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(QUALITY COSTS)
COST OF QUALITY
TM looks at every activity in terms of return on direct and indirect investment. Does not mean looking for short-term gains only. Dont mind waiting for years, if ultimately the efforts are going to pay. Adopt ISO 9000 or TQM if it is going to help the organization.
COST OF QUALITY
TQM was evolved to satisfy customers in the most economical way. Quality means cost effectiveness. It means reducing expenditure by eliminating wastes through systematic quality management approach. Therefore it is important to compute expenditure incurred on account of poor quality and prevent it.
COST OF QUALITY
TQM should result in the progressive reduction of inferior quality goods. QC is a tool to demonstrate cost of poor quality to the top management as well as the entire organization. TQM aims at gradual reduction of wasteful expenditure and eventually their total elimination.
COST OF QUALITY
QC should be accounted separately so as to know how much the organization is loosing on account of poor quality. Decreasing cost of production should indicate quality improvement. Accounting and analyzing costs has given innumerable benefits to the organizations. Thus QC is an important tool for TQM.
COST OF QUALITY
COQ is the sum of costs incurred by an organization in preventing poor quality. There are three types of QC: 1. Prevention Costs 2. Appraisal Costs 3. Failure Costs (see figure 2.1 PAF Model)
COST OF QUALITY
PREVENTION COSTS Are the planned costs incurred by an organization to ensure that no defects occur in any stages such as design, development, production and delivery of a product or service. They are incurred to reduce the inspection as well as the failure costs.
COST OF QUALITY
PREVENTION COSTS The expenditure on account of TQM implementation is a prevention costs. Include education and training of employees, field testing, preventive maintenance, calibration of instruments, audits, quality assurance staff, etc.
COST OF QUALITY
APPRAISAL COSTS Incurred in verifying, checking or evaluating a product or service at various stages during manufacturing or delivering. Incurred due to lack of confidence in the quality of the P/S either due to the incoming material or due to the process.
COST OF QUALITY
APPRAISAL COSTS Example The incoming materials are inspected because the receiver is not sure about the quality of the incoming goods. During the process, a number of inspections take place, since the quality of the process is in doubt.
COST OF QUALITY
APPRAISAL COSTS If the quality improves in the organization as well as among the vendors, inspection cost can be reduced. Appraisal costs include incoming inspection, internal product audit, supplier evaluation and audit, inspection during process and final inspection, etc.
COST OF QUALITY
FAILURE COSTS Incurred by an organization because the product or service did not meet the expected requirements and the product had to be fixed or replaced or the service had to be repeated. Due to the incurred failure of the organization to control defects in the product.
COST OF QUALITY
FAILURE COSTS Defective products in the market can lead to the loss of reputation and customer loyalty. One dissatisfied customer will tell 100 others, which means the loss of both present and future customers. It will also affect the brand image, leading to loss of goodwill and customer loyalty.
Reducing Costs
Reduction of Prevention Cost Prevention cost has to be incurred. Every preventive activity should have been preplanned to avoid wastes during process. Senior Management should devote time to prevent problems from occurring. The establishment of a Quality System in every organization calls for the preparation of a MANUAL and a set of PROCEDURES.
Reducing Costs
Documented policy should have been planned with a vision. If a documented set of policies and procedures already exist for an organization, the employees should adhere to the same. Prevention costs means expenditure. While the organization should not hesitate to improve the processes and reduce the waste through prevention, the prevention activity itself should be carried out without wastes.
Reducing Costs
Progressive Reduction of Appraisal Costs Inspection is essential before a new vendor, new process or a new product line. Inspection generates a lot of information. This information should be utilized skillfully by the organization to reduce future costs.
Reducing Costs
Example For a new vendor who is already qualified, the organization may start with 100 per cent inspection; with experience this could be reduced to sampling inspection. With the increase in confidence level , the responsibility of the inspection could be totally left to the vendor.
Reducing Costs
The organization should try to make best use of the data available within the organization in the form of inspection records to improve quality and reduce the need for inspection. The inspection costs should also be reduced with the maturity of the processes.
Reducing Costs
Reduction of Failure Costs Manufacturing or delivery of a product or service with defects is a total waste. Everything should be done right the first time and every time. There should be no occasion to reject a product or a service either at the initial stage, the intermediate stages or at the final stages.
Reducing Costs
Right the first time will happen only if the processes are streamlined and made effective and efficient. A lot of emphasis should be given to establishing a proper system to control processes. It will lead to automatic control of the quality of the output.
HIDDEN COSTS
There are many costs which cannot be identified. They may be defined as hidden costs. These include customer-incurred costs, lost reputation costs, and customer dissatisfaction costs. These costs can vary and some times affects business. They can be eliminated by eliminating external failures.