ASSIGNMENT #1
Macrosoft Data
Entertainment Corporation
Raj Sharma, OPMT 3A
9/25/2009
Raj Sharma
OPMT 3A
For Macrosoft Data Entertainment Corporation their total failure costs accounted for
82.87% of their total quality costs for 2004. This means that 82.87% of the time the company is
spending more on total failure costs than they are on total quality costs. They are simply
spending money on problems that already exist such as fixing bugs, or refunds and recalls. The
company is being more reactive than proactive. Instead of fixing problems ahead of time they
are spending money on fixing the problems after they have already occurred. In 2005
MacDatEE seems to have hit a bit of an obstacle. In this year there total failure costs decreased
by a small amount but total quality costs increased. 2005 must have been MacDatEE’s worst
year as costs were high and sales where low. From 2006-2008 total failure costs decreased
dramatically from 82.87% of total quality costs to just 64.49% in 2008 (see page 4 for
calculations).
There is a trend that shows that MacDatEE went from spending an extensive amount of money
in 2004 on total failure costs to a small amount in 2008. Also as the years went on there total
quality costs decreased. This means the company is learning from previous years and is acting
proactively by spending more money on prevention costs rather than failure costs. I also
believe that the costs where high in the beginning years as the company may have been
starting out and in a process of R & D, but as time went on they improved and developed
products that were successful and free from deficiencies.
Prevention costs compared to total quality costs increased significantly from 2004 to
2008. In 2004 for example, prevention costs accounted for just 1.66% of total quality costs (see
page 4 for calculations). The amount spent on prevention increased as the company continued
forward and by 2008 prevention costs increased to 25.36% of total quality costs. I believe
MacDatEE began to understand whether the problems where good or bad and ultimately spent
time and money ensuring these problems don’t occur.
Appraisal costs decreased from 2004 to 2008. In 2004 appraisal costs represented
15.47% of total quality costs. However, in 2008 appraisal costs were just 10.14% of total quality
costs (see calculations page 4). I believe MacDatEE spent less money on appraisal costs from
2004 to 2008 because they were spending more money on prevention. This was a very
intelligent move because MacDatEE will be far more successful by preventing a problem rather
than spending money on finding quality problems after the product has already been
developed. Design reviews are part prevention and part appraisal. To the degree that you are
looking for errors in the proposed design itself. When MacDatEE does a review they are doing
an appraisal. When they are looking for different ways to strengthen the design they are doing
prevention.
The company strategy appears to be that they want to eliminate the problem before it even
occurs or reaches the customer. They have learned that by trial and error and can now increase
profits, reduce costs, and develop an overall great product. The company strategy of being
proactive rather than reactive and creating a defect free product appears to be going smoothly
for MacDatEE.
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Raj Sharma
OPMT 3A
Prevention is the costs of activities that are specifically designed to prevent poor quality. Some
examples of prevention costs incurred by MacDatEE would be:
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Training staff to fully understand the product to reduce defects
Early prototyping
Defensive programming
Usability analysis (i.e. products ease of use)
Clear specifications (is it easy to comprehend?)
Appraisal costs are costs of activities designed to find quality problems. A few appraisal costs
for this company would be such things as:
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Design review (does the product need to be re-worked?)
Code inspection
Usability testing (are improvements or changes needed?)
Training testers
Pre-release out of box testing by the customer service staff (to check for bugs or
glitches before the product reaches the customer)
Internal failure costs are costs that arise before the company supplies its products to the
customer. MacDatEE’s internal failure costs would include costs such as:
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Fixing bugs or glitches
Wasted time testing the product before release
Direct cost of late shipment (i.e. unsatisfied customer)
Wasted press time (i.e. packaging or labeling needs to be changed)
Wasted advertisements (i.e. re-advertising a product that has gone through a design
change)
External failure costs are costs that occur after the company supplies the product to the
customer. External failure costs for this company would include:
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Investigation of customer complaints
Refunds and recalls
Lost sales and lost customer goodwill
Warranty costs
Discount to resellers to encourage them to keep selling the product
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Raj Sharma
OPMT 3A
I think that MacDatEE’s quality program has grown greatly within the past five years. They are
evolving and growing more and more as time goes on. In the early stages of the company MacDatEE was
spending a lot of money on total quality costs and roughly 80% of those costs were spent on total failure
costs. Profits were low in 2004 and 2005, while costs where high. The total number of units produced in
2004 and 2005 was just over 1 million and the error rate for units that did not pass the testing phase
was about 11-18%. From 2006 to 2008 total failure costs decreased at a rate of 7% each year. From a
high of 82.87% in 2004 to a low of 64.49% in 2008 (see calculations page 4). This shows that MacDatEE is
investing more to achieve better quality by additional training and staffing of the programming group
(i.e. prevent the bugs rather than find and fix them).
From my calculations and data analyses I have noticed that MacDatEE has been decreasing there
spending on failure and appraisal costs, while increasing their spending on prevention costs. I think that
this is very important in future success of the company. They went from spending just 1.66% of total
quality costs on prevent in 2004 to 25.36% of total quality costs on prevention in 2008. The changes in
MacDatEE’s quality program shows in their overall profits. They made 2 million dollars in 2004 to a low
of $800,000 in 2005. From 2006, profits were at 3 million and by 2008 the profits had tripled within 5
years to 6.8 million, this says a lot about MacDatEE’s quality program (see calculations page 4).
I don’t believe that MacDatEE is vulnerable. By looking at the trends over the past 5 years I have noticed
that their quality program has improved dramatically and they are being proactive and preventative
instead of reactive and fixing the problem after it has already occurred. Being reactive can be very
costly. Quality cost analysis looks at the company’s costs, not the customer’s costs. The customer suffers
quality-related costs too. This can result in angry customers who may never repurchase a product again.
If a MacDatEE sells a bad product, the customer faces significant expenses in dealing with that bad
product (i.e. shipping, warranty, repairs, troubleshooting). Customer satisfaction is the key to a
company’s success and through MacDatEE’s data and trends it is apparent they are successful with their
quality program.
As an internal consultant for MacDatEE my recommendations would be for the company to diversify and
branch out into different markets and expand the customer base. Technology is ever changing and a
company looking to succeed in the software industry must be innovative and unique. I would
recommend that MacDatEE invest in other products and services, this will increase the overall customer
base, and help decrease the risks of being overly specialized. Diversification can therefore increase the
financial health of the company. An example of this would be Microsoft, which has increased the sales
of its primary operating system software by offering products, such as Word, Excel, and Media Player
software. I would also recommend that MacDatEE focus on long term customer relationships.
Maintaining positive customer relationships helps sell additional software and future upgrades.
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Raj Sharma
OPMT 3A
Question #1 Calculation’s: Total Failure Costs vs. Total Quality Costs
2004: 250+1250/30+280+250+1250 = 1500/1810 *100 = 82.87%
2005: 360+1100/60+300+360+1100 = 1460/1820 *100 = 80.22%
2006: 280+920/200+240+280+920 = 1200/1640 *100 = 73.17%
2007: 210+870/300+200+210+870 = 1080/1580 *100 = 68.35%
2008: 170+720/350+140+170+720 = 890/1380 *100 = 64.49%
Question #2 Calculation’s: Total Prevention Costs vs. Total Quality Costs
2004: 30/1810 *100 = 1.66%
2005: 60/1820 *100 = 3.30%
2006: 200/1640 *100 = 12.19%
2007: 300/1580 *100 = 18.99%
2008: 350/1380 *100 = 25.36%
Question #2 Calculation’s: Total Appraisal Costs vs. Total Quality Costs
2004: 280/1810 *100 = 15.47%
2005: 300/1820 *100 = 16.48%
2006: 240/1640 *100 = 14.63%
2007: 200/1580 *100 = 12.66%
2008: 140/1380 *100 = 10.14%
Profit Calculations: Total Sales – Total Costs = Profit
2004: $27,000,000 – $25,000,000 = $2,000,000 profit
2005: $26,000,000 - $25,200,000 = $800,000 profit
2006: $30,000,000 - $27,000,000 = $3,000,000 profit
2007: $34,000,000 - $29,000,000 = $5,000,000 profit
2008: $37,000,000 - $30,200,000 = $6,800,000 profit
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