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  1. Concept of Cost of Quality • Was developed to bring and attract the attention of the top management. • Top management understands the language of money than 1. Indices 2. Percentages 3. Volume of work and 4. Rejection. • Top management must be shown that 1. Money wasted on avoidable operation 2. Non conformance to quality and • Reduce cost by increasing the Quality
  2. Cost of Quality ‰ Costs of quality fall into two categories • Cost of quality assurance – cost of achieving quality • Prevention costs – The second type of cost must be saved – examples of prevention costs - quality planning costs, product design costs, process costs, training costs, and information costs
  3. Importance of Cost of Quality • It is an instrument to attract the attention of top management to the problem of quality. • To understand where the company stands in terms of quality of their products/services • To know department wise the position of quality, and • To take corrective actions
  4. Components of Cost of Quality (cont) 1. Cost of prevention to achieve 2. Costs appraisal Quality 3. Cost of Internal Failure cost of 4. Cost of external failure. Poor quality – cost of not conforming to specifications – costs associated with poor quality • cost of failures is difference between what it actually costs to produce a product and what it would cost if there were no failures • cost of poor quality is usually largest quality cost source in organization
  5. Cost of prevention • Market research • Product qualification • Process validation • System development • Good manufacturing practices • Quality of education • Process improvement These are to prevent problems about quality
  6. Cost of appraisal • Company spends money to asses or test quality –catch mistakes after the fact • examples of appraisal costs – inspection and testing of incoming materials, testing equipments, field testing and operator costs
  7. Cost of internal failure Two types of cost of nonconforming • Internal failure costs 1. Discovered before product is delivered to customer 2. Rejection 3. Rework and re-processing 4. Scrap and re-inspection – examples of internal failure costs – money spent on scrap, rework, process failure, process downtime, price-downgrading
  8. Cost of Quality (cont) • external failure costs – discovered after customer receives poor quality product – examples of external failure costs – customer complaint, product return, warranty claims, product liability, and lost sales
  9. Cost of Quality (cont) • index numbers are means of measuring and reporting quality costs • index numbers are ratios which measure quality costs against a base value • general form is quality index = (total quality cost / base) x 100 • useful as standard to make comparisons over time
  10. Measurement of Cost of Quality • labor index – (total quality cost / direct labor hours) x 100 – may not be appropriate for comparisons where technology change reduces labor usage • cost index – (total quality cost / manufacturing cost) x 100 – not affected by technology change
  11. Cost of Quality (cont) • sales index – (total quality cost / sales) x 100 – may be distorted by changes in selling price or costs • production index – (total quality cost / # units final product) x 100 – may not be as effective where have number of different products
  12. Cost of Quality (cont) • quality-cost relationship – as prevention and appraisal costs increase, internal and external failure costs typically decrease – as company focuses on achieving quality, cost of achieving good quality goes down – leads companies to frequently seek 100% quality or zero defects
  13. Cost of Quality (cont) • Japanese focus on improving quality at minimum cost – improve capabilities and training of employees rather than on engineering solutions – concentrate on quality characteristics in design stage rather than trying to build quality in production process – long-term view of firm success suggests firms who take long-term focus on quality do increase profitability
  14. Cost of Quality (cont) • impact of quality management on productivity – productivity = output / input – quality impact on productivity – fewer defects increases output while quality improvement reduces inputs