Department of Management Studies

NATIONAL INSTITUTE OF TECHNOLOGY, TIRUCHIRAPPALLI no. Serial no. Topic Page

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Introduction Evolution of Cost of Quality Types of Quality Costs

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Quality Costs
EFQM Excellence Award 5 Th e S h i n Assignment Total Quality Management go P r i z e 6 7 8

Submitted to: Quality Cost

The Akao Prize Case studies

Dr. G. Muruganantham Reference

TQM Assignment

Nishant Singh Chauhan Nishant Singh Chauhan 215111052 Roll no. 215111052

2012

National Institute Of Technology

Index:

Introduction With economic liberalization, markets are becoming more competitive. In this scenario, the quality of goods and services is going to be a key issue. But at the same time, one should keep in mind that efforts and resources put in building quality must contribute to profit. In fact cost effectiveness of quality assurance is one of the most significant underlying principles and the cost of quality should be the monitoring tool. The American Society of Quality Control defines quality as the total feature and characteristic of a product or a service made or performed according to specification to satisfy the customer at the time of purchase and afterwards during time of use (Bottorff, 1997) Many companies throughout the world have emphasized quality as an important strategic dimension because a quality focus reduces costs and increases customer satisfaction. Costing has always been a very important factor for evaluation of the success of organizations. How costs are calculated, how well they are estimated and how we measure costs are important factors. So these factors need consideration in every organization. Quality plays an important role in the success of any organization. If the quality of a product is better than its competitors and the price is also on the lower side, the organization is going to get definite profits. in this era of cut-throat competition and globalization, quality plays an important role for any organization. Several prestigious high profile awards such as the
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Malcolm Baldrige Quality award in the united states, the Deming Prize in Japan and Premio Nacionalde calidad in Mexico have been instituted to recognize exceptional quality. Normally, quality-related costs run in the range of 10 to 30 percent of sales or 25 to 40 percent of operating expenses. Some of these costs are visible and some hidden. The cost of quality not only includes factory operation, but the support operations significantly contribute too. Most companies can avoid quality costs. But these companies do not assign clear responsibility for action to reduce them. Nor do they create a structured approach for doing so.

Evolution of Cost of Quality The modern quality cost system was developed out of the work of Joseph Juran (1951) and Armand Feigenbaum (1957). The American Society for Quality Control was formed in 1946 (now known as the American Society for Quality). During the 1960s the American Society for Quality (ASQ) and Quality Cost Committee refined this technique and promoted the use of Cost of Quality (Bottorff ,1997) in the 1970s and 1980s. Philip Crosbys work helped popularize the Cost of Quality (COQ) concept beyond the quality profession (Beecroft, 2001). According to Crosby, cost of quality, which is the expense of non-conformance, is the only performance measurement (Crosby, 1979). According to Crosby (1979), quality is free. What costs money is the failure to do things right the first time. Juran (1951) agrees in his definition of quality cost as the sum of all costs that would disappear if there were no quality problems. Juran and Crosby were also leaders in the movement to report quality information in dollar terms in order to attract the attention of top management. Statistical methods for quality improvement use increased in the United States during the 1980s. Total Quality Management (TQM) emerged during the 1970s and into the 1980s as an important management tool to implement statistical methods. The Malcolm Baldrige National Quality Award was established in 1988. ISO 9000 certification activities increased in the U.S. Industry in the 1990s. Motorolas Six-Sigma initiative began in 1990 (Korwar, 1997). Categories of Cost of Quality Feigenbaum defined the following quality cost area.

Costs of control (Costs of conformance or Cost of Good Quality) Costs of failure of control (Costs of non-conformance or Cost of Poor Quality)

Cost of Control : These are the cost incurred by an organization due to its quality control efforts or for maintaining good quality. Cost of Control can further be categorised in :
Appraisal Costs: These are the costs of evaluating the achievement of quality requirements

including the cost of verification and control performed at any stage of the quality loop. These occur because of the need to control products and services to ensure a high quality level in all stages, conformance to quality standards and performance requirements. Appraisal costs are incurred to ensure that products or services conform to quality. (Meigs et al, 2003). Examples include the costs for:
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Test and inspection of purchased materials Acceptance testing Setup for test or inspection Test and inspection equipment Quality audits Incoming and source inspection/test of purchased material In-process and final inspection/test Product, process or service audits Calibration of measuring and test equipment Associated supplies and materials

Prevention Costs : Prevention costs are the costs of all activities specifically designed to

prevent poor quality in product & services. (Meigs et al, 2003). These are the cost of any action taken to investigate, prevent or reduce the risk of non-conformity or defect. The costs
incurred to keep failure and appraisal costs to a minimum. Examples include the costs for:

Quality planning New product review Error proofing Capability evaluations Quality improvement team meetings Quality improvement projects Statistical process control Investment in quality-related information systems Quality training and workforce development Product-design verification Systems development and management Supplier capability surveys Process capability evaluations

Figure 1: Cost of Quality

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Cost of Quality

Cost of Control

Cost of Failure of

Appraisal Cost

Prevention Cost

Internal Failure Cost

External failure Cost

Cost of Failure of Control 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. Internal Failure Costs: Internal failure costs are the costs resulting from products or services not conforming to requirements or customer or user needs which occur prior to delivery or shipment to the customer. (Meigs et al, 2003). In other words these are the costs of deficiencies discovered before delivery. We associate deficiencies or nonconformities with the failure to meet explicit requirements or implicit needs of external or internal customers. Deficiencies are caused both by errors in products and inefficiencies in processes. These costs occur prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples are the costs of:

Scrap Rework Re-inspection Re-testing Material review Downgrading Delays Re-designing Shortages Failure analysis Lack of flexibility and adaptability

External Failure Costs : External failure costs are the costs resulting from products or services not conforming to requirements or customer or user needs which occur after delivery or
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shipment of the product, and during or after furnishing of a services to the customer.(Meigs et al, 2003) These are the costs arising after delivery to the customer due to non-conformities or defects. These also include lost opportunities for sales revenue. Examples include the costs for:

Processing customer complaints Customer returns Warranty claims Product recalls Repairing goods and redoing services Warranties Customers bad will Losses due to sales reductions Environmental costs Loss of reputation

Case studies: The Toyota Case of Quality Costs The Toyota case of sticking accelerator is a good example of how External Failure costs can add up very quickly. External failure costs (the worst type of quality costs) are those related to a failure after the product has reached the customer. In addition to the impact on Toyotas nearperfect reputation, and the loss customer confidence in the brand name, other immediate costs are incurred by the company and include, but not limited to, the following:

Recall costs Warranty (of unaffected cars) Replacement / repair of sold and unsold cars Training service staff on special repair Liability / lawsuits Downtime at factories Wages during downtime Scrap and disposition of questionable parts Troubleshooting / Corrective actions
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Trips made by executives / engineers / designers Public relations Working with suppliers Dealership support Overtime for suppliers (for making good replacement parts) Additional freight and premium freight for replacement parts Additional legal council (in many countries) Discounts for future sales

It is estimated that, with the lawsuits associated with the recall, this cost Toyota over $2 Billion.

The Case of Suzlon's Blade Recall Suzlon Energy Limited (Suzlon), engaged in the manufacture and sale of wind turbine generators, grew from a start-up in 1995 to become the third largest global player in the global wind energy market at the end of 2009. From strength of 22 people in 1995 the company expanded to 14,000 by 2011. Suzlon followed an aggressive acquisition strategy to expand its technology base and product range. In its quest for rapid growth, the company hit an obstacle in the form of defects in the wind turbine blades supplied to customers in the US. The issue received wide coverage in the industry circles and generated substantial negative publicity for the company. Though Suzlon was able to promptly address the issue and come out with a solution, the incident created a dent in its reputation and impacted the inflow of orders adversely.

Benefits achieved in implementing cost of quality system

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 unitdollar Act as a common method for quantifying qualitative improvements It builds awareness of the importance of quality.

References:
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http://en.wikipedia.org/wiki/Quality_costs http://www.accounting4management.com/quality_costs.htm http://asq.org/learn-about-quality/cost-of-quality/overview/overview.html http://www.isixsigma.com/implementation/financial-analysis/cost-quality-not-only-failurecosts/ http://worldacademyonline.com/article/29/413/total_quality_management_and_quality_costs.ht ml http://www.bexcellence.org/Cost-Of-Quality.html http://www.wildandassociates.com/free-articles/cost-of-quality-case-study/ http://www.icmrindia.org/casestudies/catalogue/Operations/OPER101.htm