quality costs and productivity

1. Quality Costs and Productivity: Measurement, Reporting, and Control Kristel Pamela P. Caluya

2. Eight Dimensions of Quality Performance Aesthetics Serviceability Features (quality of design) Reliability Durability Quality of Conformance Fitness of Use

3. Quality Defined Features (Quality of Design) refer to characteristics of a product that differentiate functionally similar products. Example: Compare first class air travel with economy travel. First Class typically offers more leg room, better meals and more luxurious seats. Quality of Conformance is a measure of how well the product meets its requirements or specifications. Example: If a Honda Civic does what it is designed to do and does it well, quality exists. For example, if economy cars are designed to provide reliable, low-cost, low-maintenance transportation, the desired quality exists.

4. Measuring Quality Costs Prevention costs Appraisal costs Internal failure costs External failure costs

5. Examples of Quality Costs Prevention costs Appraisal Costs Quality engineering Quality training programs Quality planning Quality reporting Supplier evaluation and selection Quality audits Quality circles Field trials Inspection of raw materials Testing of raw materials Packaging inspection Supervising appraisal activities Product acceptance Process acceptance Inspection of equipment Test equipment Design reviews Outside endorsements

6. Examples of Quality Costs Internal failure costs Scrap Rework Downtime (defect related) Reinspection Retesting Design changes External failure costs Cost of recalls Lost sales Returns/allowances Warranties Repairs Product liability Customer dissatisfaction Lost market share Complaint adjustment

7. Estimating Hidden Quality Costs Hidden Quality Costs are opportunity costs resulting from poor quality. The Multiplier Method The Market Research Method Taguchi Quality Loss Function

8. The Multiplier Method The multiplier method assumes that the total failure cost is simply some multiple of measured failure costs: Total external failure cost = k(Measured external failure costs) where k is the multiplier effect If k =4, and the measured external failure costs are $2 million, then the actual external failure costs are estimated to be $8 million.

9. The Market Research Method The market research method uses formal market research methods to assess the effect of poor quality on sales and market share. Customer surveys and interviews with members of a companys sales force can provide significant insights into the magnitude of a companys hidden costs. Market research results can be used to project future profit losses attributable to poor quality

10. The Taguchi Quality Loss Function The Taguchi loss function assumes any variation from the target value of a quality characteristic causes hidden quality costs. Furthermore, the hidden quality costs increase quadratically as the actual value deviates from the target value.

11. L(y)= k(y-T) 2 Where k= a proportionality constant dependent upon the organizations external failure cost structure y= Actual value of quality characteristics T= Target value of quality characteristic L= Quality loss y-T (y-T) 2 k(y-T) 2 1 Actual Diameter (y) 9.9 -0.10 0.010 4.00 2 10.1 0.10 0.010 4.00 3 10.2 0.20 0.040 16.00 4 9.8 -0.20 0.040 16.00 Total 0.100 40.00 Average 0.025 10.00 Unit

12. Total units produced are 2,000 Total expected hidden quality costs 10(0.025*$400)=$20,000 Total expected loss for the 2000 units

13. Reporting Quality Costs Quality Costs Prevention costs: Quality training Reliability engineering Appraisal costs: Materials inspection Product acceptance Process acceptance Internal failure costs: Scrap Rework External failure costs: Customer complaints Warranty Repair Total quality costs % of Sales $35,000 80,000 $115,000 4.11% $20,000 10,000 38,000 68,000 2.43% $50,000 35,000 85,000 3.04 % 65,000 $333,000 ======= 2.32% 11.90% ===== $25,000 25,000 15,000

14. Reporting Quality Costs (continued) Prevention costs Internal failure costs Appraisal costs External failure costs 19.5% 25.5% 34.5% 20.5%

15. AQL Quality Cost Graph Cost of Failures Cost Cost of Control 0 100% Optional (AQL) Percent Defects

16. Zero-Defect Graph Total Quality Cost Cost 0 Percent Defects 100%

17. Multiple-Period Quality Costs Assume the following data: Quality Costs 2002 2003 2004 2005 2006 $440,000 423,000 412,500 392,000 280,000 Actual Sales $2,200,000 2,350,000 2,750,000 2,800,000 2,800,000 % of Sales 20.0 18.0 15.0 14.0 10.0

18. Multiple-Period Trend Graph: Total Quality Costs % of Sales 20 15 10 5 0 1 2 3 Year 4 5

19. Multiple-Trend Analysis for Individual Quality Costs Assume the following quality cost data: Prevention 2002 2003 2004 2005 2006 1Expressed Appraisal 6.0%1 6.0 5.4 5.6 4.4 as a % of sales 4.5% 4.0 3.6 3.2 2.4 Internal Failure 4.5% 3.5 3.0 3.1 3.0 External Failure 6.0% 4.5 3.0 2.6 2.3

20. Productive Efficiency Productivity concerned with producing output efficiently specifically addresses the relationship of output and the inputs used to produce the outputs Total productive efficiency is the point at which two conditions are satisfied For any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output. Given the mixes that satisfy the first condition, the least costly mix is chosen 23

21. Productive Efficiency Technical Efficiency the condition where no more of any one input is used than necessary to produce a given output. Technical efficiency improvement occurs when less inputs are used to produce the same output or more output are produced using the same input. 24

22. Productive Efficiency 25

26. Productive Efficiency Of the two combinations that produce the same output, the least costly combination would be chosen. 29

27. Partial Productivity Measurement Partial Productivity Measure Measuring productivity for one input at a time. Productivity ratio = Output Input Operational Productivity Measure Partial measure where both input and output are expressed in physical terms. Financial Productivity Measure Partial measure where both input and output are expressed in dollars. 30

28. Total Productivity Measurement 2009 2010 Number of frames produced Labor hours used Materials used (lbs.) 240,000 60,000 250,000 240,000 240,000 250,000 60,000 50,000 1,200,000 1,150,000 50,000 1,200,000 250,000 1,150,000 31

29. Total Productivity Measurement Profit-Linkage Rule For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change Compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes 32

30. Total Productivity Measurement PQ = the inputs that would have been used Current-period output PQ = Base-period productivity ratio 33

31. Total Productivity Measurement 2009 Number of frames produced Labor hours used Materials used (lbs.) Unit selling price (frames) Wages per labor hour Cost per pound of material 240,000 60,000 1,200,000 $30 $15 $3 2010 250,000 50,000 1,300,000 $30 $15 $3.50 34

32. Total Productivity Measurement PQ (labor) = PQ (materials) = 250,000 4 = 250,000 0.200 = Cost of labor: (62,500 $15) Cost of materials: (1,250,000 Total PQ cost The actual cost of inputs: Cost of labor: (50,000 $15) Cost of materials: (1,300,000 Total current cost 62,500 hrs. 1,250,000 lbs. $3.50) $ 937,500 4,375,000 $5,312,500 $3.50) $ 750,000 4,550,000 $5,300,000 35

quality costs and productivity

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