
- Internal Failure Costs
- External Failure Costs
Total Cost of Quality can be calculated as the sum of costs:
Prevention + Appraisal + Internal Failure + External Failure
Prevention Costs:
Costs of activities that are specifically designed to prevent poor quality
which include
- Coding errors
- Design errors
- Mistakes in the user manuals
- Deadly documented or unmaintainably complex code
Most of the prevention costs dont fit within the Testing Groups budget.
This money is spent by the programming, design, and marketing staffs.
Appraisal Costs:
Costs of activities designed to find quality problems, such as code
inspections and any type of testing.
Design reviews are part of prevention and part appraisal. Please note the
following two points:

1. To the degree that youre looking for errors in the proposed design itself
when you do the review, youre doing an appraisal.
2. To the degree that you are looking for ways to strengthen the design, you are
doing prevention.
Failure Costs:
Costs that result from poor quality, such as the cost of fixing bugs and the
cost of dealing with customer complaints.

Internal Failure Costs:

Failure costs that arise before your company supplies its product to the
customer. Along with costs of finding and fixing bugs are many internal failure
costs borne by groups outside of Product Development. If a bug blocks
someone in your company from doing his or her job, the costs of
- the wasted time
- the missed milestones
- and the overtime to get back onto schedule are all internal failure costs.
The UI issues / bugs / defects the ones that will be fixed later can
make it hard for these staff members to take accurate screen shots. Delays
caused by these minor design flaws, or by bugs that block a packaging staff
member from creating or printing special reports, can cause the company to
miss its printer deadline.

External Failure Costs:

External failure costs are much higher. The costs that arise after your
company supplies the product to the customer such as
- Customer service costs
- Cost of patching a released product distributing the patch
It is much cheaper to fix problems before shipping the defective product
to customers.

Examples of Prevention Costs:

- Fault-tolerant design
- Defensive programming
- Usability analysis
- Clear specification
- Staff training
- Requirements analysis
- Early prototyping
- Accurate internal documentation
- Evaluation of the reliability of development tools

Examples of Appraisal Costs:

- Training testers
- Beta testing
- Test automation
- Usability testing
- Design review
- Code inspection
- Glass box testing
- Black box testing

Examples of Internal Failure Costs:

- Wasted writer time
- Wasted marketer time
- Cost of late shipment
- Bug fixes
- Regression testing
- Wasted in-house user time
- Wasted tester time

Examples of External Failure Costs:

- Lost sales
- Lost customer goodwill
- Discounts to resellers to encourage them to keep selling the product
- Warranty costs
- Liability costs
- Penalties
- Technical support calls
- Preparation of support answer books
- Investigation of customer complaints
- Refunds and recalls
- Coding / testing of interim bug fix releases
- Shipping of updated product
- All other costs imposed by law

1.

GENERAL DESCRIPTION OF QUALITY COST

a)

Prevention Cost

The cost of all activities designed to prevent defects in deliverable products or

service. Includes activities prior and after product or service development.
b)

Appraisal Cost

The costs associated with measuring, evaluating and analyzing product or

service to assure conformance to quality standard and performance
requirements.
c)

Failure Cost

The costs required to evaluate and either correct or replace products or service
not conforming to requirements.
i)

Internal Failure Cost

The costs occurring prior to completion or shipment of the product or furnishing

of service

ii)

External Failure Cost

The costs occurring after shipment of the product, and during or after failure of
a service.
2.

THE QUALITY SYSTEM

The quality system must involve the more than inspection & test in the
manufacturing place; every department has a responsibility for assuring that the
customer quality requirements are met. The responsibilities for quality must be
clearly assigned.
Quality is everyones responsibility e.g.:
Marketing
Determine the customers quality requirements; investigate customers opinion
of product quality & performance etc.
Engineering
Design quality & safety into the product to comply customers requirements,
prepare specification.
Manufacturing
Manufacture & deliver products that comply with the drawings &
specifications.
Quality Assurance
Assure that the product meets the customers quality requirements, establish
economical controls for preventing defective products
Purchasing
Select quality suppliers, keep them informed of quality requirements, work with
them to correct quality problems.
3.

FINDING THE PROBLEM AREAS

When quality costs are displayed to managers who have not been exposed to the
concept, the initial question likely to be should they be or how does this
compare with other organizations or products? unfortunately it is not
practical to establish any meaningful absolute standards to such cost
comparison.
A quality cost system should be tailored to particular companys needs, so as
to perceive trends of significance and furnish objective evidence for
management decision as to where assurance efforts should be placed for
optimum returns.
The search for industry guidelines or other standards of comparison, quite
natural, is quite dangerous, since it leads to quality cost emphasis for score
carding instead of utilization as management tool for improving the status quo.
Analysis techniques for quality cost are reviewed but trend analysis and Pareto
analysis are most common techniques.
Trend Analysis
Trend analysis is simply comparing the present cost levels to past levels. The
data should be plotted in several ways. Costs associated with each element
grouping (prevention, appraisal, internal failure and external failure) should be
plotted by month as total Rs. and as a function of several measurement base
thought to be appropriate for future use as indicators of business activity.
Elements contributing a high proportion of the costs within a grouping should
be plotted and analyzed separately. This will give the information about
particular element required to be analyzed in detail to determine the route
causes. It is suggested that cost data be collected at least one year before
attempting to draw conclusion.
PARETO Analysis
The Pareto analysis technique involves listing the factors that contribute to the
problems and ranking them according to the magnitude of their contribution. In
most situations, a relatively small number of causes / sources will contribute a
relatively large percentage of the total cost. To produce the greatest
improvement, efforts should be put in reducing costs coming from the largest
contributors.
4.

THE TEAM APPROACH

Once a problem has been identified and reported, action by the people starts.
The efforts of people involved must be planned, coordinated, scheduled,
implemented and followed up. Problems can be of two types:
Those which one individual or dept. can correct and those requiring coordinated
action from several activities in the organization. Examples of the first type of
problem are operator controllable defects, design errors & inspection errors.
Examples of the second type are product performance problems for which a
cause is not known, defects caused by a combination of factors not under the
control of one dept. and field failures of unknown cases.
To attack and solve problem of first type, an elaborate system is not required.
Most cases can be resolved at working level with the engineer, or other
responsible parties.
Problems of second type are not as easily solved since solution may require
action from several sources.
One of the best devices for doing this is the quality improvement committee.
The committee develops the plan, coordinates and schedules the investigation
and action. Meeting should be held regularly and minutes published.
5.

HOW TO REDUCE FAILURE COST

There are four steps to an effective corrective action programme.

a) Make all persons concerned aware of the problem and its possible causes
b) Create a desire in others to solve the mutual problem
c) Plan and carry out a logical investigation of the problem with others involved
d) Follow up on action taken.
The quality engineers must assure that data for investigation is providing factual
information and should investigate the problem to the extent necessary to define
the problem and uncover some of the possible causes.
The description of problem should include its effect on costs, schedule or
product quality. Quality performance report should be sent to people who can

perceive the investigations and initiate actions to correct the identified quality
problem.
The report should be sent to other departments and to higher management also
to keep management informed of the status of quality, which will help in
formulation of QIT and taking necessary action for completing project.
CHECK LIST FOR REDUCING FAILURE COST
i) Are all the causes of high cost elements known and reported to those
responsible for action?
ii) Are all the basic causes of defects found and corrected, or does the action
taken tend to be screen out the defective after they are made?
iii) Is nonconforming material salvaged economical?
iv) Is there a coordinated quality improvement efforts involving all the
necessary departments?
v)

Does the program have the continuing interest and support of the functional
department managers and G.M.?

vi) Are all cases of high cost field complaints identified and is action being
taken to prevent recurrence?
vii) Are all returned products economically handled, repaired and returned to
the customer?
viii) Are all warranty charges audited for validity and action taken as necessary?
6.

PREVENTION OF QUALITY COSTS

Prevention of quality costs is the responsibility of every department. Some

examples are given below :
i)

Accurately determining the customers quality requirements and

accurately reflecting them in internal ordering information and design
specification (MARKETING)

ii)

Designing a product, which is safe, reliable and can be profitably

manufactured satisfying customers needs (DESIGN)

iii)

Preparing drawings and specifications which clearly and accurately

describe the design and quality criteria (DESIGN)

iv)

Is the product capable of meeting quality standards required

(QUALITY)?

v)

Can we perform tests and inspection with the equipments we have?

(QUALITY)?

vi)

Data reporting and corrective actions activities

vii)

Can audits be used instead of 100% inspection (QUALITY)?

viii)

Getting material from suitable suppliers (PURCHASE)

ix)
7.

All training programmes providing a profitable return (TRAINING)

HOW TO REDUCE APPRAISAL COST?

The cost of appraisal some times approach half of the total quality cost.
CHECK LIST FOR REDUCING APPRAISAL COST
i)

Are all inspection points located to maximize the return on money

spent for inspection?

ii)

Are all inspection status and method engineered for the most efficient
work accomplishment?

iii)

Can inspection and test operations be economically automated by using

special purpose instrumentation or computer controlled equipment?

iv)

Can inspection and testing record & data reporting function be more
effectively performed using computer?

v)

Is it possible to control processes sufficiently to prevent production of

defective and eliminate product inspection?

vi)

Can SPC techniques be profitably used?

THE QUALITY COST ANALYSIS

TECHNIQUES
Abstract:
The analyses of the quality cost are very vast. The most frequent met
techniques are the analyses of the tendency and the Pareto analyses. The
objective of these techniques is to determine the opportunity to improve the
quality.
The technical analysis in order to find the cost of quality are variated. The most
frequent techniques are thetendency analysis and the Paretoanalysis. The
objective of these techniques is to determine the opportunities for the
improvement of
quality.
The Tendency analysis
The tendency analysis implies the simple comparaison between the level
of the costs from the present and from the past. It sugests that at least a year
should pass before a comparaison is made and any conclusions are drawned
from the information. The trend analisys gives us information for long term
predictions. It also gives information regarding the enforcing and
implementation of the emprovement of quality programs. The information from
this type of analisys comes from monthly reports and from the detailed
transactions that make the elements. The tendency analysis can be made from
cost categories and subcategories, on products, on the measurement scale, on
the corporations plans, departments, etc.Those charts are showed in figure
1.The time steps on the charts of temporal series are the month, the trimester
and the year, depending on the purpose at hand.
The Figure1(a) shows the chart four cost categories, in trimesters. Its the
cumulative type, the second line from the bottom includes the prevention costs
and the estimate costs; the third line from the bottom includes the internal
failure costs; and the last line includes all the included costs.
Figure 1(a) shows that the prevention and the internal failure costs are
rising, meanwhile the estimated costs are unchainged and the external failure
costs are falling. 86 75 75 Total 50 External failure 50 Internal failure 25
Aproximate 25 0 Prevention 0 3 4 1 2 3 4 1 Trimester 1 (a) Category of costs.

The Pareto Analysis

The Pareto analysis is one of the most efficient analyses. A typically
Pareto diagram for internal failure costs is shown in Figure 3(a). The elements
are showed in descending order, beginning with the biggest from the left.
A Pareto diagram has few elements that represent a substantial quantity from the
total, these elements are localized in the left side of the diagram and are called
few and vital. The Pareto diagrams also have many elements that represent a
small part of the total and localized to the right side of the diagram and are
called the many and the useful. The Pareto diagrames can be set for quality
costs guaranteed by the operator, the cars, the department, the production line,
the categories, etc.