Quality Costs

Costs Associated With Quality

  • Prevention Costs
  • Appraisal Costs – testing
  • Failure Costs

Quality Costs = Failure costs + Appraisal costs + Prevention costs

Prevention Costs

The costs of all activities specifically designed to prevent poor quality in products or services.

Examples are the costs of new product review, quality planning, supplier capability surveys, process capability evaluations, quality improvement team meetings, quality improvement projects, quality education and training.

If there were no trouble due to poor quality, there would be no need to incur these costs.

Appraisal Costs

The costs associated with testing, measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements.

These include the costs of incoming and source inspection/test of purchased material; in-process and final inspection/test; product, process, or service audits; calibration of measuring and test equipment; and the costs of associated supplies and materials.

Failure Costs

The costs resulting from products or services not conforming to requirements or customer/user needs.

Failure costs are divided into two internal categories:

  • Internal Failure Costs: Failure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. Examples are the costs of scrap, rework, reinspection, retesting, material review, and down grading.
  • External Failure Costs: Failure costs occurring after delivery or shipment of the product, and during or after furnishing of a service, to the customer, Examples are the costs of processing customer complaints, customer returns, warranty claims, and product recalls.

Definition

Quality Costs represent the difference between the actual cost of a product or service and what the reduced cost would be if there ere no possibility of substandard service, failure of products, or defects in their manufacture.

Since every cost of quality cost saved can have a positive effect on profits, the value of clearly identifying and using quality costs is obvious.

Point to note is that quality costs are not solely generated by the quality function.

Hidden Costs of Quality

Prevention – Appraisal – Failure

The idea is to reduce Failure Costs, for these increase the prevention costs, so initially total costs would seem to rise, but with time failure costs will start coming down, this will lead to reduction of appraisal/testing costs ultimately leading to reduction in Total Quality Costs.

Prevention

  • For each failure there is a root cause.
  • Causes are preventable.
  • Prevention is always cheaper.

The Strategy

The strategy for using quality costs is:

  1. Take direct attack on failure costs in an attempt to drive them to zero;
  2. Invest in the “right” prevention activities to bring about improvement;
  3. Reduce appraisal costs according to results achieved; and
  4. Continuously evaluate and redirect prevention efforts to gain further improvement.

Taguchi’s Philosophy

  • Quality can be improved without increasing cost.
  • Cost can be reduced by improving quality.
  • Costs can be reduced by reducing variation. When this is done, performance and quality will automatically improve.

 

Getting Started

Quality cost methodology seeks to assign quality-related costs to specific activities, products, processes, or departments, so that these costs can be targeted for reduction.

A review and analysis of financial data to be conducted in sufficient detail to determine the general levels of quality costs as they exist today.

Preparing a list of those tasks or functions performed that can be considered quality costs-work that would not have to be performed if quality were and always would be perfect.
Quality Cost Categories

Assignment of Cost Elements to Quality Cost Categories

Quality Cost Analysis

A spreadsheet is prepared, listing the elements of quality cost to be collected against a spread of departments, areas, and/or projects where the costs will occur.

The next step is to collate the collected costs into a second sheet, one designed to summarize the data in exact accordance with plans for use.

Pareto Analysis

The Pareto analysis technique involves listing the factors that contribute to the problem and ranking them according to the magnitude of the contributions.

In most situations, a relatively small number of causes or sources will contribute a relatively large percentage of the total costs. To produce the greatest improvement, effort should be expended on reducing costs coming from the largest contributors.

Problem Solving

Quality cost methodology seeks to assign quality-related costs to specific activities, products, processes, or departments, so that these costs can be targeted for reduction.

  1. Development of the cause-and-effect diagram(s) and brainstorming for a root cause.
  2. Calculate the failure cost of one occurrence for the problem selected.
  3. Calculate the total failure cost for a given period by using the data on actual number of times this problem occurred.
  4. Repeat the costing process for several other problems or defect types. Both the number of occurrences and the cost of quality for both internal and external failures to be viewed.
  5. Rank problems by failure costs using pareto analysis.
  6. Look at the cause-and-effect diagram and propose a prevention plan.
  7. Calculate the Return on Investment (ROI) and payback period, example: