FICCI CE Cost of Quality Visible and hidden

FICCI CE Cost of Quality

Visible and hidden costs FICCI CE Visible costs • Scrap • Rework • Warranty costs Hidden Costs • Conversion efficiency of materials • Inadequate resource utilization • Excessive use of material • Cost of redesign and re-inspection • Cost of resolving customer problems • Lost customers / Goodwill • High inventory

Categories of Quality Costs Conformance Prevention Non-Conformance Appraisal Internal failure External failure

FICCI Cost of quality = Cost of conformance + Cost of nonconformance • Cost of conformance is the cost of providing products or services as per the required standards. This can be termed as good amount spent. (Prevention & Appraisal costs) • Cost of non-conformance is the failure cost associated with a process not being operated to the requirements. This can be termed as unnecessary amount spent. ( Internal & External failure costs) CE

Prevention Costs ã ã Prevention costs are associated with design, implementation , maintenance, and planning prior to actual operation, in order to avoid defects from happening. The emphasis is on the prevention of defects in order to reduce the probability of producing defective products. Prevention activities lead to reduction of appraisal costs and both type of failures ( internal and external ). The motto is “Prevention rather than appraisal”.

Activities associated with Prevention costs ã ã ã ã ã Market research Quality training programs. Contract review Design review Field trials Supplier evaluation Process plan review Process capability review Design and manufacture of jigs and fixtures Preventive checks & maintenance

Appraisal costs are spent to detect defects to assure conformance to quality standards. Appraisal cost activities sums up to the “cost of checking if things are correct”. The appraisal costs are focused on the discovery of defects rather than prevention of defects

Activities associated with Appraisal costs ã ã ã ã Proto type testing Vendor surveillance Incoming material inspection Process inspection/control Final inspection Laboratory testing / measurement Depreciation cost for measuring Quality audits.

Internal failure costs occurs when results of work fail to reach designated quality standards , and are detected before transfer to the customer takes place.

Examples Internal failure costs ã ã ã ã Design changes/ corrective action Scrap due to design changes Excess inventory Rectification / reject disposition of purchased material Rework/rejection in manufacturing Downgrading of end product Downtime of plant & machinery Trouble-shooting & investigation of defects

External failure costs occur when the product or service from a process fails to reach designated quality standards , and is not detected until after transfer to the customer.

Activities associated with External failure costs ã ã ã Processing / investigation of customer complaint Repair/replacement of sold goods Warranty claims Product liability & litigation costs Interest charges on delayed payment due to quality problems Loss of customer goodwill & sales.

Size of four categories of quality costs. ã The organizations which do not follow TQM, there is less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs. ã Various studies have shown that quality cost in manufacturing companies the world over range from 20 % to 30 % of turnover and in the case of service companies it can go up to 40 % as illustrated in graph on the next slide.

Size of various quality cost elements Quality costs in % of sales 10 -15% 10 -12% The total quality costs 25 -35 % of turnover. 4 -6% 1% Preventive Appraisal Internal Failure External Failure

Impact of TQM on costs. ã TQM is primarily aimed to improve the quality of the product , higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly effect the profitability. ã This is demonstrated by the results of TQM program in Xerox Corp. The change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide.

Impact of TQM on costs. An example from Xerox Corp. 35 % of sales 30 25 Internal Failure 20 15 10 Internal Failure Appraisal 5 0 prevention Before TQM Prevention After TQM

Stages Prevention Correction Rs Rs Rs 10 Rs Failure Rs Rs Rs 100 Rs Rs Cost of rectifying defect 1 -10 -100 Rule

FICCI CE cost of quality Traditionally recorded quality cost generally account for only 4 to 5 percent of sales which mainly comprise of cost of scrap, re-work and warranty.

FICCI CE Hidden costs of quality There additional costs of quality which are hidden and do not appear in the account books of the company, as they are intangible and difficult to measure. These additional costs could be as high as 20 -25% of sales.

Visible and hidden costs FICCI CE Visible costs • Scrap • Rework • Warranty costs Hidden Costs • Conversion efficiency of materials • Inadequate resource utilization • Excessive use of material • Cost of redesign and re-inspection • Cost of resolving customer problems • Lost customers / Goodwill • High inventory