TOTAL QUALITY MANAGEMENT

T QM
PhD-Total Quality Management (In Progress) MSTotal Quality Management, MIT, M.Sc

QUALITY COSTING MEASUREMENT & PRODUCTIVITY

By: Sarfraz Rashid

COST OF QUALITY
Expenses

or costs of Quality department?? Costs or losses associated with poor quality of products or services?? Expenses or costs associated with preventing defects and improving quality?? Expenses or costs associated with checking and maintaining quality??

QUALITY COST

Feigenbaum defined quality costs as:

Those costs associated with the definition, creation, and control of quality as well as the evaluation and feedback of conformance with quality, reliability, and safety requirements, and those costs associated with the consequences of failure to meet the requirements both within the factory and in the hands of customers.

QUALITYCOST RELATIONSHIP
QUALITY IS FREE

FOUR ABSOLUTES OF QUALITY

Conformance to the requirement, Not Goodness System for causing quality is prevention not appraisal Performance standard is Zero defects Measure of quality is the price of nonconformance In his book Quality Without Tears, explains that the dollar cost of quality is the difference between price of nonconformance and conformance 20 to 35% of revenues

Cost of doing things wrong Cost of doing things right

3 to 4% of revenues

Profitability
In the long run, quality is free

COST OF QUALITY

CATEGORIES OF QUALITY COST:

COST OF ACHIEVING GOOD QUALITY COST OF POOR QUALITY

COST OF ACHIEVING GOOD QUALITY

PREVENTION COSTS The cost of any action taken to investigate, prevent or reduce the risk of a non-conformity Include quality planning costs, designing products with quality characteristics, Training Costs, etc. APPRAISAL COSTS The costs associated with measuring, checking, or evaluating products or services to assure conformance to quality requirements Include inspection & Testing Costs, Test Equipment Costs, Operator Costs, etc.

COST OF QUALITY

CATEGORIES OF QUALITY COST:

COST OF ACHIEVING GOOD QUALITY COST OF POOR QUALITY

COST OF POOR QUALITY

INTERNAL FAILURE COSTS The costs arising within the organization due to nonconformities or defects include scrap, rework, process failure, downtime, and price reductions EXTERNAL FAILURE COSTS The costs arising after delivery of product or service to the customer due to non-conformities or defects include complaints, returns, warranty claims, liability, and lost sales

THE 1-10-100 RULE

GOAL OF COST OF QUALITY SYSTEM

TO FACILITATE QUALITY EFFORTS THAT WILL LEAD TO OPERATING COST REDUCTION OPPORTUNITIES

Direct attack on Failure Costs to minimize them Investment in Prevention activities Reduction in Appraisal Costs

STRATEGY

MODEL OPTIMUM COST

OF OF QUALITY

 INDEX

MEASURING AND REPORTING QUALITY COSTS

NUMBERS

ratios that measure quality costs against a base value LABOR INDEX ratio of quality cost to labor hours COST INDEX ratio of quality cost to manufacturing cost SALES INDEX ratio of quality cost to sales PRODUCTION INDEX ratio of quality cost to units of final product

AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS EXAMPLE: The H&S Motor Company small motors (e.g., 3 hp) for use
YEAR

in lawnmowers and garden equipment. The company instituted a quality management program in 2004 and has recorded the following quality cost data and accounting measures for four years.
2004 QUALITY COSTS Prevention Appraisal Internal Failure External Failure TOTAL ACCOUNTING MEASURES $27,000 155,000 386,400 242,000 $810,400 41,500 122,500 469,200 196,000 829,200 74,600 113,400 347,800 103,500 639,300 112,300 107,000 544,400 106,000 544,400 2005 2006 2007

The company wants to assess 1,760,000 its qualityassurance 1,880,000 and develop program 1,890,000 Manufacturing Costs 1,810,000 quality index numbers using sales and manufacturing cost bases for the fouryear period.

Sales

$4,360,000

4,450,000

5,050,000

5,190,000

AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS: EXAMPLE (Cont)

Quality Index = [(Total Quality Costs) / Base] X 100 The Index Number for 2004 sales is:
Year 2004 2005 2006 2007 Quality Sales Index 18.58 18.63 12.66 10.49
Quality Cost per sale = [(810,400/4,360,000)] X 100 = 18.58%

Quality Manufacturing Index 46.04 45.18 34.00 28.80

The H&S Company quality index numbers reflect dramatically improved quality during he four year period Quality Costs as a Proportion of both sales & manufacturing costs improved significantly Quality Index Numbers are useful in showing trends in product quality over time and reflecting the impact of product quality relative to accounting measures with which managers are usually familiar

parkas. The company implemented a total quality management program in 2002. Following are quality related accounting data that have been accumulated for the five year period after the programs start. 2003 2004 QUALITY COSTS (000s) Prevention $3.2 10.7 Appraisal 26.3 29.2 Internal Failure 39.1 51.3 External Failure 118.6 110.5 ACCOUNTING MEASURES (000s) Sales $2,700.6 2,690.1 Manufacturing Cost 420.9 423.4 YEARS 2005 28.3 30.6 48.4 105.2 2,705.3 424.7 2006 42.6 24.1 35.9 91.3 2007 50.0 19.6 32.1 65.2

QUALITY INDEX NUMBERS: Backwoods American, Inc.,QUESTIONwater-repellent, down-lined produces expensive

2,810.2 2,880.7 436.1 435.5

Compute qualitysales indices and qualitycost indices for each of the five years. Is it possible to assess the effectiveness of the companys quality management program from these index values?

ANSWER:

QUALITY INDEX NUMBERS: QUESTION

These index values do not provide much information regarding the effectiveness of the quality assurance program. They are, however, useful in making comparisons from one period to the next and in showing trends in product quality over time.

QUALITY MANAGEMENT AND PRODUCTIVITY

Productivity

ratio of output to input

Yield:

is a measure of output used as an indicator of productivity Improved quality increases product yield
Yield=(total input)(% good units) + (total input)(1-%good units) (% reworked)
or

Y=(I)(%G)+(I)(1-%G)(%R)

COMPUTING PRODUCT EXAMPLE: YIELD The H & S Motor company starts production for a particular type of motor with a

steel motor housing. The production process begins with 100 motors each day. The percentage of good motors produced each day average 80% and the percentage of poorquality motors that can be reworked is 50%. The company wants to know the daily product yield and the effect on productivity if the daily percentage of goodquality motors is increased to 90%.

Yield=(total input)(% good units) + (total input)(1-%good units)(% reworked)

Y=(I)(%G)+(I)(1-%G)(%R) Y = (100)(0.80) + (100)(1 0.80)(0.50) = 90 Motors

If product quality is increased to 90% good motors, the yield will be:
Y = (100)(0.90) + (100)(1 0.90)(0.50) = 95 Motors

A 10% point increase in quality products results in a 5.5% *100) increase in productivity output.

((95/90 )

The oak file cabinets that are sold unassembled through catalogues. The company initiates production of 180 cabinets packages each week. The percentage of good-quality cabinets averages 83% per week, and percentage of poorquality cabinets that can be reworked is 60%. a) Determine the weekly product yield of file cabinets. b) If the company desires a product yield of 174 units per week, what increase in the percentage of good quality products must results?

COMPUTING PRODUCT YIELD QUESTION Colonial House furniture company manufactures two-draw

PRODUCT COST PER UNIT

( K d )(I ) + ( K r )(R) = Y

Product Cost

where: Kd = direct manufacturing cost per unit I = input Kr = rework cost per unit R = reworked units Y = yield

COMPUTING PRODUCT COST PER UNIT EXAMPLE:

The H & S Motor company has a direct manufacturing cost per unit of $30, and motors that are of inferior quality can be reworked for $12 per unit. From previous Example, 100 motors are produced daily, 80% (on average) are of good quality and 20% are defective. Of the defective motors, half can reworked to yield good quality products. Through its quality management program, the company has discovered a problem in its production process that, when corrected (at a minimum cost), will increase the good quality products to 90%. The company wants to assess the impact on the direct cost per unit of improvement in product quality.

The Original manufacturing cost per motor is: ( K d ) I ) + K r ) R) ( ( ( Product Cost = Y = [($30)(100) + ($12)(10)] / 90 motors = $34.67 per motor The manufacturing cost per motor with the quality improvement is: Product Cost = [($30)(100) + ($12)(5)] / 95 motors = $32.21 per motor The improvement in the production process as a result of the quality management program will result in a decrease of $2.46 per unit, or [(34.6732.21)/34.67] X 100 = 7.1%, in direct manufacturing cost per unit as well as a 5.5% increase in product yield (computed in previous example), with a minimal investment in Labor, plant, or equipment.

COMPUTING PRODUCT COST PER UNIT: QUESTION

The Omega Shoe Company manufactures a number of different styles of athletic shoes. Its biggest seller is the Xpacer running shoe. In 2005 Omega implemented a qualitymanagement program. The companys shoe production for the past three years and manufacturing costs are as fellows. 2005 32,000 $278,000 78% YEAR 2006 34,600 291,000 83% 2007 35,500 305,000 90%

Units Produced (Input) Manufacturing Cost Percent good quality

Only onequarter of the defective shoes can be reworked, at a cost of $2 apiece. Compute the manufacturing cost per good product for each of the three years and indicate the annual percentage increase or decrease resulting from the quality management program.

COMPUTING PRODUCT COST PER UNIT: QUESTION

ANSWER

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESSES

Y = (I)(%g1)(%g2) (%gn)

where: I = input of items to the production process that will result in finished products gi = good-quality, work-in-process products at stage i

EXAMPLE:

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS

At the H&S motor company, motors are produced in a four stage process. Motors are inspected following each stage, with percentage yields (on average) of goodquality, work in process units as follows: STAGE AVERAGE PERCENTAGE GOOD QUALITY 1 2 3 4
1. The

0.93 0.95 0.97 0.92

company wants to know the daily product yield for product input of 100 units per day. 2. Furthermore, it would like to know how many input units it would have to start with each day to result in a final daily yield of 100 good quality units.

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS

SOLUTION:

Y = (I)(%g1)(%g2)(%g3)(%g4) = (100)(0.93)(0.95)(0.97)(0.92) Y = 78.8 motors Thus, the production process has a daily good quality product yield of 78.8 motors.

To determine the product input that would be required to achieve a product yield of 100 motors, I is treated as a decision variable when Y equals 100:
I = (Y) / (%g1)(%g2)(%g3)(%g4) I = (100) / (0.93)(0.95)(0.97)(0.92) I = 126.8 motors To achieve output of 100 good quality motors, the production process must start with approximately 127 motors.

The Colonial House Furniture Company manufactures fourdrawer oak filing cabinets in six stages. In the first stage, the boards forming the walls of the cabinet are cut; in the second stage, the front drawer panels are wood-worked; in the third stage, the boards are sanded and finished; in the fourth stage, the boards are cleaned, stained, and painted with a clear finish; in the fifth stage, the hardware for pulls, runners, and fittings is installed; and in the final stage, the cabinets are assembled. Inspection occurs at each stage of the process, and the average percentage of good quality units are as fellows. Stage Average Percentage Good Quality 1 2 3 4 5 6 87% 91% 94% 93% 93% 96% The cabinets are produced in weekly production runs with a product input for 300 units. a.Determine the weekly product yield of goodquality cabinets. b.What would weekly product input have to be in order to achieve a final weekly product yield of 300 cabinets?

COMPUTING PRODUCT YIELD FOR MULTISTAGE PROCESS: QUESTION

QUALITYPRODUCTIVITY RATIO
QPR: productivity index that includes productivity and quality costs It increases if either processing cost or rework costs or both decrease. It increases if more good-quality units are produced relative to total product input(i.e., number of units that begin the production process)
QPR = (non-defective units) (input) (processing cost) + (defective units) (reworked cost)

COMPUTING QUALITY & PRODUCTIVITY RATIO EXAMPLE:

The H&S Motors Company produces small motors at a process cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day on average 80% goodquality motors., resulting in 20% defects, 50% of which can be reworked prior to shipping to customers. The company wants to examine the effects of: 1. Increase the production rate to 200 motors per day 2. Reducing the processing cost to $26 and the rework cost to $10 3. Increasing, through quality improvement, the product yield of good quality products to 95% 4. The combination 2 & 3

SOLUTION:
QPR for the base case:
(non-defective units) QPR = (input) (processing cost) + (defective units) (reworked cost) QPR = [(80 + 10) / {(100)($30) + (10)($12)}] X 100 QPR = 2.89

COMPUTING QUALITY & PRODUCTIVITY RATIO

SOLUTION: Case#1: Increase input to production capacity of 200 units QPR = [(160 + 20) / {(200)($30) + (20)($12)}] X 100 QPR = 2.89 Increasing production capacity alone has no effect on the QPR Case#2: Reduce processing cost to $26 and rework cost to $10 QPR = [(80 + 10) / {(100)($26) + (10)($10)}] X 100 QPR = 3.33 Processing & Rework cost decreases caused the QPR to increase Case#3: Increasing, through quality improvement, the product yield of good quality products to 95% QPR = [(95 + 2.5) / {(100)($30) + (2.5)($12)}] X 100 QPR = 3.22 Again, QPR increases as product quality improves Case#4: Decrease costs & increase initial good-quality units QPR = [(95 + 2.5) / {(100)($26) + (2.5)($10)}] X 100 QPR = 3.71 The larger increase in the QPR results from decreasing costs & increasing initial good quality products through improved quality

COMPUTING QUALITY & PRODUCTIVITY RATIO: QUESTION

AirPhone, Inc., manufactures cellular telephones at a process cost of $47 per unit. The company produces an average of 250 phones per week and has a yield of 87% good-quality phones, resulting in 13% defective phones, all of which can be reworked. The cost of reworking a defective telephone is $16. a. Compute the QualityProductivity Ratio (QPR). b. Compute the QPR if the company increase the production rate to 320 phones per week while reducing the processing cost to $42, reducing the rework cost to $12, and increasing the product yield of goodquality telephones to 94%.

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