Solution 11
3.
The composite index for quality costs for Midwest Sales shows a steady decrease
in total quality cost down from $0.2358 to $0.1562/total sales dollars. Internal
failure rates were reduced substantially, from $468.20 thousand in the first quarter
to $166.40 thousand in the fourth quarter. External failure rates also showed
substantial improvement since the first quarter, dropping from $280.80 thousand
to $128.60 thousand in the fourth quarter. Increases in prevention and appraisal
expenditures have apparently led to improvements in failure costs. The overall
index fell by one-third (8 percentage points). Management should maintain or
increase the level of prevention and appraisal in an effort to reduce quality costs,
especially failure costs. (See spreadsheet Prob8-03.xls for more details).
TOTAL SALES AND
$THOUSANDS QUARTERLY QUALITY COSTS
1
2
3
Total sales
External failure
Internal failure
Appraisal
Prevention
Total Quality Cost
4,120.00
280.80
468.20
194.20
28.40
971.60
4,206.00
208.20
372.40
227.70
29.20
837.50
4,454.00
142.80
284.40
274.40
50.20
751.80
INDEX OF QUALITY COSTS AS A % OF SALES
1 Qtr.
2 Qtr.
3 Qtr.
External failure
Internal failure
Appraisal
Prevention
Total Quality Cost
% Total Sales/Base
4
4,106.00
128.60
166.40
266.20
80.20
641.40
4 Qtr.
6.82
11.36
4.71
0.69
23.58
4.95
8.85
5.41
0.69
19.91
3.21
6.39
6.16
1.13
16.88
3.13
4.05
6.48
1.95
15.62
100
102.09
108.11
99.66
Midwest Sales, Inc. - Cost of Quality Index
25
Percent of Sales
20
15
10
5
Total Quality Cost
Internal failure
0
1 Qtr.
External failure
2 Qtr.
3 Qtr.
Quarters
10.
4 Qtr.
Appraisal
Prevention
Spreadsheet data and the Pareto chart (see Prob8-10.xls for details) for Repack
Solutions, Inc. show that the company is spending too much on appraisal and
internal failure cost and too little on prevention. Checking boxes, machine
downtime, and packaging waste need immediate improvement in order to have
the greatest impact on quality costs, since they constitute almost 82% of quality
costs. However, it should be done with caution, since “checking boxes” represents
appraisal costs designed to screen out poor quality and prevent it from reaching
the customer.
REPACK SOLUTIONS,
INC.
QUALITY COST & PERCENTAGES
Checking boxes
Mach. downtime
Pkg. waste
Income. insp.
Other waste
Cust. complaints
Error corrn.
Qual. train. assoc.
Improv. proj.
Typo corrn.
Quality planning
Total
Percent
Cumulative
%
Cost
48.80
27.84
5.15
4.12
3.78
2.75
2.75
2.06
1.37
0.69
0.69
48.80
76.63
81.79
85.91
89.69
92.44
95.19
97.25
98.63
99.31
100.00
710000
405000
75000
60000
55000
40000
40000
30000
20000
10000
10000
1455000
Quality Cost
Category
Appraisal
Int. Fail.
Int. Fail.
Appraisal
Int. Fail.
Ext. Fail.
Int. Fail.
Prevent.
Prevent.
Int. Fail.
Prevent.
Percent
Cumulative %
60.00%
120.00%
50.00%
100.00%
40.00%
80.00%
30.00%
60.00%
20.00%
40.00%
10.00%
20.00%
0.00%
C
he
c
M ki n
ac g
h. bo
do xe
w s
Pk nti
g. me
In w
co as
m te
O e. i
t
h
C e nsp
us r
.
t. wa
co st
m e
Q Er pla
ua ro i nt
l. r c s
t
Im rai orr
pr n. n.
a
o
Ty ve sso
po me c.
co nt
Q rrr p ro
ua ec j .
li t tio
y
pl ns
an
ni
ng
0.00%
Cumulative Percent
Percent Within Defect Category
Repack Solutions, Inc.
Defect Categories
Note that costs could also be classified by aggregating them into the four
categories of internal and external failure, prevention and appraisal costs, instead
of the above categories.
12.
For HiTeck Tool Company, the largest costs are internal failure (56.6%) and
appraisal (27.1%). More must be done in quality training, a component of
prevention (currently 7.8%), if failure, appraisal, and overall quality costs are to
be controlled. External failure costs are 8.6% of quality costs, so screening
methods are working fairly well. Note that the above proportions are fractions of
the total quality costs of $ 247,450.
Quality Cost Categories
Cost Elements
Proportion
APPRAISAL
Costs
Incoming test & inspection
Inspection
Test
Laboratory testing
Design of Q.A. equipment
Material testing & insp.
Insp. equipt. & calibration
Formal complaints to vendors
Setup for test & inspection
Laboratory services
7500
25000
5000
1250
1250
1250
2500
10000
10750
2500
Cost Elements
Costs
Subtotal
$ 67000
0.271
Subtotal
Proportion
PREVENTION
Quality training
Quality audits
Maintenance of tools and dies
Quality control admin.
Writing proced. & instr.
0
2500
9200
5000
2500
$ 19200
0.078
INTERNAL FAILURE COSTS
Scrap
Rework
Correcting imperfections
Rework due to vendor faults
Problem solving - prod. engrs.
35000
70000
6250
17500
11250
$140000
EXTERNAL FAILURE COSTS
0.566
Adjustment cost of complaints
Total costs
21250
$ 21250
$247,450
0.086