Cost of Quality

For this exercise, the cost of quality will be calculated as a percentage of sales. There are two scenarios; the first is before several quality improvements were implemented, the second is after the improvements have been implemented. The cost of quality directly impacts an organization's profitability and competitiveness. It is imperative that all organizations measure their cost of quality and continually improve quality to operate efficiently and effectively.

Scenario 1:

You are a local furniture manufacturer in Winnipeg, Manitoba. Your annual sales are $1,000,000. You employ 25 people including an Inspector and a Quality Assurance Supervisor who maintain the integrity of the Quality Management System. Of late, your team has expressed concerns regarding product quality. In particular, one of the most popular leather recliners is repeatedly being returned for rework and repair. This product sells for $2,500.00 and represents25% of your annual sales. Customer complaints have increased, and overtime is now being used to keep up with the warranty claims and regular production. The team has put together the following annualized data regarding the cost of quality:

32% of the recliners shipped have been returned for warranty repair

The failures include:

18% had sewing related problems

26% had failed mechanisms

12% had bent footrest brackets

37% had hardware issues

5% had general workmanship issues - leather not pulled tight over arm rests, footrests and chair backs

2% were miscellaneous, random failures

1. Draw a recliner failure Pareto diagram in excel

Costs for managing these failures include:

Inspector trained on Quality Tools - 20 hours @ $125.00 per hour

Equipment inspection - monthly - 1 hours @ $95.00 per hour, quarterly maintenance at $1,000/quarter

Inspection - $11,250

Returned shipping costs - average of $75.00 per recliner

Warranty paperwork - $50.00/claim

Costs of handling complaints - 10% of Customer Service Coordinator's time - salary $45,000 per year

Cost of fixing rejected items - average $140/recliner

2. Calculate the number of recliners returned for warranty. Using the cost of managing these failures, determine which costs are associated with prevention, appraisal, internal and external failure, enter these in the table below, and calculate the cost of quality for this product line.

Number of defective recliners

Cost Description Associated Cost Total Cost Cost of Prevention Cost of Appraisal Cost of Internal Failure Cost of External Failure Total Quality Cost % of SalesNumber of defective recliners Cost Description Associated Cost Total Cost Cost of Prevention Cost of Appraisal Cost of Internal Failure Cost of External Failure Total Quality Cost % of Sales