CHAPTER 3 Zuality Costs ematic over OBJECTIVES Identify the different cost of quality groups. Name the two classifications of failure cost. Discuss potential causes of failure. Explain how to reduce cost of quality. or Describe Juran's model of optimum quality cost. The costs of controlling quality may not be modest, whether the responsibility lies with each individual or a dedicated quality control department. It is therefore necessary to examine all the costs and benefits associated with quality, Non-conformance results to cost of quality. A company with a well- management quality program can always attain less cost of quality with prevention. s in the COST OF QUALITY The "cost of quality" is not the penalty of creating a quality product or service. It is the cost of NOT generating a quality product or service. Redoing any work amplifies the cost of quality. Obvious examples include: 1. The reworking of a manufactured item 2. The retesting of an assembly 3. The rebuilding of a tool 4. The correction of a bank statement. 5. The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant. In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality. These costs of quality are typically grouped as prevention costs, appraisal costs, internal failure costs and external failure costs. 35performing critical roles that need special skills or tacit knowledge. Human failure through mistakes also comes in two types errors and violations realize that design failures are usual. On occasion, this is the consequence of a trade off between fast time-to market performance and the risk of the product Errors are mistakes in judgment. where a person should have done something different. For instance, if the manager of a sports stadium fails to anticipate or service falling in operation. While no highly regarded business would Intentionally market defective products or services, similarly most businesses dangerous crowding during a championship event Violationsare acts which and cannot sethack a product or service launch for an indefinite period to remove clearly contrary to defined operating procedure. For instance, if a maintenance all single tiny risk of failure. engineer fails to clean a filter in the stipulated method, it is eventually possible to cause failure. Catastrophic filan's are often caused by a combination of errors Customer finlures - Not every failures are directly because of operation or its and violations. For instance, one kind of accident, where an aircraft appears suppliers. Customers may be unsuccessful in that they mishandle products to be under control and yet still thes into the ground, is very extraordinary and services. As an illustration, a computer system might have been well For this type of failure to occur, first, the pilot has to be flying at the incorrect designed, yet the user could use it in a manner that led to its failure Customers altitude (error). Second, the co-pilot would have to fall short to cross-check the are not always right because they at times fail to be attentive and competent, altitude (rialtoul, Third, air traffic controllers would have to neglect the fact Yet, simply complaining about customers is not likely to diminish the chances that the plane was at the incorrect altitude foror) Finally, the pilot would have of this type of failure taking place Most organizations will admit that they to overlook the ground proximity warning alarm in the aircraft, which can be have a responsibility to inform and instruct customers At the same time prone to give fake alarms (citation) organization need to design their products and services so as to reduce the chances of failure. 3: Organizational failure - Is usually taken to mean failures of procedures and processes and failures that obtain from a business's organizational structure Environmental disruption - Environmental disruption consists of the entire and culture. This is an enormous possible source of failure and includes causes of failure that are positioned external to an operation's direct control. This almost all operations and process management. In particular, failure in the source of potential failure has climbed to near the top of many firms' agenda, design of processes (like bottlenecks causing system overloading) and failures in As operations become more and more integrated increasingly dependent on the resourcing of processes (like insufficient capacity being provided at peak times) integrated technologies such as information technologies, businesses are more call for an investigation However, there are also many other procedures and conscious of the grave events and malfunctions that have the budding to break processes in an organization that can formulate failure more likely. For instance, off normal business activity and even discontinue the whole company. Risks in remuneration policy may prompt staff to work in a way that, that increases the this sort embrace all from cybercrime to hurricanes, from terrorism to political financial performance of the organization, but also increases the risk of failure, change A case of this can range from sales people given lots of incentives that they create promises to customers that cannot be fulfilled. This type of risk can be obtained from an organizational culture that lessens consideration of risk, or it REDUCING COST OF QUALITY may come from a lack of clearness in reporting relationships. Cost of quality is a measurement used for reviewing the waste or loss from a defined process These costs are important and can be considerably lessen or 4. Tedology andMailities failures - Technology and facilities mean all the computer avoided. Cost of quality measurement can trail changes over time for a specific systems, machines, equipment and buildings of an operation are prone to process, or be used as a standard for comparison of two or more dissimilar fallure, or breakdown. The failure may be only partial, like a machine that has processes. Cost of quality is typically calculated in monetary terms, entailing all an intermittent fault On the other hand, it can be what is normally regarded losses and waste to be converted to their liquidated cost equivalent. For instance, as a breakdown which is a complete and abrupt stoppage of operation. Either staff hours lost or spent are converted to their money equivalent by multiplying way, it's effects could bring a big part of the operation to a stop. For instance. the hourly rate for the staff by the hours spent. Cost of quality measurements can a computer failure in a supermarket chain could completely stop several large stores until it is fixed. be utilized to spot the optimum for a process, that is the best possible result from all operating modes, combinations and permutations of the existing process 5, Product / service design failures - In its devign stage, a product or service might Generally, quality costs amplify as the detection point moves further up the seem all right on paper; only when it has to deal with real circumstances may production and distribution chain. The lowest cost is commonly gained when non- Inadequates become obvious Of course, during the design process, probable conformances are prevented in the first time. If non-conformances happen, if is risk of failure should have been recognized and the design is altered. However, normally least pricey to notice them as soon as possible following their happening one only has to look at the number of product recalls or service failures to Afar from this point there is fatlure acquired from added work that may be lost. The 38 39. Prevention costs are those costs incurred in trying to prevent problems, failure and errors in design, development purchase labor and other aspects of cre of the products and services from occurring in the first place. Prevention CLASSIFICATION OF FAILURE COST Achieved through examining previous failure data and developing as plans for incorporating into the basic system so that the similar failures do not The causes of some failures are purely random, like lightning strikes and are difficult, if not impossible, to predict. However, the vast majority of failures are happen again. They include such things as, caused by something that could have been avoided Sol as a minimum starting point. a simple checklist of failure causes is helpful In fact the root cause of most failure it identifying potential problems and putting the process right before poor is usually human failure of some type, Nevertheless, identifying failure sources quality occur, typically requires a more evident set. Here, failure sources are classified as failures b. "designing and improving the design of products and services and process of supply, internal failures such as those obtained from human organizational and to reduce quality problems technological sources, failures obtained from the design of products and services. C. training and development of personnel in the best way to perform their failures obtained from customer failures, and general environmental failures jobs; d process control through Statistical Process Control (SPC). Failure costs are incurred as a result of defective parts of products or faulty services. Interital failures are those discovered during the production process. 2. Appraisal costs are those costs associated with controlling quality to check to External failures are those discovered after delivery to the customers. Internal failure occurs for a variety of reasons like defective materials from vendors, see if problems or errors have occurred during and after the creation of the Incorrect machine settings, faulty equipment, incorrect methods, incorrect product or service. They might include such things as processing carelessness, and faulty or Improper material handling procedures, The costs of internal failures include lost production time, scrap and rework, al the setting up of statistical acceptance sampling plans; investigation costs, possible employee injury External failure causes defective or by the time and effort required to inspect inputs, processes and outputs, poor service that go undetected by the producer, Resulting costs include warranty c obtaining processing inspection and test data; work, handling of complaints, replacements, liability andfor litigation and loss of d Investigating quality problems and providing quality reports; customer goodwill . c. conducting customer surveys and quality audits. 3, Internal firilure costs are failure costs associated with errors which are dealt with Potential Causes of Failures inside the operation. These costs might include such things as; There are several causes of failures, namelys a. the cost of scrapped parts and material; 14 Supply failure - Means any failure in the timing of quality of goods and services b reworked parts and materials; delivered into an operation. For instance, suppliers delivering the wrong c the lost production time as a result of coping with errors; or faulty components, outsourced call centers suffering a telecoms failure, disruption to power supplies, and so on. It can be a vital source of failure due improvement. d lack of concentration due to time spent troubleshooting rather than to increasing dependence on outsourced activities in most industries. Also, global sourcing usually means that parts are shipped around the world on their 4 External future costs are those which are associated with an error going out of journey through the supply chain, Microchips for example manufactured in the operation to a customer. These costs include such things as: Taiwan could be assembled to printed circuit boards in Shanghai which are then finally assembled into a computer in Ireland At the same time, many a loss of customer goodwill affecting future business; industries are experiencing increased instability in demand, Possibly, most aggrieved customers who may take up time; notably there tends to be far less inventory in supply chains that could buffer c litigation for payments to avoid litigation); interruptions to supply. d guarantee and warranty costs; the cost to the company of providing excessive capability (foo much coffee in 2. Human failures - There are two broad types of human failures The first i The pack of too much information to a client), where important personnel leave become ill, die, or in some way no longer can perform their role. The second is where people are doing their job but are committing mistakes Understanding risk in the first type of failure entails Identifying the key people without whom operations would struggle to operate effectively. These are not always the most senior individual, but rather those 136 37most costly quality costs come from non-conformances discovered by customers a consequence an increasing total quality costs. On top of the replacement or repair loss, a company losses customer support and Zero defects advocates support continuous improvement. This is the never company image. In severe cases lawsuit may bea consequence, adding extra cost ending of fort to absolutely eradicate all forms of waste including reworks, yield and loss of goodwill losses, unproductive time, over design, inventory, idle facilities, safety accidents, Another benefit of early detection is that it offers more significant feedback and the less tangible factors of unrealized individual and societal potential to facilitate identification of root causes. The time delay between production and Through identifying the root causes of quality problems and taking action to field failure makes it incredibly hard to draw the occurrence back to the process eliminate these causes, quality costs can be lowered. KAIZEN, reengineering and situation that created it. Whereas field failure tracking is practical in prospectively other continuous improvement approaches are commonly used assessing a repair, it is typically of modest worth in looking back evaluating a The Japanese word for continuous improvement is kaizen, "While innovation trouble. is typified by lavish major events, kaizen represents economical and almost barely The accounting department is principally answerable for accounting matters, visible continuous improvement Continuous process improvement hunts for consisting of cost of quality systems The quality department's function in incremental improvements that are not sweeping, according to Masaaki Imal in development and maintenance of the cost of quality system is to offer guidance Kaizen: The Key to Japan's Competitive Success. These incremental improvements and support to the accounting department typically center on the individual parts of a process or system. The cost of quality system is a combined subsystem of the bigger cost accounting Reengineering on the other hand, is the "fundamental rethinking and radical system. Terminology, format, and other pertinent concerns must be reliable redesign of business processes to achieve dramatic improvements in critical, between the cost of quality system and the larger system to speed the learning contemporary measure of performance, such as cost, quality, service and speed," process and Jessen uncertainty: The best cost of quality accounting system will according to Hammer and Champy in Reengineering the Corporation. In order to basically aggregate quality costs to improve their visibility to management and realize such radical improvements, prioritizing on relations is essential because. make cary efforts to shrink them. For the majority companies, this undertaking is based from systems theory, relations largely establish system performance. Hence. part of the authority of the controller's office business process reengineering centers on system relations Quality cost measurement must not be precise to the centavo to be successful The reason of measuring such costs is to afford extensive guidelines for management decision-making and action. The exceptionally nature of cost of quality creates such precision unfeasible. In a number of occasions it will only be promising to get periodic rough approximations of such costs as lost customer goodwill, cost of damage to the company's reputation, and other related estimates. These estimates can be found using special audits, statistical sampling and other market studies, These activities can be equally carried out by teams of marketing, accounting, and quality personnel. While these costs are regularly enormous, these estimates must TOTAL COST PER GOOD UNIT OF PRODUCT QUALITY COSTS be taken. Though, they necessitate not be acquired each month. Yearly studies are regularly adequate to show trends in these measures FAILURE COSTS MODEL OF OPTIMUM QUALITY COST The objective of every quality cost system is to trim down quality costs to the COSTS OF APPRAISAL lowest realistic point. In 1998 Juran and Gryna presented these costs graphically PLUS PREVENTION (See Figure 1). In the figure it can be seen that the cost of failure decreases as conformance quality levels get better in the direction of perfection, as the cost of 100 QUALITY OF CONFORMANCE, ". appraisal plus prevention increases. There is some optimum target quality level where the sum of prevention, appraisal, and failure costs is at i lowest amount. Efforts to advance quality to improve greater than the optimum level shall have as Figure 1 Juran's Model of Optimum Quality Costs 40 41