Lec 4 - Cost of Quality - TOTAL TOTAL QUALITY MANAGEMENT T...

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Unformatted text preview: TOTAL TOTAL QUALITY MANAGEMENT T QM 1 Today’s Discussion Today’s Discussion ● TQM Philosophy ● Cost of Quality ● Model of Optimum Cost of Quality ● Measuring and Reporting Quality Costs ● Quality and Cost Relationship ● The 1­10­100 RULE ● Quality and Productivity 2 TQM Philosophy TQM Philosophy “Do the Riight Things, Right ght Do the Fiirst Time, Every rst very Time” Time” COST OF QUALITY COST OF QUALITY CATEGORIES OF QUALITY COST: – COST OF ACHIEVING GOOD QUALITY – COST OF POOR QUALITY COST OF ACHIEVING GOOD QUALITY – PREVENTION COSTS The cost of any action taken to investigate, prevent or reduce the risk of a non­conformity – APPRAISAL COSTS The costs associated with measuring, checking, or evaluating products or services to assure conformance to quality requirements COST OF POOR QUALITY – INTERNAL FAILURE COSTS The costs arising within the organization due to non­conformities or defects include scrap, rework, process failure, downtime, and price reductions – EXTERNAL FAILURE COSTS The costs arising after delivery of product or service to the customer due to non­conformities or defects include complaints, returns, warranty claims, liability, and lost sales PREVENTION COSTS PREVENTION COSTS QUALITY PLANNING COSTS – costs of developing and implementing quality management program PRODUCT­DESIGN COSTS – costs of designing products with quality characteristics PROCESS COSTS – costs expended to make sure productive process conforms to quality specifications TRAINING COSTS – costs of developing and putting on quality training programs for employees and management INFORMATION COSTS – costs of acquiring and maintaining data related to quality, and development of reports on quality performance APPRAISAL COSTS APPRAISAL COSTS INSPECTION AND TESTING – costs of testing and inspecting materials, parts, and product at various stages and at end of process TEST EQUIPMENT COSTS – costs of maintaining equipment used in testing quality characteristics of products OPERATOR COSTS – costs of time spent by operators to gather data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality INTERNAL FAILURE COSTS INTERNAL FAILURE COSTS SCRAP COSTS – costs of poor­quality products that must be discarded, including labor, material, and indirect costs REWORK COSTS – costs of fixing defective products to conform to quality specifications PROCESS FAILURE COSTS – costs of determining why production process is producing poor­quality products PROCESS DOWNTIME COSTS – costs of shutting down productive process to fix problem PRICE­DOWNGRADING COSTS – costs of discounting poor­quality products—that is, selling products as “seconds” EXTERNAL FAILURE COSTS EXTERNAL FAILURE COSTS CUSTOMER COMPLAINT COSTS – costs of investigating and satisfactorily responding to a customer complaint resulting from a poor­quality product PRODUCT RETURN COSTS – costs of handling and replacing poor­quality products returned by customer WARRANTY CLAIMS COSTS – costs of complying with product warranties PRODUCT LIABILITY COSTS – litigation costs resulting from product liability and customer injury LOST SALES COSTS – costs incurred because customers are dissatisfied with poor quality products and do not make additional purchases MODEL OF MODEL OF OPTIMUM COST OF QUALITY MEASURING AND REPORTING MEASURING AND REPORTING QUALITY COSTS INDEX NUMBERS – ratios that measure quality costs against a base value – LABOR INDEX ratio of quality cost to labor hours – COST INDEX ratio of quality cost to manufacturing cost – SALES INDEX ratio of quality cost to sales – PRODUCTION INDEX ratio of quality cost to units of final product AN EVALUATION OF QUALITY AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS EXAMPLE: The H&S Motor Company small motors (e.g., 3 hp) for use in lawnmowers and garden equipment. The company instituted a quality management program in 2004 and has recorded the following quality cost data and accounting measures for four years. YEAR 2004 2005 2006 2007 Prevention $27,000 41,500 74,600 112,300 Appraisal 155,000 122,500 113,400 107,000 Internal Failure 386,400 469,200 347,800 544,400 External Failure 242,000 196,000 103,500 106,000 $810,400 829,200 639,300 544,400 Sales $4,360,000 4,450,000 5,050,000 5,190,000 Manufacturing Costs 1,760,000 1,810,000 1,880,000 1,890,000 QUALITY COSTS TOTAL ACCOUNTING MEASURES The company wants to assess its quality–assurance program and develop quality index numbers using sales and manufacturing cost bases for the four–year period. AN EVALUATION OF QUALITY COSTS & QUALITY INDEX AN EVALUATION OF QUALITY COSTS & QUALITY INDEX NUMBERS: “EXAMPLE (Cont…)” Quality Index = [(Total Quality Costs) / Base] X 100 The Index Number for 2004 sales is: – Quality Cost per sale = [(810,400/4,360,000)] X 100 = 18.58% Year Quality Sales Quality Manufacturing 2004 Index 18.58 Index 46.04 2005 18.63 45.18 2006 12.66 34.00 2007 10.49 28.80 “The H&S Company quality index numbers reflect dramatically improved quality during he four – year period” Quality Costs as a Proportion of both sales & manufacturing costs improved significantly Quality Index Numbers are useful in showing trends in product quality over time and reflecting the impact of product quality relative to accounting measures with which managers are usually familiar QUALITY–COST RELATIONSHIP “QUALITY IS FREE” FOUR ABSOLUTES OF QUALITY – – – – Conformance to the requirement, “Not Goodness” System for causing quality is prevention not appraisal Performance standard is Zero defects Measure of quality is the price of non–conformance In his book “Quality Without Tears”, explains that the dollar cost of quality is the difference between price of nonconformance and conformance – Cost of doing things wrong 20 to 35% of revenues – Cost of doing things right 3 to 4% of revenues – Profitability In the long run, quality is free THE 1­10­100 RULE THE 1­10­100 RULE QUALITY MANAGEMENT QUALITY MANAGEMENT AND PRODUCTIVITY Productivity – ratio of output to input Yield: – is a measure of output used as an indicator of productivity – Improved quality increases product yield Yield=(total input)(% good units) + (total input)(1­%good units)(% reworked) or Y=(I)(%G)+(I)(1­%G)(%R) COMPUTING PRODUCT YIELD COMPUTING PRODUCT YIELD EXAMPLE: – The H & S Motor company starts production for a particular type of motor with a steel motor housing. The production process begins with 100 motors each day. The percentage of good motors produced each day average 80% and the percentage of poor–quality motors that can be reworked is 50%. The company wants to know the daily product yield and the effect on productivity if the daily percentage of good–quality motors is increased to 90%. Yield=(total input)(% good units) + (total input)(1­%good units)(% reworked) Y=(I)(%G)+(I)(1­%G)(%R) Y = (100)(0.80) + (100)(1 – 0.80)(0.50) = 90 Motors If product quality is increased to 90% good motors, the yield will be: Y = (100)(0.90) + (100)(1 – 0.90)(0.50) = 95 Motors A 10% point increase in quality products results in a 5.5% ((95/90 )*100) increase in productivity output. QUALITY–PRODUCTIVITY RATIO QUALITY–PRODUCTIVITY RATIO QPR: – productivity index that includes productivity and quality costs – It increases if either processing cost or rework costs or both decrease. – It increases if more good­quality units are produced relative to total product input(i.e., number of units that begin the production process) QPR = (non­defective units) (input) (processing cost) + (defective units) (reworked cost) COMPUTING QUALITY & PRODUCTIVITY RATIO COMPUTING QUALITY & PRODUCTIVITY RATIO EXAMPLE: – The H&S Motors Company produces small motors at a process cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day on average 80% good­ quality motors., resulting in 20% defects, 50% of which can be reworked prior to shipping to customers. The company wants to examine the effects of: 1. Increase the production rate to 200 motors per day 2. Reducing the processing cost to $26 and the rework cost to $10 3. Increasing, through quality improvement, the product yield of good quality products to 95% 4. The combination 2 & 3 SOLUTION: – QPR for the base case: (non­defective units) QPR = (input) (processing cost) + (defective units) (reworked cost) QPR = [(80 + 10) / {(100)($30) + (10)($12)}] X 100 QPR = 2.89 COMPUTING QUALITY & PRODUCTIVITY RATIO COMPUTING QUALITY & PRODUCTIVITY RATIO SOLUTION: – Case#1: “Increase input to production capacity of 200 units” QPR = [(160 + 20) / {(200)($30) + (20)($12)}] X 100 QPR = 2.89 “Increasing production capacity alone has no effect on the QPR” – Case#2: “Reduce processing cost to $26 and rework cost to $10” QPR = [(80 + 10) / {(100)($26) + (10)($10)}] X 100 QPR = 3.33 “Processing & Rework cost decreases caused the QPR to increase” – Case#3: “Increasing, through quality improvement, the product yield of good quality products to 95% ” QPR = [(95 + 2.5) / {(100)($30) + (2.5)($12)}] X 100 QPR = 3.22 “Again, QPR increases as product quality improves” – Case#4: “Decrease costs & increase initial good­quality units” QPR = [(95 + 2.5) / {(100)($26) + (2.5)($10)}] X 100 QPR = 3.71 “The larger increase in the QPR results from decreasing costs & increasing initial good quality products through improved quality” Questions & Answers Que & A stions nswe rs NS S IOER ST W UE NS QA & QUESTIONS & S ANSWERS NS O TI ER ES SW QUAN & Qu & A esti nswons ers Questions & Answers s on rs sti we ue s Q An & Que & A stions nsw ers ...
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This note was uploaded on 10/28/2011 for the course ECONOMICS 105 taught by Professor Ak during the Spring '11 term at Punjab Engineering College.

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