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1. Quality Costs and Productivity:
Measurement, Reporting, and
Control
Kristel Pamela P. Caluya

2. Eight Dimensions of Quality
•
•
•
•
•
•
•
•
Performance
Aesthetics
Serviceability
Features (quality of design)
Reliability
Durability
Quality of Conformance
Fitness of Use

3. Quality Defined
• Features (Quality of Design) refer to characteristics
of a product that differentiate functionally similar
products.
–
Example: Compare first class air travel with economy travel. First
Class typically offers more leg room, better meals and more
luxurious seats.
• Quality of Conformance is a measure of how well
the product meets its requirements or specifications.
–
Example: If a Honda Civic does what it is designed to do and does it
well, quality exists. For example, if economy cars are designed to
provide reliable, low-cost, low-maintenance transportation, the
desired
quality exists.

4. Measuring Quality Costs
•
Prevention costs
•
Appraisal costs
•
Internal failure costs
•
External failure costs

5. Examples of Quality Costs
Prevention costs
Appraisal Costs
Quality engineering
Quality training programs
Quality planning
Quality reporting
Supplier evaluation and selection
Quality audits
Quality circles
Field trials
Inspection of raw materials
Testing of raw materials
Packaging inspection
Supervising appraisal activities
Product acceptance
Process acceptance
Inspection of equipment
Test equipment
Design reviews
Outside endorsements

6. Examples of Quality Costs
Internal failure costs
Scrap
Rework
Downtime (defect related)
Reinspection
Retesting
Design changes
External failure costs
Cost of recalls
Lost sales
Returns/allowances
Warranties
Repairs
Product liability
Customer dissatisfaction
Lost market share
Complaint adjustment

8. Estimating Hidden Quality Costs
Hidden Quality Costs are opportunity costs
resulting from poor quality.
•
The Multiplier Method
•
The Market Research Method
•
Taguchi Quality Loss Function

9. The Multiplier Method
The multiplier method assumes that the total failure
cost is simply some multiple of measured failure
costs:
 Total external failure cost = k(Measured external failure costs)
 where k is the multiplier effect
 If k =4, and the measured external failure costs are $2 million,
then the actual external failure costs are estimated to be $8
million.

10. The Market Research Method
The market research method uses formal market
research methods to assess the effect of poor
quality on sales and market share.
– Customer surveys and interviews with members of a
company’s sales force can provide significant insights into the
magnitude of a company’s hidden costs.
– Market research results can be used to project future profit
losses attributable to poor quality

11. The Taguchi Quality Loss
Function
The Taguchi loss function assumes any
variation from the target value of a quality
characteristic causes hidden quality costs.
 Furthermore, the hidden quality costs
increase quadratically as the actual
value deviates from the target value.

12.  L(y)= k(y-T) 2
 Where
k= a proportionality constant dependent upon the
organization’s external failure cost structure
y= Actual value of quality characteristics
T= Target value of quality characteristic
L= Quality loss
y-T
(y-T) 2
k(y-T) 2
1
Actual
Diameter
(y)
9.9
-0.10
0.010
4.00
2
10.1
0.10
0.010
4.00
3
10.2
0.20
0.040
16.00
4
9.8
-0.20
0.040
16.00
Total
0.100
40.00
Average
0.025
10.00
Unit

13.  Total units produced are 2,000
 Total expected hidden quality costs
10(0.025*$400)=$20,000
Total expected loss for the 2000 units

14. Reporting Quality Costs
Quality Costs
Prevention costs:
Quality training
Reliability engineering
Appraisal costs:
Materials inspection
Product acceptance
Process acceptance
Internal failure costs:
Scrap
Rework
External failure costs:
Customer complaints
Warranty
Repair
Total quality costs
% of Sales
$35,000
80,000
$115,000
4.11%
$20,000
10,000
38,000
68,000
2.43%
$50,000
35,000
85,000
3.04 %
65,000
$333,000
=======
2.32%
11.90%
=====
$25,000
25,000
15,000

15. Reporting Quality Costs
(continued)
Prevention costs
Internal failure costs
Appraisal costs
External failure costs
19.5%
25.5%
34.5%
20.5%

16. AQL Quality Cost Graph
Cost of Failures
Cost
Cost of Control
0
100%
Optional (AQL)
Percent Defects

17. Zero-Defect Graph
Total
Quality
Cost
Cost
0
Percent Defects
100%

18. Multiple-Period Quality Costs
Assume the following data:
Quality Costs
2002
2003
2004
2005
2006
$440,000
423,000
412,500
392,000
280,000
Actual Sales
$2,200,000
2,350,000
2,750,000
2,800,000
2,800,000
% of Sales
20.0
18.0
15.0
14.0
10.0

19. Multiple-Period Trend Graph:
Total Quality Costs
% of
Sales
20
15
10
5
0
1
2
3
Year
4
5

20. Multiple-Trend Analysis for Individual
Quality Costs
Assume the following quality cost data:
Prevention
2002
2003
2004
2005
2006
1Expressed
Appraisal
6.0%1
6.0
5.4
5.6
4.4
as a % of sales
4.5%
4.0
3.6
3.2
2.4
Internal
Failure
4.5%
3.5
3.0
3.1
3.0
External
Failure
6.0%
4.5
3.0
2.6
2.3

21. Productive Efficiency
 Productivity
 concerned with producing output efficiently
 specifically addresses the relationship of output and
the inputs used to produce the outputs
 Total productive efficiency is the point at which
two conditions are satisfied
 For any mix of inputs that will produce a given
output, no more of any one input is used than
necessary to produce the output.
 Given the mixes that satisfy the first condition, the
least costly mix is chosen
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22. Productive Efficiency
Technical Efficiency
the condition where no more of any one input is
used than necessary to produce a given output.
Technical efficiency improvement occurs when less
inputs are used to produce the same output or more
output are produced using the same input.
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23. Productive Efficiency
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24. Productive Efficiency
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25. Productive Efficiency
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26. Productive Efficiency
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27. Productive Efficiency
Of the two combinations that produce the same output,
the least costly combination would be chosen.
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28. Partial Productivity Measurement
Partial Productivity Measure
 Measuring productivity for one input at a time.
Productivity ratio = Output
Input
Operational Productivity Measure
 Partial measure where both input and output are
expressed in physical terms.
Financial Productivity Measure
 Partial measure where both input and output are
expressed in dollars.
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29. Total Productivity Measurement
2009
2010
Number of frames produced
Labor hours used
Materials used (lbs.)
240,000
60,000
250,000
240,000
240,000 250,000
60,000
50,000
1,200,000 1,150,000
50,000
1,200,000
250,000
1,150,000
31

30. Total Productivity Measurement
Profit-Linkage Rule
 For the current period, calculate the cost of the
inputs that would have been used in the absence of
any productivity change
 Compare this cost with the cost of the inputs
actually used.
 The difference in costs is the amount by which
profits changed because of productivity changes
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31. Total Productivity Measurement
PQ = the inputs that would have been used
Current-period output
PQ =
Base-period productivity ratio
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32. Total Productivity Measurement
2009
Number of frames produced
Labor hours used
Materials used (lbs.)
Unit selling price (frames)
Wages per labor hour
Cost per pound of material
240,000
60,000
1,200,000
$30
$15
$3
2010
250,000
50,000
1,300,000
$30
$15
$3.50
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33. Total Productivity Measurement
PQ (labor) =
PQ (materials) =
250,000 4 =
250,000 ÷ 0.200 =
Cost of labor: (62,500 $15)
Cost of materials: (1,250,000
Total PQ cost
The actual cost of inputs:
Cost of labor: (50,000 $15)
Cost of materials: (1,300,000
Total current cost
62,500 hrs.
1,250,000 lbs.
$3.50)
$ 937,500
4,375,000
$5,312,500
$3.50)
$ 750,000
4,550,000
$5,300,000
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