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  1. 1. AQM QUALITY AND COSTS DFT (AP-06) NIFT BANGALORE www.company.com
  2. 2. AQM Cost of Quality “Cost of quality is … the expense of nonconformance –Chapter 1 the cost of doing things wrong.”DEFINITION • The "cost of quality" is not the price of& MEANING creating a quality product or service. It is the cost of NOT creating a quality product or service. www.company.com
  3. 3. AQM Cost of Quality • A product that meets or exceeds its design specifications and is free of defects that mar its appearance orChapter 1 degrade its performance is said to have high quality of conformance.DEFINITION& MEANING • Preventing, detecting and dealing with defects cause costs that are called quality costs or costs of quality. www.company.com
  4. 4. AQM Cost of Quality Opportunity to Reduce Real CostsChapter 1 • Quality costs enables to Understand hidden costs.DEFINITION Reduce and eliminate unnecessary costs.& MEANING • Prevent problems from happening. www.company.com
  5. 5. AQM Cost of Quality Understated Quality CostsChapter 1 • Quality costs are real and estimated at: 25% of costs in manufacturingDEFINITION 35% of costs in service industry& MEANING • Quality costs can be categorised to enable better understanding. www.company.com
  6. 6. AQM Cost of Quality • Quantify the size of the quality problem in language that will have an impact on upper management.Chapter 2 • Identify major opportunities for reduction in cost of poor quality throughout all activities inOBJECTIVES an organisation. OF • Identify opportunities for reducing customerEVALUATION dissatisfaction and associated threats to sales revenues. • Provide a mean of measuring the result of quality improvement activities instituted to achieve the above mentioned opportunities. • Align quality goals with organisation goals. www.company.com
  7. 7. AQM Cost of Quality QUALITY COSTSChapter 3 CATEGORIES OF QUALITY COSTS www.company.com
  8. 8. AQM Cost of Quality Internal Failure CostsChapter 3 “ The costs of deficiencies discovered before delivery which are associated withCATEGORIES the failure (nonconformities) to meetOF QUALITY explicit requirements or implicit needs of COSTS external or internal customers.” • Also include avoidable losses and inefficiencies that occur even when requirements and needs are met. www.company.com
  9. 9. AQM Cost of Quality Internal Failure Costs • Failure to Meet Customer Requirements and NeedsChapter 3 • Scrap • ReworkCATEGORIES • Lost or missing informationOF QUALITY • Failure analysis COSTS • Scrap and rework- supplier • Reinspection, retest • Changing processes • Redesign of hardware/software • Rework in internal support operations • Downgrading www.company.com
  10. 10. AQM Cost of Quality Internal Failure Costs • Cost of Inefficient Processes • Variability of product characteristicsChapter 3 • Unplanned downtime of equipment • Inventory shrinkageCATEGORIES • Variation of process characteristics from “bestOF QUALITY practice” COSTS • Non-value added activities. • “These are the costs that would disappear if no deficiencies existed.” www.company.com
  11. 11. AQM Cost of Quality External Failure CostsChapter 3 “ The costs associated with theCATEGORIES deficiencies that is found afterOF QUALITY product is received by the COSTS customer.” • Also includes the lost opportunities for sales revenue. www.company.com
  12. 12. AQM Cost of Quality External Failure Costs • Failure to Meet Customer Requirements and NeedsChapter 3 • Warranty charges • Complaint adjustmentCATEGORIES • Returned materialOF QUALITY • Allowances COSTS • Penalties due to poor quality • Rework on support operations • Revenue losses in support operations. www.company.com
  13. 13. AQM Cost of Quality External Failure Costs • Lost Opportunities for Sales Revenue • Customer defectionsChapter 3 • New customer lost because of quality • New customer lost because of lack of capability.CATEGORIESOF QUALITY COSTS • “These costs also would disappear if no deficiencies existed.” www.company.com
  14. 14. AQM Cost of Quality External Failure Costs • Those costs incurred if poor qualityChapter 3 products receive further processingCATEGORIES • If this occurs then the previous processingOF QUALITY is wasted •cost Why would you do this? COSTS www.company.com
  15. 15. AQM Cost of Quality Appraisal CostsChapter 3 “Appraisal costs support activitiesCATEGORIES whose purpose is to determine theOF QUALITY degree of conformance to the COSTS quality requirements.” • Any defective parts and products should be caught as early as possible in the production process. www.company.com • Sometimes called inspection costs.
  16. 16. AQM Cost of Quality Appraisal Costs • Examples • Incoming inspection and testChapter 3 • In-process inspection and testCATEGORIES • Final inspection and testOF QUALITY • Document review COSTS • Balancing • Product quality audits • Managing accuracy of test equipments • Inspection and test materials and services. • The kind of the work done is decisive, not www.company.com the department.
  17. 17. AQM Cost of Quality Appraisal CostsChapter 3 • Those costs incurred because poor quality products might existCATEGORIESOF QUALITY • If these costs are necessarythis? the •Why would you permit then process is flawed and management is COSTS guilty. www.company.com
  18. 18. AQM Cost of Quality Prevention Costs “Prevention costs support activitiesChapter 3 whose purpose is to reduce the number of defects.”CATEGORIESOF QUALITY COSTS • The most effective way to manage quality costs is to avoid having defects in the first place. • much less costly to prevent a problem from ever happening than it is to find and correct the problem after it has occurred. www.company.com
  19. 19. AQM Cost of Quality Prevention Costs • Examples • Quality planningChapter 3 • New-product reviewCATEGORIES • Process planningOF QUALITY • Process control COSTS • Quality audits • Supplier quality evaluation • Training. • Do not include basic activities. www.company.com
  20. 20. AQM Cost of Quality Prevention CostsChapter 3 • Those costs incurred because management is committed toCATEGORIES prevent poor quality products fromOF QUALITY happening COSTS • Why would you not do this? www.company.com
  21. 21. AQM Cost of Quality • Important points to be kept in mind • Definitions should be tailor-made for each organization.Chapter 4 • Failure cost elements are key categories. FINALIZING • Agreement should be reached on the categories THE of cost to include before any data are collected.DEFINITIONS • Certain costs routinely incurred may have been accepted as inevitable but are really part of the cost of poor quality. • As the detailed categories of the cost of poor quality are identified, some categories will be controversial. www.company.com
  22. 22. AQM Cost of Quality • ISO 9004-1 (1994), Quality Management and Quality System Elements- Guidelines, Section 6, “Financial Consideration of QualityChapter 5 Systems.”INTERNATIONAL STANDARDS • Identifies the approaches to data collection and reporting. • Quality costing approach • Process cost approach • Quality loss approach. www.company.com
  23. 23. AQM Cost of Quality • Quality Costing Approach • Failure, appraisal and prevention approach.Chapter 5 • Process Cost ApproachINTERNATIONAL • Collects data for a process rather than a product. STANDARDS • Costs are divided into cost of conformity and cost of nonconformity. • Quality Loss Approach • Collects data on many of the “hidden” costs. www.company.com
  24. 24. AQM Cost of Quality Benefits of an improvement effort • Reduced costs of errors 6Chapter • Improved process capability RETURN ON • Reduced customer defections QUALITY • Increase in new customers. www.company.com
  25. 25. AQM Cost of Quality Return on Quality Prevention Costs Benefitcosts Appraisal Costs Prevention Costs Failure Costs • Internal Appraisal Costs • External Failure Costs Before Quality After Quality Cost Alignment Cost Alignment www.company.com
  26. 26. AQM Cost of Quality Optimum Cost of Poor Quality • Minimum level of total quality costs when the quality of conformance is 100%, i.e., perfection.Chapter 6RETURN ON QUALITY www.company.com
  27. 27. AQM Cost of Quality • Would it not make sense to preventChapter 7 poor quality products from happening?PREVENTION OF • How can this be done?POOR QUALITY • Whose responsibility is this? PAYS www.company.com
  28. 28. AQM Cost of Quality How to Prevent Poor QualityChapter 7 • Prepare to measure costs of qualityPREVENTION OF – Determine categories of quality costsPOOR QUALITY PAYS – Create measurement system that captures categories of quality costs • Assign responsibility to collect data • Analyse collected data. www.company.com
  29. 29. AQM Cost of Quality Determine Quality Cost CategoriesChapter 7 • Understand productPREVENTION OF • Understand processPOOR QUALITY • Understand where problems occur PAYS • Determine precisely what goes wrong • Determine what costs represents each problem. www.company.com
  30. 30. AQM Cost of Quality Assign ResponsibilityChapter 7 • Make individuals at all levels responsible for collecting quality costPREVENTION OF data:POOR QUALITY – If quality cost data is required then PAYS make it the responsibility of the person who creates the cost to collect the data • If no one is responsible no one will bother. www.company.com
  31. 31. AQM Cost of Quality Analyse Collected DataChapter 7 • Data on its own is uselessPREVENTION OF • Data must be analysed to extract meaning.POOR QUALITY PAYS • Determine what knowledge is required. • Develop an analysis system that provides the knowledge which is required. www.company.com
  32. 32. AQM Cost of Quality Data Collection Approaches • Established accountsChapter 7 • Analysis of ingredients of established accountsPREVENTION OF • Basic accounting documentsPOOR QUALITY • Estimates PAYS • Temporary records • Work sampling • Allocation of total resources • Unit cost data • Market research data www.company.com
  33. 33. AQM Cost of Quality Useful Quality Cost KnowledgeChapter 7 • What needed to be known is useful.PREVENTION OF • What do not need to be known is useless.POOR QUALITY PAYS • Only ask for knowledge that is needed to be known. • Demand that knowledge is presented so that it can be understood easily. www.company.com
  34. 34. AQM Cost of Quality Summarize Collected DataChapter 7 The most basic ways are:PREVENTION OF • By product, process, component, defect type, or other likely defect concentrationPOOR QUALITY pattern. PAYS • By organizational unit. • By category cost of poor quality. • By time. www.company.com
  35. 35. AQM Cost of Quality Reporting the ResultsChapter 7 Must provide the following perspective with integration into overall performancePREVENTION OF reporting system of organisation.POOR QUALITY • How do customer see us? (customer PAYS perspective) • What must we excel at? (internal perspective) • Can we continue to improve and create value? (innovation and learning perspective) • How do we look to shareholders? (financial perspective) www.company.com
  36. 36. AQM Cost of Quality Gaining approval for the improvement program • Establish that costs are large enough to justify the actionChapter 7 • Use the grand total to demonstrate the need.PREVENTION • Relate the grand total to business measures. OF POOR • Show the subtotals for the broad majorQUALITY PAYS groupings of quality costs. • Estimate the savings and other benefits. • Calculate the return on investment. • Use a successful case history. • Identify the specific improvement projects. • Propose the structure of the improvement www.company.com program.
  37. 37. AQM Cost of Quality Management is ResponsibleChapter 7 • Management decides what to produce in terms of Products (goods and / orPREVENTION OF services).POOR QUALITY • Management assigns responsibilities to PAYS produce products. • Management is accountable for effectively using resources to produce products. www.company.com
  38. 38. “Cost of quality is … the expense of nonconformance – the cost of doing things wrong.” Crosby, P. 1979, Quality is Free, McGraw-Hill, Torontowww.company.com