COST OF QUALITY

COST OF QUALITY
Cost of quality is defined as the cost associated with the non-achievement of product/service quality Thus defined by the requirements established by the organization and its contracts with customer and society.

COST OF QUALITY

It is the cost of poor products/services Difference between actual cost of making and selling products/services and cost of no failure.

Means to gauge the RETURN OF QUALITY in an organization and how this return impacts the bottom line. COST OF QUALITY forms an integral part of an effective TQM Model.

ELEMENTS OF QUALITY COST

There are four categories:

Cost of prevention

Cost of appraisal
Cost of internal failure

Cost of external failure.

COST OF PREVENTION

The cost of any action taken to investigate, prevent or reduce the risk of non-conformity or defect.

Preventing a quality problem from arising. Prevention costs relate to efforts to prevent failures.

Example : Planning, Preparation, Training, Preventive Maintenance and Evaluation.

COST OF PREVENTION

Cost of quality planning Cost of documentation Process control cost

Cost of training Cost preventing the recurring defects Cost of investigation, analysis and correction of causes of defects by quality control and engineering department
Cost of quality awareness program

COST OF APPRAISAL

The costs of evaluating the achievement of quality requirements including the cost of verification and control performed at any stage of the quality loop

Example : Production Trial, Test , Execution and Examination to asses whether specified quality is being maintained.

COST OF APPRAISAL

Cost of receiving test and inspection. Cost of laboratory acceptance testing.

Cost if installation testing. Cost of installation and commissioning.

Cost of maintenance and calibration of testing and inspecting equipments. Cost of test equipment depreciation. Cost of analysis of reporting of test and inspection results.

Cost of line quality engineering. Cost of vendor rejects.

COST OF INTERNAL FAILURES

Internal failures costs arise due to internal failures. These are the costs arising within organization due to non-conformity or defects at any style of the quality loop. These costs are linked to correcting mistakes before delivery of the product.

Cost of internal failures

Cost associated with scraps and rejects. Cost of repair and rework. Cost of design changes. Cost of trouble-shooting or defect failure analysis.

Cost of re-inspection & retesting. Cost of sales discounts for inferior products. Cost of downgrading.
Cost of downtime.

COST OF EXTERNAL FAILURES

These are the costs arising after delivery to the customer due to non-conformities or defects. These costs are associated with the adjustment of malfunctioning after delivery of the product.

COST OF EXTERNAL FAILURES

Cost of processing complaints from the customers.

Cost of commissioning failures. Cost of servicing or replacing the defective item.

Cost of guarantee & warranty claims. Cost of lost goodwill of customers. Cost of product reliability compensation (voluntary/legal). Cost of loss of sales. Cost of concessions offered to customers (due to substandard products being accepted by customers).

The last two of the Pandavas

COST OF CONFORMANCE ( COC ) Both Preventive and Appraisal Costs are known as the Costs of Conformance. The cost of doing things right the first time.

COST OF NON-CONFORMANCE ( CONC ) Both Internal and External Failure Costs are known as the Costs of Non-Conformance.
The cost incurred as a result of things not being done right the first time.

IDENTIFICATION OF CONFORMANCE COST ITEMS

Step 1 : Develop and Prepare Cost of Conformance (COC ) Checklist :
Prevention Planning and Writing of Procedures and Instructions Vendor Assurance Process Capability Studies Quality Training Quality Improvement Programs Collection, Analysis & Reporting of Quality Data Appraisal In-coming Inspection In-process Inspection Final Testing and Inspection Production Trial Materials consumed during Inspection and Testing Field Performance Testing

Step 2 : Evaluate The Identified Cost of Conformance ( COC ) Items.

IDENTIFYING NON-CONFORMANCE COST ( CONC ) ITEM

Step 1 : Develop and Prepare Cost of Non-Conformance ( CONC ) Checklists
Internal Failure 1. Rework 2. Scrap 3. Obsolescence 4. Downtime 5. Sub-contractor faults 6. Replacement 7. Defect / Failure Analysis 8. Re-inspection and Re-testing 9. Downgrading 10. Accidents 11. Improper Invoicing External Failure 1. Complaints 2. Warranty Claim 3. Bad Debts 4. Returned Products 5. Concessions 6. Loss of Sale 7. Product Liability 8. Extended Warranty 9. Product Recall 10. Overdue Accounts Receivable

Step 2 : Evaluate The Identified Cost of NonConformance ( CONC ) Items.

QUANTIFICATION OF COST OF QUALITY ( COQ )

Step 1 : Source of COC and CONC Data Production Records QC Records Operation Records Accounting Records

Step 2 : Develop and Formulate Accounting Basis. Step 3 : Execute Costing of COQ Items

Whole Account And Unit Pricing

Whole Account This method requires gathering existing financial data from company accounts. If accounts are set up to capture costs, such as training and rework, information from the accounts can be used to measure COQ.

Unit Pricing

This method is effective when a defect or problem is recurring. To use defect pricing, simply multiply the cost of one defective unit by number of defective units.

Whole Person And Labour/Resource Claiming

Whole Person

This method is used when people are employed strictly for the purpose of working on or handling defects.

Labour / Resource Claiming

Involves calculating actual expenditure on a specific activity:

the amount of time spent by an employee performing a task or the amount of financial outlay for a one-time expense. This information might come from time sheet, vouchers or any other method for determining exactly how much was spent.

BENEFITS

Acts as method for assessing the overall effectiveness of the quality programmes

Act as a method for determining problem areas and action priorities

Provides a platform for measurement of return on investment

Converts the various performance indicators used in the company into a single unit-currency
Act as a common method for quantifying qualitative improvements

DOCUMENTATION, TRAINING, COMMUNICATION AND IMPLEMENTATION

It is necessary to document the required changes of quality activities in a recognized Quality Assurance Model or ISO 9000 Quality System or an In-house TQM Manual with a view to train and communicate with all relevant personnel in implementing the changes effectively

PERFORMANCE INDICATIONS AND MEASUREMENT

Step 1 : Outline the business processes and identify appropriate Performance Indicators

Step 2 : Establish and Define the proposed Performance Indicators

Performance Indicators
General Indicators

Productivity Labour Productivity Capital Productivity Space Productivity

ISO 9000 related indicators

No. of Complaints per Month Internal Rejection Rate External Rejection Rate Production Yield Cost of Quality

ISO 14000 related indicators

Waste Reduction / Minimization Increase Level of Recycling Improve Energy Efficiency Reduce Environmental Impact

AUDIT AND REVIEW

Conduct quality audit and management review regularly in order to assess the effectiveness of the quantity system.

Initiate appropriate corrective and preventive action as and when necessary.

A PRACTICAL APPROACH

Phase 01: Project Initiation and Preparation Phase 02: Assessment of Current Business Performance

Phase 03: Project Organization and Assignments

Phase 04: Identification of Major Cost of Conformance (COC) and Cost of Non-Conformance (CONC) Items.

Phase 05: Identification and Provision of Additional Training Needs.

Phase 06: Collect, Compile and Process Cost of Quality Data

Phase 07: Analyze Cost of Quality To Identify Opportunities for Improvements.

Phase 08: Organize and Implement Quality Improvement and Cost Reduction Programmes.

Phase 09: Establish Continuous Improvement of The Cost of Quality Performance.

Phase 10: Conduct Quality Audits regularly and Initiate Document Changes In Response To Improvements made In Various Processes.

CONCLUSION

The goal of using COQ is to increase prevention activities in order to eliminate internal and external failures and to reduce appraisal activities.

Reduction of COQ must be part of a sustained quality improvement process in an organization headed by top management through a TQM Program.

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