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Quality and Environmental Cost Management

Chapter 14 ObjectivesDefine quality, describe the four types of quality costs, and discuss the approaches used for quality cost measurement.Explain why quality cost information is needed and how it is used.

Improving quality may actually be the key to survival for many firms.Improving process quality and the quality of products and services is a fundamental strategic objective.If quality is improved, then customer satisfaction increases.If customer satisfaction increases, then market share will increase.If market share increases, then revenues will increase.If quality improves, then operating costs will also decrease.*Quality

A quality product or service is one that meets or exceeds customer expectations.

A defective product is one that does not conform to specifications.

Quality is customer satisfaction.

Quality of conformance is a measure of how a product meets is specifications.

Zero defects means all products conform to specifications.

Robustness means exact conformance to target value.14-*Objective 1Costs of Quality

14-*Costs of quality costs that exist because poor quality may or does existControl activities: performed by an organization to prevent or detect poor qualityPrevention and appraisal activitiesControl Costs: costs of performing control activitiesFailure activities: performed by an organization or its customers in response to poor qualityFailure costs: costs incurred by an organization because failure activities are performedObjective 1Costs of Quality

14-*Defining Quality Costs:

Prevention costs= to prevent poor quality

Appraisal costs= whether products conform to customer needs/requirements

Internal failure costs= incurred because products do not conform to the above

External failure costs=after delivery

Objective 1Costs of Quality

14-*Objective 1Costs of Quality

2012 Pearson Prentice Hall. All rights reserved.Prevention CostsPrevention costs are incurred to ensure that companies produce products according to quality standardsExamples:Quality engineeringTraining employeesStatistical process controlTraining and certifying suppliers

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.Appraisal CostsAppraisal costs relate to inspecting products to make sure they meet both internal and external customers requirementsExamples:Inspection of incoming materialsMaintenance of test equipmentProcess control monitoring

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.Internal Failure CostsAn internal failure occurs when the manufacturing process detects a defective component or product before it is shipped to an external customer

Examples:Reworking defective components or productsThe cost of downtime in production

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.External Failure CostsExternal failures occur when customers discover a defectExamples:All costs associated with correcting the problemRepair of the productWarranty costsService callsProduct liability recallsFor many companies, this is the most critical quality cost to avoid

2012 Pearson Prentice Hall. All rights reserved.

2012 Pearson Prentice Hall. All rights reserved.Cost-of-Quality ReportInformation is compiled in a cost-of-quality (COQ) report, developed for several reasons:Illustrates the financial magnitude of quality factorsHelps managers set priorities for the quality issues and problems they should addressAllows managers to see the big picture of quality issuesAllows managers to try to find the root causes of their quality problems

2012 Pearson Prentice Hall. All rights reserved.

Objective 2Reporting Quality Costs

14-*Strategy to reduce quality costs recommended by the American Society for Quality Control:The strategy for reducing quality costs is quite simple: (1) take direct attack on failure costs in an attempt to drive them to zero; (2) invest in the right prevention activities to bring about improvement; (3) reduce appraisal costs according to results achieved; and (4) continuously evaluate and redirect prevention efforts to gain further improvement. This strategy is based on the premise that:For each failure, there is a root cause.Causes are preventable.Prevention is always cheaper.Objective 2Reporting Quality Costs

14-*The Total Quality Approach

Zero-defect standards reflects a philosophy of total quality control and calls for products and services to be produced and delivered that meet the targeted value.Objective 4Controlling Quality Costs

14-*The Total Quality ApproachStandard referred to as the robust zero-defects standard.

Three types of progress can be measured and reported:Progress with respect to a current-period standard or goal (an interim standard report)The progress trend since the inception of the quality-improvement program (a multiple-period trend report)Progress with respect to the long-range standard or goal (a long-range report)Objective 4Controlling Quality Costs

14-*Incentives for Quality Improvement

Nonmonetary IncentivesParticipation helps employees internalize quality improvement goals as their ownError Cause Identification is a program in which employees describe problems that interfere with their ability to do the job right the first time

Monetary Incentives GainsharingProvides cash incentives for a companys entire workforce that are keyed to quality or productivity gainsGainsharing provides an incentive by offering a bonus to the employees equal to a percentage of the cost savingsObjective 4Controlling Quality Costs

End of Chapter 14

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