Cost of Quality - 3 September, 2010 - Dr. Paramjit Kaur

Cost Of Quality (COQ)

ASSIGNMENT

ACCOUNTING FOR DECISION MAKING

COST OF QUALITY

SUBMITTED TO: SUBMITTED

BY:

DR. PARMJIT KAUR DHEERAJ AGGARWAL

(FACULTY) KRITI SINGHAL

UNIVERSITY BUSINESS SCHOOL PANKAJ JUNEJA

PANJAB UNIVERSITY. SANCHIT AGARWAL

SONALI SHARMA

University Business School


Content1) Introduction …………………………………………………..032) Quality …………………………………………………..033) Quality Control ….……………………………………………….044) Evolution of cost of quality …………………………………………………..075) Cost of Quality Models ………..…………………………………………076) P-A-F Method …………………………………………………..08

a) Prevention Costs …………………………………………………..08 b)Appraisal Costs …………………………………………………..08 c) Failure Costs …………………………………………………..09

I)Internal Failure …………………………………………………..09 ii)External failure Costs …………………………………………………..09

7) Total Quality Cost …………………………………………………..108) Crosby’s Model …………………………………………………..119) Opportunity and Intangible Costs …………………………………………………..1110) Team Approach Method …………………………………………………..1311) Process Cost Model …………………………………………………..1312) Activity Based Quality Model …………………………………………………..1413) Techniques to Measure Cost Of Quality ……………………………………………..15

a) Control Chart …………………………………………………..15b) Control Limit …………………………………………………..15c) Pareto Diagram …………………………………………………..16

i) Count Pareto …………………………………………………..16ii) Cost Pareto …………………………………………………..16

d) Cost and effect diagram …………………………………………………..1714) Typical Uses …………………………………………………..2015) Typical Results Achieved …………………………………………………..2116) Typical Symptoms …………………………………………………..2217) Typical Problems Encountered …………………………………………………..2318) Things to Consider Before Implementing Cost of Quality (“COQ”)……………….2419) Quality Management …………………………………………………...2620) Cost of Poor Quality …………………………………………………...2921) Reducing the Failure of Cost of Quality …………………………………………....3022) Defect Removal Activities ……………………………………………………3023) Goal of Cost of Quality ……………………………………………………3224) Companies Visited ……………………………………………………33

i) Mahindra & Mahindra ……………………………………………………33ii) Rana Polycot Ltd. ……………………………………………………39iii) Sigma Freudenberg Nok Pvt. Ltd.....................………………………………42iv) Maruti Suzuki Ltd.……………………………………………………46v) Parabolic Drugs Limited ……………………………………………………49



INTRODUCTION

Quality has become so important to success that currently many prestigious, internationally

recognized awards are given to companies for quality by nearly every country and many

professional organizations. For example, the Malcolm Baldrige Quality Award, created by the

United States Congress in 1987, recognizes US firms with outstanding records of quality

improvement and quality management. The Deming Prize created in Japan by the Japanese union

of scientists and engineers long before the Baldrige Quality Awards is awarded to companies

around the world that excel in quality improvement.

The international Organization for Standardization, based in Europe, has developed international

standards for quality management called ISO 9000. The ISO standards first gained popularity in

Europe but are now global guidelines for the design, development, production, final inspection

and testing, installation, and servicing of products, processes, and services. To be certified, a

company must document its quality systems and pass a rigorous third-party audit of its

manufacturing and customer- service processes.

Organizations proudly display their quality awards and certificates as evidences of their

commitment to product and services quality. Many organizations have adopted Baldrige or

Deming prize criteria as their internal quality management guidelines even if they do not seek to

win a prize for their efforts. TCSI, for example, has adopted criteria from both the Baldrige and

Deming awards and has obtained ISO 9000 certification. The company does not plan to apply for

any awards, however, because CEO Cooper and CFO Freeman believe the prizes themselves are

unnecessary to the company’s success and that the lengthy application and evaluation processes

would distract the growing business. Freeman would rather spend his time managing TCSI’S

quality than applying for quality prizes.

QUALITY

Quality means getting everyone to do what he or she has agreed to do and do it right the first

time. Quality is an effective system of integrating quality improvement efforts of various groups

of the organization so as to provide products or services at a level at which all customers are

satisfied. Quality is defined as a process of matching or achieving the standard already laid down

for various functions or services. This can be brought about by “Total Quality Management”



(TQM). Deming and Juran have defined TQM as the strategic commitment to improve quality by

combining statistical quality control methods with a cultural commitment to seeking incremental

improvements that increase productivity and lower cost. Quality is something which is complex

and varies from one industry to another. Quality needs to be model on the basis of customer

need, context of the market, industrial goals, system requirements etc.

Quality gurus have given definitions that cover the meaning of quality. Some of them have been

considered as the starting point to define quality, for example the definitions given by Philip

Crosby and Joseph M. Juran. Still the major problem with software engineering is that the term

quality cannot be defined with absolute clarity. The experts disagree both on the definition of

quality and how to achieve it.

“Quality is the conformance to requirements.” Requirements must be clearly stated so that

people involved can clearly understand that. Then in the development process, measurements are

taken continually to determine conformance to those requirements. The non-conformance will be

treated as absence of quality or defect.

“Quality of a good is its Fitness for use.”Customer requirements and expectations involves

whether the products or service fit for their uses. Since the different customer may use the

products in different ways, it means that products must possess multiple elements of fitness for

use. Each of these elements is a quality characteristic and they can be categories into two types

that is quality of design and quality of conformance.

QUALITY CONTROL

The purpose of quality control is to uncover defects and have them corrected so that defect-free

products will be produced. Quality control is limited to looking at products. It is a function that

should be performed by the workers. Tasks such as systems reviews and software testing are

quality control tasks. In other words Quality control is operational techniques and activities that

are used to fulfill requirements for product quality. It involves techniques that monitor a process

and eliminate causes of unsatisfactory performance at all stages of the quality loop. Quality

Control (QC), in real meaning, relates to the inspection of finished goods prior to shipment.



In the usual term in manufacturing, QC involves taking a sample of finished goods from an

assembly line, testing them for quality, and extrapolating the general quality of the production

run from the quality of that sample. Quality Control is also about monitoring a process to

determine if the standards set for the process were being followed (such as for an assembly line).

In software applications, this term tends to take on the role of referring to the testing of the

application. In the IT world, still many IT professionals think Quality Control to be same as

software Testing. This concept can be workable if the word "testing" is broadened out to include

executable (source code) and non-executable (artifacts) aspects of a product. QualityControl

tends to find the defects in a product by a monitoring, audit, and assessment of process. Quality

Testing is then considered the procedures by which those defects are actually found. Thus, that is

why some people make the distinctions between quality control and quality testing. The latter

tends to be the "find-and-isolate" procedure and the former tends to be the "monitor-and-assess"

procedure. In other words, one might say that Quality Control is used as a feedback mechanism

for the Quality Testing process. Both of which are derived from the Quality Assurance process,

which dictates the actions of the Quality Test and Quality Control procedures.

Quality control is used to verify that deliverables are of acceptable quality and that they meet the

completeness and correctness criteria that were established in the quality planning process. If no

such criteria were established, then this becomes more of an ad hoc process.

The Cost of Quality is often referred to as the “cost of doing things wrong”. Every time a

business makes a mistake it costs money to make the mistake and then correct it. The cost of

doing it wrong is the hit; the activities to correct it usually match that which should have been

done correctly so don’t count. Well, not directly anyway but fixing the issue could have impacts

that push the Cost of Quality up.

Cost of quality can be defined as all the costs attributable to the production of quality which is

not 100 percent perfect. Murthy (1983) and CEM (1996) classify costs of quality into the

following types: Appraisal Costs, which are the costs of inspection, testing and other tasks to

ensure that the product or process is acceptable, prevention costs, which are the sum of all costs

to prevent defects, internal failure are the costs incurred within the system and external failure

costs that are costs of defects that pass through the system.



“Quality Costs represent the difference between the actual cost of a product or

service and what the reduced cost would be if there were no possibility of

substandard service, failure of products, or defects in their manufacturing.”

Improving quality is considered by many to be the best way to enhance customer satisfaction,

to reduce manufacturing costs and to increase productivity. Any serious attempt to improve

quality must take into account the costs associated with achieving quality, since nowadays

it does not suffice to meet customer requirements, it must be done at the lowest possible cost

as well. This can only happen by reducing the costs needed to achieve quality, and the

reduction of these costs is only possible if they are identified and measured.

The identification itself is not straightforward because there is no general agreement on a single

broad definition of quality costs. However, CoQ is usually understood as the sum of

conformance plus non-conformance costs, where cost of conformance is the price paid for

prevention of poor quality (for example, inspection and quality appraisal) and cost of non-

conformance is the cost of poor quality caused by product and service failure (for example,

rework and returns).

"Highest quality is lowest cost" is a Japanese manufacturing aphorism based on the premise that

the highest quality manufacturer will earn a reputation that makes buyers prefer, price being

reasonably similar, to buy its goods. This means that the manufacturer will produce more than its

competitors, and thus will both have economies of scale and be able to accept a lower profit per

unit—thus the highest quality goods will have a lower cost by driving other goods from the

market. The production of higher quality goods can also reduce quality costs.

From the purchaser's point of view the highest quality goods will have the fewest problems, and

the cost of dealing with a problem far outweighs the extra purchase cost.

The Cost of Quality ("COQ") measurement can track changes over time for one particular

process, or be used as a benchmark for comparison of two or more different processes (eg. two

machines, different production lines, sister plants, two competitor companies, etc.).

Usually, Cost of Quality ("COQ") is measured in currency (eg. $), requiring all losses and wastes

to be converted to their liquidated cost equivalent (i.e. man-hrs lost or spent are converted to $ by

multiplying by the hourly rate, $/hr).



Why is Cost of Quality ("COQ") Important?

Cost of Quality ("COQ") can be used to identify the global optimum for a process, and monitor

that process' progress towards its global optimum. Global optimum is defined as the best

possible outcome from all physically possible operating modes, combinations, and permutations

of the current process.

EVOLUTION OF COST OF QUALITY

The modern quality cost system was developed out of the work of Joseph Juran, 1951 and

Armand Feigenbaum 1957. The American society for quality control was formed in 1946. (Now

known as The American Society for Quality). During the 1960’s, ASQ and Quality Cost

Committee refined this technique and promoted the use of Cost of Quality(Bottorff, 1997) in

1970’s and 1980s.Philip Crosby’s work helped popularize the Cost of Quality(CoQ)concept

beyond the quality profession. According to Crosby, cost of quality, which is the expense of non-

conformance, is the only performance measurement (1979).According to Crosby (1979), quality

is free. What costs money is the failure to do things right the first time. Juran agrees in his

definition of quality cost as the sum of all costs that would disappear if there were no quality

problems. Juran and Crosby were also leaders in the movement to report quality information in

dollar terms in order to attract the attention of top management.

Statistical methods for quality improvement use increased in the United States during the 1980’s.

Total Quality Management emerged during the 1970’s and into the 1980’s as an important

management tool to implement statistical methods. The Malcolm Baldrige National Quality

Award was established in 1988.ISO 9000 certification activities increased in the U.S. Industry in

the 1990’s. Motorola’s Six-Sigma initiative began in 1990.

CO ST O F Q UALITY MODEL S

There are several methods that can be used to collect, categorize and measure quality costs.



P-A- F METHOD

The traditional P-A-F method suggested by Juran (1951) and Feigenbaum (1956) classifies

quality costs into prevention, appraisal and failure costs. Prevention costs are associated with

actions taken to ensure that a process provides quality products and services, appraisal

costs are associated with measuring the level of quality attained by the process, and failure

costs are incurred to correct quality in products and services before (internal) or after

(external) delivery to the customer.

PREVENTION COSTS are those associated with preventing defects before they happen.

This is a proactive approach to defect prevention rather than defect correction and removes the

idea of quality efforts essentially being reactive in efforts to "put out fires." Prevention costs

involve investments aimed at getting work done right the first time and preventing quality

problems from ever coming up, as far as it is possible. It is long-term strategy adopted by the

organization for the continuous improvement in their processes. The elimination of the rework

goes hand in hand with increase in quality, and decreases in schedule and cost; this is the

fastest, cheapest, and highest approach to building software. They include:-

Staff Training

Requirement Analysis

Fault-Tolerant Design

Defensive Programming

Usability Analysis

Clear Specification

Accurate internal communication

APPRAISAL COSTS include cost incurred in detecting the error. Appraisal techniques are used

for the verification and validation. These techniques help organization to increase in quality with

lesser cost. Examples of appraisal costs include code inspections, testing, software design

reviews. They may be summarized as:-



Design review

Code inspection

Usability Testing

Calibration cost

Laboratory expenses

FAILURE COSTS: The cost resulting from products or services not conforming to

requirements or needs of the customer. Failure costs are divided into – A. Internal failure

costs and B. External failure costs.

INTERNAL FAILURE COSTS: Failure costs occurring prior to delivery or shipment of the

product, of finishing of a service to the customer. Examples are the costs of:

Scraps and rejects

Repair and Rework

Downtime

Bug fixes

Wasted in-house user time

Wasted tester time

Wasted marketer time

Wasted advertisements

Direct cost of late shipment

Opportunity cost of late shipment

Retesting

Material review

Sales and discounts for inferior product

EXTERNAL FAILURE COSTS: Failure costs occurring after delivery of shipment of the

product and during or after furnishing of a service to the customer. Examples are the costs of:

Warranty costs and Off warranty repairs and replacement



Customer complaints

Product liability

Transportation losses

Technical support calls

Preparation of support answer books

Refunds and replacement with updated product

Lost sales

Lost customer goodwill

Costs imposed by law

Customer returns

TOTAL QUALITY COSTS: It is the sum of the above costs. It represents the difference

between the annual cost of a product or service and what the reduced cost would be if there were

no possibility of substandard service, failure of products or defects in their manufacture.

Most COQ systems are defined by use of 4 categories of costs:

COQ

Category

Typical Descriptions (may vary between different

Organizations)Examples

InternalCosts associated with internal losses (i.e. within the

process being analyzed)

off-cuts, equipment

breakdowns, spills, scrap,

yield, productivity

External

Costs external the process being analyzed (i.e. occur

outside, not within). These costs are usually

discovered by, or affect third parties (eg. customers).

Some External costs may have originated from within,

or been caused, created by, or made worse by the

process being analyzed. They are defined as External

because of where they were discovered, or who is

primarily or initially affected.

customer complaints,

latent defects found by the

customer, warranty

Preventive Costs associated with the prevention of future losses: planning, mistake-



(eg. unplanned or undesired problems, losses, lost

opportunities, breakdowns, work stoppages, waste,

etc.)

proofing, scheduled

maintenance, quality

assurance

AssessmentCosts associated with measurement and assessment of

the process.

KPI's, inspection, quality

check, dock audits, third

party audits, measuring

devices, reporting systems,

data collection systems,

forms

COQ systems are sometimes assisted by specially designed COQ Software

CRO SBY ’S MO DEL

The cost categories of Crosby’s model (Crosby, 1979) are similar to the P- A-F scheme. Crosby

sees quality as “conformance to requirements”, and therefore, defines the cost of quality as the

sum of price of conformance and price of non-conformance (Crosby, 1979). The price of

conformance is the cost involved in making certain that things are done right the first time

and the price of non-conformance is the money wasted when work fails to conform to customer

requirements.

OPPORTUNITY AND INTANGIBLE COSTS

Several references propose CoQ models that include the additional category of intangible

costs. These are costs that can be only estimated such as profits not earned because of lost

customers and reduction in revenue owing to non-conformance. The importance of

opportunity and intangible costs for quality costing has been describe a less formal method

based on collecting quality costs by department.



Cost area Examples

Tangible costs—

factory accounts

· Materials scrapped or junked

· Labor and burden on product scrapped or

junked

· Labor, materials, and burden necessary to

effect repairs on salvageable product

· Extra operations added because of presence of defectives

· Burden arising from excess production

capacity necessitated by defectives

· Excess inspection costs

· Investigation of causes of defects

Tangible costs—

sales accounts

· Discount on seconds

· Customer complaints

· Charges to quality guarantee account

Intangible costs

· Delays and stoppages caused by defectives

· Customer good will

· Loss in morale due to friction between

Departments



TE AM A PPRO AC H ME THOD

Another recently proposed CoQ methodology is a method based on a team approach, in

which the aim is to identify the costs associated with things that have gone wrong in a process

(Robison, 1997).

PROCE S S CO S T MODEL

Another formal quality costing approach is the process cost model, which was developed

by Ross (1977) and first used for quality costing by Marsh (1989); it represents quality

cost systems that focus on process rather than products or services. Process cost is the

total cost of conformance and non-conformance for a particular process. The cost of

conformance is the actual process cost of producing products and services first time to the

required standard by a given specified process, whereas cost of non-conformance is the failure

cost associated with the process not being executed to the required standard. These costs can

be measured at any step of the process . Accordingly, it can be determined whether high

non-conformance costs show the requirement for further expenditure on failure prevention

activities or whether excessive conformance costs indicate the need for a process redesign. The

use of a process cost model is suggested as a preferred method for quality costing within

total quality management (TQM) as it recognizes the importance of process cost measurement

and ownership, and presents a more integrated approach to quality than a P-A-F model. Also

analysts place emphasis on the cost of each process rather than on an arbitrarily defined

cost of quality under a P-A-F model. Moreover, the quality cost categorization is simpler and

some researchers argue that it is also more relevant than the P-A-F scheme. The process

model has wider application in that it facilitates the collection and analysis of quality

costs for both direct and indirect functions. However, the process cost model is not in

widespread use.

ACTIV IT Y BA SED QUALI TY MO DEL

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Existing accounting systems are usually considered as poorly fitted for generating reports on

quality measurements .They do not provide appropriate quality related data, and benefits

resulting from improved quality are not measured .Although most CoQ measurement

methods are activity/process oriented, traditional cost accounting establishes cost accounts

by the categories of expenses instead of activities. Thus, many CoQ elements need to be

estimated or collected by other methods.

There is no consensus method on how to allocate overheads to CoQ elements and no

adequate method to trace quality costs to their sources.

An activity-based costing (ABC) model was developed by Cooper and Kaplan to solve this

problem. Under ABC, accurate costs for various cost objects b y t r a c i n g r e s o u r c e c o s t s t o

their r e s p e c t i v e activities and the cost of activities to cost objects a r e a c h i e v e d . The

ABC approach is actually not a CoQ model. It is an alternative approach that can be used to

identify, quantify and allocate quality costs among products, and therefore, helps to manage

quality costs more effectively. The long- term goal of ABC systems is to eliminate non-value

added activities and to continuously improve processes, activities and quality so that no

defects are produced.

No matter which quality costing approach is used, the main idea behind the CoQ analysis is the

linking of improvement activities with associated costs and customer expectations, thus allowing

targeted action for reducing quality costs and increasing quality improvement benefits.

Therefore, a realistic estimate of CoQ, which is the appropriate tradeoff between the levels of

conformance and non-conformance costs, should be considered an essential element of any

quality initiative and a crucial issue for any manager. A number of organizations are now

seeking both theoretical advice and practical evidence about quality related costs

And the implementation of quality costing systems.

TECHNIQUES TO MEASURE COST OF QUALITY

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CONTROL CHART

Statistical quality control (SQC), which is also called statistical process control (SPC), is a

formal means of distinguishing between random and non-random variations in an operating

process. A control chart, one of the tools in SQC, is a graph of a series of successive

observations of a particular step, procedure, or operation taken at regular intervals of time. It

indicates upper and lower statistical control limits, and an average line, for samples or subgroups

of a given process. If all points on the control chart are within the limits, variation may be

ascribed to common causes and the process is deemed to be "in control." If points fall outside the

limits, it is an indication that special causes of variation are occurring, and the process is said to

be "out of control."

Control Limit: A statistically-determined line on a control chart used to analyze variation within

a process. If variation exceeds the control limits, then the process is being affected by special

causes and is said to be "out of control." A control limit is not the same as a specification limit.

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If analysis of the control chart indicates that the process is currently under control (i.e. is stable,

with variation only coming from sources common to the process) then data from the process can

be used to predict the future performance of the process. If the chart indicates that the process

being monitored is not in control, analysis of the chart can help determine the sources of

variation, which can then be eliminated to bring the process back into control. A control chart is

a specific kind of run chart that allows significant change to be differentiated from the natural

variability of the process.

The control chart can be seen as part of an objective and disciplined approach that enables

correct decisions regarding control of the process, including whether or not to change process

control parameters. Process parameters should never be adjusted for a process that is in control,

as this will result in degraded process performance.

PARETO DIAGRAM

Observations outside control limits serve as inputs for Pareto diagrams. A Pareto diagram is a

simple bar chart that ranks related measures in decreasing order of occurrence. The principle was

developed by Vilfredo Pareto, an Italian economist and sociologist who conducted a study in

Europe in the early 1900s on wealth and poverty. The purpose of a Pareto diagram is to separate

the significant aspects of a problem from the trivial ones. By graphically separating the aspects

of a problem, a team will know where to direct its improvement efforts. Reducing the largest

bars identified in the diagram will do more for overall improvement than reducing the smaller

ones.

There are two ways to analyze Pareto data depending on what you want to know:

COUNT PARETO: Use this type of Pareto analysis to learn which category occurs most often,

you will need to do a counts Pareto diagram. To create a counts Pareto, you will need to know

the categories and how often each occurred.

COST PARETO: Use this type of Pareto analysis if you want to know which category of

problem is the most expensive in terms of some cost. A cost Pareto provides more details about

the impact of a specific category, than a count Pareto can. For example, suppose you have 50

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occurrences of one problem and 3 occurrences of another. Based on a count Pareto, you would

be likely to tackle the problem that occurred 50 times first. However, suppose the problem that

occurred 50 times costs only $.50 per occurrence ($25 total) and the problem that occurs 3 times

costs $50 each time ($150 total). Based on the cost Pareto, you may want to tackle the more

expensive problem first. To create a cost Pareto, you will need to know the categories, how often

each occurred, and a cost for each category.

CAUSE & EFFECT DIAGRAMS

The Cause & Effect (CE) diagram, also sometimes called the ‘fishbone’ diagram, is a tool for

discovering all the possible causes for a particular effect. The effect being examined is normally

some troublesome aspect of product or service quality, such as 'a machined part not to

specification', 'delivery times varying too widely', 'excessive number of bugs in software under

development', and so on, but the effect may also relate to internal processes such as 'high rate of

team failures'.

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The major purpose of the CE Diagram is to act as a first step in problem solving by generating a

comprehensive list of possible causes. It can lead to immediate identification of major causes and

point to the potential remedial actions or, failing this, it may indicate the best potential areas for

further exploration and analysis. At a minimum, preparing a CE Diagram will lead to greater

understanding of the problem.

The CE Diagram was invented by Professor Kaoru Ishikawa of Tokyo University, a highly

regarded Japanese expert in quality management. He first used it in 1943 to help explain to a

group of engineers at Kawasaki Steel Works how a complex set of factors could be related to

help understand a problem. CE Diagrams have since become a standard tool of analysis in Japan

and in the West in conjunction with other analytical and problem-solving tools and techniques.

CE Diagrams are also often called Ishikawa Diagrams, after their inventor, or Fishbone

Diagrams because the diagram itself can look like the skeleton of a fish. The steps for using

cause and effect diagrams are as follows:

The problem under investigation is described in a box at the head of the diagram.

A long spine with an arrow pointing towards the head forms the backbone of the "fish."

The direction of the arrow indicates that the items that feed into the spine might cause the

problem described in the head.

A few large bones feed into the spine. These large bones represent the main categories of

potential causes of the problem. Again, the arrows represent the direction of the action;

the items on the larger bones are thought to cause the problem in the head.

The smaller bones represent deeper causes of the larger bones they are attached to. Each

bone is a link in a Cause-and-Effect chain that leads from the deepest causes to the

targeted problem.

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Quality processes cannot be justified simply because "everyone else is doing them" - but return

on quality (ROQ) has dramatic impacts as companies mature. Research shows that the costs of

poor quality can range from 15%-40% of business costs (e.g., rework, returns or complaints,

reduced service levels, lost revenue). Most businesses do not know what their quality costs are

because they do not keep reliable statistics. Finding and correcting mistakes consumes

inordinately large portion resources. Typically, the cost to eliminate a failure in the customer

phase is five times greater than it is at the development or manufacturing phase. Effective quality

management decreases production costs because the sooner an error is found and corrected, the

less costly it will be.

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No matter which quality costing approach is used, the main idea behind the CoQ analysis is the

linking of improvement activities with associated costs and customer expectations, thus allowing

targeted action for reducing quality costs and increasing quality improvement benefits.

Therefore, a realistic estimate of CoQ, which is the appropriate tradeoff between the levels of

conformance and non-conformance costs, should be considered an essential element of any

quality initiative and a crucial issue for any manager. A number of organizations are now

seeking both theoretical advice and practical evidence about quality related cost and the

implementation of quality costing systems.

Typical Uses

Cost of Quality ("COQ") is used to collect cost data on a sampling basis (eg. all data occurring

during a 24 hr period, calculated once each quarter), or on a continuous basis (eg. Cost of Quality

("COQ") is calculated with all data occurring in the month, and reported monthly).

After confirming that the data is accurate and comprehensive, and consistent with previous

definitions and implementations, it is analyzed for opportunities and trends. Based upon

statistical analysis (eg. regression analysis, indexes, correlations, Pareto analysis, factor analysis,

etc.), conclusions and recommendations are presented to managers of the process being

analyzed.

In some cases (supported by process modeling, heuristics, prior experience, or intuition) the

optimum Cost of Quality ("COQ") can be predicted, and the process design necessary for

achieving this global optimum Cost of Quality ("COQ") can be defined. A plan can then be

defined to modify the current process, phase by phase, so as to move towards this global

optimum process.

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Management responsible for the process can decide on if, how, and when they will run the

current process, or modify the process for even better results. All projects are analyzed for their

impact on Cost of Quality ("COQ"), and projects that show high ROQ are implemented on a

priority basis

(ROQ%= $Cost of Quality ("COQ") savings/$Implementation cost*100%). COQ Software is

often used to enhance the COQ data collection, reduce the cost of running a COQ system, and

ensure excellent data as fast and cheap as possible.

Typical Results Achieved

When all costs are included, Cost of Quality ("COQ") as a % of gross sales $ will probably be

around 30% to 35% for a profit orientated organization, 40% to 60% for a not-for-profit

organization (i.e. hospitals, charities, government, etc.). Many organizations take only a sub-set

of the costs, including only those that tend to fluctuate, or that often need management

intervention. The others are assumed to be constant.

When manufacturing companies often earn only 5% NPBT (Net Profit Before Tax), a 35% Cost

of Quality ("COQ") indicates that 40% of gross revenue is generated by the company as profit,

but only 5% of that gets trapped as NPBT. Therefore, the profit yield is only 12.5% (87.5% of

the available profit is lost before it gets to the bank). For improvements in Cost of Quality

("COQ"), some manufacturers have been able to reduce manufacturing costs by as much as

7.65% per year, every year, for more than 10 years.

For Six Sigma processes, Cost of Quality ("COQ") is usually reduced to less than 1% of gross

sales $. This indicates that, as large and unbelievable as Cost of Quality ("COQ") $ seems to

most managers, it is a real number that can be eliminated through hard work and dedication.

Obviously, as more and more improvements are made, it becomes more difficult to find the next

saving. This is when an excellent Cost of Quality ("COQ") system can help point out the

remaining opportunities.

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TYPICAL SYMPTOMS

For organizations that:

Currently have no Cost of Quality ("COQ") system, but could benefit from a well-

designed & implemented Cost of Quality ("COQ") system

Have a Cost of Quality ("COQ") system, but that Cost of Quality ("COQ") system is

poorly designed, or poorly implemented.

The following symptoms are typically felt:

Slow rate of improvement

Low or no profitability

Bureaucracy or complexity of business processes continue to get worse and worse

Changes in one area tend to have disastrous effects in other areas

Management get personally involved in quality problems only during a major crisis

Management is running out of ideas on where to cut costs any further

All employees are not actively and personally involved in driving the Organization's

Mission forward

Many individuals and departments disagree on what are the top priorities for the

Organization

Sub-processes and Departments are operated in a manner that is detrimental to the

Organization's overall best interest.

For organizations not using COQ Software, there are often higher costs for running the

COQ system, inconsistent implementation, and non-optimum results from the COQ

system.

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Typical Problems Encountered

Because of poor design or poor implementation of Cost of Quality ("COQ") systems, the Cost

of Quality ("COQ") systems often suffer from one or more of the following problems:

COQ data collection is watered-down, or has superficial implementations that quickly

become make-work exercises with little or no benefit, other than to fill filing cabinets or

hard disk drives on computers.

Efforts are directed at where it is easy to collect data, or easy to implement changes,

instead of focusing on the Cost of Quality ("COQ") priorities (eg. largest cost category,

most variation, largest business risk, etc.)

The Cost of Quality ("COQ") input data are often incomplete. The Cost of Quality

("COQ") definitions are often un-clear, or not fully understood, resulting in varying

interpretation and implementation over time. This variability tends to add significant

noise to the Cost of Quality ("COQ") data, clouding the interpretation and hiding

significant trends for extended periods of time.

Management does not actively use the Cost of Quality ("COQ") data in an effective

manner. Decisions are often made without neither realizing nor considering the impact

on Cost of Quality ("COQ"), thereby neutering the Cost of Quality ("COQ") system to

irrelevancy.

When Cost of Quality ("COQ") is not utilized during project approval decisions, as

management makes changes (supposed "improvements"), Cost of Quality ("COQ") $

tend to shift from one category to another, with little net effect. For example, a new

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machine is purchased to reduce scrap. Higher setup, first-off, inspection, and

maintenance costs offset the scrap savings, with no net improvement in Cost of Quality

("COQ").

Cost of Quality ("COQ") costs oscillate between the four Cost of Quality ("COQ")

categories on a revolving basis, with little or no reduction in the total Cost of Quality

("COQ"). For example, money is spent to increase surveillance, which indicates a

problem exists with internal &/or external failure costs. Surveillance costs are stopped,

but prevention actions are taken to reduce failure costs, thereby increasing prevention

costs. The preventive actions are not comprehensive or not consistently implemented, so

the internal and/or external failures eventually come back. The rising internal &/or

external failures prompt another round of surveillance activities, with additional

assessment costs incurred.

The collection of Cost of Quality ("COQ") data becomes more and more costly and

bureaucratic over time, making it slower to respond to significant changes, and less

useful.

Statistical analysis of Cost of Quality ("COQ") data is not performed. Early recognition

of trends is missed, and random variations are mistaken for significant signals; starting

"wild goose" chases, wasting time & resources, and distracting everyone from the real

issues.

Cost of Quality ("COQ") system is isolated from other KPI (Key Performance Indicators)

systems, missing the opportunity for more in-depth understanding of cause-effect

relationships for the Cost of Quality ("COQ") results.

For any measurement system, it should cost less than ~1% of the savings generated by

the use of the measurement.

Things to Consider Before Implementing Cost of Quality ("COQ")

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1. Is the management team committed to making rapid changes for maximum profitability,

within the imposed constraints (eg. Company's Mission, laws & regulations, stakeholder

satisfaction, etc.)?

2. Are there "sacred cows", legacy systems, departmental silos, and empire building that are

exempt from re-evaluation?

3. Are the hard costs (payroll, raw materials, utilities, etc.) more easily measured (or more

important) than the soft costs (morale, employee satisfaction, market share, plant capacity

utilization, customer's losses, supplier's losses, societal losses)?

4. Are the current management measurement systems (eg. KPI's, scrap, rework, excess

freight charges, stock outages, absenteeism, productivity, profitability, etc.) Compatible

with Cost of Quality ("COQ")? Can these other systems be adapted to include Cost of

Quality ("COQ") without neither duplication nor conflict?

5. Will people be receiving mixed messages and conflicting signals between Cost of Quality

("COQ") and the traditional management measurements?

6. Is there management commitment to do something about the Cost of Quality ("COQ")

data on a timely basis?

7. Is there COQ Software available that suits your current and future needs for maximum

value from data at minimum cost?

8. If analysis of the control chart indicates that the process is currently under control (i.e. is

stable, with variation only coming from sources common to the process) then data from

the process can be used to predict the future performance of the process. If the chart

indicates that the process being monitored is not in control, analysis of the chart can help

determine the sources of variation, which can then be eliminated to bring the process

25


back into control. A control chart is a specific kind of run chart that allows significant

change to be differentiated from the natural variability of the process.

9. The control chart can be seen as part of an objective and disciplined approach that

enables correct decisions regarding control of the process, including whether or not to

change process control parameters. Process parameters should never be adjusted for a

process that is in control, as this will result in degraded process performance

10. If analysis of the control chart indicates that the process is currently under control (i.e. is

stable, with variation only coming from sources common to the process) then data from

the process can be used to predict the future performance of the process. If the chart

indicates that the process being monitored is not in control, analysis of the chart can help

determine the sources of variation, which can then be eliminated to bring the process

back into control. A control chart is a specific kind of run chart that allows significant

change to be differentiated from the natural variability of the process.

11. The control chart can be seen as part of an objective and disciplined approach that

enables correct decisions regarding control of the process, including whether or not to

change process control parameters. Process parameters should never be adjusted for a

process that is in control, as this will result in degraded process performance

Quality management: - It is a method for ensuring that all the activities necessary to design,

develop and implement a product or service are effective and efficient with respect to the system

and its performance. Quality management can be considered to have three main components:-

1. Quality control

2. Quality assurance

3. Quality improvement.

4. Quality management is focused not only on product quality, but also the means to achieve it.

Quality management therefore uses quality assurance and control of processes as well as

products to achieve more consistent quality. Quality Management is all activities of the

overall management function that determine the quality policy, objectives and

26


responsibilities and implement them by means such as quality control and quality

improvements within a quality system.

5. Quality management is not a recent phenomenon. Advanced civilizations that supported the

arts and crafts allowed clients to choose goods meeting higher quality standards than normal

goods. In societies where art and craft (and craftsmanship) were valued, one of the

responsibilities of a master craftsman (and similarly for artists) was to lead their studio, train

and supervise the work of their craftsmen and apprentices. The master craftsman set

standards, reviewed the work of others and ordered rework and revision as necessary. One of

the limitations of the craft approach was that relatively few goods could be produced; on the

other hand an advantage was that each item produced could be individually shaped to suit the

client. This craft-based approach to quality and the practices used were major inputs when

quality management was created as a management science.

6. During the industrial revolution, the importance of craftsmen was diminished as mass

production and repetitive work practices were instituted. The aim was to produce large

numbers of the same goods. The first proponent in the US for this approach was Eli Whitney

who proposed (interchangeable) parts manufacture for muskets, hence producing the

identical components and creating a musket assembly line. The next step forward was

promoted by several people including Frederick Winslow Taylor a mechanical engineer who

sought to improve industrial efficiency. He is sometimes called "the father of scientific

management." He was one of the intellectual leaders of the Efficiency Movement and part of

his approach laid a further foundation for quality management, including aspects like

standardization and adopting improved practices. Henry Ford also was important in bringing

process and quality management practices into operation in his assembly lines. In Germany,

Karl Friedrich Benz, often called the inventor of the motor car, was pursuing similar

assembly and production practices, although real mass production was properly initiated in

Volkswagen after world war two. From this period onwards, North American companies

focused predominantly upon production against lower cost with increased efficiency.

7. Walter A. Shewhart made a major step in the evolution towards quality management by

creating a method for quality control for production, using statistical methods, first proposed

in 1924. This became the foundation for his ongoing work on statistical quality control. W.

Edwards Deming later applied statistical process control methods in the United States during

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World War II, thereby successfully improving quality in the manufacture of munitions and

other strategically important products.

8. Quality leadership from a national perspective has changed over the past five to six decades.

After the Second World War, Japan decided to make quality improvement a national

imperative as part of rebuilding their economy, and sought the help of Shewhart, Deming and

Juran, amongst others. W. Edwards Deming championed Shewhart's ideas in Japan from

1950 onwards. He is probably best known for his management philosophy establishing

quality, productivity, and competitive position.

9. In the 1950s and 1960s, Japanese goods were synonymous with cheapness and low quality

(Just as Chinese goods are today), but over time their quality initiatives began to be

successful, with Japan achieving very high levels of quality in products from the 1970s

onward. For example, Japanese cars regularly top the J.D. Power customer satisfaction

ratings. In the 1980s Deming was asked by Ford Motor Company to start a quality initiative

after they realized that they were falling behind Japanese manufacturers. A number of highly

successful quality initiatives have been invented by the Japanese for example: - Taguchi,

QFD, Toyota Production System. Many of the methods not only provide techniques but also

have associated quality culture aspects (i.e. people factors). These methods are now adopted

by the same western countries that decades earlier derided Japanese methods.

10. Customers recognize that quality is an important attribute in products and services. Suppliers

recognize that quality can be an important differentiator between their own offerings and

those of competitors (quality differentiation is also called the quality gap). In the past two

decades this quality gap has been greatly reduced between competitive products and services.

This is partly due to the contracting (also called outsourcing) of manufacture to countries like

India and China, as well internationalization of trade and competition. These countries

amongst many others have raised their own standards of quality in order to meet International

standards and customer demands. The ISO 9000 series of standards are probably the best

known International standards for quality management.

11. The International Organization for Standardization (ISO) created the Quality Management

System (QMS) standards in 1987. These were the ISO 9000, ISO 9001, ISO 9002 and ISO

9003which all were 1987 series of standards comprising which were applicable in different

types of industries, based on the type of activity or process: designing, production or service

28


delivery. The standards have been regularly reviewed every few years by the International

Organization for Standardization. The version in 1994 and was called the ISO 9000:1994

series; comprising of the ISO 9001, 9002 and 9003. The last revision was in the year 2000

and the series was called ISO 9000:2000 series. However the ISO 9002 and 9003 standards

were integrated and one single certifiable standard was created under ISO 9001:2000. Since

December 2003, ISO 9002 and 9003 standards are not valid, and the organizations previously

holding these standards need to do a transition from the old to the new standards. The ISO

9004:2000 document gives guidelines for performance improvement over and above the

basic standard (i.e. ISO 9001:2000). This standard provides a measurement framework for

improved quality management, similar to and based upon the measurement framework for

process assessment.

12. The Quality Management System standards created by ISO are meant to certify the processes

and the system of an organization and not the product or service itself. ISO 9000 standards

do not certify the quality of the product or service.

13. Recently the International Organisation for Standardisation released a new standard, ISO

22000, meant for the food industry. This standard covers the values and principles of ISO

9000 and the HACCP standards. It gives one single integrated standard for the food industry

and is expected to become more popular in the coming years in such industry.

14. ISO has a number of standards that support quality management, one group describes

processes (including ISO 12207, ISO 15288) and another describes process assessment and

improvement ISO 15504. The Software Engineering Institute has its own process assessment

and improvement methods, called CMMi (Capability Maturity Model - integrated) and

IDEAL respectively.

15. COST OF POOR QUALITY (COPQ): Cost of poor quality (COPQ) or poor quality costs

(PQC) are defined as costs that would disappear if systems, processes, and products were

perfect. COPQ was popularized by IBM quality expert H. James Harrington in his 1987 book

“Poor Quality Costs.” COPQ is a refinement of the concept of quality costs. In the 1960s,

IBM undertook an effort to study its own quality costs and tailored the concept for its own

use. While Feigenbaum's term "quality costs" is technically accurate, it's easy for the

uninitiated to jump to the conclusion that better quality products cost more to produce.

Harrington adopted the name "poor quality costs" to emphasize the belief that investment in

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detection and prevention of product failures is more than offset by the savings in reductions

in product failures.

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REDUCING THE FAILURE COST OF QUALITY

Conventional wisdom would tell us that when you have some costs you can directly

control (Appraisal Costs) and others that you cannot (Failure Costs), that you should keep

a tight reign on the controllable costs and hope for the best with the others. Like most

paragraphs that begin with a statement about “conventional wisdom”, this one argues

against that strategy. The fact is that you can exercise indirect control over your

organization’s Failure Costs by appropriately managing the Appraisal Costs. This is not

to say that you should allow your Appraisal Costs to run wild. But it also infers that you

may not want to cut them too deeply. All of your Failure costs (every dollar of them) are

caused by a finite number of defects in your software. Every defect that you can remove

more economically than you currently do represents money on your company’s bottom

line. Every defect you can remove in a more timely way represents hours or days (or

weeks!) of schedule saved. Every defect that you avoid shipping to you customer, and

every useful feature that you do ship is priceless good will that builds your reputation in

the marketplace. The key is to find more efficient methods to detect and remove defects.

Defect Removal Activities

This is a list of the various methods that different organizations use to remove defects

from their software. They are listed roughly in order from most effective to least

effective (in terms of both time and cost per defect removed). Beside each is the word

“Appraisal” or “Failure”, indicating how most of the effort involved in that activity

would be classified.

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Activity Cost of

Personal Reviews (PSP reviews) Appraisal

Software Inspections (Fagan Appraisal

Peer Reviews Appraisal

Compiling Failure

Unit Testing Failure

Beta Testing Failure

System Testing (and performance & Failure

Acceptance Testing Failure

Walkt

hroug

hs

Appra

isal

Eff

e c tiveness

Testing is a relatively ineffective way to remove defects, but it is still a necessary part of your

development lifecycle. Rather than continuing to make it your main defect removal mechanism,

you would do better to use it to gage of the effectiveness of your earlier defect removal activities

like reviews, inspections and unit testing.

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GOAL OF COST OF QUALITY

The most costly condition occurs when a customer finds defects. Had the manufacturer

or service organization found the defects, through much inspection, testing and checking,

a less costly condition would have resulted. If the manufacturing or service

organization’s quality program had been geared toward defect prevention and continuous

quality improvement, defects and their resulting costs would have been minimized,

which is, obviously, the most desirable condition. The most costly condition occurs

when a customer finds defects. Had the manufacturer or service organization found the

defects, through much inspection, testing, and checking, a less costly condition would

have resulted? If the manufacturing or service organization's quality program had been

geared toward defect prevention and continuous quality improvement, defects and their

resulting costs would have been minimized—obviously, the most desirable condition.

Recent successes have resulted in revisions to the classic model of optimum quality

costs. Previously, prevention and appraisal costs were portrayed as rising asymptotically

as defect-free levels were achieved there is increasing evidence that the processes of

improvement and new loss prevention are themselves subject to increasing cost

effectiveness. New technology has reduced inherent failure rates of materials and

products, while robotics and other forms of automation have reduced human error

during production, and automated inspection and testing have reduced the human

error of appraisal. These developments have resulted in an ability to achieve perfection

at finite costs.

The goal of any quality cost system, therefore, is to facilitate quality improvement

effort that will lead to operating cost reduction opportunities.

The strategy for using quality costs is quite simple:

Take direct attack on failure costs in an attempt to drive them to zero;

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Invest in the “right” prevention activities to bring about improvement;

Reduce appraisal costs according to results achieved; and (4) continuously evaluate and

redirect prevention efforts to gain further improvement.

This strategy is based on the premise that

For each failure there is a root cause

Causes are preventable

Prevention is always cheaper

In a practical sense, real quality costs can be measured and then reduced through the

proper analysis of cause and effect. As failures are revealed through appraisal actions or

customer complaints, they are examined for root causes and eliminated through corrective

action. Elimination of root causes means permanent removal. The further along in the

operating process that a failure is discovered—that is, the nearer to product or service use by

the customer—the more expensive it is to correct.

Usually, as failure costs are reduced, appraisal efforts can also be reduced in a

statistically sound manner. The knowledge gained from this improvement can then be

applied, through prevention activities or disciplines, to all new work.

As straightforward as this approach may appear, it cannot work unless there is first a

basic quality measurement system that clearly identifies the correctable elements of

performance failures which represent the best potential for cost improvement. Such a

system is designed to use the data from inspections, tests, process control

measurements or evaluations, quality audits, and customer complaints as a measure of

company performance and a source of determining cost reduction projects. This

measurement is a basic and important part of quality management. The potential for

improvement can be determined by a system of accurate and dependable quality

cost measurement and analysis.

Since every dollar of quality cost saved can have a positive effect on profits, the value of

clearly identifying and using quality costs should be obvious. By minimizing quality

costs, quality performance levels can be improved.

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Companies VisitedMAHINDRA & MAHINDRA LTD.

Swaraj Division Plant 2 Chappercheri , Chandigarh Group of Colleges, Landran, Mohali, Punjab.

About the Company:

Mahindra Tractors is one of the top three international tractor companies in the world. For over two decades, the company is the undisputed leader in the Indian tractor market, which is also the largest tractor market in the world. Over the years, Mahindra Tractors grew by leaps and bounds to become a trusted name across all six continents of the world.

Established in year 1945, Mahindra & Mahindra Ltd. is a subsidiary of Mahindra group. The company manufactures general-purpose utility vehicles and today, it is the 10th largest private sector company in India, which is into manufacturing of tractors and light commercial vehicles along with other general utility vehicles. With increased scope of work, company's business is divided into four divisions viz. automotive, tractor, inter trade and MSL. These divisions handle steel, trading and manufacturing of ash handling plants and traveling water screens.

Rapidly expanding itself, now the company has seven state-of-the-art factories and 33 sales offices supported by a network of more than 500 dealers throughout the country. The company area exceeds over 5, 00,000 square meters and over 17,000 technical and non – technical personnel are employed there.

The company is offering services in the Indian sub-continent as well as international markets in Africa, Europe, the Middle East, the US, Latin America, China and Malaysia.The company has been awarded by many acknowledgments like Bombay Chamber Good Corporate Citizen Award for 2006-07, Business world FICCI-SEDF Corporate Social Responsibility Award – 2007, Deming Application Prize and Japan Quality Medal in 2007. On an average market capitalization up till June 2008 is around Rs. 13822.16 crores.

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Farm Equipment Sector (FES) is a part of US $6.3 billion Mahindra group, which is amongst the top 10 industrial houses in India. The group has a leading presence in key sectors of the Indian economy, including the financial services, trade, retail and logistics, automotive components, after-market, information technology and infrastructure development.

The Mahindra group's Farm Equipment Sector (FES) is amongst the top three tractor brands in the world. It has won the Japan Quality Medal in 2007. It also holds the distinction of being the first tractor company globally to win the Deming Application Prize in 2003. FES is the first tractor company worldwide to win these honors. This shows the strong focus of FES on Quality and Customer Satisfaction. Today, the domestic market share of FES is around 42%. (Mahindra brand: 30% and Swaraj brand: 12%).

FES has 6 state-of-the-art manufacturing plants (including 2 plants of Swaraj) in India, 2 plants in China, 3 assembly plants in USA and 1 assembly plant in Australia. FES has its presence in around 25 countries across six continents with more than 1000 dealers world-wide. FES has a subsidiary agricultural tractor manufacturing company in India known as Mahindra Gujarat Tractor Limited (MGTL). FES has a Sustainability Committee in place to take care of the implementation of GRI requirements.

Some facts about the company:

Industry Automotive Farm Equipment

Revenue 31,568.54 crore (US$ 6.85 billion) (2010).

Net income 2,871.49 crore (US$ 623.11 million) (2010).

Employees 16,000

MAHINDRA SWARAJ: Swaraj Group, part of Mahindra & Mahindra (FES Sector) is a dynamic and growing group, wherein focus is laid on generating economic prosperity for stakeholders, while growing harmoniously with the community and environment. Swaraj is one of the leading tractor manufacturers in India and the company is totally indigenous. Nearly 6, 00,000 Swaraj tractors operate in the field providing durable delight to the discerning farming community of India. Swaraj has over 600 dealers across the country. Swaraj Group has achieved

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http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Net_income

http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Revenue

http://en.wikipedia.org/wiki/Indian_Rupee

http://en.wikipedia.org/wiki/Indian_Rupee


ISO 14001:2004 & OHSAS 18001:2007 Certification and TS 16949 certification for Swaraj Automotives Ltd.

PRODUCTS: Tractors, Harvesters, Combines and Forklifts

MANUFACTURING AND QUALITY CHECK PROCESS

There are manufacturing shops like welding, assembly, paint shop, etc.

1. LMS (light machine shop): gears

2. HMS (Heavy Machine Shop): differential housing, gear box housing.

3. Assembly Shop

4. Paint Shop

There is buyout components quality check. Too many vendors are there. Standard Vendors are not checked. When everyday all shops start working, first testing is done at that point. Secondly when lots of material is there for example 40 gears are there in a lot, then 1-2 gears are picked at random and are tested. Third stage of testing is testing of finished product in stages eg. the car is tested on conveyor belt system.

At the Swaraj Division, 6 Quality posts were there out of which quality post QP- 4,5and 6 are merged. Finally there is final advice and touch up area. This is basically the rework area. QP1- QP4: testing of the various parts of the product is done to test whether there is any defect or not. Travel Card is used for this evaluation process. There is a quality check team in every shop which consists of around 3-4 Diploma Engineer Trainee.

Rework done is categorized as major rework, i.e. checking the noise in the differential, etc and minor rework includes repainting, etc. Training of the employees is basically done through session videos.

Testing is basically of two types:

37


Roller Testing: In this car is basically at one position and it is made to move in order to check the hydraulics, idle engine RPM, dent, left out paint area, etc.

Road Test: In this testing the overall product is checked for tyre alignment, engine working, etc.

Then there is Pre- Dispatch Inspection (PDI): Gate checking to check that the material that is being dispatched is in proper condition. Two copies of PDI report is there, one for the owner and the other for the dealer.

Quality Costing:

Prevention cost Quarterly Cost (Rs.) Percentage Total (%)

Quality training 90000 1.32Reliability engineering 400000 5.86Pilot studies 145000 2.12System Development 200000 2.93Total Prevention Cost 835000 12.24Appraisal Costs

Material Inspection 280000 4.10Supplies Inspection 170000 2.49Reliability Testing 265000 3.88Total Appraisal Cost 715000 10.32

Internal failure Costs

Scrap 865000 12.68Repair 765000 11.17Rework 980000 14.36Downtime 290000 4.25Total Internal Costs 2900000 42.75

External Failure Costs

Off warranty repairs andreplacements

560000 8.21

Customer Complaints 500000 7.33Product Liability 925000 13.56

38


Transportation Losses 380000 05.57Total External Failure 2365000 34.70

Total Quality Costs 6820000 100Kaizen costing

Poka yoke: full proof

Quality Circle

IQS( Initial Quality Service)

The Swaraj Division has a capacity of 1 lac units. However currently it is producing 60,000 tractors. There are seven different models of tractors that are designed and manufactured in this unit. Harvesters, combines and forklifts are also manufactured in this division. Units of harvesters manufactured 500 pa and forklifts produced are 1000 per annum.

COST OF QUALITY 2010 (Q1)

Person Contacted:

Ravinder

Assistant Manager,

M & M Ltd Swaraj Division.

Phone +91-172-2273404

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Rana Polycot Limited

Introduction

Rana Polycot Limited (RPL), promoted by Rana Gurjeet Singh and his brother Rana Ranjit

Singh, has facilities for – (1)(a) manufacture of cotton yarn with installed capacity of 72768

spindles, (b) Dyeing of Yarn with installed capacity of 4.8 TPD at village Alamgir, near

Lalru, District Mohali, Punjab and (2) knitted garments (with 16 computerized Flat Knitting

Machines and 220 Hand Flat Knitting Machines) at B-103, Industrial Area, Phase 8, Mohali,

Punjab.

Company History

Rana Polycot Limited, incorporated on July 5, 1993, entered into an agreement

with PSIDC (Punjab State Industrial Development Corporation), for setting up a

spinning unit in joint sector. In 1993-94, the company originally envisaged

setting up of a spinning unit with 24960 spindles at village Sanghol, Khamano,

District Fatehgarh Sahib, Punjab for manufacture of Combed Cotton Yarn. The

cost of the project, as appraised by IFCI, was estimated at Rs. 64.8 crore, which

was proposed to be financed by equity share capital of Rs. 35.50 crore (Pvt.

Promoters- Rs. 10.17 crore, PSIDC – Rs. 10.58 crore and public issue – Rs. 14.75

crore), subsidy of Rs. 0.30 crore and Foreign Currency Loan of Rs. 29 crores.

RPL is basically divided into three major units- 1. Spinning Unit:- This unit manufactures combed cotton yarn with counts ranging from

16s to 40s and is equipped with state of art technology. It being an export oriented unit, exports about 75% of the yarn produced.

2. Knitting Unit:- This unit is engaged in manufacturing of flat knit garments 90% of whose total production is exported to the brands like Espirit, Impulse, Wrangler, Fusion etc, with the balance 10% being sold in domestic market to the clients like ITC Wills, Madura Garments, and Tommy Hilfiger etc.

3. Yarn Dyeing Unit:- This unit has an installed capacity of 4.8 TPD (Tones per Day) which was setup during 2005-06 in order to cater to the higher value added segment. About 30% of the dyed yarn is presently being exported whereas the balance is being sold in domestic market.

The assets of the Company are financed through outsider’s funds and that the Company is using its resources of men, material and machinery effectively. On the whole the Company is growing and expanding its activities to increase the sales of the Company.

40


Quality : The Company’s quality department ensures that these processes support standard in the procurement of raw material, error profiling and proofing, best methods for checking product defects and regular quality audits.

41


COST OF QUALITY MEASUREMENT For the year 2009-10

Person contacted:Mr. R.C Sharma Senior Manager (Finance)

42

COST OF QUALITY (Rs.) p.a.

INTERNAL QUALITY COSTCosts related to scrap 19,11,954Rework Cost 2,41,097Invisible waste unused 600000Special Tests (Problem examination)Product waste and reprocess 1.2 Cr Salaries of quality departmentTotal Internal Cost 1.475 cr

EXTERNAL QUALITY COST

Product Insurance premiums 1.2 crTotal External Cost 1.2 cr

PREVENTION COST & APPRAISAL COSTQuality System Audit Cost 1,00,000Training cost 6,00,000Repair 2,30,000Maintenance cost (of plant) 35000000Costs of special audit 600000Total Prevention Cost 3.654 cr

Total cost of quality 6.325 cr(approx)

Production Value 180 cr% of Production Value 3.51 %


SIGM A FREUDENBER G NO K PVT . LTD.

(An Indo German Japanese Joint Venture) - Established in 1964

World leader in sealing technology

TS-16949, ISO-14001, OHSAS-18001 & ISO-9001 Certified Company

About The Company:

In August' 2000 Delhi based Sigma Corporation, Freudenberg Germany & NOK Japan formed a joint venture company, Sigma Freudenberg NOK Pvt. Ltd. (SFN) to manufacture the Freudenberg & NOK range of seals in India and to act as a sole marketing arm of both partners for their products manufactured worldwide in India.

This joint venture in India is closing one of the last gaps in the international set up of the Freudenberg NOK Group of Companies, since it is the 28th country and the 46th factory to manufacture the sealing range of their products. Being the unchallenged market leader in sealing technology, the Freudenberg & NOK, group of companies together with their Indian partner, Sigma will bring the latest technology in design, material, application engineering and production to India to support their Indian customers with state of the art seals, giving them a competitive edge in a more and more competitive environment.

Freudenberg & NOK will support the company with all know how available and guarantee the implementation with a full time Technical Director from Germany, having more than 30 years experience in other group companies worldwide. The core team of the factory has been trained in Germany for 6 months and the sales engineers have been intensively trained by experienced design Engineers from Freudenberg & NOK.

Production started in November 2001 and will continue to increase over the next years. Together with the trading business, Sigma Freudenberg NOK (SFN) will be able to offer a unique range of seals for every kind of application in the Engineering Industry.

Access to all R&D centres within the group leads to the best and most economical solutions for the Indian customers. The involvement of Sigma Freudenberg NOK from the first design step onwards gives the customer, access to the worldwide knowhow of the Freudenberg & NOK group, whereas the management expertise of the Sigma Group ensures the best possible implementation of the Freudenberg &

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NOK know how and technology in the Indian Company.

Sigma Freudenberg NOK is actively participating globally to continuously improve its performance in all business areas by adopting "GROWTTH" as its key strategy.

Our success, along with ongoing organization streamlining and continuous improvement measures, are powerful indicators of our ability to meet the challenges of the market with close customer focus.

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Cost Of Quality(Rs.) – JUNE 2010 27,83,713

Internal Quality CostCosts related to scrap 24,31,894Rework Cost 1,819

Unplanned sorting inspectionRepeat inspections and testsWaste – Discrepancies in quantities (Inventory Correction)Special Tests (Problem examination)

Costs resulting from customer complaints which will not be compensated, e.g. costs of travelling, special examination, sorting tests, non-chargeable stoppage, etc.

Costs resulting from extra transport under responsibility of FDSSalary of Q.A. Dept. 3,00,000Total Internal Cost 27,33,713

External Quality CostScrapping of returned goodsRework of returned goods

Costs of inspection and testing, rework, assembly and disassembly at the customer’s end

Recall from field

Chargeable subsequent expenditures at the customer’s, e.g. after process interruption

Costs of warranty claims – less insurance payments, if applicableTravel expenses and expense allowancesCosts of special inspection and testing

Product liability insurance premiums 20,000Total External Cost 20,000

Prevention Cost and appraisal cost

Quality System Audit Cost 18,000Calibration Cost 8,000Supplier Development Cost 4,000

Total Prevention Cost 30,000

Production Value 885.25 Lacs% of Production Value 3.14%

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Clients:ABB Harig Rane TRW ABI Showa Tech

Hindustan Hydraulics SimpsonsAshok Leyland Int. Combuston UT Bosch Knorr VoltasBHEL Komatzu Vickers Bajaj Tempo L & T Veljan Brakes India LML Wipro

Delphi Automotive Systems Lincon HelliousDantal Mahindra & MahindraEicher New HollandEscorts OscarHegglunds Royal Enfield

Contac t at:

Head Off. & PlantB-70, Industrial Area, Phase-VII,Sector-73, Mohali-160055(India)

Contact person: Mr. Anil Gupta (Senior Manager Finance & Accounts)Mr. Rajesh Garg (Head QA - dept)

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MARUTI SUZUKI INDIA LTD

Company Introduction

Maruti Suzuki India Limited (MSIL, formerly Maruti Udyog Limited), a subsidiary of Suzuki Motor Corporation of Japan is India's largest passenger car company, accounting for over 50 per cent of the domestic car market.

Maruti Suzuki has been ranked Indian most Trusted Brand by India's leading Business newspaper The Economic Times. This prestigious accolade comes alongside company's 10-year long pole position in customer satisfaction surveys. The biggest draw for the past ten years has been the award for highest recognition by the customer. In 2009-10 again, for the tenth consecutive time, Maruti Suzuki ranked the highest in JD Power.

Maruti Suzuki is currently expanding its network of Maruti Driving Schools across India, in collaboration with its dealers. These state-of-the-art institutes, offering practical, theory and simulator training along international lines, are aimed at making roads safer. This feat is entirely based on the company's constant endeavour to meet aspirations of a large and diverse demography, by providing the best through innovative products and services. Today, each car from the Maruti Suzuki factories at Gurgaon, and Manesar, Haryana, North India are the tangible evidence of Quality, manufacturing standards and efficiency.

Just two years back, Maruti Suzuki inaugurated its state-of-the-art new engine plant at Gurgaon. This new technology plant churns out K-series engines that are lean, highly fuel efficient and environment friendly. The introduction of new technology engines is in line with the company’s commitment to offer latest technology in full range of models. The K-series engines presently power the A-star, Ritz, Estilo, WagonR, and Swift.

Dzire models. The K-series engines would soon be extended to other models in the Maruti Suzuki range. Maruti Suzuki will be investing around Rs 1,250 crore (Rs 12.5 billion) on capacity expansion of the K-series engines. The expanded annual capacity will be over 7 lakh units from the present 5 lakh units. This will be a progressive investment to be completed by 2012.

Over the quarter century of its existence, Maruti Suzuki's contribution as the growth engine for the Indian automobile industry is widely acknowledged. Maruti Suzuki has impacted the lifestyle and psyche of an entire generation of Indian middle class through the quality of its products and services that are in direct sync with the needs of the Indian populace.

Manufacturing excellence

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This feat is entirely based on the company's constant endeavour to meet aspirations of a large and diverse demography, by providing the best through innovative products and services.Today, each car from the Maruti Suzuki factories at Gurgaon, and Manesar, Haryana, North India are the tangible evidence of Quality, manufacturing standards and efficiency.

Lean manufacturing

Maruti Production System or MPS draws learning's from its parent company Suzuki Motor Corporation's concepts on `lean manufacturing' under Suzuki Production System i.e. SPS.

Setting trends in new products and achieving customer delight starts with Manufacturing Excellence and Maruti's manufacturing excellence hinges around four important pillars-Cost, Quality, Safety and Productivity.

Cost

Every employee working on the line is 'cost sensitive' and functions in capacity of a Cost Manager. He is a key contributor in suggesting how to keep costs of production under control.

Quality

A product of poor quality requires repeated inspections, entails wastage in terms of repairs and replacements. "Do it right first time", is the principle followed to avoid wastage.

To ensure quality, robots were devices and deployed especially where they reduced worker fatigue and were critical in delivering consistent quality. With consistent improvements in the plant the company was able to manufacture over 600,000 vehicles in 2006-07 with an installed capacity of just 350,000 vehicles per year.

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COST OF QUALITY

Prevention cost Cost per annum(Rs.) Percentage Total (%)

Quality training 240000 1.52Reliability engineering 1200000 7.60Pilot studies 600000 3.80System Development 960000 6.08Total Prevention Cost 3000000 19.01Appraisal Costs

Material Inspection 720000 4.56Supplies Inspection 360000 2.28Reliability Testing 600000 3.80Total Appraisal Cost 1680000 10.64

Internal failure Costs

Scrap 1000000 6.34Repair 1140000 7.22Rework 1560000 9.88Special Tests (Problem examination) 1310000 8.3Costs resulting from customer complaints which will not be compensated, e.g. costs of travelling, special examination, sorting tests, non-chargeable stoppage, etc.

1110000 7.03

Total Internal Costs 6120000 38.78

External Failure Costs

Off warranty repairs andreplacements

1520000 9.63

Customer Complaints 1260000 7.98Product Liability 2200000 13.94Total External Failure 4980000 31.55

Total Quality Costs 15780000 100

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PARABOLIC DRUGS LTD.

Regd. Office: SCO 99-100, 3 rd & 4 th Floor, Sector 17-B, Chandigarh-160017(India) Ph. : +91-172-3914646, 3914647 Fax: +91-172-3914645Works: Village Sundhran, P.O. Mubarakpur, Derabassi(Pb.) 45, Industrial Area, Phase II, Panchkula.Website: www.parabolicdrugs.com

About the Company:

Parabolic Drugs Limited is one of the fast growing API (Active Pharmaceutical Ingredients) and API intermediate manufacturing and marketing company in with increasing international presence and a strong R&D foundation, based at Chandigarh, India. Commissioned in 1998, PDL has two fully functional, state of the art manufacturing units, a WHO-GMP certified Unit based in Derabassi (Punjab) and a world class Semi Synthetic Penicillin manufacturing plant at Panchkula, (Haryana) with one of its products been approved for sales to USA, respectively.

PDL has a dedicated Custom Synthesis and Research & development Centre at Barwala (Haryana), fully equipped with latest analytical facilities and backed up with GMP pilot plant for scale up of technologies and filing of DMFs.

Over the last twelve years of its existence, PDL’s management has created a scalable business model in the API & API Intermediate segment to offer a product basket of Semi Synthetic Penicillin’s (oral & Sterile) and Cephalosporin’s (oral) and Cephalosporin Sterile. The Company’s foray into Custom Synthesis & Contract Manufacture for innovator companies in US and Europe began in 2009 and it has made sizable inroads in the segment, having successfully executed orders for US based counterparts and many custom synthesis projects in process. This phenomenal growth has been driven by a vision of INR 1000 Crores, Global API and CRAMS Company by the year 2011-2012 under the leadership of Mr. Pranav Gupta, a young and dynamic first generation entrepreneur. The Company came out with its initial Public Office and got listed at NSE & BSE w.e.f. July 1st, 2010. It has recorded a turnover of Rs 559 crores in FY 2009 – 10 with a CAGR of 60% over the last five years. The Company has set forth huge expansion plans, including inorganic growth.

Parabolic Drugs Limited (PDL) received its certification of European Union in july 2010, for its Cephalasporin manufacturing facility in Derabassi, Punjab.The company has received approval

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for three of its molecules – namely, Cefuroxime Axetil, Cefpodoxime Proxetil and Cefixime Trihydrate. This will enable the company to sell its products into Europe, Canada and Australian markets, thus giving a boost to Company’s vision of building its business in regulated markets.With this EU-GMP certification of its Derabassi facility, PDL has expanded its sales reach in the highly regulated markets and has positioned itself as a strong API company”.The company has a stronghold in antibiotic space and marking its presence in the Custom Synthesis and Contract manufacturing (CRAMS) segment.PRODUCTS: SSP(Semi Synthetic Penicillin) , CEPH(Cephalosporin), 6API

Some basic facts about the company

HQ Region Chandigarh Area, India

Industry Pharmaceuticals

Type Public Company

Company Size 1,200 employees

Founded 1996

KEY FINANCIAL HIGHLIGHTS(FY-10) Gross Sales: Q4 FY10 up 35.90% to Rs. 183.78 Crores; FY10 up 30.10% to Rs.559.00 Crores

Launch of 5 new products in Cephalosporin antibiotic APIs, oral and sterile range Penetration of new geographies – exports made to 45 countries in fiscal 2010

Net Profit: Q4 FY10 up 105.71% to Rs. 11.52 Crores; FY10 up 42.84% to Rs. 34.20 Crores. Key Highlights

Received Certificate of Suitability (“COS”) from the European Directorate for the Quality of Medicines (and Healthcare), France (“EDQM”) for its DMF filed for Cefuroxime Axetil Amorphous - granting permission to sell the product in the regulated markets of the European Union

Executed 8 custom synthesis contracts for global innovator and biotech companies since January 2010

Signed long term sales contracts with Ranbaxy, Lindopharm Germany and Chemworth USA

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Commercial production at phase I of the Chachrauli facility for manufacturing non-antibiotic products to start in September 2010. Company has a pipeline of 20 non-antibiotic products

Expect total capacity expansion of 80% in the next twelve months time.QUALITY PROCESS OF API (ACTIVE PHARMACEUTICAL INGREDIENTS) BUSINESS

1. Incoming Quality Control: Raw materials are imported from China, Hong Kong, Taiwan and also domestically. First Quality Check when the vendors deliver the raw material.

2. Second testing : When the raw material is received at the plant.3. Processing check: in conformance with the SOP(Standard Operating Procedure):

whether the raw material that is received is actually the desired one or not.4. Employees quality oriented training program: rigorous training of employees.5. Quality Assurance: checking the product that is being delivered to external agencies

after processing.6. Cost incurred in terms of customer audit and accredit ion costs: the quality is

maintained under various regulatory accreditions like WHOGMP(World Health Organization good manufacturing practice), EUGMP(European good manufacturing Practice) and ISO 14001: 2004

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COST OF QUALITY FOR YEAR 2009

Cost (in % of actual cost of quality)

Total cost(in lacs)

Appraisal Costs Testing cost 8% 64Incoming Quality control cost 10% 80Infrastructural quality standards 15% 120Total Appraisal costs 33% 264 Prevention cost GMP training 16% 128Employee Quality oriented training 10% 80Research and development for quality enhancemeny 20% 160Customer audits 6% 48Quality audits 9% 72Total Prevention costs 61% 488 Internal failure Costs Rework 5% 40Total Internal Costs 5% 40 External Failure Costs 1% 8 Total Quality Costs 100% 800

Total Cost 3000

Cost of Quality as a Percentage of total cost 26.67%

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Cost of Quality - 3 September, 2010 - Dr. Paramjit Kaur

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Transcript of Cost of Quality - 3 September, 2010 - Dr. Paramjit Kaur