Cost of Quality

“Quality is a Cost”
Defining Quality
Quality has many meanings:
a degree of excellence,
conformance with requirements,
the totality of characteristics of an entity that bear on
its ability to satisfy stated or implied needs,
fitness for use,
freedom from defects, imperfections or
contamination and delighting customers.
Defining Quality
Quality is not only about:
Complying with a specification;
Being the best;
Only producing a product that is ‘fit for the
purpose’
Defining Quality
Quality is all about meeting and exceeding

Customer Satisfaction!
Dimensions of Quality
How consistently and well a product
Performance functions
The appearance of tangible products (style,
Aesthetics beauty)
Serviceability Measures the ease of maintaining

and/or repairing the product
Features Characteristics of a product that differentiate

functionally similar products
The probability that the product or service will
Reliability perform its intended function for a specified
length of time
Durability The length of time a product functions

A measure of how a product meets its
Quality of conformance specification
The suitability of the product for carrying out
Fitness for use its advertised function
Why is Quality Cost
Important?
Research indicates that
2/3rd of the quality costs may be reduced of their
present level, within 3 years, by the commitment
of the organization to a process of continuous
improvement and company-wide quality improvement
It helps the organization to evaluate the effectiveness

and results of its quality programs in real terms and
also helps in cost-benefit analysis for future investments
in quality programs
Cost of Quality (CoQ)
Expenditure in Defect
Appraisals activities
+
COST Losses due to
Internal & External
OF failure
QUALITY +
Expenditure in Defect
Prevention activities
Categories
Cost of Conformance Cost of Non-Conformance
(Cost of Poor Quality)
PREVENTION COST INTERNAL FAILURE COST

The cost of any action taken to Cost incurred when products
investigate, prevent or reduce and services do not conform
the risk of a non-conformity. to specifications.
APPRAISAL COST EXTERNAL FAILURE COST

The costs associated with The costs arising after delivery
measuring, checking, or of product or service to the
evaluating products or services customer due to non-
to assure conformance to conformities or defects.
quality requirements.
Examples
PREVENTION COST INTERNAL FAILURE COST
- Training cost - Rejection cost
- Quality planning cost - Rework/Repair cost
- Quality system design cost - Loss due to down grading
- Quality audit cost - Re-testing costs,
- Quality improvement projects etc.
APPRAISAL COST EXTERNAL FAILURE COST

- Inspection & test cost - Warrantee Expenses
- Calibration cost - Claims
- Laboratory expenses - Returns/Replacements
- product/process audits, - Complaints handling,
etc. etc.
Cost of Quality Facts
Price of Non-Conformance (PONC)
All expenses involved in doing things wrong.
Represents:
20% of sales in Manufacturing.
30% of operating costs in Service
companies.
Price of Conformance (POC)

What is necessary to spend to make things right
which includes quality functions, prevention
effort, quality education.
Represents:
3-4% of sales.
Cost of Quality Facts
Size of Quality Cost Elements
10-15%
Quality costs in % of sales
The total quality

costs 25-35 % 10-12%
of turnover.
4-6%
1%
Preventive Appraisal Internal External

Failure Failure
Costs of Defects?
Does it cost more to make processes better ?
NO
Making processes better leads to reduced
Rework
Scrap
Warranty Cost
Inspection Cost
Many think that quality costs money and
adversely affects profits. But these costs
are the costs of doing it wrong first time .
Quality in the long run results in
increased profitability.
For example if we design the product right

first time, build it right first time - we save
all the costs of redesign, rework, scrap,
resetting, repair, warranty work etc.
Quality is Free
Effects of Non-Quality
Ariane 5 Failure
On 4th June1996, Ariane 5
exploded shortly after start.
Loss: 500 Million. $
approx. for the rocket and
Freight (4 Satellites).
Development Costs 7
Million $ approx.
Reason for the Crash:

Breakdown of the Main Computer.
Software was derived of Ariane 4,
whereas the other Data from Ariane 5.
1-10-100 Quality Rule
1
Prevention Rs
10
Correction
Stages
Rs
100
Rs
Failure
Rs
Rs
1-10-100 Quality Rule
(Example)
The 1-10-100 rule states that as a product or service moves
through the production system, the cost of correcting An
error multiplies by 10.
Activity Cost
Order entered correctly $1
Error detected in billing $ 10
Error detected by customer $ 100
Dissatisfied customer shares the experience with
others the costs is
$1000
Quality is Free
Quality Planning
Quality Control Quality Trilogy
Quality Improvement
Quality Planning
According to ISO 9000:2000 Quality Planning is:
“Art of quality management focused on setting

quality objectives and specifying necessary
operational processes and related resources to
fulfill quality objectives."
Quality Planning
Quality Planning
Inputs
1) Enterprise Environmental Factors
Quality Planning
Inputs
2) Organizational Process Assets
Describes the organization’s assets that may
influence
how the project is managed.
This includes existing project plan templates,

policies, procedures, and guidelines.
The most evident organizational process asset is
the lessons learned documentation and
historical
information from previous projects.
Quality Planning
Inputs
3) Project Scope Statement (Hyperlink)

Quality Planning
Tools & Techniques
1) Cost-Benefit Analysis
An analysis of the cost effectiveness of different
alternatives in order to see whether the benefits
outweigh the costs.
Benefit Measurement Methods
1) Benefit/Cost Ratio (Favourable if >1)
2) Payback Period (Time needed for a firm to recover
its initial investment on a project)
3) Net Present Value (For long term projects, as it
considers the time value of
money)
Quality Planning
Tools & Techniques
2) Benchmarking
A way to go backstage and watch another
company's performance from the wings, where
all stage tricks and hurried realignments are
visible. (By, Juran)
Quality Planning
Benchmarking at XEROX
Invented the photocopier in 1959 and maintained a
virtual monopoly for many years.
By 1981,the company’s market shrunk to 35 % as
IBM and Kodak developed high-end machines and
Canon, Ricoh and Savin dominated the low-end
segment of the market.
XEROX 5-stage Benchmarking
Planning: Determine subject to be benchmarked.
Analysis: Asses the strength of competitors, and
asses its performance with that of its
competitors.
Integration: Determine new goals or targets.
Action: Implement action plans and assess them
periodically.
Maturity: Determine whether the company has
attained a superior performance level.
Quality Planning
XEROX’S Benefit
Number of defects reduced 78 per 100 machines
Service response time reduced by 27%.
Defects in incoming parts reduced to 150ppm.
Improved sales from 152% to 328%.
Won all the 3 prestigious quality awards:
The Deming Award (In 1980)
The Malcolm Baldridge National Quality
Award (In 1989)
The European Quality Award (In 1992)
Quality Planning
Outputs
1) Quality Plan Template (Hyperlink)

Quality Planning
Outputs
2) Quality Metric
A “Quality Metric”, is a measure of quality as

defined by the customer.
Quality Control
Quality control (QC) is a procedure or set of
procedures intended to ensure that a
manufactured product or performed service
adheres to a defined set of quality criteria or
meets the requirements of the client or
customer.
Quality Control
Quality Control
Tools & Techniques
1) Quality Checklist
2) Pareto Diagrams
3) Control Chart
4) Inspection
5) Cause Effect Diagram
Thank You !!

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What are the different dimensions of quality discussed in the document?

What are the different dimensions of quality discussed in the document?

What is cost of quality and what are its categories?

What is cost of quality and what are its categories?

“Quality is a Cost”

Quality is all about meeting and exceeding

Serviceability Measures the ease of maintaining

Features Characteristics of a product that differentiate

Durability The length of time a product functions

It helps the organization to evaluate the effectiveness

PREVENTION COST INTERNAL FAILURE COST

APPRAISAL COST EXTERNAL FAILURE COST

APPRAISAL COST EXTERNAL FAILURE COST

Price of Conformance (POC)

The total quality

Preventive Appraisal Internal External

For example if we design the product right

Reason for the Crash:

Quality Control Quality Trilogy

According to ISO 9000:2000 Quality Planning is:

“Art of quality management focused on setting

This includes existing project plan templates,

3) Project Scope Statement (Hyperlink)

1) Quality Plan Template (Hyperlink)

A “Quality Metric”, is a measure of quality as

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