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Cost of Quality

Cost of Quality. What are Quality Costs?. A quality product or service is one that conforms to customer expectations. Assume that Design specifications are for product Product meeting specifications meet customer expectations Can determine adherence to specifications.

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Cost of Quality

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  1. Cost of Quality Session 11 - Cost of Quality

  2. What are Quality Costs? • A quality product or service is one that conforms to customer expectations. • Assume that • Design specifications are for product • Product meeting specifications meet customer expectations • Can determine adherence to specifications Session 11 - Cost of Quality

  3. Quality costs are costs incurred because poor quality may or does exist • Broad categories of quality costs • Prevention costs • appraisal costs • Internal failure costs • External failure costs Session 11 - Cost of Quality

  4. Uses of Quality Cost Information • Alerting executives to potential impact • Motivating action to improve quality • Help determine types of activities to reduce quality costs • Prioritize quality improvement efforts Session 11 - Cost of Quality

  5. Concepts of Quality • Common misconceptions • Productivity and quality are incompatible • Higher quality can only be obtained at higher cost • Webster’s Dictionary defines quality as: • that which makes something what it is; characteristic; attribute • basic nature;characteristic; kind • the degree of excellence which a thing possesses • excellence; superiority Session 11 - Cost of Quality

  6. Grade, Expectations, Specifications, and Actual Results • Quality - “Conformance to customer expectation” or “fitness for use” • Three primary determinants • Customer expectations • Product Specifications • Actual results Session 11 - Cost of Quality

  7. Grade relates to the difference in customer expectation between products having the same functional use. • Customers compare products having the same functional use and develop expectations for the relative performance of alternative products. Session 11 - Cost of Quality

  8. Designing a New Product High Grade Step 1 Step 2 Step 4 Step 3 Customer Expectation Functional Specification Design Specification Manufacturing Specification Actual Results Low Grade Session 11 - Cost of Quality

  9. Restate customers qualitative expectations into quantitative functional specifications Functional Specifications are quantitative statements regarding the capabilities of the product Step 1 in the Design of a New Product Session 11 - Cost of Quality

  10. Develop design specifications that meet the functional requirements Design specifications will include statements regarding the physical characteristics of the product (engineering drawings) Step 2 in the Design of a New Product Session 11 - Cost of Quality

  11. Develop manufacturing specifications Manufacturing specifications specify in detail how the product is to be produced and what its physical characteristics should be at each step of the production process Step 3 in the Design of a New Product Session 11 - Cost of Quality

  12. Manufacture the product using the manufacturing specifications If all steps have been carried out perfectly, the actual results is a product that meets customer expectations Step 4 in the Design of a New Product Session 11 - Cost of Quality

  13. Ultimate test - compare customer satisfaction with actual product Seldom possible; expectations are qualitative Design specification often used as standard Two possible sources of error Differences between customer expectations and design specification Differences between design specifications and the actual product Quality of Design/Conformance Session 11 - Cost of Quality

  14. Refers to the degree of conformance between customer expectations and design specifications for product Ensuring conformance is critical to proper evaluation of product quality Quality of Design Session 11 - Cost of Quality

  15. Degree to which a product or service conforms to its design specification If specification allows no dents If specification allows one 1/2” scratch What about customer? Quality of Conformance Session 11 - Cost of Quality

  16. Decisions regarding grade are based on Organizational choice Market identification Higher grade is attained at greater cost to producer and consumer High grade does not ensure high quality or high conformance Determination of Grade Session 11 - Cost of Quality

  17. If “quality” refers to grade positive correlation with cost If “quality” refers to conformance negative correlation with cost Session 11 - Cost of Quality

  18. A measure of the efficiency of resource use Not the same as production - volume of output Ratio of outputs to inputs Increased productivity is the source of increases in real wealth Changes in national productivity Government policy Management decisions Productivity Session 11 - Cost of Quality

  19. The relationship between quality of conformance, productivity, and production costs Higher quality of conformance - lower rejection rates Lower rejection rates - less waste of materials, labor, and/or equipment time Improving Quality Through Quality Session 11 - Cost of Quality

  20. Quality, Productivity, and Profitability Higher Unit Margin Increased Profit Lower Unit Costs Higher Selling Price For Quality Premium Consistent Sales Volume Increased Profit Selling Price Unchanged Higher Margin Increased Quality Lower Unit Costs Higher Sales Volume Increased Profit Lower Selling Price Increased Sales Volume Lower Unit Costs Increased Profit Session 11 - Cost of Quality

  21. Quality costs - basis for evaluating investments in quality programs Cost Improvement Profit Enhancement Other Benefits Profitability Session 11 - Cost of Quality

  22. Dollars can be added across departments/products Total dollars more meaningful to top management Helps identify quality problems and opportunities Helps evaluate relative importance of quality programs Demonstrate the worth of improvement programs Aid in budgeting quality costs Evaluate company’s success in achieving quality goals Why Measure Quality Costs? Session 11 - Cost of Quality

  23. Periodic summaries by: Organization unit Product Other segments of interest Organization as a whole Prepared Monthly Annually Other period of time Quality Cost Reports Session 11 - Cost of Quality

  24. Reports may contain Data for current period Data for corresponding period last year Budgeted quality costs for current period Year-to-date information Session 11 - Cost of Quality

  25. Pie chart shows relative cost distribution for a single period Bar/line charts better for showing changes with time Trends of more interest to management Quality Cost Trend Analysis Session 11 - Cost of Quality

  26. Quality Cost Trend by Quarters Session 11 - Cost of Quality

  27. Changes in level of activity can make interpretation difficult Restate quality costs as a % of some standard measure Standard manufacturing costs Standard direct material Standard direct labor costs Standard direct labor hours Relating Quality Costs to the Level of Activity Session 11 - Cost of Quality

  28. Methods vary widely Income statement approach; bottom line % of Sales % of profit Example (Hartford Insurance Group) Expressed in terms of labor-hours devoted to each element Then restated in terms of number of persons needed Ultimately - number of persons needed because of poor quality Relating Quality Costs to Financial Performance Session 11 - Cost of Quality

  29. Indicating the financial significance of quality costs Helping identify relative importance of quality problems Indicating if there is a maldistribution of quality costs Establishing goals or budgets for quality costs Evaluating the performance of quality improvement projects Evaluating capital expenditure proposals Uses of Quality Cost Information Session 11 - Cost of Quality

  30. Quality cost measurements do not solve quality problems Quality cost reports do not suggest specific actions Quality costs are susceptible to short-term mismanagement It is difficult to match effort and accomplishment Important costs may be eliminated from reports Inappropriate costs may be included in reports Many quality costs are susceptible to measurement error Limitations of Quality Cost Information Session 11 - Cost of Quality

  31. Obtain management commitment and support Establish an installation team Select a single organization segment as a prototype Obtain cooperation and support of the users/suppliers of information Operationally define quality costs and quality categories Identify quality costs within each category Determine sources of quality information Design quality cost reports and graphs Establish procedures to accumulate information Accumulate information, prepare and distribute reports Eliminate bugs Expand system Twelve Steps to System Installation Session 11 - Cost of Quality

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