4.

5
 Cost of Quality (COQ)
Out-of-pocket
Out-of-pocketcosts
costsassociated
associatedwith
withquality
qualitygenerally
generally
fall
fallinto
intotwo
twocategories:
categories:

Costs
Costsassociated
associatedwith
withactivities
activitiesto
to
correct
correctfailure
failureto
tocontrol
controlquality.
quality.

Costs
Costsassociated
associatedwith
withcontrolling
controlling
quality.
quality.

Prof M. Ramani
 BASIC CONCEPTS OF TQM

• A successful TQM programme requires the following six

basic concepts.
• 1. Top Management Commitment: Top management
should participate and completely involve in the total
quality programme. They should ensure their complete
commitment to the approach through management
meetings, company magazines or newsletters. Also, top
management should make sure that everybody within the
organization from top to bottom is communicated about
the TQM programme.
• 2. Focus on the customer : Achieving customer satisfaction is
the heart of TQM. Customers include both internal and
external customers. So focus on the customer is the key for
any TQM programme.
• 3. Effective involvement and utilization of the entire work
force: This concept is sometimes referred as ‘principle of
employees involvement’ or ‘respect for people’. TQM is a
team work. Total quality recognizes that each person is
responsible for the quality of his work and for the work of the
group. All persons must be trained in TQM, Statistical Process
Control (SPC), and other appropriate quality improvement
skills so that they can effectively participate on quality teams.
• 4. Continuous improvement:: TQM is based on the
quest for progress and improvement. TQM believes
that there is always a better way of doing things, way to
make better use of the company’s total quality
resources, a way to be more productive. For this
purpose various quality tools and techniques may be
used.
• 5. Treating suppliers as partners: Since the suppliers
influence the company’s quality, therefore a partnering
relationship should be developed between the
management and the suppliers.
• 6. Establishing performance measures for the
processes: As we know, quantitative data are
necessary to measure the continuous quality
improvement activity. Therefore performance
measures such as uptime, productivity, sales
turnover, absenteeism, percent non- conforming,
customer satisfaction, etc., should be determined
for each functional area. These results can be
used for further improvement activities.
 Quality–Cost Relationship

• Cost of quality
– 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

Prof M. Ramani
 Cost to Control Quality
Prevention
Prevention Appraisal
Appraisal
Activities
Activitiesthat
thatseek
seekto
toprevent
prevent Activities
Activitiesfor
forinspecting
inspectinginputs
inputsand
and
defects
defects in the productsor
in the products orservices
services attributes of individual units
attributes of individual units ofof
being
beingproduced.
produced. product
productand andservice.
service.
••Certifying
CertifyingSuppliers
Suppliers ••Inspecting
InspectingMaterials
Materials
••Designing
Designingfor forManufacturability
Manufacturability ••Inspecting
InspectingMachines
Machines
••Quality
QualityTraining
Training ••Inspecting
InspectingProcesses
Processes
••Quality
QualityEvaluations
Evaluations ••Statistical
StatisticalProcess
ProcessControl
Control
••Process
ProcessImprovements
Improvements ••Sampling
SamplingandandTesting
Testing

Prof M. Ramani
 Costs of Failing to Control Quality
Internal
InternalFailure
Failure External
ExternalFailure
Failure
Costs
Costsassociated
associatedwith
with Costs
Costsassociated
associatedwith
with
defects
defectsininprocesses
processesand
and defects
defectsininprocesses
processesand
and
products
productsthat
thatare
arefound
found products
productsthatthatare
aredetected
detected
prior
priorto
todelivery
deliveryto
to after
afterdelivery
deliverytotocustomers.
customers.
customers.
customers. ••Warranty
WarrantyRepairs
Repairs
••Disposing
Disposingof ofScrap
Scrap ••Field
FieldReplacements
Replacements
••Rework
Rework ••Product
ProductLiability
Liability
••Reinspecting/Retesting
Reinspecting/Retesting ••Restoring
Restoringreputation
reputation
••Delaying
DelayingProcesses
Processes ••Lost
LostSales
Sales

Prof M. Ramani
 Prevention Costs
• Quality
Trainingplanning
costs costs
–
– costs
costs of
of developing
developing and
and implementing quality
putting on quality management
training programs program
for
• Product-design
employees andcosts
management
– costs of designing
• Information costs products with quality characteristics
• Process costs
– costs of acquiring and maintaining data related to quality, and
– costs expended
development of to make on
reports sure productive
quality process conforms to quality
performance
specifications

Prof M. Ramani
 Appraisal Costs

• Inspection and testing

– costs of testing and inspecting materials, parts, and
product at various stages and at the end of a process
• Test equipment costs
– costs of maintaining equipment used in testing quality
characteristics of products
• Operator costs
– costs of time spent by operators to gar data for testing
product quality, to make equipment adjustments to
maintain quality, and to stop work to assess quality

Prof M. Ramani
 Internal Failure Costs
• Process downtime costs
– costs of shutting down productive process to fix problem
• Scrap costs
• Price-downgrading costsproducts
– costs of poor-quality
that
– costs of must be discarded,
discounting poor-quality products—that is, selling products as
including
“seconds” 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 poor-quality
products

Prof M. Ramani
 External Failure Costs

• Customer complaint costs • Product liability costs

– costs of investigating and – litigation costs resulting
satisfactorily responding to a from product liability
customer complaint resulting and customer injury
from a poor-quality product
• Product return costs • Lost sales costs
– costs of handling and replacing – costs incurred because
poor-quality products returned by customers are
customer dissatisfied with poor
• Warranty claims costs quality products and do
– costs of complying with product not make additional
warranties purchases

Prof M. Ramani
Prof M. Ramani
 Performance measures
• Performance measures indicates the measurement of
success in an organization.
Ray f. Boedecker has identified and listed seven objectives of
performance measures.
The seven objectives are :
• a. To establish baseline measures and reveal trends.
• b. To determine which processes need to be improved.
• c. To indicate process gains and losses.
• d. To compare goals with actual performance.
• e. To provide information for individual and team evaluation.
• f. To provide information to make informed decisions.
• g. To determine the overall performance of the organization.
• Techniques commonly used for performance
measures
• 1. Time series trend graph
• 2. Control charts
• 3. Capability index
• 4. Taguchi‟s loss function
• 5. Cost of poor quality, &
• 6. Quality awards