Quality Cost and Productivity

Quality

- The degree or grade of excellence

- Quality is a relative measure of goodness

8 Quality Dimensions:

1. Performance
 How consistently and how well a product functions
 For service, inseparable principle means that the service is performed in the presence of
the customers
 Thus, performance dimensions for services can be further defined by the attributes of:
Responsiveness, Assurance, and Empathy
- Responsiveness: The willingness to help customers and provide prompt, consistent
service
- Assurance: The knowledge and courtesy of employee and their ability to convert trust
and confidence
- Empathy: Providing caring, individualized attention to customer
2. Aesthetics
 Concerned with the appearance of tangible products as well as the appearance of facilities,
equipment, personnel, and communication materials associated with service
3. Serviceability
 Measure the ease of maintaining and or repairing the product
4. Features
 Refer to characteristics of product that differentiate between functionally similar products
 For example: The function of automobile is to provide transportation
5. Reliability
 Probability that the product or service will perform its intended function for a specified
length of time
6. Durability
 The length of time a product function
7. Quality of Conformance
 Measure of how a product meets its specification
8. Fitness for use
 The suitability of the product for carrying out its advertised functions
 If there is a fundamental flaw, the product may fail in the field even if it conforms to its
specification
 Product recalls are frequently the result of fitness-for-use failure
 Improving quality means improving one or more of the quality dimension, while maintaining
performance of the remaining dimensions
 Although 8 dimensions are important and can affect customer satisfaction, the quality attributes
that are measureable tend to receive more emphasis. Conformance is strongly emphasized
Quality Cost and Productivity

 Product specification should explicitly consider such things as: Reliability, Durability, Fitness for Use,
Performance
 Conformance is the basis for defining what is meant by a Nonconforming or Defective Product.
 Defective Product is one that does not conform to specification
 Zero Defect means that all product conforms to specification
- Conforming to specification: Traditional View and Robustness View
- Traditional View
o Assumes that there is an acceptable range of values of each specification
o A target value is defines, and upper and lower limits are set that describe acceptable
product variation
- Robustness View
o Conformance emphasize fitness of use
o Robustness means hitting the target value eveytime
o There is no range in which variation is acceptable

Cost of Quality

 Costs of performing the quality-linked activities

 Costs of quality are the cost that exist because poor quality may or does exist
 Control Activities
- Performed by an organization to prevent or detect poor quality
- Control Cost = costs of performing control activities
 Failure Activities
- Performed by an organization or its customers in response to poor quality
- Internal vs External Failure Activities
- Failure Cost = The costs incurred by an organization because failure activities are performed
 Categories of Quality Cost
1. Prevention Cost
- Incurred to prevent poor quality in the products of services being produced
- Example: Quality engineering, quality training program, supplier evaluation, and quality
planning
2. Appraisal cost
- Incurred to determine whether products and services are conforming to their requirement
or customer needs
- Example: Inspecting and testing materials, packaging inspection, supervising appraisal
activities, product appearance, and process acceptance
- Product acceptance: Sampling form batches or finished good to determine whether they
meet an acceptable quality level
- Process acceptance: Involve sampling goods while in process to see if the process is in
control and producing nondefective goods
3. Internal Failure Cost
- Incurred when products and services do not conform to specification or customer needs
Quality Cost and Productivity

- Defective non-conformance occurs before the product is shipped or deliveries

- Example: Scrap, rework, downtime, reinspection, retesting, and design changes
4. External Failure Cost
- Incurred when products and services fails to conform to requirement or satisfy customer
needs after being delivered to customers
- Example: cost of recall, return, warranties, repairs, customer dissatisfaction, and loss
market share
 Measuring Quality Cost
- Obeservable quality cost
o Those are available from an organization’s accounting record
- Hidden quality cost
o Opportunity cost resulting from poor quality
o Opportunity cost are not usually recognized accounting record
 Hidden cost are all in the external failure category
 The hidden cost can be significant and it should be estimated
o The multiplier method
- Assumes that the total failure cost is simple some multiple of measured failure cost
- Total External Failure Cost = k x measured external failure costs
o The market research method
- It uses to assess the effect poor quality has on sales and market share
- Customer surveys and interviews with member of company’s sales can provide
insight into the magnitude of company’s hidden cost
- Market research result can be used to project future profit losses attributable to
poor quality
o Tagichi Quality Loss function
- Assumes that any variation from the target value of a quality characteristics caused
hidden costs
- L(y) = k (y-T) 2
- The quality cost is zero at the target value
- The quality cost is increased symmetrically, at an increasing rate, as the actual value
varies from the target value
 Quality cost report: the financial significance of quality cost can be assessed more easily by
expressing these costs as percentage of actual sales
 Activity-based management and optimal quality cost
- Activity-based management classifies activities as value added and non value added
- Appraisal and failure activities are non-valued added, should be eliminated
- Prevention activities if performed efficiently can be classified as value added, it should be
retained
- Once the activities are identified for each category, resource drivers can be used to improve cost
assignemnet
 Trend analysis
Quality Cost and Productivity

- Quality cost report reveal the magnitude of quality costs and distribution among the four
categories
- Quality cost report will not reveal whether or not improvement has occurred
 Using quality cost information: strategic pricing, profitability analysis or new product, through price
education
 Productivity
- Concerned with producing output efficiently
- It focuses on the relationship of output and input used to produce the output