COST OF QUALITY: COST OF QUALITY Prepared by: : Arslan Ahsan Definition of cost of Quality: Definition of 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. Every time work is redone, the cost of quality increases. Obvious examples include: The reworking of a manufactured item. The retesting of an assembly The rebuilding of a tool The correction of a bank statement The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant What are the high costs of poor quality? : What are the high costs of poor quality? Experts estimate 20-30% costs of poor quality for defective or unsatisfactory products because the costs of poor quality are more than the obvious cost of scrap or rework. costs associated with quality management are as follows Prevention Appraisal Internal failure External failure COST OF QUALITY: COST OF QUALITY PREVENTION Cost incurred to prevent (keep failure and appraisal cost to a minimum) poor quality. Example: New product review, quality planning, supplier surveys, process reviews, quality improvement teams, education and training. Remove and prevent defects from occurring in production process Production Design Review Training Supplier Evaluation Quality Audits Preventive Maintenance COST OF QUALITY: COST OF QUALITY APPRAISAL Cost incurred to determine the degree of conformance to quality requirements (measuring, evaluating or auditing). Example: Inspection, testing, process or service audits, calibration of measuring and test equipment . Identify poor quality products after they occur but before shipment to customer Inspection Process control Equipment costs Material Receiving inspection (from vendor) COST OF QUALITY: COST OF QUALITY INTERNAL FAILURE Cost associated with defects found before the customer receives the product or service. Example: Scrap, rework, re-inspection, re-testing, material review, material downgrades Failure during the production process Machine downtime Poor quality material Scrap Rework Re-inspection Disposal costs COST OF QUALITY: COST OF QUALITY External Failure Cost: Cost associated with defects found after the customer receives the product or service. Example: Processing customer complaints, customer returns, warranty claims, product recalls. Failure after the product is shipped Returns Lost Market Share Delivery Delay Customer dissatisfaction COST OF QUALITY: COST OF QUALITY Appraisal, internal and external costs decrease as the quality level or quality consistency increases. Prevention costs increase as the quality level or quality consistency increases. Quality Level is measured by product or service design. Quality Consistency is measured by conformance to specifications. PowerPoint Presentation: Cost Category As Quality increases, cost…… Comments Prevention Costs Increases Costs are associated with preventing defects before they happen. Examples are the costs of process design, product and service design, employee training, and supplier programs. Appraisal Costs Decrease Costs are incurred in assessing the level of quality attained by the operating system. Examples are costs of quality audits and Statistical Quality Control programs. PowerPoint Presentation: Cost Category As Quality increases, cost…… Comments Internal Failure Costs Decrease These costs result from defects generated during production of a product or service. Costs result from yield losses and the need to rework products or services because of defective workmanship. Yield Losses are incurred if the defective item must be scrapped. Rework Costs are incurred if the item is rerouted to some previous operation to correct the defect. Estimating Yield Losses: Manufacturing the head of a fireplace shovel requires four steps as shown in Fig. below:: Estimating Yield Losses: Manufacturing the head of a fireplace shovel requires four steps as shown in Fig. below: Step 1 Step 2 Step 3 Step 4 Defective? Go to inventory YES NO Scrap Estimating Yield Losses: Each operation generates the following average proportion of defects. : Estimating Yield Losses: Each operation generates the following average proportion of defects. SR # Operation Description Proportion defective 1 Cut off blade 0.01 2 Weld Shank to blade 0.04 3 Heat and roll blade 0.02 4 Stamp blade 0.06 How many units of the raw material (Shanks and steel blanks), on the average, are needed at operation 1 to ensure 100 non-defective shovel heads after operation 4? Estimating Yield Losses: Solution: Estimating Yield Losses: Solution B (1-d1) (1-d2)……... (1-dn) = M B = M/ (1-d1) (1-d2)……... (1-dn) B = 100/ (1-0.01) (1-0.04) (1-0.02) (1-0.06) B = 100/ 0.8755 = 114 114 Shanks and 114 Steel blanks are needed at the start. Where B = number of Shanks required = number of Steel blanks required = average number of units of the raw material needed at the start of the production process- the decision variable. d1 = average proportion of defective units generated at operation 1 and so on. M = desired number of units of finished products. Estimating Yield Losses: Solution: Estimating Yield Losses: Solution The output of each operation is the input for the next operation. The input for operation 2 is B multiplied by proportion of non-defective Shovels generated by operation 1 or B (1-0.01). The input for operation 3 is B (1-0.01) (1-0.04). The input for operation 4 is B (1-0.01) (1-0.04) (1-0.02). The input for inspection is B (1-0.01) (1-0.04) (1-0.02) (1-0.06). The Raw material costs: Increased by 14%. Hidden Costs: Labor and machine costs Increased by 14%. Also manufacturing time and WIP increases. Rework Costs: Rework Costs If we need to produce 100 items/ day. If there are chances of 10% items being defective. At the inspection stage we expect to process at least 110 items/ day. We have to process 110 items per day. Following costs occur: More labor, machine and inspection hours WIP increases because of defective units in line for longer time. Increase manufacturing time. PowerPoint Presentation: Cost Category As Quality increases, cost…… Comments External Failure Costs Decrease These costs arise from product or service failure at the customer level. Examples are Warranty repairs, Loss of market share and lawsuits arising from injury or property damage from use of the product or service . Cost of finding defect: Cost of finding defect As the product is going from initial process towards customer, the cost to find and correct a defect is increasing. If defect detection occurs once the product left the plant, the costs will raise in accordance to the efforts spent to locate, return or replace it. If additionally this product is already delivered to the customer, it is possible to face costs of penalties, a drop of customer confidence and a spoiling of company's reputation. Cost of finding defect: Cost of finding defect External Failure Costs : External Failure Costs Warranty Costs: A Warranty is a written guarantee of the integrity of a product or Service and of the producer’s responsibility to replace or repair defective parts or to re-perform the service to the customer’s satisfaction. Examples are: T.V. repairs = 90 days. New automobiles for three years or 36000 miles, whichever comes first. External Failure Costs : External Failure Costs Litigation Costs: Defective products can injure and even kill consumers who purchase them. Such a defect could arise from poor product design and/ or non-conformance to specifications.