Quality Cost Management

If you don’t measure results, you can’t tell success from failure

If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure

If you can’t recognize failure, you can’t correct it

Economic Analysis of Quality

W. A. Shewhart: 《 Economic Control of Quality of Manufactured Product 》—— relationship between quality and economy

A． V． Feigenbaum: Definition of TQC——at the most economical level…

J．M． Juran： focus on strengthening QM through financial management

-- Evolution of quality concept: conformity to customer satisfaction

-- The economy of quality has been more and more important.

Sales & Quality level

Product cost and quality cost

Sum

Quality level-TT1 T2 T3

Loss LossProfit

P’(T)=C’(T)

Quality Cost

The cost of avoiding poor quality, or incurred as a result of poor quality

Translates defects, errors, etc. into the “language of management” – $$$

Provides a basis for identifying improvement opportunities and success of improvement programs

Quality Cost Classification

Assurance cost ： All expenses spent on preventing product defects and appraising whether the output satisfies the specified quality requirements. It can be divided into Prevention Cost and Appraisal Cost.

Failure cost： The costs resulting from products or services not conforming to requirements or customer/ user needs. It can be divided into Internal Failure Cost and External Failure Cost.

PREVENTION COST

Costs associated with designing, installing, maintaining and auditing plans for control of manufacturing products and services to prevent the creation of defects and failures or the creation of process wastes.

PREVENTION COST--Examples Personnel associated with preventing poor quality Quality training and education Contract reviews Design reviews Defect prevention activities (Quality improvement) Reliability engineering and testing Capability studies Preventive efforts with supplier

Supplier evaluation Supplier selection Supplier surveillance

APPRAISAL COST

Costs associated with the measuring, evaluating, or auditing of goods, components, services and purchased materials to verify conformance with quality standards and performance requirements. the cost of evaluating processes and their outputs to ensure quality

APPRAISAL COST--Examples

Inspection and Test Set-up Materials Personnel Equipment/tools Energy

Product quality audits Any activities associated with checking

previously performed work

INTELNAL FAILURE COST

Costs associated with defective products, components, and materials which fail to meet quality requirements and found before delivery to the customer, namely costs incurred to correct an identified defect before the customer receives the product

INTELNAL FAILURE COST--Examples Scrap and Rework

Material Labor

Failure investigations Overtime to correct internal failures Downtime, Delay Time Corrective action to eliminate the internal failu

res Design and development of rework/repair tec

hniques

EXTERNAL FAILURE COST

Costs associated with deficiencies found to the customer and with customer dissatisfaction

Costs that relate to all errors not detected and corrected before delivery to the customer

EXTERNAL FAILURE COST--Examples Repair, Replacement Expenses under

Warranty customer complaint Product liability claims Failure investigations Corrective actions

Downtime charges Modification delays and costs Product recalls

0% 100% Defective Rate

QualityCost in $

Failure cost

Control cost

Total cost

MinimumOptimalAcceptable Quality Level

Calculating the Total Quality Cost

Total QualityCost

PreventionCost

AppraisalCost

FailureCost= + +

Benefits of Quality Cost Management Ability to identify the nonconformities and opportunities

to reduce costs Enables quality improvement efforts to be measured

-- Improvements in quality often result in lower total cost improved productivity

Ability to track progress over time Ability to identify areas to focus on where the result

may be increased customer satisfaction Provides a common denominator: currency language

Organization and responsibility in QCM To establish a QCM system to

organize and coordinate the work concerning QCM, in which the policy and contents could be decided jointly by the QM and finance department

All the departments should be involved in the QCM since quality issue concerns each department.

Track the costs of quality

Every kind of work misplay in each department and post will lead to quality cost,

It is necessary to study the source of quality cost.

Quality cost problems in the departments?

Quality Cost Management Tools Cost indexes Pareto analysis Sampling and work measurement Activity-based costing

Return on Quality (ROQ)

ROQ – measure of revenue gains against costs associated with quality efforts

Principles Quality is an investment Quality efforts must be made financially accounta

ble It is possible to spend too much on quality Not all quality expenditures are equally valid

Managing Data and Information Validity – Does the indicator measure w

hat it says it does? Reliability – How well does an indicator

consistently measure the “true value” of the characteristic?

Accessibility – Do the right people have access to the data?

Analysis

Statistical summaries and charts Trends over time Comparisons with key benchmarks Aggregate summaries and indexes Cause-and-effect linkages and correlations (i

nterlinking) Data mining

Basic

Advanced

Quality Cost Indexes

——structural cost indexes

prevention cost ratio, appraisal cost ratio, internal failure cost ratio, external failure cost ratio

——indexes concerning quality cost

Ratio of quality cost to total cost, sales or profit, ratio of internal failure cost to man-hour, ratio of external failure cost to sales

Failure types Annual loss for quality failure （ 100

0$ ）

Percentage in total

quality failure cost

Proportion

(100%)

Accumulated prop. (100%)

Rework 5560 61 61

Customer complaint 1220 14 75

Scrap 780 9 84

Material quality problem 670 7 91

Sales discount 370 4 95

Failure investigation 280 3 98

Downtime 190 2 100

合计 9070 100

Pareto analysis based on quality failure cost types

Product types Annual rework loss （ 1000$ ）

Proportion (100%)

Accumulated prop. (100%)

A 1320 24 24

B 960 17 41

C 720 13 54

D 680 12 66

E 470 8 74

F 330 6 80

Other kinds 1080 20 100

合计 5560 100

Pareto analysis of Rework based on product types

100

330 470 680 720 960 10801320 5.9 8.512.212.917.3 19.423.7

100.0 94.1 85.6 73.4 60.4 43.2 23.7

5000

4000

3000

2000

1000

0

100

80

60

40

20

0

Defect

CountPercentCum %

Pe

rce

nt

Co

un

t

Pareto Chart for C1

41 53.9 66.1 74.6 80.5 100

Other kinds

Setting up proper quality cost subjects SMEC quality failure costs collecting table

1st 2nd 3rd Sum (RMB)

Last year This year Growth rate

Quality

failu

re co

sts

Inte

rnal fa

ilure

cost

Scrap failure

Repair failure

Failure analysis and recheck

Downtime failure

Exte

rnal fa

ilure

cost

Guarantee fee

Failure analysis and recheck

Lawsuit fee

Claim fee

Sales discount

Summary Purpose of quality cost management to be more effective in finding out the reasons behin

d those quality problems, instead of finding out whose fault it is, thus helping relevant departments and people prevent the similar problems, or address them as soon as possible

It is objective for quality costs to exist Problems of nonconformity are hard to avoid, and th

e loss concerned and expenses on prevention would occur consequentially.

Quality cost is relevant to quality requirements It is quality requirements that constitute the basis for

judging the conformity and nonconformity.