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IE 475
Advanced ManufacturingCosting Techniques
Lecture Notes #6
Cost of Quality
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Learning Objectives
After completing this module, IE 475students should be able to:
Understand the strategic importance of quality Understand the differences between the twotypes of conformanceUnderstand the four major categories of quality
costs
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Introduction
Prior to 1950 there was very little tracking ofquality costs
Much of the costs appeared in overheadcategories
Since then, quality costs have been steadilyrising and they can be significant
Costs of Quality (CoQ) are associated solelywith defective product
Making, finding, repairing and avoiding
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Hidden Costs of Poor Quality
Adapted from Juran, J.M., Gyrna F.M. (1993), Qual ity P lann ing and Analys i s , Third Edition, McGraw-Hill, Inc., New York
Reprocessing
Rejects Sorting Inspection
Customer Returns
Warranty Expenses
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Cost Management Paradigms
Traditional CostManagement Strategic Cost Management
Normal allowance for
scrap and rework
Overhead varianceanalysis encourages
maximum productionquantity not qualityFinancial measures only
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Cost Management Paradigms (cont.)
Traditional CostManagement Strategic Cost Management
No tracking of customer
acceptanceNo COQ analysis
Top tier of referencegroup
Meet standards
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Why is Quality important?
IncreasedBusiness
Volume
QualityProducts
&Services
Greatercustomer
satisfaction
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Conceptual Linkage betweenQuality and Profitability
Product quality and profitability are closelyrelatedBusinesses that offer premium-qualityproducts and services are more likely tohave large market sharesQuality relates positively to a higher returnon investment
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Conceptual Linkage betweenQuality and Profitability (cont.)
LowerReturnSales
LowerMfg Cost
HigherPerceived
Value
FasterThroughput
Time
Lower
WarrantyandServiceCosts
Higher
Prices
Improved Quality
Higher
MarketShare
Faster
Delivery
IncreasedRevenues
Financial Performance
LowerInventory
MoreSatisfied
Customers
Higher
Turnover
Investments in Quality
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Types of Quality Conformance
Quality involves conformance with specificationsfor products or services that meet or exceedcustomer requirements and expectationsConformance, however, can differ amongindividuals or firmsTypes of Quality Conformance
Goalpost Absolute
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Types of Quality ConformanceGoalpos t Confo rm anc e
Conformance to a quality specification expressed as aspecified range around the target
Target is the ideal or desirable outcome of the operation
Goalpost conformance assumes that the firm incurs noquality or failure cost or loss if quality measures fallwithin the specified limits
Considered a zero-defect conformance
Loss No Loss Loss
Lower Target Upper Limit Value Limit
.45 .50 .55
ThicknessThickness
Loss No Loss Loss
Lower Target Upper Limit Value Limit
.45 .50 .55
ThicknessThickness
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0.50Target Value
Losses
Types of Quality ConformanceA bs olu te Con form anc e
Absolute quality conformance requires that allproducts or services meet exactly the target valuewith no variation allowed
Also referred to as robust quality approach
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Analysis of Quality CostsQuality per the Gurus
Taguchi - there is increasing loss for the producer, thecustomer, and society associated with increasingvariability or deviation from a target value that reflectsthe ideal state.
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Analysis of Quality CostsTagu ch i Lo ss Func t ion
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Quality Loss Function
For a quality characteristic with the target valueT , the loss from having a quality characteristic x can be estimated by this quadratic function:
where:x = an observed value of the quality characteristicT = the target value of the quality characteristick = the cost coefficient, determined by the firmsfailure costs
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Quality Loss Function (cont.)Your firm has determined that no customer will acceptsheet- metal deviating more than .05 from the targetvalue in thickness, that the target thickness is .50, andthat the cost to the firm is $5,000 for each rejection by acustomer
If the actual thickness of a unit is .47, then the estimatedtotal loss for the unit is:
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Analysis of Quality CostsQuality per the Gurus
Deming - Do not perform quality cost analysis.Spend the money upfront to do the right thingsthe first time.Crosby - Perform a special one time COQanalysis to assess the stage of qualitymanagement. Quality is free.
Juran - Prepare cost of quality reporting on aperiodic basis and use as a management controltool. Economic tradeoff between cost andquality.
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Costs of QualityPrevention
Expenditures incurred to keep quality defects fromoccurring
Appraisal
Costs incurred in the measurement and analysis ofdata to find out if products and services conform tospecification
Internal failureCosts incurred as a result of poor quality foundthrough appraisal prior to delivery to customers
External failureCosts incurred to rectify quality defects afterunacceptable products or services reach thecustomer
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Costs of Quality (cont.)Prevent ion co s ts include:
Ap pra isa l co s t s include:
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Costs of Quality (cont.)Internal fa ilure co sts include:
External fa i lure cos ts include:
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Categories of Quality CostsWhere i s the m on ey s pent?
Many companies have high internal and externalfailure costs
And often times appraisal costs are higher thanpreventionConcentrate on prevention
One rule of thumb is that every $1 spent on
prevention can save $10 in appraisal and failure costs
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Conformance andNonconformance Costs
Cost of Conformity
Cost of Nonconformity
1. Prevention costs2. Appraisal costs
1. Internal failure costs2. External failure costs
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Benefits of CoQ Analysis
CoQ can link operational decisions with financialperformanceCoQ can help with the selection of improvementprojectsTo be useful, quality costs must be accurate
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