Cost of Quality or Quality Costs

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Cost of Quality or Quality Costs
There are significant cost benefits to be gained from implementing a QA system.
The costs associated with implementing a Quality Management System can be broadly
classified as Prevention costs , Appraisal Costs and Failure costs. Prevention costs are the
cost incurred by an organization in implementing a Quality Management System. They
include costs such as hiring an outside consultant, providing training to employees,
creating the infrastructure for calibration, inspection and testing, etc. Before an
organization implements a Quality Management System, these costs are negligible.
However as the implementation gathers momentum these costs increase. The Appraisal
costs are the costs of inspection and testing, pre production trails, inspection costs at
suppliers premises, etc. These too are initially negligible and increase as a QMS is
implemented. Failure costs can be broadly sub-divided into External Failure Costs and
Internal Failure Costs. External Failure costs are costs associated with customer claims
for failed or inferior products, loss of orders, legal costs,etc. Internal Failure Costs are
costs incurred due to scrap, rejection, downgrading, blending, recovery, etc. These costs
tend to be very high before a QMS is implemented. However as a QMS is implemented,
there is a drastic reduction in the Failure costs resulting in an overall reduction in the total
cost of Quality. This is represented in Figure 1.
If we are to calculate the cost savings we first must determine the cost of quality.
Figure - 2 shows the components which form the quality costs.
It has
been estimated that
the average
large
American corporation
using conventional methods of
quality prevention, eg inspection and quality
control, produces an after-tax profit of 4.8% of sales and has a cost of quality
of
approximate 20%. By changing the emphasis away from costs associated with nonconformance, then the cost of quality can be reduced and the savings go straight onto
the bottom line of the profit account.
To obtain all the cost benefits an organization’s management need to maintain a
highly visible approach to the reporting and monitoring of quality costs and where
possible should relate them to other cost measures, eg sales, turnover, in order to :
(a)
evaluate
system
the
adequacy
and effectiveness of the quality management
(c)
identify additional areas requiring attention
(c)
establish quality and cost objectives.
QUALITY PROGRAMME COST BENEFITS
Rs.
PREVENTION
Decrease in total
cost of quality
INC
R
AS EASE
%
TOT OF
AL
Margin
PREVENTION
APPRAISAL
COST
DECREASE
AS % OF
TOTAL
APPRAISAL
FAILURE
DECREASE
AS % OF
TOTAL
FAILURE
START OF
PROGRAMME
TIME
Figure 1
Prevention costs
e.g
Cost of Conformance
Appraisal Costs
e.g
- Supplier assurance
- Training
- Calibration and Maintenance of Production
equipment
- Design and Development work
- Design Reviews
- Quality Auditing
- Inspection and Testing
- Receipt Inspection
- Pre-Production Verification
- Stock Evaluation
Cost of Quality
Internal failure costs
e.g
Cost of
Non- Conformance
External Failure costs
e.g.
Scrap
Rework/Repair
Re-inspection and Retesting
- Permits and concessions
- Complaints
- Warranty claims
- Products rejected/returned
- Loss of Sales
- Product Liability
- Recall costs
Figure 2: COST OF QUALITY
B.Girish, Dy. Director
National Productivity Council, Chennai
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