(COQ)

PRESENTED BY:
RAMJAN Sheik
RAMDOO Krish

RAMRUTTON Natasha
RAMKALAWON Avinash RAMPERSAD Mitilesh

OBJECTIVES
COST OF QUALITY
COST CATEGORIES COLLECTION SYSTEM DESIGN QUALITY COST BASES ANALYSIS

PROGRAM IMPLEMENTATION

INTRODUCTION
Performance

measurement

is

how

organizations, whether

public or private

measure the quality of their activities and

services.
Cost of Poor Quality- a technique for

measuring Performance Measures.

EVOLUTION OF COQ
First appearance in 1930

1951- Dr Feigenbaum and Dr Juran give a

new dimension of the concept

1979- Crosby find that many organization spend about 15 to 20% of sales on quality cost

COST OF QUALITY (CoQ)

According to Dale and Plunkett (1995), quality

costs refers to all necessary costs and non-value added activities required to achieve a quality

product or service.

COQ is usually understood as the sum of

conformance

plus

nonconformance

costs,

(Schiffauerova, 2006)

COST OF QUALITY AS A MANAGEMENT TECHNIQUE

Quality costs mainly are used management in order to be aware of:

by

1) Quality Improvement 2) Customer Satisfaction 3) Profit enhancement

Understanding quality cost enables management to be aware of hidden costs.

3) Profit enhancement

Source: Cookins 2010, Measuring the Cost of Quality for Management

HIDDEN COST

Source: Krishnan 2006 . pp.84

IMPORTANCE OF CoQ
To identify the global optimum for a

process
Quality along with the cost responds to

time and is flexible

The quality concept continues to evolve Used as a measuring tool

CoQ: SERVICE V/S MANUFACTURING ORGANIZATION

External failure costs are less relevant to

services than to manufacturing

Internal failure costs might not be as

evident in services as in manufacturing

Internal failure costs tend to be lower in

service organizations

QUALITY COST: XEROXs case

Year 1989: saved the company $53 million

Year 1990: saved the company $77 million Year 1991: saved the company $20 million COQ concentrates on tasks that have high opportunity costs and makes those tasks more

efficient

COST CATEGORIES
Cost Of Conformance PREVENTION COST The cost of any action taken to investigate, prevent or reduce the risk of a nonconformity Cost Of Non Conformance INTERNAL FAILURE COST The costs arising within the organization due to nonconformities or defects

APPRAISAL COST The costs associated with measuring, checking, or evaluating products or services to assure conformance to quality requirements

EXTERNAL FAILURE COST The costs arising after delivery of product or service to the customer due to nonconformities or defects

Cost of Good Quality: 1. PREVENTION COST

Prevention cost is achieved by examining

closely the total of the lessons learnt or the experience gained

Developing and integrating activities into

the management systems making it difficult for the same errors to occur again

1. PREVENTION COST (Cond)

Focus is put on continuous need for evaluating the

customer

and

user

quality

requirements

and

perceptions

Costs are incurred in: marketing research, customer

& user perception surveys, focus groups, contracts and document reviews

1. PREVENTION COST (Cond)

Costs are incurred to transform the customer and user

needs into reliable quality standards

Sub-elements of these costs are: design quality progress

reviews,

design

support

activities,

product

design

qualification tests, and product or service redesign.

1. PREVENTION COST (Cond)

Money spent to assure conformance to requirements of

supplier parts, materials or processes

Sub-elements of these are: supplier

reviews, supplier rating and supplier quality planning

1. PREVENTION COST (Cond)

Include those costs that are incurred in assuring the

capability and readiness of operations to meet quality standards and requirements

Sub-elements include: operation process validation,

operations

quality

planning,

design

and

development of quality measurement and control requirement and collecting quality costs

1. PREVENTION COST (Cond)

Costs that are incurred in the overall administration of the

quality management function. Sub-elements include:

Administrative salaries & expenses

Quality program planning Quality education, Quality improvement, Quality audits for the whole program

Cost of Good Quality: 2. APPRAISAL COST

The appraisal costs of poor quality have

been defined to include all costs incurred in the planned conduct of product or service appraisals to determine compliance to requirements

2. APPRAISAL COST (Cond)

Cost incurred in the inspection and /test of

purchased suppliers or service to determine

acceptability for use

Sub-elements

are

receiving

or

incoming

inspections

and

tests,

measurement

equipment, qualification of supplier product

2. APPRAISAL COST (Cond)

The cost incurred for the inspection, test or audits required to determine and ensure the acceptability of product or service to continue into each discrete step in the operation plan from start of production to delivery

Include costs linked to machines break-downs,

destructive testing and the other costs of losses

2. APPRAISAL COST (Cond)

Expenses made when there is need for field setup or installation and check-out prior to official

acceptance by the customer

Sub-elements include: evaluations of field performance

special product evaluations

evaluations of field stock

2. APPRAISAL COST (Cond)

Cost that are incurred due to regular reviewing

and inspection and test data prior to release the product for shipment to determine whether product requirements have been met.

2. APPRAISAL COST (Cond)

Costs of all support area quality evaluations

For e.g. : Mail rooms, storerooms and packaging and shipping.

Cost of Poor Quality: 3. INTERNAL FAILURE COST

Internal Failure Cost refers to those costs associated with

defects that are found prior to transfer of the product to the customer (Krishnan 2006). For ex:

Scrap; Rework; Material review; Trouble shooting and retest; Customer service

3. Internal Failure Cost (Cond)

Design failure costs are due to the design inadequacies that exist in released documentation for production operations

Sub-elements

are:

design

corrective

action,

rework due to design changes, scrap due to design changes, and production liaison costs

3. Internal Failure Cost (Cond)

Purchased

items

are

not

significant

portion

of

conformant to the requirements due to degradation or

overall quality costs

Sub-elements are: material

depreciation of the item

Sub-elements are purchased

review, internal etc

corrective failure

action labour

costs, operations rework, losses, equipment repair,

material

reject

disposition

costs,

supplier

corrective

actions, rework of the supplier rejects, etc

Cost of Poor Quality: 4. EXTERNAL FAILURE COST

Costs associated with defects that are found

after product is shipped to the customer (Krishnan 2006). common examples of the external failure costs are:

Customer incurred cost; Customer dissatisfaction cost; Loss of reputation; and Lost opportunity cost

4. EXTERNAL FAILURE COST (Cond)

According to Besterfield et al., (2006), external failure cost is

divided into eight elements:

Complaint investigations of customer or user service Returned goods Retrofit and recall costs Warranty claims Liability Costs Penalties Customer or User Goodwill Lost sales

THE 1- 10- 100 RULE

Ross (2009) pp.

QUALITY COST MODEL

Crosbys Model
Crosby (1979) sees quality as conformance to

requirements
The price of conformance:

Actual Prevention and Appraisal Cost

Price

of non-conformance:

Failure Costs

QUALITY COST MODEL (Cond)

Opportunity Cost or Intangible costs

models
Emphasizes the role of intangible cost

within the overall quality cost scheme

Intangible or opportunity losses cost is

incorporated into a typical P-A-F model.

QUALITY COST MODEL (Cond)

Process cost model
Recognizes the importance of process cost measurement

and ownership
Total of the cost of conformance and the cost of

nonconformance
The use of a process cost model is suggested as a

preferred method for quality costing within TQM

The model pursues a continuous improvement policy on

key processes

QUALITY COST MODEL (Cond)

ABC Model
Uses the two-stage procedure to achieve the

accurate costs of various cost objects

Early ABC systems focus on the accurate

assignment of overhead costs to products

A two-dimensional model of ABC was proposed

by Tsai (1998)

ABC MODEL (Cond)

Vaxevanidis and Petropoulos (2008) pp 279

COLLECTION SYSYTEM DESIGN

The system requires the close

interaction of the Quality and

Quality Dept

Accounting Dept

Accounting departments

Some quality costs data cross departmental lines

Insignificant costs of poor quality may be difficult to

determine

ACCOUNTING SYSTEM
time sheets, Schedules,

Minutes of meetings,
Expense reports, Purchase orders, Rework reports, Scrap report, Debit and credit memos,

QUALITY COST BASES

Quality costs provide little information
Vary due to factors such as production volume or

seasonality
Measurement base sensitive to change must be

chosen which is compared to quality cost to obtain

an index
Index numbers are used to measure prices, costs

or other numerical quantities

QUALITY COST BASES (Cond)

FOR EXAMPLE :

Cost index in quarter t = costs in quarter t x 100 Base period cost

QUALITY COST BASES (Cond)

1.
2.
Labour
Production Sales Unit

3.
4.

HOW TO START A QUALITY COST AUDIT

QUALITY COST AUDIT (Cond)

Howard (2005) proposed a fourteen steps

approach to cost of quality

The decisive stage is to prepare the report after

the audit, communicating its results or getting buy-

in for the necessary changes

QUALITY COST AUDIT (Cond)

STEP 1 Choose the audit team

QUALITY COST AUDIT (Cond)

STEP 2
Choose the process

STEP 3 Communicate the audit plan

QUALITY COST AUDIT (Cond)

STEP 4
Choose people working on the process to assist

with the audit

STEP 5
Agree a mission, set a schedule and identify any

training needed

STEP 6
Define and map the process

QUALITY COST AUDIT (Cond)

STEP 7 Prepare to calculate Quality costs
What is cost of quality?

Definition of each category of cost should be written and distributed to all users

QUALITY COST AUDIT (Cond)

STEP 8
Determine the causes of Quality costs

STEP 9
Interview staff

STEP 10
Allocate costs

STEP 11
Prepare the assessment reports

QUALITY COST AUDIT (Cond)

STEP 12
Prepare the audit report

STEP 13
Share the findings and take action

STEP 14
Develop a cycle of improvement

PURPOSE OF QUALITY COST SYSTEM

Morse (1983):
Systematic means of achieving planning and

controlling quality costs

Provides some enlightment to management To reduce the misdistribution of quality costs

Goals for the reduction of quality costs

LIMITATION OF QUALITY COST L INFORMATION

Morse (1983):
Information is subjective Important costs are omitted from the report

Overhead costs may be imprecise

Variation in activity

QUALITY COST REPORT

VENTURA COMPANY QUALITY COST

REPORT (Cond)

QUALITY COST ANALYSIS

Quality Cost Analysis is the process that

consists in comparing and examining the individual quality cost item to each other and to the total so that appropriate action could be taken

QUALITY COST ANALYSIS (Cond)

Main Analysis Technique

Trend Analysis

Pareto Analysis

1.TREND ANALYSIS
Comparative Analysis between the level of the

costs from the present and from the past. Besterfield et al., 2006
Trend analysis can be made from cost

categories and subcategories, on products, on the measurement scale, by plants within a corporation, departments, and work-centres

1.TREND ANALYSIS (Cond)

By Cost Category

1.TREND ANALYSIS (Cond)

By Index

1.TREND ANALYSIS (Cond)

By Product

1.TREND ANALYSIS (Cond)

Within a Category

1.TREND ANALYSIS (Cond)

Short Run Trend Analysis Graph

2. PARETO ANALYSIS
Pareto analysis is a classical technique for

ranking the problems or activities after their importance

founded Vilfredo Pareto
A small number of problems or

activities usually have caused larger proportion

of the troubles or consequences
called 80-20% principle

PARETO ANALYSIS (Cond)

By Category

Vital Few Useful Many

PARETO ANALYSIS (Cond)

By Element

OPTIMIZING COST
In line with Besterfield et al., (2006) there are three

techniques to find out about optimum costs

To make comparisons with other

organizations
To optimize the individual categories To analyze the relationships among the cost

categories

OPTIMIZING COST (Cond)

Optimum Quality Cost

QUALITY IMPROVEMENT STRATEGY

The idea of a quality improvement strategy is

that each failure has a root cause, causes are preventable, and prevention is cheaper
Projected teams is established to take corrective

actions after a problem has been identified with

the use of various analysis techniques

QUALITY IMPROVEMENT STRATEGY (Cond)

2 types of problems when projected team is

established
1.

Firstly, problems which need to be dealt with little or no help from other departments

2.

Problems which need to be handled with full

co-ordination from the various departments in

the organization.

REDUCING FAILURE COST

Most of the quality improvement projects will be

directed toward reducing failure costs

Failures which are detected at the beginning of

operations are less costly than failures detected at the end of the operations or by customers and are also cheaper to correct
The project team must concentrate on finding the

root cause of the problem

REDUCING FAILURE COST (Cond)

Once the cause has been determined, the project

team can concentrate on developing the corrective action

Follow-up activities are conducted to ensure that

the corrective action was effective in solving the problem

cost saving is calculated

REDUCING APPRAISAL COST

Appraisal cost are non valued added as they do

not change the quality of the product delivered

As failure costs are reduced, most likely the need

for appraisal activities will be reduced

The

project team should review the entire

appraisal activity to determine its effectiveness

REDUCING APPRAISAL COST (Cond)

Typical question that the project team might investigate:
Is 100% inspection necessary or would statistical process

control work more efficiently and effectively?

Can inspection stations be combined, relocated, or

eliminated?
Are inspection methods the most efficient? Could the inspection and test activity be automated? Could data be more efficiently collected, reported and

analyzed using the computer?

PREVENTION OF QUALITY COST

The most effective way to manage quality cost is

to avoid having defects in the first place

Prevention activities are related to employee

attitudes and to formal techniques to eliminate problems in the product cycle

Companies employs many technique to prevent

defects for eg.SPC, Quality engineering, training and a variety of tools from TQM

PROGRAM IMPLEMENTATION
With reference to Besterfield et al., (2006) the

program implementation is divided into six steps

STEP 1
Determine if the program can be beneficial to the

organization

STEP 2
Management Commitment

PROGRAM IMPLEMENTATION (Cond)

STEP 3
Pretesting

STEP 4
Train and educate the personnel

STEP 5
Revise the accounting procedures in order to

accommodate the quality cost system

PROGRAM IMPLEMENTATION (Cond)

STEP 6
Expand the quality cost system in the entire

organization

CONCLUSION
There is by no means a uniform view of

what is meant by quality cost and what should be included under the quality cost umbrella. (Barrie Dale and James

Plunkett, 1991 Quality Costing)