"The cost of quality.” It’s a term
that’s widely used – and widely misunderstood. The “cost of quality” isn’t the
price of creating a quality product or service. It’s the cost of NOT creating a
quality product or service.
1. Every time work is redone, the
cost of quality increases.
2. The reworking of a manufactured
item.
3. The retesting of an assembly.
4. The rebuilding of a tool.
5. The correction of a bank
statement.
6. The reworking of a service, such
as the reprocessing of a loan operation or the replacement of a food order in a
restaurant.
In short, any cost that would not
have been expended if quality were perfect contributes to the cost of quality.
Elements of quality
cost
Prevention
Costs
The costs of all activities
specifically designed to prevent poor quality in products or services.
Examples are the costs of:
1. New product review
2. Quality planning
3. Supplier capability surveys
4. Process capability evaluations
5. Quality improvement team
meetings
6. Quality improvement projects
7. Quality education and training
1. Appraisal
Costs
The costs associated with
measuring, evaluating or auditing products or services to assure conformance to
quality standards and performance requirements.
These include the costs of:
1. Incoming and source inspection/test
of purchased material
2. In-process and final
inspection/test
3. Product, process or service
audits
4. Calibration of measuring and
test equipment
5. Associated supplies and
materials
2. Failure Costs
The costs resulting from products
or services not conforming to requirements or customer/user needs. Failure
costs are divided into internal and external failure categories.
3. Internal
Failure Costs
Failure costs occurring prior to
delivery or shipment of the product, or the furnishing of a service, to the
customer.
Examples are the costs of:
1. Scrap
2. Rework
3. Re-inspection
4. Re-testing
5. Material review
6. Downgrading
4. External
Failure Costs
Failure costs occurring after
delivery or shipment of the product
and during or after furnishing of a
service to the customer.
Examples are the costs of:
1. Processing customer complaints
2. Customer returns
3. Warranty claims
4. Product recalls
5. Total Quality
Costs:
The sum of the above costs. This
represents 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 manufacture.
Analysis
Techniques for Quality Costs
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
everyone’s responsibility e.g.:
Marketing
Determine the customer’s
quality requirements; investigate customer’s opinion of product quality &
performance etc.
Engineering
Design quality & safety into the product to comply
customer’s requirements, prepare specification.
Manufacturing
Manufacture & deliver products that comply with the
drawings & specifications.
Quality
Assurance
Assure that the product meets
the customer’s 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.
Finding Quality Costs
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 “customized” to particular
company’s needs, so as to distinguish 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 quality.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.
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.
How to reduce Failure cost
There are four steps to an effective corrective action
programme.
1. Make all persons concerned aware of the problem and its possible
causes
2. Create a desire in others
to solve the mutual problem
3. Plan and carry out a logical investigation of the problem with
others involved
4. 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
1. Are all the causes
of high cost elements known and reported to those responsible for action?
2. Are all the basic cause of defects found and corrected, or does the
action taken tend to be screen out the defective after they are made?
3. Is nonconforming material salvaged economical?
4. Is there a coordinated quality improvement efforts involving all the necessary departments?
5. Does the program have the continuing interest and support of the
functional department managers and G.M.?
6. Are all cases of high cost field complaints identified and is
action being taken to prevent recurrence?
7. Are
all returned products economically handled, repaired and returned to the
customer?
8. Are
all warranty charges audited for validity and action taken as necessary?
Prevention of quality cost
Prevention of quality costs
is the responsibility of every department.
Some examples are given below:
1. Accurately determining the customer’s quality requirements and
accurately reflecting them in internal ordering information and design
specification (MARKETING)
2. Designing a product, which is safe, reliable and can be profitably
manufactured satisfying customers, needs (DESIGN)
3. Preparing drawings and specifications which clearly and accurately
describe the design and quality criteria (DESIGN)
4. Is the product capable of meeting quality standards required
(QUALITY)?
5. Can
we perform tests and inspection with the equipments we have? (QUALITY)?
6. Data reporting and corrective actions activities
7. Can audits be used instead of 100% inspection (QUALITY)?
8. Getting material from suitable suppliers (PURCHASE)
9. All
training programmers providing a profitable return (TRAINING)
How to reduce the appraisal cost?
The cost of appraisal some times approaches half of the
total quality cost.
1. Are all inspection points
located to maximize the return on money spent for inspection?
2. Are all inspection status and
method engineered for the most efficient work accomplishment?
3. Can inspection and test
operations be economically automated by using special purpose instrumentation
or computer controlled equipment?
4. Can inspection and testing
record & data reporting function be more effectively performed using
computer?
5. Is it possible to control
processes sufficiently to prevent production of defective and eliminate product
inspection?
6. Can SPC techniques be profitably
used?
Optimal Price Analysis
The Optimal Price Analysis is a
mathematical computation that helps a business identify the point where it
realize the maximum of profit.
This Optimal price calculator
allows a business to accomplish the following:
Determine the quantity it needs to
produce or sell in order to realize the maximum of profit;
Determine the selling price it
needs to charge for a specific quantity you sell in order to realize the
maximum of profit.
Definitions and terms used in the
Optimal Price Analysis
Variable Cost per Unit: the cost that vary with the production or the purchase of
one unit.
Fixed Cost (FC):
the cost that remains constant within a range of production or sales,
regardless of the number of units produced or sold within that range. Typical
fixed costs are: rent, mortgage, equipment, salaries, insurance, fixed
utilities (office utilities) etc.
Current selling price: the price that a unit is currently sold for.
Current selling units: the number of units currently sold or produced.
Maximum capacity (Units): the constraint regarding the maximum number of units that
the company can produce or sell.
Maximum financing capacity: the constraint regarding the financing capacity of the
company (bank accounts, credit cards, lines of credit etc.).
Price elasticity of demand (PeD): the responsiveness of the quantity demanded of a good or
service to the increase or decrease in its price. As a general rule, sales
increase with drop in prices and decrease with rise in prices.
Typically, PeD has a negative value. For our purpose, in order to make it
easier for our users, we will consider the absolute value of PeD. By default we
setup PeD as 1 (unit elastic).
Optimal Price: the selling price where the company realize its
maximum of profit.
Optimal Units: the number of selling units to be sold in order to
realize the maximum of profit.
Total Variable Cost (VC): the cost that varies directly with the number of
units produced or sold. Typical variable costs are: materials, packaging and
shipping, sales commission, hourly wages, variable utilities (factory
utilities) etc.
Total Variable Cost = Selling Units x Variable Cost per Unit
Total Cost (TC): total expenses incurred in the process of producing
or selling a number of units.
Total Cost (TC) = Fixed Cost (FC) + Total Variable Cost (VC)
Total Revenue: the total sales value of the units produced or
sold.
Total Revenue = Selling Units x Selling Price per Unit
Profit: the benefits from producing or selling a number of
units.
Profit = Total Revenue – Total Cost
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