QUALITY COSTINGHistorical perspective : The work of the Quality gurusDeming, Juran and Crosby have carried the message of quality to the world for more than thirty years. Nowadays more managers are focusing on quality as a way of increasing productivity, reducing costs and meeting customer needs. They have understood the importance of continuously improving the quality of their products and services in order to achieve these goals.1. William Edwards Deming ( 14.10.1900 to 20.12.1993 ) : The father of the third wave of the industrial revolution.Best known for his work in Japan from 1950 onward. He led Japanese businesses on the course that made them leaders in quality and productivity. Had a Phd in physics. Better known as a statistician. Was an educator, lecturer, author, an international consultant. According to him quality of a product or service is defined by the customer. His approach to quality : A systems and leadership approach.His Concepts :(i)System of profound knowledge – According to him there is no substitute for knowledge. Hard work and best efforts are not the answer. Without profound knowledge, management action can lead to ruination.The system of profound knowledge is made up of four interrelated parts.(a) Theory of systems : A system is a series of functions or activities within an organization that work together for the aim of the organization. Without an aim, there is no system. What must be studied are the components of the system ( management style, employees, customers, environmental constraints, shareholders, training, recruitment, suppliers …) and their interrelationships with each other.Problems which can be caused by lack of appreciation of organizations as systems – leads to fragmentation, people going in different directions unaware of the internal and external influences and interactions that affect their work. (b) Theory of variation : Knowledge of statistical theory is essential to profound knowledge. Managers must be able to recognize a stable system and understand the concepts of special( localized) and common (system) causes of variation. Measurements of variation provides the means for predicting the behaviour of a system. (c) Theory of knowledge : It addresses the way in which knowledge is advanced. The process of advancing knowledge - as a slow, continuous stream of tests and experiments, each designed to advance the state of knowledge in a particular field.Managers should pursue goals similar to those of science ( explain, predict and control 0 to gain more knowledge about the systems and processes in their organizations.They have to collect, analyze, interpret and apply data derived from experimentation.One should not just copy successful examples from elsewhere. One should understand the example with the aid of theory. Many organizations fail in their quest of quality due to the fact that they fail to learn the theory of Quality management first. (d) Knowledge of psychology : The dynamics of people in the workplace, group, team performance, leaning styles and cultural change have to be understood by management.Since people are different from one another, management must be aware of those differences and use them to optimize performance.

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(ii) The Plan-do-check- Act Cycle ( or the Shewhart cycle ) : He emphasized continuous improvement and it is the obligation of management to constantly improve the system of production and service. The cycle shows the concept of ongoing improvement.(iii) Prevention by process improvement: Inspection at the end is too late. Shift from detection to prevention.Prevention approach achieved by process analysis, control and improvement.A process can be considered as a series of interrelated activities with inputs ( resources), transformation and outputs ( goods and services ). Can also be considered as a set of conditions or a set of causes that work together to produce a given result. It is a blending of machines, people, methods and materials. Quality results from studying and changing the process, not inspecting the final product. Measurement is used to monitor processes and take action to minimize the possibility of producing unacceptable products and services and delivering them to the customer. (iv) Chain reaction for Quality improvement: Deming’s philosophy can best be depicted by what he calls the chain reaction for quality improvement. By improving quality, costs decrease and productivity improves. As a result, there is a greater potential for an increased market share.To address the first box in the chain reaction (improve quality) management must adopt the 14 principles of management and understand the statistical approach to process improvement. To appreciate fully the meaning of improving quality in Deming’s chain reaction, an understanding of the concept of variation is required.(v) Common cause and special cause variation:When Deming describes quality, he talks about products that possess a predictable degree of uniformity, suited to the end-users at a price that they can pay. McConnell refers to it as a predictable degree of variation. Deming says that there is no such thing as two of a kind, since variation is inherent in everything we do. No two services offered are identical. So, to produce quality, you must produce outcomes that are predictably uniform as well as satisfactory from a customer’s perception. Deming has labeled sources of variation as common cause and special cause. He talks about them in terms of who is responsible for taking action. Common causes of variation exist because of the system or the way the system is managed. These causes are beyond the reach of the Chain Reaction for Quality Improvement.(vi) 14 points : According to Deming, the 14 points or obligations apply anywhere, in any type of organization. These points provide the basis for initiating and sustaining an organizational transformation that focuses on customer satisfaction through quality. These are the obligations of management and cannot be delegated.To adopt the 14 points, management should think long term so that they can be in business tomorrow.The 14 key principles for transforming business effectiveness:

(1) Create constancy of purpose toward improvement of product and service, with the aim to become competitive and stay in the business.

(2) Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership change. 2.

(3) Cease dependence on inspection to achieve quality. Eliminate the need for inspection on a mass basis by building quality into the product in the first place.

(4) End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move towards a single supplier for any one item, on a long-term relationship of loyalty and trust.

(5) Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.

(6) Institute training on the job.(7) Institute leadership. The aim of supervision should be to help people and

machines and gadgets to do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.

(8) Drive out fear, so that everyone may work effectively for the company.(9) Break down barriers between departments. People in research, design, sales, and

production must work as a team, to foresee problems of and in use that may be encountered with the product or service.

(10) Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.

(11) a. Eliminate work standards (quotas) on the factory floor. Substitute leadership. b. Eliminate management by objective. Eliminate management by numbers, numerical goals. Substitute leadership. (12) a. Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality. b. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. (13) Institute a vigorous program of education and self-improvement. (14) Put everybody in the company to work to accomplish the transformation which is everybody’s job.‘Massive training is required to instill the courage to break the tradition. Every activity and every job is part of the process.’(vii) The seven deadly diseases : According to Deming deadly diseases afflict most companies in the western world. The cure is not easy. It requires a complete change in management style. The diseases include : (a) Lack of constancy of purpose. (b) Emphasis on short-term profits (c) Evaluation by performance, merit rating or annual review of performance.(d) Mobility of management (e) Running a company on visible figures alone (f) Excessive medical costs (g) Excessive cost of warranty, fueled by lawyers who work for contingency fee The remedy was the 14 points.Summary : - Quality in terms of current and future needs of customers.

- Emphasis on statistical thinking and methods.- An understanding of profound knowledge is essential to his approach of quality.- Management given the responsibility of adopting the 14 points and of leading by

example.- The organization is viewed as a system and the use of scientific method to optimize the system. 3.

2. Joseph Moses Juran ( 24.12.1904 to 28.02.08 ) : Better known as a Quality management consultant..Quality is fitness for use. He stresses on a balance between product/service features and product/service free from deficiencies.1st element :Features mean technological properties of a product, ( e.g fuel consumption of a vehicle ) to meet the customer’s needs. In the case of services it can be promptness of delivery or courtesy extended. 2nd element : Product free from deficiencies (e.g errors in invoicing, factory scrap, late deliveries ). These failures cause customers to become dissatisfied.Anyone affected by the product is a customer – those who deal with the product during the developmental stage (internal customers) and those who deal with the finished product ( external customers ).Juran proposes a strategic and structured approach to achieving quality and the following concepts:(i) The spiral of progress in quality : Any organization produces and distributes its products through a series of specialized activities carried out by specialized departments. These activities are depicted by the spiral of progress in quality. The spiral shows actions necessary before a product or service can be introduced to the market.- Each specialized department in the spiral (e.g customer service, marketing, purchasing) is given the responsibilities to carry out its assigned special function.- In addition each specialized department is also assigned a share of the responsibility of carrying out certain company-wide functions such as human relations. finance and quality.- Quality results from the interrelationship of all departments within the spiral.- Juran talks about Quality function to describe activities through which the department around the spiral can attain quality.

(ii) Developing and implementing Quality Improvement projects : Quality improvement projects are carried out throughout the organization.The approach :1.Identifying the activities that could meet the company’s goal of ‘Fitness for use.’2.Assigning the activities to the various departments around the spiral.3.Providing the facilities and tools needed to conduct these activities.4.Conducting the assigned activities within the designated departments.5.Ensuring that these activities are properly carried out.6.Coordinating the departmental activities.

(iii) Breakthrough Sequence : His philosophy addresses improvement and innovation in terms of breakthrough.A breakthrough is a dynamic, decisive movement to new, higher levels of performance.The breakthrough sequence involves activities that, if carried out properly, will result in improvements in quality and will eventually result in unprecedented performance that will help the organization to launch innovative products.Possible results of breakthroughs:(1) Attainment of quality leadership (2) Solution to a large number of field problems (3) Improvement of the organisation’s public image.

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Barriers affecting opportunities for breakthroughs : Breakthrough can be resisted by managers who traditionally concentrate on control.Through control, managers, maintain the present levels of performance or prevent adverse change.Control activities such as short-term problem solving have a short-term focus. They are necessary to hold on to gains, but will not lead to improvement and innovation.Breakthrough activities are needed to achieve higher levels of performance and innovation and to exceed customer satisfaction.All breakthroughs follow the same sequence :(1) Policy making (2) Setting objectives for breakthrough (3) Breakthroughs in attitudes (4) Use of Pareto principle (5) Organising for breakthrough in knowledge (6) Creation of steering arm (7) Creation of diagnostic arm (8) Diagnosis (9) Breakthrough in cultural pattern (9) Transition to the new level.

(iv) Project-by-project approach to implementation of quality improvement methodology:- Two kinds of teams are formed, the steering arm and the diagnostic arm, to work on analysing problems.- A committee of managers is formed to solicit project nominations from all employees, to select that year’s projects and to appoint teams to address each one. A number of teams are formed depending on the number of projects selected.Members of the team should develop skills in team leadership and team participation and acquire knowledge of problem-solving tools.Also all employees need to participate in the improvement process and have the skills needed to make improvements.The main thrust of these teams is to solve problems. Not quick-fix but actually finding the causes of problems. The journey from symptom to cause.Examination of the symptom is the starting point of the action team, since the symptom shows that something is wrong. The members then need to discover the cause.The diagnostic journey : The journey from symptom to cause.The remedial journey : The journey from cause to remedy.Since both journeys are different in purpose, they require teams of people from different levels and departments and with different skills.The teams’ outcomes are documented and presented to the rest of the organization in an annual audit.The process of soliciting nominations for next year’s projects is then repeated.(v) The Juran Trilogy : It provides a systematic approach to carrying out Juran’s methodology for managing quality. However active leadership from the top is essential for its implementation.According to the trilogy management for quality consists of three interrelated quality-oriented processes : Quality planning, Quality control and Quality improvement.Quality planning involves developing a process that will achieve established goals. People working in the planning phase are responsible for determining who their customers are and identifying customer needs and expectations.

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Quality control is concerned with holding onto gains and not letting waste increase. The control process addresses the sporadic spikes in variation and if necessary, the people working in this process create teams to determine the causes of any abnormal variation in the process.Those working in the Quality improvement process are concerned with lowering the cost of poor quality in existing processes, but more importantly, are responsible for using the lessons learned for seeking innovative ways to achieve better levels of performance. This is continuous improvement.Each process in the trilogy is universal and inherent in organizations focusing on quality.Relevant activities include identifying customers, establishing measurements and diagnosing causes.Quality planning is analogous to budgeting, quality control to cost control and quality improvement to cost reduction.(vi) The vital few and the trivial many : Prioritisation of problems to be solved.The Pareto principle is a useful tool. A few factors account for the largest percentage of a total.Most of the cost of poor quality can be attributed to a very small number of causes called the vital few. The other defects called the trivial many, lately the useful many, can be ignored for a time. But can be useful later.One should concentrate on the causes that are responsible for most of the defects and will result in the greatest pay-off. ( Cause A ).

3.Philip B. Crosby ( 18.06.1926 to 18.08.2001 ) PREVENTION IS THE FOUNDATION OF HIS APPROACHQuality means conformance to requirements.Quality must be defined in measurable and clearly stated terms to help the organization take action based on tangible targets, rather than on hunch, experience, or opinions.Quality is either present or not present.There is no such thing as differing levels of quality. Thus management must measure quality by continually tracking the cost of doing things wrong- the price of non-conformance.Cost of quality (COQ) = Price of conformance (POC) + Price of Nonconformance (PONC)POC refers to the cost of getting things done right the first time.PONC provides management with information regarding the wasted cost and a visible indication of progress as the organization improves.CONCEPTS :(i) Do it right the first time (DIRFT) : Focuses on doing things right the first time and every time. There is no place for differing levels of quality or categories of quality (high/low, good/poor). There should be no reason for planning and investing in strategies that are designed in case something does not conform to requirements and goes wrong. - The way to manage quality is by prevention, not detection and testing.Any product that falls within its design specifications is a quality product.- It is a common attitude amongst managers to believe that error is inevitable, it is a normal part of business life and that one has to cope with it. Management creates most of

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its problems through its attitudes and practices in terms of what is rewarded and supported in an organization, e.g if adherence to schedule is reinforced over quality, then schedule will become the focus of the work. Thus there is a need to change management’s perception of and attitudes about quality.(ii) The performance standard is Zero defects : The ultimate goal of his quality improvement process is Zero defects or defect-free products and services. Zero defects is an attitude and commitment to prevention.Zero defects does not mean that the product has to be perfect. It does mean that every individual in the organization is committed to meet the requirement the first time, every time and not meeting the requirement is not acceptable.To get everyone involved in the process of quality improvement, individual conformance to requirements must be stressed upon.He proposed a Zero Defects Day : a day that provides a forum for management to reaffirm its commitment to quality and allows employees to make the same commitment.The four absolutes of Quality Management ( The core concepts of the quality improvement process )1.Quality is conformance to the requirements: All the actions necessary to run an organization, produce a product or service and deal with customers must be met and agreed. If management wants people to do it right the 1st time, they must clearly communicate what it is and help them achieve it through leadership, training, and fostering a climate of cooperation. 2.The system of quality is prevention: The system that produces quality is prevention (i.e. eliminating errors before they occur). To Crosby, training, discipline, example and leadership produce prevention. Management must consciously commit themselves to a prevention-oriented work environment. 3.The performance standard is Zero Defects (Do it right the first time): the attitude of close enough is not tolerated in Crosby’s approach. Errors are too costly to ignore. Leaders must help others in their pursuit of conforming to requirements by allocating resources for training, providing time, tools, etc., to all employees. 4.The measurement of quality is the price of nonconformance: Nonconformance is a management tool for diagnosing an organization’s effectiveness and efficiency.

These absolutes help management focus on quality improvement and more importantly help them make the shift from what Crosby calls conventional wisdom (the idea that if quality goes up, so does the cost) to the idea that quality and costs are not in competition with each other. According to Crosby, as quality increases, cost decreases- thus, quality doesn’t cost. This reasoning led to Crosby’s famous phrase, Quality is free, but it is not a gift.To implement his quality improvement process, Crosby delineates a 14-step approach consisting of activities that are the responsibility of top management, but also involve workers. The 14 steps represent Crosby’s techniques for managing quality improvement and communicating the four absolutes.Prevention process : His approach addresses prevention rather than inspection and correction of errors. According to him prevention involves thinking, planning, and analysing processes to anticipate where errors could occur, and then taking action to keep them from occurring. 7.

Problems usually arise because product or service requirements are either lacking or in error. His prevention process begins by establishing the product or service requirement, developing the product or service, gathering data, comparing the data to the requirement, and taking action on the result. This is a continuing activity.Quality Vaccine : He formulated a quality vaccine that consists of three distinct management actions : determination, education and implementation.Determination surfaces when management sees the need to exchange and recognizes that change requires management action.Education is the process of providing all employees with the common language of quality, helping them to understand what their role is in the quality improvement process, as well as helping them to develop a knowledge base for preventing problems.Implementation consists of development of a plan, the assignment of resources, and the support of an environment consistent with a quality improvement philosophy. Management must lead by example and provide follow-up education.The Six C’s : Education is a multi-stage process that every organization go through. The process consists of 6 C’s - comprehension, commitment, competence, communication, correction and continuance. Comprehension : Must begin at the top and must include all employees eventually. Without it quality improvement will not occur.Commitment : Must also begin at the top and represents the stage when managers establish a quality policy.Competence : Developing an education and training plan during this stage is critical to implementing the quality improvement process in a methodical way.Communication : All efforts must be documented and success stories published so that complete understanding of quality by all people in the corporate culture is achieved.Correction : Focuses on prevention and performance.Continuance : The process must become a way of life in the organization. Quality must be integrated into all day-to-day operations.4. Kaoru Ishikawa ( 13.07.1915 to 16.04.1993 )Best known for the Ishikawa or cause and effect diagram ( fishbone diagram ) used in the analysis of industrial process.It was his skill at mobilizing large groups of people towards a specific common goal that was largely responsible for Japan’s quality improvement initiatives.He translated, integrated and expanded the management concepts of Deming and Juran into the Japanese system. Some of his contributions are :(i) User friendly quality control (ii)Fishbone cause and effect diagram – Ishikawa diagram (iii)Implementation of quality circles (iv) Emphasized the internal customer.(v) Shared vision5. Armand V. Feigenbaum (1922): His contributions to the quality body of knowledge :- Total quality control is an effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in an organization so as to enable production and service at the most economical levels which allow full customer satisfaction. This came to be called Total quality management.- The concept of the hidden plant – So much extra work is performed in correcting mistakes that there is effectively a hidden plant within any factory.- Accountability for quality : Must be managed and have visibility at the top level.- The concept of quality costs. 8.

DEVELOPMENT OF THE CONCEPT OF QUALITY COSTS- The concept of the economics of quality can be traced back to the early 1950s.During the 50s the new statistical quality control depts. Could no longer sell their programs solely on enthusiasm for the statistical tools. A new approach was needed based on the language of management, i.e money.- Chapter I of J.M.Juran’s first ‘Quality control handbook’ (1951) was titled ‘The Economics of Quality.’. It contained discussions on the ‘cost of quality’ and his analogy ‘gold in the mine.’- 1960 : Harold Freeman’s paper ‘How to put Quality costs to use.’- A.V. Feigenbaum : ‘Total quality control, 1961 – Chapter 5 : Quality Costs.’. He categorized Quality costs into the costs of prevention, appraisal, internal and external failure.- American society for quality controllers ( ASQC ). ASQC Quality cost technical committee was formed in 1961.- December 1963 : Department of Defence issued MIL –Q-9858 A : ‘Quality program requirements, making costs related to quality a requirement on many government contracts and subcontracts.- 1964 : Industrial engineering department of Stanford university did a research study for Airforce Systems command and published, ‘Quality improvement through cost optimization system.’- 1967 : Release of Quality and reliability assurance technical report TR8, ‘Guide to Quality cost analysis.’ - ASQC technical committee published ‘Quality costs – What and how’ in 1967.- 1977 : Guide to reducing quality costs- 1980 : Guide for managing vendor quality costsQUALITY COSTS V/S THE COST OF THE QUALITY DEPARTMENT - Do not confuse quality costs and the cost of the quality department.- Don’t view quality costs as the expenses of the quality Department- Each time work must be redone, we are adding to the cost of qualitye.g rework of a manufactured item, retest of an assembly, rebuilding of a tool because it was originally unacceptable, response to a customer complaint.Any cost that would not have been expended if quality was perfect contributed to the cost of quality.Why was the system of quality created ? Because many such costs are overlooked or unrecognized because most accounting systems are not designed to identify them.What does the system of quality costs demonstrate ? (i) That the cost of ‘doing things over’ is a significant addition to the cost of quality management.(ii) To show that these costs collectively offer an otherwise hidden opportunity for profit improvement.When does the most costly condition exist ?When a customer finds defects. Had defects been found through inspection and testing it would have saved money. If prevention was there, defects and their resulting costs would have been minimized. This is the most desirable condition.Definition : Quality costs are all those costs due to defective product: the cost associated with making, finding, repairing and avoiding defects. Costs associated with providing and insuring a high quality product or service.

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Categories of quality costs1. Prevention costs : Activities designed to keep defects or customer dissatisfaction from occurring in the first place. To keep appraisal costs to a minimum and to keep failure from happening.Examples of such activities :Quality planning : preparation of manuals and procedures, creating the overall quality plan.New products review, training, quality circle meetings, quality improvement projects Defect prevention program.2. Appraisal costs : These are costs incurred to discover the condition of the product, mainly during the ‘first time through’.The costs include :Incoming material inspection, Inspection and test, Maintaining accuracy of test equipment, Materials and services consumed for tests and during destructive tests.Evaluation of stock to evaluate degradation.3.Internal failure costs : These are costs which would disappear if no defects existed in he product prior to shipment to the customer. Examples include :Scrap: The net loss in labour and material resulting from defectives which cannot be economically repaired or used.Rework : The cost of correcting defectives to make them fit for use.Retest : The cost of reinspection and retest of products which have undergone rework or other revision.Downtime : The cost of idle facilities resulting from defects, e.g printing press down due to paper breaking.Yield losses : The cost of process yields lower than might be attainable by improved controls. Includes ‘overfill’ containers due to variability in filling and measuring equipment.Disposition : The effort required to determine whether nonconforming products are usable and to make final disposition. Includes the time of individuals and material review boards.4.External failure costs : The defects are found after shipment to the customer. These costs would also disappear if there were no defects.Complaint adjustment : All costs of investigation and adjustment of justified complaints attributable to defective product or installation.Returned material : All costs associated with receipt and replacement with defective product returned from the field.Warranty charges : All costs involved in service to customers under warranty contracts.Allowances : Costs of concessions made to customers due to substandard products being accepted by the customer as is. Includes loss due to down grading products for sale to customers.Uses of quality costs :(i) Potential quality problems can be verified by developing quality costs.(ii) Quality costs can alert an area about quality problems that may not be evident by traditional quality standards. 10.

(iii) Once activities with high failure costs are identified, action can be taken to correct the problemThe net consequence is reduced failure costs, improved quality and productivity.

Contribution of quality control professionals in an organization : Maintaining the required level of quality while minimizing the costs of achieving that quality.How to do this ? (i) Measure the cost of quality (ii) Analyse it (iii) Control itHow can the quality department indicate its importance /By showing how a reduction in the cost of quality for the whole operation can result in improved profitability of manufacturing and reduced warranty costs, with improved customer relations. The strategy to be followed is to show top management the potential for reducing costs of quality.

QUALITY COST PROGRAMSPurposes of quality cost programs :(i) To estimate the quality costs, with a view of using the information to justify a program of quality improvement and quality cost reduction.(ii) To measure quality costs and to publish the results as a continuing scoreboard in the expectation that the new knowledge will stimulate managers to take appropriate action. Phases in the quality cost program :A quality cost program consists of 3 phases – selling, project and control phases.

Selling phase : Serves to identify the existence of a chronic quality cost situationWhich could be economically improved

Project phase : Serves to observe progress during the improvement program

Control phase: ProvidesData needed for control at the new improved level.

Objectives of the phase

To justify a program of Quality improvement andCost reduction

To observe an stimulate progress during the improvementprogram

To hold gains made during the improvement program and to provide data for continuing control of quality costs

Sources of information

Estimates made by Quality specialists supplemented byAccounting data

Accounting data Supplemented by estimates made byQC specialists

Accounting data

Information published by

Quality control Quality control withVerification by Accounting

Accounting with chartingand commentary by Qualitycontrol

Frequency ofpublication

One-time orInfrequently, e.gAnnually

At least annually :Sometimes monthly

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Monthly or quarterly

SOURCES OF QUALITY COST DATA :1. From established accounts, as in the common cases of inspection costs or guarantee charges2. From analysis of the ingredients of established accounts :e.g an account consists of the cost of customers’ returns. However these returns are made for two different reasons - defective product and surplus product. The quality costs can be separated from the non-quality costs.3. From basic accounting records : e.g some production department employees are engaged full-time in product inspection. By securing their names and using the payroll department records, it is feasible to summarize this contribution to quality costs.4. By estimate : e.g the process development department engages in some activities which are classified as quality costs, but the personnel do not separate their time charges in a way which permits an evaluation of these costs.The departmental supervisor is asked to work up an estimate based on work sampling or by judging the proportions of time spent by the various men on the quality cost activity.5. By creating temporary records : e.g Some Production operators spend part of their time repairing defective product. No records are available to show how this time has been divided in the past. The men are asked to keep record for a four-week period and the results are used to create an estimate.It must be noted that managers often make decisions on estimate of the facts or on incomplete facts. Hence using estimates is acceptable.

Overstatement and understatement of quality costs :It is a common mistake to include costs which are not quality costs which lead to overstatement of the overall figure. It can also be understated.

1. Inclusion of non-quality costs in quality costs : e.g scrap for quality control people means defective product that cannot be salvaged. Scrap to the accountant means all material sold to the junkman.Loss due to poor yields for the accountant may include not only spoiled batches and kettle residues washed during cleaning between batches.Hence care must be exercised to separate those non-quality costs (avoidable costs ) out of the totals so that attention will be directed towards the main issue.

2.Implication of Zero defects : Quality costs are often presented with the implication that they could be reduced to zero and that the total costs of quality can be avoided. There is an optimum level of quality costs and it is not zero.

3. Avoidable costs hidden in standards : There are true quality costs which are included in the standards and are thus disguised as being unavoidable. E.g a process may have been operated for years at a yield of 90% good product. Alarm signal will sound only if the 10% defectives are exceeded. The cost of 10% defectives is part of the quality costs and is a likely project for improvement. Product designs which are unduly precise may require continuing quality costs in the form of sorting and rework and are avoidable quality costs.

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Managing cost of quality programsFor a cost of quality program to be successful it needs :- Blessings of top management – Commitment of top management3 basic ingredients to success in managing cost of quality1. Acceptance by Top Management2. Acceptance by the financial community3. Must be easily understood by lower levels of management.

How to determine the quality cost of a quality activity ?1. Labour costs :The number of hours per month spent performing the activity is calculated.

Total labour hours spent = Total labour time x number of employees performing that activity

Labour cost per hour = Midpoint of the salary scale x FactorFactor allows for fringe benefits associated with a basic salary , e.g if fringe benefits are 30% of basic salary factor is 1.3- A particular activity’s cost = adjusted salary rate x total labour hours spentIf more than one employee salary level performs that activity, the weighted average of the adjusted salary levels of all individuals performing that function are calculated when determining the cost of that activity. 2. Non-labour costs : These should be analysed for their quality cost contribution. Examples of non-labour costs – having extra equipment on hand for possible machine downtime (prevention), destroying forms which were prepared incorrectly (internal failure), paying interest penalties (external failure )

STEPS IN DEVELOPING A COST QUALITY PROGRAM(i) Identify the activities within each of the product assurance Engineering departments and the manufacturing departments. Consider each area and each activity in that area is listed. Use a questionnaire with the listing of all the conceivable activities. Request the respondents to answer the questionnaire.- The supervisor of each department enumerates how many people perform the activity, salary level of each individual and how much time is spent performing each activity.Time can be a % of a working day or in absolute hours.- Labour time shown on the report should balance to the total amount of labour time available in that area, including supervisor’s time.- All activities should be categorized into quality and non-quality activities ( e.g Production and administration ).

(ii) Identify the quality related costs for each activity. Quality activities are then categorized by specific quality cost category.Data are collated : Allocate the departmental costs into the proper quality costs categories. 13.

Expenses associated with the central product assurance engineering operations consisting of the Director and his direct reports were proportionately allocated to the plants based on the plant head counts.- Each quality activity is costed out to determine each activity’s cost as well as each quality cost category’s total.- Completion of calculations : Quality costs of all activities are totaled by category to determine the percentage each quality cost category contributes to overall quality costs.- Each category’s total is compared to the area’s overall expense figure to provide further comparison of quality costs to overall area expense.(iv) Analysis of findings and recommendations :

- This highlights the magnitude of quality costs- Area’s quality cost mix- Specific high failure costs

The analysis suggests a future course of action, e.g quality improvement project, e.g high failure costs are associated with a particular activity.A quality improvement project is done in order to reduce quality and total costs or change the quality cost mix in order to improve actual quality levels. (v) Generation of a report highlighting the problem areas and significant opportunities for improvement.

PRESENTATION TO TOP MANAGEMENTTo convince top management to support a program of improvementCertain principles have to be followed to be able to do this.1. Establish that quality costs are of a size and nature sufficient to attract top management attention. Present simple summaries of the total quality costs and the main elements of each summary.An example : Quality costs : Printing company ( Rs 000 )Losses due to quality failuresPress downtime 404Correction of typos 309Bindery Waste 74Plate Revision 40Cover-making waste 56Customer complaints remakes 41TOTAL 924Appraisal expensesProof reading 709Other checking and inspection 62TOTAL 771Prevention expensesQuality improvement project 20Quality planning 10TOTAL 30TOTAL QUALITY COSTS 1725

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2. Single out individual cost elements which look like they have the potential. In the table above there are three elements on which improvement can be brought.3. Prepare a Pareto Analysis to show which elements of quality costs are the vital few and which are the trivial many.4. Prepare the return on investment estimates for specific projects identified by the Pareto analysis. These estimates involve the potential improvement and the analytical effort required to discover causes and to point to remedies.5. Prepare and present the quality cost summary by cost categories.

EXAMPLE OF QUALITY COST DATA : Quality costs ( Rs 000) by QuartersCost categories I II III IV YEAR QC engineering 5 5 5 5 20Tool maintenance 4 5 4 4 17Gauge control 3 3 3 3 12Other 1 1 1 1 4Total Prevention 13 14 13 13 53Inspection 66 72 51 66 255Test 24 30 10 18 82Test materials 12 22 12 27 73Vendor inspection 8 9 6 8 31Other 21 20 19 22 82Total appraisal 131 153 98 141 523Rework 74 98 55 69 296Spoilage 58 20 30 35 143Other internal failure 24 30 22 26 102Total internal failure 156 148 107 130 541Complaints andother external failure

601 51 668 1318 2638

Total failure costs 757 199 775 1448 3179

Grand total 901 366 886 1602 3755

CONCLUSION : (i) The total quality costs for the year are Rs 3 755 000. This is a top management problem.(ii) Failure costs = Rs3 179 000. 85% of all costs. Any real improvement must come primarily from reduction of failure costs.(iii) Complaint costs = Rs 2 638 000. 83% of failure costsAny major reduction in failure costs must come from reducing complaint costs.(iv) Failure costs are 6 times as large as appraisal costs. Hence any reduction of appraisal costs must be preceded by reduction in failure costs.(v) Prevention costs are only 1% of total quality costs. This seems ridiculously low.

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QUALITY COST MODELS

1. Model for optimum quality costsThe question often asked by managers is, ‘what are the right quality costs ?’

The model shows a general relationship and interaction of the four cost categories, as quality of conformance ranges from one extreme to another.- As conformance quality increases, sum or appraisal and prevention costs increases rapidly.- As conformance increases, external and internal failures costs decreases rapidly.- It is important to strike the correct balance between the cost of quality and the value of quality. Total cost is a minimum when the cost of quality is at an optimum point.- At the optimum point the correct balance between the cost and value of quality has been reached.

How can companies discover the level of optimum quality costs ?(a) By getting data on ‘market’ quality costs. There is usually wide variations among industries. In some industries quality costs can run under 2% of sales but in extreme cases (high precision) can run to over 25% of sales.(b) The budgeting process : Budgets for inspection costs are often based on standards. Prevention costs consist almost entirely of personnel costs, which are often based on past history.Budgeting is also done for failure costs and here also it is based on past history.Variances from the costs rather than the costs are watched. However no alarm signal sounds when current costs are no worse than prior costs.Weaknesses : (i) Use off dubious data and dubious historical standards.

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(ii) Budgeting the various elements of quality costs does not succeed in optimizing the total.

(c) By establishing ratios of the various quality cost categories: (i) When the costs of appraisal and prevention are zero, the product is 100% defective.To improve conformance, prevention and appraisal costs are increased until perfection is approached. Prevention costs rise asymptotically, becoming infinite at 100% conformance.(ii) Failure costs due to the existence of defects : When the product is 100% good - no defects, zero failure costs. As non-conformance sets in, failure costs rise until at 100% non-conformance the product is 100% defective. At this point none of the units are good. Failure costs per good unit become infinite.

The application of this model : The total quality cost curve is divided into 3 zones :(1) Zone of improvement projects (2) Zone of indifference (3) Zone of perfectionism(1) Zone of improvement projects : Failure costs are greater than 70% and Prevention costs less than 10%. Find breakthrough projects to pursue.(2) Zone of indifference : This is around the optimum. Failure costs are about 50%. Prevention about 10%.If no profitable projects can be found shift emphasis to control.Optimum reached. Problem is one of control and how to hold this optimum level..(3) Zone of perfectionism : Failure costs less than 40%. Appraisal costs greater than 50%.The strategies are : - Studying the cost of detecting defects compared to damage done if they are not detected. - Reviewing the quality standards to see if they are realistic in relation to fitness for use.- Seeing if it is feasible to reduce inspection through use of process capability and preserving the order.- Considering the feasibility of audit or decisions to reduce inspection costs.

OPTIMIZING THE CATEGORIESThere is an interaction among the categories and this is critical.- Failure costs are at their optimum when we are unable to identify profitable projects for reducing them.- Appraisal costs are at their optimum when : (i) Failure costs have been brought down to optimum (ii) We are unable to identify profitable projects for further reduction in appraisal costs (iii) We have established good work methods and standards for inspection and tests used are meeting these standards. (iv) Prevention costs are at their optimum when the bulk of prevention work is being directed to authorized improvement projects , prevention work itself has been subject to analysis for improvement and non-project prevention work is controlled by sound budgeting.QUALITY COSTS AND COMPANY COSTSIn trying to reduce quality costs, care must be taken not to increase total costs. This can happen when non-quality costs are increased to reduce quality costs.Reduction of quality costs is a means to the end of improving the overall company economics.

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Comparing productivity to quality :It is important to consider all the facts. One operator was 20% slower than the average, his annual production cost was Rs7 280 above average. However he made fewer errors. The effect of this greater precision was to save Rs1 714 annually in quality costs.It is also worthwhile to find the most economic place to find a defect.

THE CONTROL SCOREBOARDThe control phase : As quality cost program succeeds in reducing quality costs to a point approaching the optimum one enters the control phase.What is needed in the control phase ?(i) Need to set standards and budgets which reflect the attainable quality costs.(ii)Need to establish a continuing scoreboard on how actual quality costs compare to those budgeted.The continuing scoreboard must be based on a formal system of data collection carried out in full collaboration with the accounting department.

What is needed in order to collect and use cost data systematically ?(i) A list of chart of accounts against which charges of all sorts can be made, e.g scrap, salaries. downtime,..(ii) A system of record keeping to enable the charges to be collected for data processing.(iii) A plan for summarizing the data in ways which will simplify managerial interpretation.(iv) Establishment of bases for comparison, standards and budgets.(v) Publication of the results in a form convenient for managerial control.

CHART OF ACCOUNTS - The company’s man-hours, materials, machines, tools are used for ‘regular’ work which does not contribute to quality costs and also for ‘extra-work’ which does contribute to quality costs.- It is necessary to redefine the quality cost categories into terms which are directly applicable to the activities performed or guided by the employees, e.g inspection and test is a quality cost category. However to assist in identifying avoidable quality costs, it may be necessary to create several accounts : sampling inspection to determine lot conformance to specification, sorting of non-conforming lots, re-inspection of repaired product, inspection of field returns.- Some companies prepare a full list of quality control ‘work elements’.Material and facilities usage : Breakdown to separate quality costs from other costs.Vendor-caused costs to be kept separate from in-house costs.Material junked due to obsolescence – out of quality costs. Concessions to customers for ‘sales policy’ reasons separate from adjustments due to service failures.- Responsibility of Quality control is to identify what quality cost elements are needed and define them sufficiently so that the resulting data collection will meet the needs of the quality cost concept. 18.

- Responsibility of accounting is to work out the means for quantifying the amount of money associated with each of these accounts. However extensive participation from the line departments is needed.

The larger the organization the larger the number of accounts and the greater their variety.‘The illusion of totality’ : In assuring that all quality costs are included in the picture.

Data collection system: It provides the essential ingredients through which the various quality costs are charged to the proper accounts, priced out and prepared for data processing.- To facilitate data recording on save documents, code numbers are assigned to the accounts, departments, products, components, operators, dates, machine classes, types of defects, job orders, vendors, customers, operators.Source record : Time and requisition, inspection report, scrap ticket, repair ticket, field service report, complaint report.- Natural data such as man-hours or units of product are converted into money equivalent.- Computer systems are used to store and process data.

SUMMARIZING THE DATAThere are multiple ways of summarizing the quality cost data.

(i) By product, process, component, defect type.Advantages : Easy to conduct the Pareto analysis to find the vital few contributors to quality costs.

(ii) By organizational responsibility : By division, department identified with the manager.It provides essential feedback on current or recent performance.

(iii) By quality cost category : Assist in updating the relationships among categories. Total costs and trends for each category can be identified.

(iv) By time : Summaries of cost data by calendar periods become the input to the time series reports and charts which are used to observe trends and progress.

BASES FOR COMPARISON : Several indexes of quality costs have been developed :

- Per hour of direct production labour.- Per Re of direct production labour- Per Re of standard manufacturing costs ( Per Re of direct production labour + cost

of materials and factory overheads )- Per Re of processing cost ( Per Re of value added )- Per unit of product

The most useful ones are agreed upon. 19.

PUBLICATION : Tabular , graphic, narrative.QUALITY COST REPORT : (i) The tabular form This month

Rs % of total PREVENTION COSTSQuality control administrationQuality control engineeringOther quality planningTrainingTotal preventionAPPRAISAL COSTSInspection , Product quality auditTestsVendor controlMeasurement controlMaterials consumedTotal appraisalINTERNAL FAILURE COSTSScrapRepair, ReworkVendor lossesFailure analysisTotal internal failure costsEXTERNAL FAILURE COSTSFailures- manufacturingFailures – engineeringFailures – salesWarranty chargesFailure analysisTotal external failuresTOTAL QUALITY COSTSBASESDirect LabourConversion costSales

RATIOSInternal to direct labourInternal to conversionTotal to salesCan be shown for the year. If budgets have been set, the budgeted figures and variances will be shown.

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(ii) Graphic reports

The horizontal scale is time. The vertical can be quality costs in Rs.

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(iii) Narrative reports : These are usually for reporting on the status of projects. They also identify future potential projects by bringing up to date the matrices made and by revising the Pareto analyses.

Responsibility of publication: Divided between accounting and Quality Control departments.Cost data collection and data processing done by accounting.Publication of tabular reports, based solely on cost figures done by accounting.Quality control should participate in design of format and selection of bases for comparison.Graphic reports prepared by Quality Control.

Distribution list : All levels of management receive quality cost reports. Summaries are prepared for each level of responsibility.

Frequency : For upper management - Quarterly or monthly.Lowest level weekly. Improvement reports – quarterly.

ESTIMATING QUALITY COSTS FOR BID PROPOSALSQuality cost data are used to prepare estimates for bid purposes. There is an increasing tendency for government agencies to call for separate estimates of quality costs.The major categories of quality costs in such estimates are :

- Reliability programs- Development of test procedures and test equipment- Documentation and data systems appropriate to the needs of the contract- Quality control engineering activities

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2. QUALITY COST MODEL BY PHASE

Each phase represents the progression of activities in the development of the quality system and the drive toward optimum.

QUALITY COST PHASEA B C D E

Operationalconditions

Unfocusedeffort

Internal product Sorting in place

Process controlsinstalled

Improvementprojects definedand active

Too much appraisal andplanning

Action items

- Establish final acceptanceto sortproductinternally- Develop datasystem- Analyseproblems

- Establish process control based on problemanalysis

-Establish improvement projects based on process control data

- Maintainthe status quo

- Relaxcontrols asappropriate

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Certain relationships exist among the four quality cost categories within each phase.

Importance of these phases :- Provide direction to an evolutionary system.- Ability to set priorities for the effort to implement such a system

% of total quality cost saved by moving to phase How to move to phase D immediately ? By simultaneously instituting sample plan changes, process controls and improvement projects. Current Phase B C DA 20 30 60B - 12.5 50C - - 43E - - 20

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It is difficult to attack all problems at one go. Action items of each phase are to be implemented before progress to next phase.The optimization process : The jobs of the quality manager are :

- To determine the phase of his quality system- To separate the total job into manageable elements

How to determine the phase of the quality system ?Analyse 2 criteria :

- Quality costs relationships- Statements of operational condition

A complete cost analysis must be carried out where hidden costs are identified.How to separate the total job into manageable elements for priority setting ?

- By breaking out the total quality costs by product.- Note that each product will usually be found to be in its own phase.

The current phase of each product must be converted into opportunity rupees to be saved in moving each product to the next phase.

Product I II III IV VPhase A A B C COpportunity Rupees 20x400

100= 80

20 25 130 30

Product IV shows the largest opportunity dollars to be saved.

PRIORITY MATRIX

A Vertical axis: Current phase CURRENT PHASE of each product B

C

0 40 80 0-40 41-80 780

Opportunity Rupees26.

Product II

4

Product II

2 1

Product III

7 5 3

Product V

9 8

Product IV

6

How to determine priorities ?By moving diagonally from upper right cell to lower left with the upper cell having top priority in each diagonalPriorities : Product I II IV III V 80 20 130 25 30

IMPACTS OF QUALITY COSTS ON PRODUCTIVITY

Productivity is a relationship between quantities of outputs and quantities of inputs for a given organization system.It is measured by an output/input equation which gives an index.Productivity index = Volume of the item processed during the month Volume of resources expanded to process the volume of the item in the month

- Productivity can be positively affected by a change in the quality cost mix if failure costs are reduced.

Example : Consider the loan section of a bank where tickets are processed by computer.

Numerator = Number of tickets processed during the month

Denominator = Resources incurred to process the tickets ( labour hours, computer run time, ticket forms )

Productivity Index = No. of tickets processed during the month Labour hours + systems+ computer run time + formsLabour hours, systems, computer run time and forms cannot be added together as they are not in the same unit.Solution : Assign a base period cost to each resource

The base costs do not change over time. Only the amount of resources used change.- Base period cost of labour = Rs11.13 per hour- Systems was a fixed Rs500 rate for the month- Forms were Rs0.05 a piece

At the time 2080 tickets were processed per month at a cost of Rs7 753 and using 2600 formsThe labour hours = 640 for the monthLabour represented Rs 7 123 ( Rs11.13x640 hours )Systems = Rs500Forms = Rs0.05 x 2600 formsProductivity index = 2080 (11.13x 640) + (500) + (0.05x2600) = 26.83

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A quality improvement project was completed. Now 2100 tickets were processed using 2100 forms and the time is 546 hours.

New productivity index = 2100 ( 11.13x546) + 500 + (0.05x21000) = 31.43There has been an improvement in productivity

Approximately same number of tickets were processed. Amount of labour and forms decreased since hold outs ( computer tickets that are rejected during daily processing ) decreased.