Cost Of Quality 2009

INTRODUCTION
“Quality Costs represent 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 manufacturers.”
Improving quality is considered by many to be the best way to enhance
customer satisfaction, to reduce manufacturing costs and to increase
productivity. Any serious attempt to improve quality must take into
account the costs associated with achieving quality, since nowadays it
does not suffice to meet customer requirements, it must be done at the
lowest possible cost as well. This can only happen by reducing the costs
needed to achieve quality, and the reduction of these costs is only
possible if they are identified and measured.
The identification itself is not straightforward because there is no general
agreement on a single broad definition of quality costs. However, CoQ is
usually understood as the sum of conformance plus non-conformance
costs, where cost of conformance is the price paid for prevention of poor
quality (for example, inspection and quality appraisal) and cost of non-
conformance is the cost of poor quality caused by product and service
failure (for example, rework and returns). According to Dale and Plunkett
(1995), it is now widely accepted that quality costs are the costs incurred
in the design, implementation, operation and maintenance of a quality
management system, the cost of resources committed to continuous
improvement, the costs of system, product and service failures, and all
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Cost Of Quality 2009
other necessary costs and non-value added activities required to achieve
a quality product or service. Measuring and reporting these costs should
be considered a critical issue for any manager who aims to achieve
competitiveness in today’s markets.
CoQ analysis links improvement actions with associated costs
and customer expectations, and this is seen as the coupling of reduced
costs and increased benefits for quality improvement. Therefore, a
realistic estimate of CoQ and improvement benefits, which is the
tradeoff between the level of conformance and non-conformance costs,
should be considered an essential element of any quality initiative, and
thus, a crucial issue for any manager. A number of organizations are now
seeking both information on the theoretical background of quality
related costs as well as practical evidence about the implementation of
quality costing systems
So Cost of Quality is commonly referred to as the “cost of doing things
wrong”. Every time a business makes a mistake it costs money to make
the mistake and then correct it.
For example may be a video game wasn’t published correctly on a
CD/DVD and so there could be a direct cost of fixing that and an indirect
cost of missing a marketing window. In his book, Quality is Free; Crosby
suggests the cost is 10% to 15% of revenue. Mr. Vorley and Tickle in their
book, Quality Management, suggested the figure is 5% to 25% of
revenue. An incredible figure in terms of wasted revenue wherever it
falls for a business. If we take the 15% figure as EA (monopoly in video
games) has lower material scrap costs, for example, and to leave a little
to the imagination, what’s the estimated Cost of Quality for EA? Revenue
was reported as $2.95b for 2006 and $442.6m a year were their
replacement costs just for quality reasons.
"Highest quality is lowest cost" is a Japanese manufacturing aphorism
based on the premise that the highest quality manufacturer will earn a
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reputation that makes buyers prefer, price being reasonably similar, to
buy its goods. This means that the manufacturer will produce more than
its competitors, and thus will both have economies of scale and be able
to accept a lower profit per unit—thus the highest quality goods will
have a lower cost by driving other goods from the market. The
production of higher quality goods can also reduce quality costs.
From the purchaser's point of view the highest quality goods will have
the fewest problems, and the cost of dealing with a problem far
outweighs the extra purchase cost.
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Cost Of Quality 2009
COST OF QUALITY MODELS
There are several methods that can be used to collect, categorize and
measure quality costs.
P-A-F METHOD
The traditional P-A-F method suggested by Juran (1951) and Feigenbaum
(1956) classifies quality costs into prevention, appraisal and failure costs.
Prevention costs are associated with actions taken to ensure that a
process provides quality products and services, appraisal costs are
associated with measuring the level of quality attained by the process,
and failure costs are incurred to correct quality in products and services
before (internal) or after (external) delivery to the customer.
1. Prevention Costs are those associated with preventing defects before
they happen. This is a proactive approach to defect prevention rather
than defect correction and removes the idea of quality efforts essentially
being reactive in efforts to "put out fires." Prevention costs involve
investments aimed at getting work done right the first time and
preventing quality problems from ever coming up, as far as it is possible.
It is long-term strategy adopted by the organization for the continuous
improvement in their processes. The elimination of the rework goes
hand in hand with increase in quality, and decreases in schedule and
cost; this is the fastest, cheapest, and highest approach to building
software. They include:-
v Staff Training
v Requirement Analysis
v Fault-Tolerant Design
v Defensive Programming
v Usability Analysis
v Clear Specification
v Accurate internal communication
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2. Appraisal Costs include cost incurred in detecting the error. Appraisal
techniques are used for the verification and validation. These techniques
help organization to increase in quality with lesser cost. Examples of
appraisal costs include code inspections, testing, software design
reviews. They may be summarized as:-
v Design review
v Code inspection
v Glass box testing
v Black box testing
v Training testers
v Test automation
v Usability Testing
v Pre-release out-of-box testing by customer service staff
v Calibration cost
v Laboratory expenses
3. Failure Costs: The cost resulting from products or services not
conforming to requirements or needs of the customer. Failure costs are
divided into – A. Internal failure costs and B. External failure costs.
Internal Failure Costs:
Failure costs occurring prior to delivery or shipment of the product, of
finishing of a service to the customer. Examples are the costs of:
v Scraps and rejects
v Repair and Rework
v Downtime
v Bug fixes
v Wasted in-house user time
v Wasted tester time
v Wasted marketer time
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Cost Of Quality 2009
v
v
v
v
v
v
Wasted advertisements
Direct cost of late shipment
Opportunity cost of late shipment
Retesting
Material review
Sales and discounts for inferior products
External Failure Costs:
Failure costs occurring after delivery of shipment of the product and
during or after furnishing of a service to the customer. Examples are the
costs of:
v Warranty costs
v Off warranty repairs and replacement
v Customer complaints
v Product liability
v Transportation losses
v Technical support calls
v Preparation of support answer books
v Refunds and replacement with updated product
v Lost sales
v PR work to soften drafts of harsh reviews
v Lost customer goodwill
v Costs imposed by law
v Customer returns
Total Quality Costs:
It is the sum of the above costs. It represents the difference between the
annual 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.
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CROSBY’S MODEL
The cost categories of Crosby’s model (Crosby, 1979) are similar to the P-
A-F scheme. Crosby sees quality as “conformance to requirements”, and
therefore, defines the cost of quality as the sum of price of conformance
and price of non-conformance (Crosby, 1979). The price of conformance
is the cost involved in making certain that things are done right the first
time and the price of non-conformance is the money wasted when work
fails to conform to customer requirements.
Figure 1: Classical view on the left and the modern view on the right
0%
QUALITY LEVEL
100 %
(0 % good)
0%
QUALITY LEVEL
100 %
(100 % defective)
(100 % defective)
(0 % good)
Conformance Cost
Prevention Cost
Appraisal Cost
Non-Conformance Cost
Internal Failure Cost
External Failure
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OPPORTUNITY AND INTANGIBLE COSTS
Several references propose CoQ models that include the additional
category of intangible costs. These are costs that can be only estimated
such as profits not earned because of lost customers and reduction in
revenue owing to non-conformance. The importance of opportunity
and intangible costs for quality costing has been describe a less formal
method based on collecting quality costs by department.
Cost area
·
·
Examples
Materials scrapped or junked
Labor and burden on product scrapped or
junked
Labor, materials, and burden necessary to
effect repairs on salvageable product
Extra operations added because of presence
of defectives
Burden arising from excess production
capacity necessitated by defectives
Excess inspection costs
Investigation of causes of defects
Discount on seconds
Customer complaints
Charges to quality guarantee account
Delays and stoppages caused by defectives
Customer good will
Loss in morale due to friction between
departments
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·
Tangible costs—
factory accounts
·
·
·
·
Tangible costs—
sales accounts
·
·
·
·
Intangible costs
·
·
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Cost Of Quality 2009
TEAM APPROACH METHOD
Another recently proposed CoQ methodology is a method based on a
team approach, in which the aim is to identify the costs associated with
things that have gone wrong in a process (Robison, 1997).
PROCESS COST MODEL
Another formal quality costing approach is the process cost model,
which was developed by Ross (1977) and first used for quality costing
by Marsh (1989); it represents quality cost systems that focus on
process rather than products or services. Process cost is the total cost
of conformance and non-conformance for a particular process. The cost
of conformance is the actual process cost of producing products and
services first time to the required standard by a given specified process,
whereas cost of non-conformance is the failure cost associated with the
process not being executed to the required standard. These costs can
be measured at any step of the process. Accordingly, it can be
determined whether high non-conformance costs show the
requirement for further expenditure on failure prevention activities or
whether excessive conformance costs indicate the need for a process
redesign. The use of a process cost model is suggested as a preferred
method for quality costing within total quality management (TQM) as it
recognizes the importance of process cost measurement and
ownership, and presents a more integrated approach to quality than a
P-A-F model. Also analysts place emphasis on the cost of each process
rather than on an arbitrarily defined cost of quality under a P-A-F
model. Moreover, the quality cost categorization is simpler and some
researchers argue that it is also more relevant than the P-A-F scheme.
The process model has wider application in that it facilitates the
collection and analysis of quality costs for both direct and indirect
functions. However, the process cost model is not in widespread use.
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ACTIVITY BASE QUALITY MODEL
Existing accounting systems are usually considered as poorly fitted for
generating reports on quality measurements .They do not provide
appropriate quality related data, and benefits resulting from improved
quality are not measured .Although most CoQ measurement methods
are activity/process oriented, traditional cost accounting establishes
cost accounts by the categories of expenses instead of activities. Thus,
many CoQ elements need to be estimated or collected by other
methods.
There is no consensus method on how to allocate overheads to CoQ
elements and no adequate method to trace quality costs to their
sources.
An activity-based costing (ABC) model was developed by Cooper and
Kaplan to solve this problem. Under ABC, accurate costs for various cost
objects are achieved by tracing resource costs to their respective
activities and the cost of activities to cost objects. The ABC approach is
actually not a CoQ model. It is an alternative approach that can be used
to identify, quantify and allocate quality costs among products, and
therefore, helps to manage quality costs more effectively. The long-
term goal of ABC systems is to eliminate non-value added activities and
to continuously improve processes, activities and quality so that no
defects are produced.
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No matter which quality costing approach is used, the main idea behind
the CoQ analysis is the linking of improvement activities with associated
costs and customer expectations, thus allowing targeted action for
reducing quality costs and increasing quality improvement benefits.
Therefore, a realistic estimate of CoQ, which is the appropriate tradeoff
between the levels of conformance and non-conformance costs, should
be considered an essential element of any quality initiative and a crucial
issue for any manager. A number of organizations are now seeking both
theoretical advice and practical evidence about quality related costs
and the implementation of quality costing systems.
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Cost Of Quality 2009
QUALITY
As stated by Will A. Foster, "Quality is never an accident; it is always the
result of high intention, sincere effort, intelligent direction and skilful
execution; it represents the wise choice of many alternatives."
Quality is something, which is complex and varies from one industry to
another. Quality needs to be model on the basis of customer need,
context of the market, industrial goals, system requirements etc.
Quality has many layers, and no universal definition will apply in every
case. Even the experts could not agree on single definition for the
quality.
Quality gurus have given definitions that cover the meaning of quality.
Some of them have been considered as the starting point to define
quality; for example the definitions given by Philip Crosby and Joseph
M. Juran. The experts disagree both on the definition of quality and
how to achieve it.
“Quality is the conformance to requirements.” Requirements must be
clearly stated so that people involved can clearly understand that. Then
in the development process, measurements are taken continually to
determine conformance to those requirements. The non-conformance
will be treated as absence of quality (or defect).
Or
“Quality of a good is its Fitness for use.” Customer requirements and
expectations involves whether the products or service fit for their uses.
Since the different customer may use the products in different ways, it
means that products must possess multiple elements of fitness for use.
Each of these elements is a quality characteristic and they can be
categories into two types that is quality of design and quality of
conformance.
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Cost Of Quality 2009
QUALITY MANAGEMENT
It is a method for ensuring that all the activities necessary to design,
develop and implement a product or service are effective and efficient
with respect to the system and its performance. Quality management
can be considered to have three main components:
1. Quality control
2. Quality assurance
3. Quality improvement.
Quality management is focused not only on product quality, but also
the means to achieve it. Quality management therefore uses quality
assurance and control of processes as well as products to achieve more
consistent quality. Quality Management is all activities of the overall
management function that determine the quality policy, objectives and
responsibilities and implement them by means such as quality control
and quality improvements within a quality system.
The International Organization for Standardization (ISO) created the
Quality Management System (QMS) standards in 1987. These were the
ISO 9000, ISO 9001, ISO 9002 and ISO 9003which all were 1987 series of
standards comprising which were applicable in different types of
industries, based on the type of activity or process: designing,
production or service delivery. The standards have been regularly
reviewed every few years by the International Organization for
Standardization. The version in 1994 and was called the ISO 9000:1994
series; comprising of the ISO 9001, 9002 and 9003. The last revision was
in the year 2000 and the series was called ISO 9000:2000 series.
However the ISO 9002 and 9003 standards were integrated and one
single certifiable standard was created under ISO 9001:2000. Since
December 2003, ISO 9002 and 9003 standards are not valid, and the
organizations previously holding these standards need to do a
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transition from the old to the new standards. The ISO 9004:2000
document gives guidelines for performance improvement over and
above the basic standard (i.e. ISO 9001:2000). This standard provides a
measurement framework for improved quality management, similar to
and based upon the measurement framework for process assessment.
The Quality Management System standards created by ISO are meant
to certify the processes and the system of an organization and not the
product or service itself. ISO 9000 standards do not certify the quality
of the product or service.
Recently the International Organization for Standardization released a
new standard, ISO 22000, meant for the food industry. This standard
covers the values and principles of ISO 9000 and the HACCP standards.
It gives one single integrated standard for the food industry and is
expected to become more popular in the coming years in such industry.
ISO has a number of standards that support quality management, one
group describes processes (including ISO 12207, ISO 15288) and
another describes process assessment and improvement ISO 15504.
The Software Engineering Institute has its own process assessment and
improvement methods, called CMMi (Capability Maturity Model -
integrated) and IDEAL respectively.
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COST OF POOR QUALITY (COPQ)
Cost of poor quality (COPQ) or poor quality costs (PQC), are defined as
costs that would disappear if systems, processes, and products were
perfect. COPQ was popularized by IBM quality expert H. James
Harrington in his 1987 book “Poor Quality Costs.”
COPQ is a refinement of the concept of quality costs. In the 1960s, IBM
undertook an effort to study its own quality costs and tailored the
concept for its own use. While Feigenbaum's term "quality costs" is
technically accurate, it's easy for the uninitiated to jump to the
conclusion that better quality products cost more to produce.
Harrington adopted the name "poor quality costs" to emphasize the
belief that investment in detection and prevention of product failures is
more than offset by the savings in reductions in product failures.
Cost element
Examples
Quality planning (for test,
inspection, audits, process
control)
Direct
poor-
quality
costs
Controllable
poor-quality
cost
Prevention
Education and training
cost
Performing capability analyses
Conducting design reviews
Appraisal
cost
Test and inspection
Supplier acceptance sampling
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Cost Of Quality 2009
Auditing processes
In-process scrap and rework
Troubleshooting and repairing
Design changes
Internal
error cost
Additional inventory required
to support poor process yields
and rejected lots
Re-inspection and retest of
reworked items
Downgrading
Sales returns and allowances
Service level agreement
penalties
Complaint handling
Field service labor and parts
costs incurred due to warranty
obligations
Micrometers, voltmeters,
automated test equipment
(but not equipment used to
make the product)
Resultant
poor-quality
cost
External
error cost
Equipment poor-quality
cost
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Loss of productivity due to
product or service downtime
Travel costs and time spent to
return defective product
Repair costs after warranty
period
Backup product or service to
cover failure periods
Customer-dissatisfaction
cost
Loss-of-reputation cost
Dissatisfaction shared by word
of mouth
Customer perception of firm
Customer-incurred cost
Indirect
poor-
quality
costs
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COST OF QUALITY: TWO COMPONENTS
We tend to think of Quality Assurance as a necessary evil. What we
often overlook is that the cost of quality has two distinct components:
Appraisal Costs and Failure Costs.
Appraisal Costs of Quality are the ones we tend to focus on because we
have direct control over them. We explicitly plan for certain appraisal
activities, and we decide when we have done enough of them. We
budget for the cost of the QA staff and their tools, the time they spend
and the resources they use doing test planning, testing, and other parts
of their jobs. But Appraisal Costs aren’t even the biggest part of our
Cost of Quality.
Failure Costs of Quality are the ones that happen to us. They are
variable costs that are hard to predict, and are the more significant
portion of our Cost of Quality. These costs (often called the “Cost of
Poor Quality”) are the ones that are caused by defects in our work
products. Failure Costs have an insidious way of sneaking up on us in
the form of costs that we don’t immediately see as Costs of Quality.
Let’s look at a few of those.
Failure Cost: Busted Budget
The single largest Failure Cost of Quality is the effort that our
developers spend investigating and diagnosing defects, and then
reworking designs and code to correct them. Although we may try to
minimize those costs by putting less expensive people on the line, we
find that our most experienced (and most expensive) developers end
up being sucked into the fray on the most challenging and elusive of the
defects. The bottom line is that the people we most need to have
focusing on the next product–the future of our company–are stuck
processing an endless stream of bug reports.
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These costs are so significant that we routinely engage in triage of
problem reports. We decide that a few of the defects must be fixed
immediately. Others can wait till later. (Maybe next week we’ll have
time to fix them.) We will defer many of the problems until the next
release. (This can cause a firestorm of protest from QA or from
Marketing, and the ensuing negotiations waste even more of
everyone’s effort as we sort it all out.) Finally, we will choose to ignore
some defects. (After all, there is a reasonable workaround, so it won’t
cause the customers too much trouble.)
The vast majority of us no longer expect to fix all known defects before
releasing our software. We simply hold it back until we decide that the
cost of not shipping the software has exceeded the cost of shipping a
defective product. That is why so many of us can identify with the
statement made by a recent client of mine who said, “We don’t release
software, it escapes!”
Of course, fixing the problem next week or next release, or letting
customer support deal with it does not get rid of the failure cost; it only
defers it until later. The company ends up paying the cost one way or
the other.
Failure Cost: Slipped Schedule
Developers seem to be lousy estimators. No matter how long they say a
project will take, even if we double the schedule, they still can’t deliver
on time! This is a common frustration. But if you could gain insight into
why schedules slip, you might be surprised at the most common cause.
While there are times when technical challenges or gross
underestimates are to blame, the most common cause of schedule
problems is defects.
Testing is like a big black hole. Software is sucked into test, and it is
never seen again. Sometimes we blame the testers; “We delivered the
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software to QA on schedule, but they are holding up the release!” But
QA is only finding defects, and it is the defective software that is
holding the schedule up.
More often that not, defects prevent test suites from being completed.
Testing is halted until the defects that block execution can be removed.
When the fixed software is available, QA first re-tests to be sure the
defect was fixed, then they move forward–until the next blocking
defect is encountered. This cycle continues for a much longer time than
anyone would like. Even when the testing can be completed, the
backlog of defects that are being fixed requires continual re-testing.
And of course too often, defect fixes introduce new defects into the
system, starting the cycle all over again.
While delivering the software on time is critically important, we often
find that defects simply prevent it. We must hold the product back until
we can reach some reasonable quality level. Of course, the definition of
“reasonable quality” is a matter of great debate. No matter when we
finally release, some people will think we waited too long, and others
will fear the consequences of the remaining defects.
Failure Cost: Costly Customers
Once the product has been released, the Failure Costs associated with
it are not over. In fact a significant portion of them will continue for as
long as the product is in use. Let’s face it: The reason we want to force
our customers to upgrade is to stop the hemorrhaging of support costs!
Most of the effort in our customer support group is spent helping
customers to deal with all of the defects we shipped to them. But the
cost of support is not limited to the support group. Every time a
customer reports a new defect, a developer must investigate it and
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diagnose the problem. Fixing the defect in the next release does not
avoid the cost; it only defers it, while aggravating the customer.
For those defects that are deemed to be significant, the costs can be
staggering. The developer must rework the design or code or develop a
patch, QA must test the fix to be sure it works and it did not cause
unforeseen problems, and finally, it must be installed at the customer
site to fix their particular problems. It is easy to see why the research
shows that the cost of the average defect found by the customer is 50
to 100 times higher than those found in-house.
Failure Cost: Meager Market
Alienating customers is easy. Deliver the product late. Defer shipping
promised features while you are correcting defects. Ship lots of defects
for customers to find. Continually tell them “it will be fixed in the next
version”. Placate them with “ingenious” work-around.
The biggest Failure Costs are nearly impossible to quantify; loss of
customer good will, tarnished reputation in the market, and loss of
product momentum. The customers who dump your product in favor of
your competitor’s immediately erode your market share. But those
who don’t go that far are still unlikely to encourage others to buy your
products, and your market share will continue to erode.
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TOTAL QUALITY CONTROL
Total quality control (TQC) is a management process based on the
belief that quality costs are minimized with zero defects. The phrase
quality is free given by Philip Crosby is commonly advocated by
proponents of TQC, who argue that the reduction of failure costs due
to improved quality outweigh additional prevention and appraisal
costs.
TQC begins with the design and engineering of the product. Designing a
product to be resistant to workmanship defects may not be
incrementally more costly than the present design process, but the
reduction in other quality costs can be substantial. TQC is often
associated with just-in-time (JIT) manufacturing. Under JIT each worker
is trained to be a quality inspector. Therefore teams specializing in
quality inspection become unnecessary. With suppliers delivering high-
quality parts and materials, a company can substantially reduce if not
eliminate the appraisal costs. Total quality control is sometimes
referred to as total quality management (TQM) because a completely
new orientation must be taken by management to make TQC
successful. New performance measures that reinforce quality
improvements must be initiated. Standard cost variance such as the
materials price variance and labor efficiency variance tend to
emphasize price and quantity rather than quality and should not be
used to reward employees. The productivity measures described in the
next section are more useful in motivating workers to achieve both
quality and productivity.
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REDUCING THE FAILURE COST OF QUALITY
Conventional wisdom would tell us that when you have some costs you
can directly control (Appraisal Costs) and others that you cannot (Failure
Costs), that you should keep a tight reign on the controllable costs and
hope for the best with the others. Like most paragraphs that begin with
a statement about “conventional wisdom”, this one argues against that
strategy. The fact is that you can exercise indirect control over your
organization’s Failure Costs by appropriately managing the Appraisal
Costs. This is not to say that you should allow your Appraisal Costs to
run wild. But it also infers that you may not want to cut them too
deeply.
All of your Failure costs (every dollar of them) are caused by a finite
number of defects in your software. Every defect that you can remove
more economically than you currently do represents money on your
company’s bottom line. Every defect you can remove in a more timely
way represents hours or days (or weeks!) of schedule saved. Every
defect that you avoid shipping to you customer, and every useful
feature that you do ship is priceless good will that builds your
reputation in the marketplace. The key is to find more efficient
methods to detect and remove defects.
Defect Removal Activities
This is a list of the various methods that different organizations use to
remove defects from their software. They are listed roughly in order
from most effective to least effective (in terms of both time and cost
per defect removed). Beside each is the word “Appraisal” or “Failure”,
indicating how most of the effort involved in that activity would be
classified.
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Activity
v Personal Reviews (PSP reviews)
v Software Inspections (Fagan
Inspections)
v Peer Reviews
v Compiling
v Unit Testing
v Beta Testing
v System Testing (and performance &
other testing)
v Acceptance Testing
v Walkthroughs
Cost of
Quality
Appraisal
Appraisal
Appraisal
Failure
Failure
Failure
Failure
Failure
Appraisal
Effectiveness
Testing is a relatively ineffective way to remove defects, but it is still a
necessary part of your development lifecycle. Rather than continuing to
make it your main defect removal mechanism, you would do better to
use it to gage of the effectiveness of your earlier defect removal
activities like reviews, inspections and unit testing.
Many of the above methods will be discussed in future articles on this
site. In the mean time, you can begin to reduce your total cost of quality
by moving your defect removal activities up toward the top of this list.
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GOAL OF COST OF QUALITY
The most costly condition occurs when a customer finds defects. Had
the manufacturer or service organization found the defects, through
much inspection, testing and checking, a less costly condition would
have resulted. If the manufacturing or service organization’s quality
program had been geared toward defect prevention and continuous
quality improvement, defects and their resulting costs would have been
minimized, which is, obviously, the most desirable condition. The most
costly condition occurs when a customer finds defects. Had the
manufacturer or service organization found the defects, through much
inspection, testing, and checking, a less costly condition would have
resulted? If the manufacturing or service organization's quality program
had been geared toward defect prevention and continuous quality
improvement, defects and their resulting costs would have been
minimized—obviously, the most desirable condition.
Recent successes have resulted in revisions to the classic model of
optimum quality costs. Previously, prevention and appraisal costs were
portrayed as rising asymptotically as defect-free levels were achieved
there is increasing evidence that the processes of improvement and
new loss prevention are themselves subject to increasing cost effec-
tiveness. New technology has reduced inherent failure rates of
materials and products, while robotics and other forms of automation
have reduced human error during production, and automated
inspection and testing have reduced the human error of appraisal.
These developments have resulted in an ability to achieve perfection at
finite costs.
The goal of any quality cost system, therefore, is to facilitate quality
improvement efforts that will lead to operating cost reduction
opportunities.
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The strategy for using quality costs is quite simple:
1. Take direct attack on failure costs in an attempt to drive them to
zero;
2. Invest in the "right" prevention activities to bring about
improvement;
3. Reduce appraisal costs according to results achieved; and (4)
continuously evaluate and redirect prevention efforts to gain further
improvement.
This strategy is based on the premise that
v For each failure there is a root cause. -
v Causes are preventable.
v Prevention is always cheaper.
In a practical sense, real quality costs can be measured and then
reduced through the proper analysis of cause and effect. As failures are
revealed through appraisal actions or customer complaints, they are
examined for root causes and eliminated through corrective action.
Elimination of root causes means permanent removal. The further
along in the operating process that a failure is discovered—that is, the
nearer to product or service use by the customer—the more expensive
it is to correct.
Usually, as failure costs are reduced, appraisal efforts can also be
reduced in a statistically sound manner. The knowledge gained from
this improvement can then be applied, through prevention activities or
disciplines, to all new work.
As straightforward as this approach may appear, it cannot work unless
there is first a basic quality measurement system that clearly identifies
the correctable elements of performance failures which represent the
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Cost Of Quality 2009
best potential for cost improvement. Such a system is designed to use
the data from inspections, tests, process control measurements or
evaluations, quality audits, and customer complaints as a measure of
company performance and a source of determining cost reduction
projects. This measurement is a basic and important part of quality
management. The potential for improvement can be determined by a
system of accurate and dependable quality cost measurement and
analysis.
Since every dollar of quality cost saved can have a positive effect on prof-
its, the value of clearly identifying and using quality costs should be
obvious. By minimizing quality costs, quality performance levels can be
improved.
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Cost Of Quality 2009
COMPANY REFERRED
SIGMA FREUDENBERG NOK PVT. LTD.
(An Indo German Japanese Joint Venture) - Established in 1964
World leader in sealing technology
TS-16949, ISO-14001, OHSAS-18001 & ISO-9001 Certified Company
About The Company:
In August' 2000 Delhi based Sigma Corporation, Freudenberg Germany
& NOK Japan formed a joint venture company, Sigma Freudenberg NOK
Pvt. Ltd. (SFN) to manufacture the Freudenberg & NOK range of seals in
India and to act as a sole marketing arm of both partners for their
products manufactured worldwide in India.
This joint venture in India is closing one of the last gaps in the
international set up of the Freudenberg NOK Group of Companies,
since it is the 28th country and the 46th factory to manufacture the
sealing range of their products. Being the unchallenged market leader
in sealing technology, the Freudenberg & NOK, group of companies
together with their Indian partner, Sigma will bring the latest
technology in design, material, application engineering and production
to India to support their Indian customers with state of the art seals,
giving them a competitive edge in a more and more competitive
environment.
Freudenberg & NOK will support the company with all know how
available and guarantee the implementation with a full time Technical
Director from Germany, having more than 30 years experience in other
group companies worldwide. The core team of the factory has been
trained in Germany for 6 months and the sales engineers have been
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Cost Of Quality 2009
intensively trained by experienced design Engineers from Freudenberg
& NOK.
Production started in November 2001 and will continue to increase
over the next years. Together with the trading business, Sigma
Freudenberg NOK (SFN) will be able to offer a unique range of seals for
every kind of application in the Engineering Industry.
Access to all R&D centres within the group leads to the best and most
economical solutions for the Indian customers. The involvement of
Sigma Freudenberg NOK from the first design step onwards gives the
customer, access to the worldwide knowhow of the Freudenberg &
NOK group, whereas the management expertise of the Sigma Group
ensures the best possible implementation of the Freudenberg & NOK
know how and technology in the Indian Company.
Sigma Freudenberg NOK is actively participating globally to
continuously improve its performance in all business areas by adopting
"GROWTTH" as its key strategy.
Our success, along with ongoing organization streamlining and
continuous improvement measures, are powerful indicators of our
ability to meet the challenges of the market with close customer focus.
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Cost Of Quality 2009
Cost Of Quality(Rs.)
Internal Quality Cost
Costs related to scrap
Rework Cost
Unplanned sorting inspection
Repeat inspections and tests
Waste – Discrepancies in quantities (Inventory Correction)
Special Tests (Problem examination)
Costs resulting from customer complaints which will not be
compensated, e.g. costs of travelling, special examination, sorting
tests, non-chargeable stoppage, etc.
Costs resulting from extra transport under responsibility of FDS
Salary of Q.A. Dept.
Total Internal Cost
External Quality Cost
Scrapping of returned goods
Rework of returned goods
Costs of inspection and testing, rework, assembly and disassembly
at the customer’s end
Recall from field
Chargeable subsequent expenditures at the customer’s, e.g. after
process interruption
Costs of warranty claims – less insurance payments, if applicable
Travel expenses and expense allowances
Costs of special inspection and testing
Product liability insurance premiums
Total External Cost
12,63,280
9,11,954
2,097
5,396
3,19,750
12,39,197
7,083
7,083
Prevention Cost
Quality System Audit Cost
Calibration Cost
Supplier Development Cost
Total Prevention Cost
Production Value
% of Production Value
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9,000
5,000
3,000
17,000
357 Lacs
3.54%
Page 30
Cost Of Quality 2009
Customers:
ABB Harig Rane TRW
ABI Showa Tech
Hindustan Hydraulics Simpsons
Ashok Leyland Int. Combuston UT
Bosch Knorr Voltas
BHEL Komatzu Vickers
Bajaj Tempo L & T Veljan
Brakes India LML Wipro
Delphi Automotive Systems Lincon Hellious
Dantal Mahindra & Mahindra
Eicher New Holland
Escorts Oscar
Hegglunds Royal Enfield
Contact at:
Head Off. & Plant
B-70, Industrial Area, Phase-VII,
Sector-73, Mohali-160055(India)
Contact person:
Mr. Ajay Gupta
(Senior Executive Finance & Accounts)
Mobile No. : 987266288
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Cost Of Quality 2009
GILARD ELECTRONICS PVT. LTD.
A Buyer-Company with ISO 9001 Certification
Established in 1962
Number of Employees: 101 to 500 People
Turnover: US$ 1-10 Million (or Rs. 4-40 Crore Approx.)
About the Company:
Gilard Electronics is an ISO-9001:2000 and ISO/TS 16949:2002 certified
company. Set up in 1961 as a Radio components manufacturing
company, it later enhanced its range to electronic components for
telecom, instrumentation, entertainment and defense. Over a period of
time Gilard built up its strength in Re engineering of components and
manufacturing import substitution components. This was made
possible with an infrastructure backed by a very strong Tool room and
Design. Based on its strength, in 1987 the organization diversified into
the manufacture of components for the Automobile companies and are
now considered the most preferred source for the same. Today Gilard
is a Design responsible Company and also assists its customers in
research and develops products for them, from concept to completion.
Gilard is also certified for ISO14001:2004 and OHSAS 18001:1996
Gilard is an ISO 9001:2000 and TS16949:2002 certified Company and is
also certified for ISO 14001:2004 & OHSAS 18001:1999. All
certifications have been done by the UL (Underwriters Laboratory) of
USA. Gilard has the honor of being a supplier to the First 4 Auto-
Electrical Companies of the world :
Delphi, Bosch, Denso and Visteon
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Cost Of Quality 2009
Products:
Toggle switches, Snap Action / Micro Switches, Connectors, Cold Start
of Diesel Engines, Relays and Relay Sockets, Receptacles / Power
Outlet, Rocker Switches, Tractor Switches, Switches for Trucks, Buses
LCVs, AC Switches, Selector Switches, Resistors, Solenoid Valve, Flasher,
2-Wheeler Switches, Fuel Gauge Float Assembly, Wiper Covers,
Moulded Products
Quality Costs: Definition
v Also termed as cost of quality (COQ)
v COQ should not be misunderstood as the cost of making a quality
product or service. It is the cost of not making a quality product or
service. Or it is the cost that an organization will have to suffer
due to poor quality product/service.
v Understanding the cost of quality concept shatters the general
perception or paradigm that higher quality requires higher costs.
In fact, it is the other way round.
v Therefore, quality saves; quality is free.
First Time Right Saves; Rework is Expensive
services given are first time right and are with zero defects.
v When you cannot produce, right the first time, you may have to
carry out rework on them to make it of acceptable quality.
v Rework means: literally doing it all over again and that may cost
almost twice as much of the cost of first time right product.
Worse, it will be a reworked product/service that can never match
the quality of first time right one since rework is usually done
using a less capable process ( not using the process which is used
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v The quality cost is barest minimum when the goods produced or
Cost Of Quality 2009
for normal manufacturing line and which has better process
capability).
Components of Costs of Quality
Costs of conformance (Cost of control): It has two components:
1. Prevention costs
2. Appraisal costs
Costs of non conformance (Cost of failure of control): It has two
components:
1. Internal failure costs
2. External failure costs
Prevention Costs
v The costs of any action taken to investigate, prevent or
reduce defects and failures.
v The costs of all the efforts to keep defects from occurring at
all.
v The costs of quality planning, quality enhancement projects,
quality training and development, supplier quality capability
evaluation, process capability improvement, new product
quality review etc.
Appraisal Costs
v The costs of assessing the quality achieved.
v The costs of detecting defects through inspection/audit and
test procedures and sifting out defects from OK products.
v The costs of inspection of bought out materials at the source
or in-coming point in the organization, in process inspection,
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Cost Of Quality 2009
final product inspection, calibration of inspection/test
instruments and equipment etc.
Internal Failure Costs
v The costs arising within the manufacturing organization of
failure to achieve quality specified (before transfer of
ownership to the customer).
v The costs of defects identified internally and then,
rejecting/scrapping or reworking on the defective items.
v The costs of lost lead times/cycle times and delayed delivery
to customers.
v The costs of scrapping/discarding, rework/repair, re-
inspection/re-testing, downgrading the produced items
fetching lower price/lower image.
External Failure Costs
v The costs arising outside the organization of failure to
achieve quality specified (after the transfer of ownership to
the customer).
v The costs associated with the defects that actually reach
customers and field failures.
v The costs of lost goodwill and image, lost existing and
prospective customers, recalls, returned goods, free
replacements for defective goods, processing of warranty
claims/customer complaints etc.
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Cost Of Quality 2009
Proportions of Costs
The estimates of proportion of these four quality costs are given below:
v Preventive costs: $1
v Appraisal costs: $10 (if you are not interested in investing $1
on preventive costs)
v Internal failure costs: $100 (if you are not interested in
investing $1 on preventive costs)
v External failure costs: $1000 (if you are not interested in
investing $1 on preventive costs)
Quality is Free; Quality Saves
Look at the proportions of costs carefully. What's the inference? It says
clearly that if you invest wisely $1 in prevention costs, you can
avoid/eliminate the appraisal costs, internal failure costs and external
failure costs which total up to $1110.
Invest $1 in establishing quality systems and save $1110. Net savings:
$1109.
So, quality is not only free, it saves.
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Cost Of Quality 2009
Cost of Quality
Particulars
Internal Quality Cost
Costs related to scrap
Waste-Discrepancies in quantities (Inventory Correction)
Salary of Quality Department
Man Days Salary
Rework Cost
Unplanned Sorting Inspection
Repeat Inspection and Test
Estimated Cost of Rejected Piece
Cost of Consumables
Costs resulting from customer complaints
3476542
548767
127656
298563
23987
312543
265432
234198
765490
Amount
External Quality Cost
Scrapping of Returned goods
Rework of Returned goods
Travel Expenses and expense allowances
Costs of Special Inspection and Testing
Product liability and insurance premium
467519
4126743
65789
61867
Prevention Cost
Supplier Development Cost
TOTAL
Production value
Percent of production value
35000
10810096
381982190
2.83
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Cost Of Quality 2009
JAY BHARAT MARUTI LTD.
Jay Bharat Maruti Ltd. (JBML), a Public limited company, was
incorporated in 1987 as a Joint Venture with Maruti Suzuki India Limited
(MSIL). Keeping pace with the steep rise in demand and quality of
passenger cars and the fierce competition from the entry of international
auto majors in the country, JBML had to continually expand its
manufacturing capacity and capability. The capacity, therefore, was
expanded in 1991-92 and in 1993-94. A new plant was set up in 1995-96.
The capacities were further expanded in 1996-97, 2001-02 and 2002-03.
The world-class manufacturing capabilities include imported and
indigenous press lines, robotic welding lines as well as plating and
painting facilities.
JBML added capabilities to produce exhaust systems, axles and fuel neck
fillers to the existing capabilities of sheet metal components and welded
modules. With several awards to its credit and support of its partners the
company stands posed atop a launch pad to the future fully geared to
meet new challenges and is destined to touch new heights in excellence.
Jay Bharat Maruti limited, engaged in manufacturing of sheet metal
components, welded sub-assemblies and exhaust systems for
automotive applications, re-affirms its commitment to minimize the
adverse impacts of its operations on the environment. To this end, we
shall endeavor to:
1) Develop and maintain an environmental management system and
continually monitor, set and review the environmental objectives and
targets.
2) Meet all applicable environmental legislations, regulations and
customer requirements.
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Cost Of Quality 2009
3) Conserve natural resources and energy by constantly seeking to
reduce their consumption or wastage and maximize their recycle / reuse.
4) Minimize / prevent air, water, noise and land pollution generated
from our activities.
5) Maintain a system for hazard waste management.
Cost of poor Quality (09-10)
Month
Descripti
on
Cost of
Rejection
Cost of
Rework &
Warranty
Cost of
Consumabl
es
Total
Apr.'
09
4198
00
0
May'
09
4817
00
875
Jun.'
09
4040
00
0
Jul.'0
9
4651
00
0
0
Aug.'
09
Sep.'
09
Oct.'
09
Nov.'
09
Dec.'
09
Jan.'
10
Feb.'
10
Mar.'
10
1931
9
4391
19
3211
2
5146
88
9796
4137
96
9675
4747
75
1064
0
1064
0
0
0
0
0
0
0
0
600000
500000
400000
300000
200000
Cost of Poor Quality (09-10)
Rs.
100000
0
Apr.'09 May'09 Jun.'09 Jul.'09 Aug.'09 Sep.'09 Oct.'09 Nov.'09 Dec.'09 Jan.'10 Feb.'10 Mar.'10
419800 481700 404000 465100
0
875
0
9796
0
9675
0
10640
0
0
0
0
0
0
0
19319 32112
Cost of Rejection
Cost of Rework & Warranty
Cost of Consumables
Total
439119 514688 413796 474775 10640
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Cost Of Quality 2009
GILCO EXPORT LTD.
Corporate Profile
Gilco Export Ltd. Was founded in 1978 with a vision to emerge a global
supplier of metal based fabricator of a wide range of product. The
company’s commitment to the highest standard of quality and its
ability to innovate over three decades, has seen it flourish to become
the leader in manufacturing with business lines that focuses on:
v Design, manufacture and export of Wrought iron furniture.
v Design, manufacture and implementation of conveyer system,
baggage handling systems and public seating systems for the
aviation sector.
v Design, manufacture and export of retail solutions and store
fixtures.
v Design, manufacture and export of metal based agriculture
equipment and accessories.
Gilco Quality
The quality of products at Gilco Exports Ltd. is determined by stringent
processes and systems that ensure highest standards of quality from
early stages of production. The company’s quality department ensures
that these processes support standard. in the procurement of raw
material, error profiling and proofing, best methods for checking
product defects and regular quality audits. A step-by-step methodology
for quality assurance is followed to ensure that quality driven products
are effectively packaged and shipped to customer in a timely manner
resulting in zero defect deliveries consistently over the last several
years.
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Cost Of Quality 2009
Current month cost (Rs.)
Prevention cost
Quality training
Reliability engineering
Pilot studies
System Development
Total Prevention
Appraisal Costs
Material Inspection
Supplies Inspection
Reliability Testing
Total Appraisal
Internal failure Costs
Scrap
Repair
Rework
Downtime
Total Internal Costs
External Failure Costs
Off warranty repairs
replacements
Customer Complaints
Product Liability
Transportation Losses
Total External Failure
20000
100000
50000
80000
2,50,000
60000
30000
50000
1,40,000
150000
180000
120000
60000
5,10,000
and 60000
30000
100000
50000
2,40,000
Percentage Total (%)
1.3
6.5
3.3
5.2
16.3
3.9
2.0
3.3
25.5
9.8
11.8
7.8
3.9
33.3
3.9
2.0
6.5
3.3
24.9
Total Quality Costs
11,40,000
100
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