Introduction to

Cost of

uality

Total Quality Assurance

Scope of Influence on Product Quality
Touch Labor

Non-Touch Labor Supervisor & Managers

CEO, VP, & Directors

Owners & Public

TOTAL QUALITY ASSURANCE

Elements for Success
Quality planning

Process Quality Control

Cost of Quality

Problem Solving

Cost of

uality

Running a company by profit alone is like driving a car by looking in the rearview mirror.
It tells you where youve been, not where you are going!
Dr. E. Deming

Cost of
The

uality

Goal
goal of a Cost of Quality system is to:

Facilitate Quality Improvements that leads

to operating cost reduction Opportunities.

Cost of

uality

Definition
The cost difference between present operation and the possible operation of a business with all systems and employees at 100% performance. or

The difference between actual revenues and what

revenues could be if all customers were always satisfied, that is , No Unhappy Customers.
LDC 10/88

Cost of
Cost of Quality is Not:

uality

An Exact Cost.

A Performance Measurement.

Cost of

uality

Measurement of a Companys Health

Financial Data
Sales Operation Costs Material Costs Overhead Costs Gen. & Admin. Costs

%
50 40 30 20 10

Percentage of Sales Dollar

Factory Data
Defect Reports Labor Hours Recode/Redesign Customer Complaints

Cost of

Iceberg

uality

Bugs Returned Goods Recode Qual. Dept. Warranty Costs Product Liability Missed Deadlines Complaint Handling Bad Market Reviews Poor Documentation Software Patches
12/88 LDC

Interface Errors

Quotation Errors Configuration Errors Help Desk Training

Process Slowdown

Field Service Lost Market Share

Cost of
Is Cost related to Prevention of NonConformance ?

uality
PREVENTION

Element Decision Flow

YES

NO
Is Cost related to Evaluating the Conformance ?

YES

APPRAISAL

NO
Is Cost related to Non-conformance ?

INTERNAL FAILURE
YES
Is Non-Conformance found prior to Shipment ?

YES

NO
Not a Quality Cost

NO EXTERNAL FAILURE

Cost of

Examples of Elements

uality
APPRAISAL Unit Testing Regression Testing Automated Test Tools User Interface Reviews EXTERNAL FAILURE Returned Goods Liability Costs Help Desk Lost Sales/Market Share

PREVENTION Design Quality Progress Reviews Requirements Documentation SQA Training Cleanroom Software Engineering

INTERNAL FAILURE Recode/Repair Labor Defect Tracking & Reports Requirement Changes Down Hardware

Corrective Action vs Failure

Cost of

uality

Corrective Action is paid for Once,

Whereas Failure to take corrective action may be paid for over and over again.

Cost of

Strategy Premise

uality

The Strategy is based on the premise that:

For each failure there is a root cause.

Causes are preventable. Prevention is always cheaper.

ACQC, Principles of Quality Costs, 1986

Cost of

uality

Strategy for using Quality Costs

Take direct attack on FAILURE costs, try to drive to zero $. Invest in the "right" PREVENTION activities to bring about improvements. Reduce APPRAISAL costs according to results achieved. Continuously evaluate and redirect PREVENTION efforts to gain further improvement.

ASQC, Principles of Quality Costs, 1986

Cost of

uality

Recipe for Success

1. Educate & Develop: Management & Employee Support 2. Collect, Analysis and Report Cost of Quality Data 3. Involve & Support Corrective Action Teams (CAT) 4. Implement Changes recommended by CAT 5. Go to Step #2 (expand data items collected)

1.

2.

3.

4.

5.

Cost of

uality
Appraisal Prevention

NORMAL DISTRIBUTION

Total Sales

Cost of Quality%
TOTAL SALES

Internal Failures External Failures

C O Q $$$

Cost of

uality
Appraisal
2%

Example based on 14% COQ

$.04 Mil

Sales = $127 Million

Prevention

20% $3.6 Mil

SALES

COQ @ 14% COQ $17.8 Mil.

Internal Failures

45% $8.0 Mil

External Failures

33%

$5.9 Mil

1/20/89 LDC

Evolutionary Phases
Implementation (Selling) Phase

Cost of

uality

C O Q
Project (Pilot) Phase

Expand & Ongoing Phase

LDC 10/88

Cost of Quality History

Prevention & Appraisal Costs
Start COQ

25

% o 20 f
15 Prev. Appr. 10

S a l e s
0 1/98 3/98 1/99 3/99 1/00 3/00 5

COQ

Quarters

Cost of Quality History

Failure Cost
Start COQ

25

% o 20 f
15

S a l e s
0 1/98 3/98 1/99 3/99 1/00 3/00 Ex. Fail. 5 COQ 10 In. Fail.

Quarters

Cost of Quality History

COQ as a Percentage of Sales
Start COQ

25

% o 20 f
15

Sales

Prev. Appr.

S a l e s
0 1/98 3/98 1/99 3/99 1/00 3/00 10

In. Fail. Ex. Fail.

5 COQ

Quarters

Cost of

uality

C s o Qa o t f u lity OPTIMUM DISTRIBUTION

Appraisal

Cost of Quality%
TOTAL SALES

Prevention Internal Failures External Failures

C O Q $$$

Cost of
$1,500.00 $1,000.00 $500.00 $0.00

uality

Est. Cost to Fix a Bug at Various Stages

Requirments

Analysis

Design

Testing

Install

Code

$10

$20

$30

$50

$200 $800 $1500

End Use

Cost of
1 2 3 4 5 6 7 8 9 10 11 12
$0 $500

uality - PARETO

Accumulated Cost per Item Type

$1000

$1500

$2000

$2500

$3000

X 1000 $
COST OF QUALITY

Benefits of Improved Quality

Decreases
Defects Overall Costs Returned Goods Employee Turnover Customer Complaints Owner & Mgmt. Stress

Increases
Revenue Sales Capacity Employee Satisfaction Customer Satisfaction Market Share Competitive Edge Personal Time Away

QUALITY is KEY
CHAIN of ELEMENTS

Culture Mgmt. Commitment

Skills Training Recognition

Quality Improvement Teams

Quality Concept Training

Corrective Action Teams Define Requirements Measurement

Cost of Quality

Awareness/ communication
12/88 LDC

Total Quality Assurance

Required Attitudes for Success
The Customer is the Next Operation Plan & Design in Quality Make Quality Decisions
ONE WAY

Touch Labor

Non-Touch Labor Supervisor & Managers

Select Quality Before Schedule & Profits

Demand & Buy Only Quality
LDC, 12/89

CEO, VP & Directors

Owners & Public