Quality Costing 1

One indication of the importance of Quality in the United States is the creation of the Malcolm Baldrige National Quality Award in 1987 to recognize companies that excel in quality management and achievement.

Award categories are: Manufacturing, Small business, Service, Educational Health entities.

Two awards are given per category. E.g. : Boeing, ST Microelectronics

Quality Costing 2

BALDRIDGE INDEX

Baldridge index is a portfolio made up of publicly traded companies that have won the award.

It was assumed that a hypothetical $ 1000 is invested in each winner. The Baldrige portfolio has outperformed the S&P 500 index every year and by impressive amounts. For example, this index outperformed the S&P 500 by 4.8 to 1.

A positive correlation between Quality & Firm Value

Quality Costing 3

In a study of 300,000 semiconductors produced by America and Japanese firms, the failure rate of American chip was 0.1 %

While the Japanese failure rate was zero.

Two views for quality :

a) Traditional View or AQV

b) Robust Quality View

Quality Costing 4

Robust Quality View

Control costs do not increase without limit as a robust zero-defect state is approached.

Control costs may increase and then decrease as the robust state is approached.

Failure costs can be driven to zero.

Quality Costing 5

Robust Quality View

As the firm works to implement this program, additional costs may be incurred (special studies, consulting fees, etc.) Initially the prevention and appraisal costs may continue at their current levels.

But once the program is fully implemented, and the failure cost starts reducing (less rework, fewer complaints and fewer repairs), then the company can cut back on inspection of products, customer complaint dept. and so on. The net effect is a reduction in all quality cost categories.

And quality has increased !!!

Quality Costing 6

Strategy to reduce quality costs recommended by the American Society for Quality Control.

The strategy for reducing cost is quite simple: 1. Take direct attack on failure costs in an attempt to drive them to zero;

2. Invest in the right prevention activities to bring about the improvement;

3. Reduce appraisal costs according to the results achieved.

4. Continuously evaluate and redirect prevention efforts to gain further improvement.

The strategy is based on the premise that: For each failure there is a root cause. Causes are preventable. Prevention is always cheaper.

Quality Costing 7

Reporting Quality Costs

Quality Costing 8

Reporting Quality Costs

Relative Contributin Graph

57%25%

10%

8% External Failure

Internal failure

Appraisal

Prevention

Quality Costing 9

Quality ISO 9000

ISO 9000 is a set of quality measurements. Developed by the International Organization for standardization in Geneva, is a set of five international quality standards.

These standards center around the concept of documentation and control of non conformance and change.

ISO 9000 doesn’t certify either the quality of the product or the production process but to the way in which a company ensures quality.

60 countries have adopted ISO 9000 standards.

ISO certified companies : GE, Motorola, DuPont, Eastman Kodak, British Telecom, PNB, etc.

Quality Costing 10

ISO 9000 Standards

Quality Costing 11

Thanks