Cost of Quality

Part 5

Cost of Quality

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 Cost of Quality Topics
 Introduction.
 Understanding Quality
Cost, Categories and
Models.
 Hidden Costs.
 Benefits of a Cost of
Quality System.
 Management Reports.

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 Why Use COQ In Process
Improvements
 Most Quality Costs are NOT
MEASURED, they are HIDDEN.
 Most Quality Costs captured are caused
by upstream process failures.
 Any costs can not be captured
effectively unless they are measured and
reviewed.

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 Objectives of A COQ System
 Quantify the Problem in the Language
of Management.
 Identify Opportunities for Cost
Reduction.
 Reduce Customer Dissatisfaction.
 Expand Budgetary & Cost Controls.
 Stimulate Improvement.

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 Why Quality Costs and
Process Measurements?
 Evaluation of Business Strategies.
 Right Size Organization.
 Identify Key Indices.
 Focus on Key Business Processes.
 Better Assess Impact on Organization of
Process Changes.

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 Jim Harrington said this
about Cost of Quality

If you do not measure it you

cannot control it.

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 Traditional COQ Categories
 Prevention
 Appraisal
 Failure
- Internal failure
- External Failure

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 Prevention Costs: Costs Designed to
Keep Failures from Occurring

 Methods improvements.
 Training.
 Planning.
 Procedures.
 Quality improvement projects.
 Quality reporting.
 Data gathering and analysis.
 Preventive maintenance.
 SPC training costs.
 ISO 9000 training costs.

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 Appraisal Costs: Costs associated with
the measuring, evaluating, or auditing
of products or services.

 Inspections  Reviews (Meeting

 Process Audits Time)
 Product Audits  Data Collection
 Testing and Test  Outside
Equipment Endorsements
 Receiving  Outside
Inspection and Certifications
Testing

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 Internal Failure Costs: Resulting from
products or services not conforming to
internal customer requirements.

 Re-work.
 Re-audit.
 Re-test.
 Defects.
 Unscheduled lost time.
 Excess Inventory.
 Obsolescence.
 Scrap.
 White Collar Mistakes.
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 External Failure Costs: Resulting from
products or services not conforming
to paying customer requirements.

 Warranty.
 Tech Support.
 Customer Complaints.
 Customer Bad Will.
 Customer Appeasement.
 Lost Business.
 Liability.
 Returns.
 Refunds.

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 Not Every Activity is
a COQ Component
Value added  Order Entry.
activities are the  Sales.
investment required  Purchasing Necessary
to produce a product Goods and Services.
or service. These are  Standard Production.
not part of the cost of  Installing New Service.
quality.  Meeting Contractual
Requirements.

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 Goals of A COQ System

To Facilitate Quality Improvement

Efforts that Will Lead to Operating Cost
Reduction Opportunities.

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 Goals of A COQ System
Strategy – COQ Use
 Take Direct Attack on Failure Costs in an

Attempt to Drive Them to Zero.

 Invest in the “Right” Prevention Activities

to Bring About Improvement

 Reduce Appraisal Costs According to

Results Achieved.
 Continuously Evaluate and Redirect

Prevention.
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 Goals of A COQ System

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 COQ Benefits
The Prime value of a Quality Cost System is in
Identifying Opportunities for Improvement and
then Providing a Measurement of that
Improvement Over Time.

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 How Large is Your Cost
of Quality?

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 Typical Industry Figures
COQ as Percent of Sales

 Manufacturing: 20-30%

 Services: 30-50%

 Software: 40-65%

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 Harrington’s Model
Direct poor-quality cost
A. Controllable poor-quality cost
1) Prevention cost
2) Appraisal cost
3) No-value-added cost
B. Resultant poor-quality cost
1) Internal error cost
2) External error cost
C. Equipment poor-quality cost

Indirect poor-quality cost

A. Customer-incurred cost
B. Customer-dissatisfaction cost
C. Lost-opportunity cost
D. Loss-of-reputation cost
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 Beheiry’s Model
1. Productive activities: making a
product, designing a machine, writing
a report, conducting financial analysis,
selling a service, etc…… These are
our budgeted operating costs.

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 Beheiry’s Model
2. Preventive activities: making sure that our
processes and procedures will lead to the
desired results (conformance to
requirements) every time without
breakdown. These activities would include
such things as preventive maintenance,
quality education and training, process
proving, procedure verification, customer-
orientation training, design review, etc.

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 Beheiry’s Model
3. Corrective activities: finding where we went
wrong (inspection after the fact) and then correcting
the nonconformance (defect). This could include
reworking or reprocessing a transaction, or if not
possible, scrapping the old product/service and
redoing the whole operation. Also, expediting the
output to meet deadline requirements, computer
reruns, excess inventories, downtime,service after
service, warranty activities, obsolete material
disposal, etc.

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 Gryna’s Model
Cost of Poor Quality

Cost of Cost of Cost of

Non Conformities Inefficient Lost Opportunities

Processes of Sales Revenue

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 Wilson’s Model
Non Conformance. This area covers the price paid by not
having quality product.
Examples of this are:
1) Rework. Doing the job over again because it wasn’t

right the first time.

2) Scrap. Throwing away the results of your work

because it is not up to the required standard.

3) Waiting. Time wasted whilst waiting for other

people.
4) Down Time. Not being able to do your job because

a machine is broken.

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 Wilson’s Model
Conformance. Conformance is an aim of quality assurance. This
aim is achieved at a price. Examples of this are:
1) Documentation. Writing work instructions, technical
instructions and producing paperwork.
2) Training. On the job training, quality training, etc.

3) Auditing. Internal, external and extrinsic.

4) Planning. Prevention, do the right thing first time and

poka yoke.
5) Inspection. Vehicles, equipment, buildings and
people.

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 Wilson’s Model
Prevention
Cost of control
(conformance)
Appraisal
Cost

Internal failure
Cost of failure to control
(non conformance)
External failure

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 Hidden Costs
A seemingly innocuous defect is traced
through the manufacturing process at a
window plant. At each point, the costs of
wasted time and materials are calculated.
This cases study illustrates the hidden
costs of poor quality and the Cost of
Confusion that results.

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 Hidden Costs
Activity Costs $

1 The extrusion department makes 100 pounds of C-80019 $116.00

extrusion that is defective. One flange is bent slightly inward.
The defect is not detected. At this point, the extrusion has cost
$1.16/lb.
2 The extrusion moves through several additional processes $ 19.00
including paint. It is stored, handled, and records are kept. The
additional cost is $0.19/lb.

3 An operator sets up a punch press to notch the ends. The $ 5.88

setup requires 0.5 Hours @ $11.75/Hr

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 Hidden Costs
4 An operator attempts to notch the extrusions. The bent flange
prevents entry into the punch die. The operator calls for a
supervisor and waits for 15 minutes. Operator cost is $11.75/Hr.

5 Supervisor arrives. Operator and supervisor attempt to process

the parts without success. Supervisor calls Diemaker. Both wait
for arrival of diemaker. Total time is 20 minutes. Supervisor’s
time costs $14.75/Hr.

6 Supervisor, Operator, and Diemaker discuss the problem and

attempt to process without success. They decide to grind out the
die so the extrusion with the bent flange will fit into it. All three
work to remove the die and take it to the die shop. Total time
required is 1.0 Hours. Diemaker’s cost is $13.50/Hr.

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 Hidden Costs
7 Diemaker grinds out die, returns to press and sets up the press. Total $ 45.90
time 3.4 hrs.

8 Diemaker, Operator, and Supervisor assemble to determine status. $ 11.33

The operations seems to work. Diemaker and Supervisor go on to
other activities. Operator prepares to process parts. Total time
required 17.0 minutes.
8A Scheduler spends 1.5 Hrs @ $15.75/Hr to change schedule and advise $ 23.63
customers of change.

9 Operator processes parts and carries them to the Assembly $ 9.79

Department. Total time for the lot of 100-lb of parts is 50.0 minutes.

10 Assembly builds windows with the defective parts. Many windows do $ 44.10
not operate properly because of the bent flange. Assemblers spent
4.2 extra man-hrs attempting to make the windows operate.
Assembler time costs $10.50/hr.

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 Hidden Costs
11 An Inspector notices that some windows are difficult to operate. She $ 5.81
confers with Assembler for 15.0 minutes and decides to call the
Inspection Supervisor. Inspector rate is $12.75/Hr and Inspection
Supervisor is $17.25/Hr.
12 The Inspection Supervisor arrives and the Assembly Supervisor comes $ 21.28
to see what the problem is. Four persons meet on this problem for
13.0 minutes and decide to call the Engineer. All wait for an additional
11.0 minutes until the Engineer arrives.
13 The Engineer, Inspection Supervisor, Assembly Supervisor, Assembler, $ 34.27
and Inspector confer for 25.0 minutes and determine a way to fix the
problem. All then depart to other activities. The Engineer’s time costs
$26.75/Hr.
13 A Inspector documents event for 25 minutes. $ 5.31

14 Assembler works for 3.9 hours to repair windows and then sends $ 40.95
them to shipping and eventually to the customer.

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 Hidden Costs
15 After 2 weeks, customer calls. Some of the windows worked OK until they were installed. Then the bent $ 15.60
flanges caused additional problems. Customer requests a Field Service Engineer to fix the problems.
Engineer spends 35 minutes.
16 After many phone calls, it is decided to send a Field Service Engineer to the construction site. Times $248.70
involved in making this decision:
Engineer .…………3.75 Hrs @ $26.75/Hr
QA Supervisor……1.75 Hrs @ $17.25/Hr
Plant Manager……1.75 Hrs @ $52.00/Hr
Field Engineer……1.60 Hrs @ $17.00/Hr
17 Field Service Engineer spends 37.0 Hrs in travel to site, fixing problems, and reporting. In addition, $ 1822.00
Engineer spends 1.6 Hrs on the problem. The Sales Manager spends 3.4 Hrs @ $48.00/Hr. Travel costs
$987.

18 Weeks later, the same part is run again. It is found that the die can no longer run parts that are in spec $169.08
because it has been “relieved” too much. A similar chain of events occurs. Time required:
Diemaker………8.0 Hrs
Supervisor ……0.5 Hrs
Operator………2.0 Hrs
Engineer………0.7 Hrs
Inspector………0.9 Hrs
Scrap Value @ $0.17/lb $ -17.00

Cost of Original Error…$135.00

Total Cost of Error……$2673.31
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 COQ & Hidden Costs
 Hidden costs are Intangible Costs.
 What you see is only part of what you
have.
 You must look below the surface for
process savings.

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 COQ & Hidden Costs
Error Defect
made found

1 2 3 4 5

The Total Quality Cost Impact

Must be Summed

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 What you See is only Part
of What you Have
 Above the Surface  Below the Surface
 Scrap  Warranty and Recalls
 Rework  Returns
 Repair  Complaints
 Inspection  Corrective Action
 Test  Turnover
 Injuries
 Billing Errors
 Shipping Costs
 Material Delays

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 Workshop
Hidden Quality Costs
Background

Assume your workgroup is the Human Resources Department. Your

quality requirements is to have zero turn over of personnel during the
year.
In March a R&D engineer responsible for the design of the ABC
product line resigns, feeling frustrated because marketing has constantly
changed their design requirements. He must be replaced with an outside
individual immediately, due to project scheduling.
Assignment

Please identify in the following format the tasks/impacts and the quality costs
associated with replacing the R&D engineer.
Look at the quality costs on a company wide basis.

You have creative freedom. Make any realistic assumptions.

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