Quality Management

RICHMOND V. CRUZ, CPA, MBA, CMITAP

Quality
The degree or level of excellence (Oxford American
Dictionary)
The totality of features and characteristics of a
product or service that bears on its ability to satisfy
given needs (American Society for Quality)
Quality From Consumer’s Perspective
Fitness for use- is how well the product or service
does what it is supposed to
Quality of design- involves designing quality
characteristics into a product service
Dimension of Quality: Manufactured
th
Products (Russel and Taylor, 5 ed)
Performance- the basic operating characteristics of a product
Features- the extra items added to the basic features
Reliability- the probability that a product will operate properly within an expected time frame
Conformance- the degree to which the product meets pre-established standards
Durability- how long the product lasts
Serviceability- the ease of getting repairs, the speed of repairs, and the courtesy and competence of
the repair person
Aesthetic- how a product looks, feels, sounds, smells, or tastes
Safety- assurance that the customer will not suffer injury or harm from a product
Other perception- subjective perceptions based on brand name, advertising, etc
Quality from the Producer’s Perspective
Quality of conformance- is making sure the
product or service is produced according to
design
Final Perspective
Fitness for use
“if customer satisfaction increases, then market share
will increase, and if market share increases, then
revenues will increase, if quality improves, then
operating costs will also decrease…” (Mowen and
Hansen, 2014)
Quality
Quality—the sum of all of the characteristics of a product
or service that influence its ability to meet the stated or
implied needs of the person acquiring it
◦ Totality of internal processes that generate a product or
service
◦ Customer satisfaction with that product or service

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DUPLICATED, OR POSTED TO A PUBLICLY ACCESSIBLE WEBSITE, IN WHOLE OR IN PART.
Total Quality Management
Is the approach to the management of quality
throughout the whole organization that requires
commitment to quality…”
Productivity
Six Sigma
Statistical Process Control
Benchmarking
 Principles of Total Quality Management
th
(Russell and Taylor, 5 ed.)
Represents a set of management principles that focus on quality improvement as the driving force in all
functional areas and at all levels in a company. These principles are:
1. The customer defines quality, and customer satisfaction is the top priority
2. Top management must provide the leadership for quality
3. Quality is a strategic issue and requires a strategic plan
4. Quality is the responsibility of every employee at every level of the organization
5. All functions of the company must focus on continuous quality improvement and strategic goals
6. Quality problems are solved through cooperation among employees and management
7. Problem solving and continuous quality improvement use statistical quality- control methods
8. Training and education of all employees is the basis for continuous quality improvement
 Cost of Quality
Are the costs that exist because of poor quality may or does exist
Cost of Compliance
Prevention costs- incurred to prevent poor quality in the products or services produced
Appraisal costs- incurred to determine whether products and services are conforming to
their requirements or customer needs
Cost of Non-Compliance
Internal failure costs- incurred because products and services do not conform to
specifications or customer needs
External failure costs- incurred because products and services fail to conform to
requirements or satisfy customer needs after being delivered to customers
Examples of Quality Costs by Category
PREVENTION COSTS APPRAISAL (DETECTION) COSTS
Quality engineering Inspection of materials
Quality training
Packaging inspection
Recruiting
Quality audits Product acceptance
Design reviews Process acceptance
Quality circles Field testing
Marketing research
Continuing supplier verification
Prototype inspection
Vendor certification
Examples of Quality Costs by Category
INTERNAL FAILURE COSTS EXTERNAL FAILURE COSTS

Scrap Lost sales (performance-related)

Rework Returns/ allowances
Downtime (defect-related) Warranties
Reinspection Discounts due to defects
Retesting Product liability
Design changes Complaint adjustments
repairs Recalls
Cost of Quality
Prevention costs
◦ Quality training
◦ Quality market research
◦ Quality technology
◦ Quality product design
◦ Preventive maintenance
Separate cost of quality accounts include:
Internal failure costs
◦ Reworking products
◦ Scrap and waste
◦ Storing and disposing of waste
◦ Reprocessing
◦ Rescheduling and setup

Appraisal costs External failure costs

◦ Quality inspections ◦ Complaint handling
◦ Procedure verifications ◦ Warranty handling
◦ Measurement equipment ◦ Repairing or replacing returns
◦ Customer reimbursements
◦ Expediting replacements
◦ Product recalls
◦ Image improvement after failure

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Example- Quality Cost Classification
The following information are available for ABC Company:

2010 (in PHP) 2011 (in PHP)

Sales 10,000,000 10,000,000
Scrap 400,000 300,000
Rework 600,000 400,000
Production inspection 100,000 125,000
Product warranty 800,000 600,000
Quality training 40,000 80,000
Materials inspection 60,000 40,000

Required: (1) Classify the cost of quality; (2) compute quality cost as a percentage of sales for each of the two
years. By how much has profit increased because of quality improvement?
Calculating the Total Quality Cost

Total
Prevention Appraisal Failure
Quality = Cost
+ Cost
+ Cost
Cost

T=K+A+F

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DUPLICATED, OR POSTED TO A PUBLICLY ACCESSIBLE WEBSITE, IN WHOLE OR IN PART.
 Calculating Total Failure Cost
Total Failure Cost =
Profit Lost by Selling Units as Defects
+ Rework Cost
+ Cost of Processing Customer Returns
+ Cost of Warranty Work
+ Cost of Product Recalls
+ Cost of Litigation Related to Products
+ Opportunity Cost of Lost Customers

F = Z + R + W + PR + L + O
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Calculating Lost Profits
Total Number
Defective of Units
Units Reworked
Profit Lost
by Selling = X
Units as
Defects Profit Profit for
for Good Defective
Unit Unit

Z = (D – Y) (P1 – P2 )
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Calculating Internal Costs of Failure

Cost to
Number of
Rework Rework
Cost
= Units X Defective
Reworked
Unit

R = (Y)(r)

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DUPLICATED, OR POSTED TO A PUBLICLY ACCESSIBLE WEBSITE, IN WHOLE OR IN PART.
Calculating External Costs of Failure

Cost of
Number of Cost
Processing
= Defective Units X of a
Customer
Returned Return
Returns

W = (Dr)(w)

© 2013 CENGAGE LEARNING. ALL RIGHTS RESERVED. MAY NOT BE SCANNED, COPIED,
DUPLICATED, OR POSTED TO A PUBLICLY ACCESSIBLE WEBSITE, IN WHOLE OR IN PART.