Quality-Cost Analysis

By: Mahendra Singh Central University of Jharkhand, Ranchi

Quality Cost: - It is represented by the costs encountered in: - preventing - finding - correcting the defective work - warranty & rework - It represents the basis through which investment in quality projects can be actually evaluated in terms of cost improvement, profit enhancement. - Quality Costs have an impact through the entire life cycle of the product, it does not stop at the shipping phase - They represent in general a significant amount - It is affected (reduced) by Total Quality Control.
- A little bit of History: - Gold in the Mine concept - This concept triggered a better understanding of: - 1. The companys accounting system - 2. The identification of all the quality related costs - 3. The idea of an optimum for quality costs.

Quality Cost Analysis: The process that consists in comparing and examining the individual quality cost item to each other and to the total so that appropriate action could be taken. Generally, it is more meaningful to talk about time intervals and about absolute dollar amounts. History: One of its first advocates was quality theorist: Joseph Juran. The objective of quality cost analysis is to minimize the total cost of quality across the life of a product (therefore, to reduce the quality costs) Quality cost analysis is a standard part of traditional quality control

Manufacturing Context

Quality Costs (sometimes overlap) Prevention Costs (Pc): Costs associated with preventing poor quality. examples: design errors, coding errors Appraisal Costs (Ac): Costs associated with revealing the poor quality Testing Design reviews are somewhere in the middle Failure Costs (Fc): Internal Failure Costs Costs encountered before the product was shipped to the customer Example: fixing bugs External Failure Costs Costs encountered after product was shipped to the customer Example: patching a released product and distributing the patch Total Cost of Quality = Pc + Ac +Fc

COQ Models
COQ models are classified into four groups (Schiffauerova and Thomson,2006). 1. P-A-F models: Prevention costs+ Appraisal costs+ Failure costs 2. Crosbys model: Cost of conformance+ Cost of non-conformance 3. Opportunity or intangible cost models: [Prevention costs+ Appraisal costs + Failure costs+ Opportunity costs] / [Cost of conformance+ Cost of nonconformance+ Opportunity costs] / [Tangibles + intangibles] 4. Process cost models: Cost of conformance + Cost of non-conformance

Optimum quality cost model

The traditional model detailed by Brown and Kane (1984) has got widespread acceptance. there is an inverse relationship between prevention and appraisal effort and failure cost. The optimum conformance to quality or defect level is where the increasing costs of the prevention and appraisal curve converges with the curve of decreasing failure costs. Total quality costs are minimized to the point where the cost of prevention plus appraisal equals the cost of failure. The total quality cost curve represents the sum of the other two curves, and the location of the minimum point on the total quality cost curve, sometimes referred to as the optimum point

Model of optimum quality cost

Prevention Costs

The costs encountered in the activities preventing poor quality. Examples:

Staff training Early Prototyping/Requirements analysis Clear Specification/unambiguous documentation Evaluation of the development tools that will be used

Interesting features:
The costs are distributed to almost all the groups involved in the product development. Any group that might not be affected? Defensive programming?

Defensive Programming

Defensive programming is the practice of anticipating where failures can occur and then creating an infrastructure that tests for errors, notifies you when anticipated failures occur, and performs damage-control actions you have specified-- such as stopping program execution, redirecting users to a backup server, enabling debugging information you can use to diagnose the problem. This way:
problems that might otherwise go unnoticed are detected small errors that might turn into disasters are caught a lot of debugging and maintenance could be saved.

Appraisal Costs:
The Costs encountered in the activities aimed at revealing quality problems. Examples:

Glass box testing Black box testing Code inspections Test automation

Interesting issues:
What about design review? Part appraisal, part prevention

Internal Failure
The Costs encountered before the product distribution to the customers. Examples

Fixing bugs Regression testing

Interesting issues:
What about cost of delays and of lost opportunity? Like: Direct and Opportunity cost of late shipment and Wasted advertisements
These are costs borne by the groups outside the product development Might give birth to controversy, so it is recommended not to be used especially the first times the organization is try to implement the quality-cost analysis.

External Failure
Costs encountered after the product has already been shipped to the customers. Examples:

Investigation of customer complaints Refunds and recalls Lost sales Coding/testing/shipping of updated product Can this always be done? All costs imposed by law

Interesting issues:
What about cost of high turnover or cost of lost pride? Hard to estimate

Benefits
The goal is to reach minimum quality costs at the desired outgoing quality level. Its a feed-back mechanism: quality costs data is used by the management to make decisions that will impact the quality costs. Applications of Quality Costs Measurement Tool: Quality costs provide comparative measurements for evaluating quality programs versus the value of the results achieved Process-Quality Analysis Tool Quality costs can serve effectively as an analysis tool and point out where the problems are Programming Tool Quality costs determine how the available resources to be divided Predictive Tool Quality costs can also be used to evaluate and assure performance in relation to the goals and objectives of the organization.

Risks

Implementation Risks
Not being realistic and trying to achieve too much too soon. Controversial costs should be left aside, especially the first few times the company is trying to implement the quality-costs analysis

Other risks:
Looking only from the point of view of the company, not looking at the customers costs Might result in other types of risk: Customer Dissatisfaction Litigation

How To Use the Quality cost Analysis Tool: 1. Cost of quality data can be either collected on a sampling basis or on

a continuous basis. 2. After confirming that the data is accurate and comprehensive or representative, and consistent with previous definitions and implementations, data is analyzed for trends and opportunities. 3. Statistical analysis such as regression analysis, indexes, correlations, Pareto analysis, etc., is utilized to formulate conclusions about the present state and recommendations. 4. In some cases utilizing tools such as modeling can predict the optimum cost of quality and the process design or improvement necessary for achieving the optimum can be defined. 5. A plan is then defined to modify the current process, phasing as appropriate, to move towards the optimum cost of quality. 6. Projects are analyzed for their impact on cost of quality, and projects or processes that how a high return on quality (Return on Quality = (Dollar Cost of Quality Savings/Dollar Cost of Implementation) x 100 ) 7. Improvements are measured and evaluated for effectiveness, and a continuous improvement cycle is implemented. Results are also communicated widely.

Ford Pinto litigation

Benefits and Costs Relating to Fuel Leakage Associated with the Static Rollover Test Portion of FMVSS 208

Benefits Savings 180 burn deaths, 180 serious burn injuries, 2100 burned vehicles Unit Cost -- $200,000 per death, $67,000 per injury, $700 per vehicle Total Benefit 180 x ($200,000) + 180 x ($67,000) + 2100 x ($700) = $49.5 million. Costs Sales 11 million cars, 1.5 million light trucks. Unit Cost -- $11 per car, $11 per truck Total Cost 11,000,000 x ($11) + 1,500,000 x ($11) = $137 million.

Ford Pinto
Quality-cost analysis looks at the costs from only the companies perspective. However, these costs might not be easily estimated

It ends up costing Ford way more Motors Corp vs Johnston

When calculating the trade-off between several factors (costs one of them) it is important for the companies to realize and take into account the customers costs.

Another look at External Failure Costs

Borne by seller
Given in the previous slide

Borne by buyer
Death / Injury Embarrassment Might affect their customers Cost of tech support Cost of replacing product

Why are the companies reluctant to implement quality-costs analysis?

Skepticism ; some companies have tried and failed or they are aware of other companies that tried and failed They dont know whom to trust; there are many advocates and agendas. They believe in Our business is different. Mediocre quality is still saleable. The confusion in languagethe belief that higher quality costs more.

Certification to the ISO 9000 will solve all their issues related to quality

performance. ISO 9000: The quality management system standards, which are based on the eight quality management principles: Principle 1 Customer focus Principle 2 Leadership Principle 3 Involvement of people Principle 4 Process approach Principle 5 System approach to management Principle 6 Continual improvement Principle 7 Factual approach to decision making Principle 8 Mutually beneficial supplier relationships