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cost of quality

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cost of quality

  1. 1. Cost Of Quality LECTURE PREPARED BY PROF.R.C.PANDA,ACET. What can we do to improve quality? How much will it cost to improve quality?
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  3. 3. Understand Quality Costs • Understand quality costs enables you to – Understand hidden costs – Reduce and eliminate unnecessary cost • Prevent problems from happening • Management responsibility to enable this • Quality costs are real and estimated at: – 25% of costs in manufacturing – 35% of costs in service industry • Quality costs can be categorised to enable better understanding 3Total Quality Management - Spring 2010 - IUG
  4. 4. “Cost of quality is … the expense of noncomformance – the cost of doing things wrong.” Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto
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  8. 8. 08/02/16 8 Cost of Quality Quality Cost Breakout Testing 26% Planning 4% Training 4% Bug Fix 35% Development 31%
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  10. 10. Quality and the New Production Environment Objective – To stay competitive through: Improving customer service and product quality Reducing costs Objective – To stay competitive through: Improving customer service and product quality Reducing costs
  11. 11. 08/02/16 11 Cost of Quality  Quality costs can mean two things:  Cost of attaining quality  Cost of poor quality  Can run 10 - 30% of sales or 25 – 40% of operating expenses
  12. 12. 08/02/16 12 Cost of Quality “We need to communicate to management the impact of quality in language they understand which is often in terms of dollars.” “Quality cost measurement and publication does not solve quality problems.”
  13. 13. 08/02/16 13 Cost of Quality 0 100 Failure Cost Costs of appraisal and Prevention Total Cost Quality of Conformance, % Cost per good unit of product
  14. 14. 08/02/16 14 Hidden Cost of Quality Lost Customers Bad Will Hidden Rework Rework Testing Costs Inspection Costs Canceled Licenses Bugs Employee Turnover Expediting Costs Excessive Overtime Field Service Costs Customer Allowances Missed Payments Loss of Market Share Excessive Travel Expense Consulting Time
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  18. 18. 08/02/16 18 Group Exercise – Quality Costs Analysis  The costs are as follows:  code reviews - 20 hrs  training - 240 hrs  system test – 1200 hrs  component testing - 300 hrs  test script writing - 200 hrs  requirements review - 50 hrs  bug fixes - 1780 Hrs  retesting fixed bugs - 1200 hrs  post-mortem review - 8 hrs  Total effort – 6500 hrs
  19. 19. 08/02/16 19 Sequence of Events To reduce CQ:  Review available literature  Select an organizational unit in the company  Discuss the objectives with key people  Collect cost available  Make proposal for full study  Publish draft of categories, get agreement  Finalize definitions and get management buy in  Establish who will collect data  Collect and summarize data  Present the results
  20. 20. 08/02/16 20 Cost of Quality – Example February Bug Fix Testing Planning Training Development Hrs Available Phil Smith 140.0 25.0 8.0 110 283.0 Ilene Bloggins 87.0 120.0 8.0 56 271.0 Skip Roy 92.0 4.0 4.0 75 175.0 Bill Lee 20.0 82.5 4.0 8.0 33.5 148.0 Matt Truman 65.0 100 165.0 Total 404.0 227.5 8.0 28.0 374.5 1042.0 % of Hrs Available 38.8% 21.8% 0.8% 2.7% 35.9% 100.0% Total Quality Costs 667.5 Quality Costs % 64.06% Bug Fix % of Quality Costs 60.52% Testing % of Quality Costs 34.08% Planning % of Quality Costs 1.20% Training % of Quality Costs 2.69%
  21. 21. Improving Quality Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customer Total Quality Management (TQM) Managing an organization so that it excels in areas important to the customer Organization strives for excellence Quality is defined by the customer
  22. 22. Is Quality Worth the Investment? Cost vs. Benefit Quality is free Costs of quality programs are easily measured, but benefits of increased customer satisfaction are difficult to measure. The long-run benefits of increased customer satisfaction far outweigh the costs of improving quality. Two Views
  23. 23. The Quality Is Free Concept Greater customer satisfaction Quality products and services Increased business and profits
  24. 24. Methods to Identify Quality Problems Control charts Pareto diagrams Cause and effect analysis
  25. 25. Additional Quality Concepts Motivation Employees respond favorably to quality initiatives Motivation Employees respond favorably to quality initiatives Strategic advantages Favorable reputation among competitors Strategic advantages Favorable reputation among competitors Benchmarking Continuous process of measuring performance against best of similar organizations Benchmarking Continuous process of measuring performance against best of similar organizations
  26. 26. Products are completed just in time for shipment to customers Raw materials are received just in time for production Just-In-Time (JIT) InventoryJust-In-Time (JIT) Inventory
  27. 27. In conventional system, materials are “pushed” through assembly process. In JIT system, materials are “pulled” through assembly process by customers’ needs. Just-In-Time (JIT) Inventory
  28. 28. Complete parts just in time for assembly into products Receive materials just in time for production Receive customer orders Complete products just in time to ship to customers Schedule production Just-In-Time (JIT) Inventory
  29. 29. and Total Quality Management Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory
  30. 30. and Total Quality Management More rapid response to customer orders Greater customer satisfaction Higher quality products Less warehouse space needed Reduced inventory carrying costs Reduced risk of obsolete inventory
  31. 31. and Total Quality Management JIT factory is idle, waiting on quality raw materials Raw materials Poor quality items returned Unhappy customer Latedelivery Quality must be stressed from the very beginning for JIT to be successful.
  32. 32. Impact of Just-in-Time on Accounting Procedures JIT goal is to minimize inventories:JIT goal is to minimize inventories: Production costs are assigned directly to cost of goods sold. Production costs are assigned directly to cost of goods sold. Raw Materials Work in Process Finished Goods
  33. 33. Impact of Just-in-Time on Accounting Procedures Any end-of-period inventory is recorded in a procedure known as backflush costing. Any end-of-period inventory is recorded in a procedure known as backflush costing. Cost of Goods Sold Inventory
  34. 34. 34 • Phillip B. Crosby (Quality is free . . . ): • The system for causing quality is prevention, not appraisal – Quality is Free • The performance standard must be Zero Defects, not "that's close enough" • The measurement of quality is the Price of Non- conformance. • Cost of quality is only the measure of operational performance • “Quality is free. It’s not a gift, but it is free. What costs money are the unquality things -- all the actions that involve not doing jobs right the first time.” Founders Point of View Total Quality Management - Spring 2010 - IUG
  35. 35. Total Quality Management (TQM) W. Edwards Deming proposed that improving quality reduces cost and improves profitability. W. Edwards Deming proposed that improving quality reduces cost and improves profitability. Quality can be and should be improved continuously. Quality can be and should be improved continuously. Revenues Cost Max Profit Max Quality 35Total Quality Management - Spring 2010 - IUG
  36. 36. Return on Quality (ROQ) Profit is maximized at the optimum quality level. Profit is maximized at the optimum quality level. The optimum quality level is always achieved before maximum attainable profit is reached. The optimum quality level is always achieved before maximum attainable profit is reached. Revenues Cost Max Profit Optimum Quality 36Total Quality Management - Spring 2010 - IUG
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  38. 38. Preventing Poor Quality (Comparison) Failure Costs • Internal • External Failure Costs Repair Costs Repair Costs Appraisal Costs Appraisal Costs Prevention Costs Prevention Costs $ Before Quality Cost Alignment After Quality Cost Alignment Benefit 38Total Quality Management - Spring 2010 - IUG
  39. 39. 1-10-100 Rule $ $ $ $ $ $ $ $ $ $ 1 10 100 Prevention Correction Failure 39Total Quality Management - Spring 2010 - IUG
  40. 40. The 1:10:100 rule:  Re.1 spent on prevention will save Rs.10 spent on appraisal and Rs.100 on failure costs.  One dollar spent on prevention will save $10 on appraisal and $100 on failure costs.  This rule helps one to prioritize expenditure on prevention, which is sure to bring in greater returns.  “The earlier you detect and prevent a defect the more you can save. If you catch a two cent resistor before you use it and throw it away, you lose two Cents. If you don’t find it until it has been soldered into a computer component, it may cost $10 to repair the part. If you don’t catch the component until it is in the computer user’s hands, the repair will cost hundreds of dollars. Indeed, if a $5000 computer has to be repaired in the field, the expense may exceed the manufacturing cost.” 40Total Quality Management - Spring 2010 - IUG
  41. 41. Difficulties in using Quality costing  Management have not believed in the possibilities of improvement  Quality costing is demanding ◦ It requires a lot of data of each activity related to quality  Other limitations ◦ Does not resolve quality problems ◦ Does not provide specific actions ◦ vulnerable to short-term mismanagement ◦ difficult to match effort and accomplishment ◦ subject to measurement errors ◦ may neglect important or include inappropriate costs 41Total Quality Management - Spring 2010 - IUG
  42. 42. Steps in implementing quality cost 1. Involve accountants right from the start 2. Decide purpose and objectives 3. Decide how to deal with overheads 4. Distinguish between basic work and quality related activities 5. Collection data which offers the prospect of real gains 6. Start by examining failure costs 7. Evaluate the costs of inspection 8. Analyze and use the data 9. Collecting and reporting quality cost data 42Total Quality Management - Spring 2010 - IUG
  43. 43. Determine Quality Cost Categories • Understand your product • Understand your process • Understand where problems occur • Determine precisely what goes wrong • Determine what costs represents each problem 43Total Quality Management - Spring 2010 - IUG
  44. 44. The Quality Gurus – Edward Deming 1900-1993 1986 Quality is “uniformity and dependability” Focus on SPC and statistical tools “14 Points” for management PDCA method
  45. 45. The Quality Gurus – Joseph Juran 1904 - 2008 1951 Quality is “fitness for use” Pareto Principle Cost of Quality General management approach as well as statistics
  46. 46. Developing quality specifications Input Process Output Design Design quality Dimensions of quality Conformance quality
  47. 47. Tools used for continuous improvement 4. Cause and effect diagram (fishbone) Environmen t Machine Man Method Material
  48. 48. Tools used for continuous improvement 5. Check sheet Item A B C D E F G ------- ------- ------- √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √
  49. 49. Tools used for continuous improvement 6. Histogram Frequency
  50. 50. Tools used for continuous improvement 7. Pareto Analysis A B C D E F Frequency Percentage 50 % 100% 0% 75 % 25 %10 20 30 40 50 60
  51. 51. Summary of Tools 1. Process flow chart 2. Run diagram 3. Control charts 4. Fishbone 5. Check sheet 6. Histogram 7. Pareto analysis
  52. 52. Makes custom er wait Absent receiving party Working system of operators Customer Operator Fishbone diagram analysis Absent Out of office Not at desk Lunchtime Too many phone calls Absent Not giving receiving party’s coordinates Complaining Leaving a message Lengthy talk Does not know organization well Takes too much time to explain Does not understan d customer
  53. 53. Statistical Process Control (SPC) Every output measure has a target value and a level of “acceptable” variation (upper and lower tolerance limits) SPC uses samples from output measures to estimate the mean and the variation (standard deviation) Example We want beer bottles to be filled with 12 FL OZ ± 0.05 FL OZ Question: How do we define the output measures?

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