Cost Of Quality

Cost of quality refers to costs incurred while ensuring that you get high-
quality deliverables. It also includes the cost of dealing with any defects in
your work. This is different from the cost of production, which refers to the
total amount spent on labour and materials.

CLASSIFICATION:
The cost of quality can be categorized into four categories:

 Prevention Cost
 Appraisal Cost
 Internal Failure Cost and
 External Failure Cost
1. Prevention Costs:
Prevention costs are the costs of all activities that are designed to prevent
poor quality from arising in products or services. The examples of the
prevention costs include:

 Quality planning
 Education and training
 Conducting design reviews
 Supplier reviews and selection
 Quality system audits
 Process planning and control
 Product modifications
 Equipment upgrades
2. Appraisal Costs:
Appraisal costs are costs that are incurred to ensure the conformance to
quality standards and performance requirements. The examples of the
appraisal costs include:

 Test and inspection (receiving, in-process and final)

 Supplier acceptance sampling
 Product Audits
 Calibration
3. Internal Failure Costs:
Internal Failure Costs are the costs that are associated with defects found
within the organization before after the customer receives the product or
service. The examples of the internal failure costs include:

 In-process scrap and rework

 Troubleshooting and repairing
 Design changes
 Inventory required to support poor process yields and rejected lots
 Re-inspection / retest of reworked items
4. External Failure Costs:
External Failure Costs are the costs that are associated with defects found
after the customer receives the product or service. The examples of the
external failure costs include:

 Sales returns and allowances

 Replacing defective products
 Service level agreement penalties
 Complaint handling
  Field service labor and parts costs incurred due to warranty obligations
 Product recalls / Legal claims
 Lost customers and opportunities
 Downgrading
 Processing of customer complaints

Classification of the Cost of Quality - Some

Examples:
Let's look at some examples to understand the classification we discussed
above.
1. Cost of getting company certified to ISO 9001
This will be a prevention cost, as our intention is to establish a system to
avoid problems from happening in the first place.

2. The cost of quality-related training

This will also be a prevention cost, as the training is being delivered to avoid
or prevent poor quality.

3. Review of drawings
This is an appraisal cost, as in this case, you are checking if the drawings
have been made correctly.

4. Preparation of quality management system and inspection

procedures
This will be a prevention cost, as the quality management system and
inspection procedures help us avoid quality problems.

5. Product recall and warranty repairs

This will obviously be an external failure cost.

6. Defects found by customers after receiving the product

Once again, this will be an external failure cost.

7. Inspection and re-inspection of the repaired product

These will be internal failure costs.
Deming’s Cycle & 14 points
The concept of quality is at the core of many of our ideas about

effective management and leadership, and programs like Total Quality

Management and Six Sigma have been at the heart of many companies'

success.

Before things like globalization and technological advances became so

important, competitive pressures were typically much lower, and

companies were usually satisfied with focusing their quality efforts on

the production process alone.

Now, quality is often thought to start and end with the customer, and

all points leading to and from the customer must aim for high-quality

service and interaction.

But to be truly successful, quality needs to be built into every level of a

company, and become part of everything the organization does. From

answering the phone to assembling products and serving the end

customer, quality is key to organizational success.

Deming's 14-Point Philosophy is a great tool you can use to build quality

in at every level of your business.

What Is Deming's 14-Point Philosophy?
Dr. W. Edwards Deming is largely credited with the focus on quality
within business to achieve success. A statistician who went to Japan to
help with the census after World War II, Deming also taught statistical
process control to leaders of prominent Japanese businesses. His
message was this: By improving quality, companies will decrease
expenses as well as increase productivity and market share.
After applying Deming's techniques, Japanese businesses like Toyota,

Fuji, and Sony saw great success. Their quality was far superior to that

of their global competitors, and their costs were lower. The demand for

Japanese products soared – and by the 1970s, many of these

companies dominated the global market. American and European

companies realized that they could no longer ignore the quality

revolution.

So the business world developed a new appreciation for the effect of

quality on production and price. Although Deming didn't create the

phrase "Total Quality Management," he's credited with starting the

movement. He didn't receive much recognition for his work until 1982,

when he wrote the book now titled "Out of the Crisis," which

summarized his famous 14-point management philosophy. [1]

There's much to learn from these 14 points. Study after study of highly

successful companies shows that following the philosophy leads to

significant improvements. That's why these 14 points have since

become a standard reference for quality transformation.

Note:

Deming's points apply to any type and size of business. Service

companies need to control quality just as much as manufacturing

companies. And the philosophy applies equally to large multinational

corporations, different divisions or departments within a company, or

even single-person operations.

The 14 Points
1. Create a Constant Purpose Toward Improvement

 Plan for quality in the long term.

 Resist reacting with short-term solutions.
 Don't just do the same things better – find better things to do.
 Predict and prepare for future challenges, and always have the goal of getting
better .

2. Adopt the New Philosophy

 Embrace quality throughout the organization.

 Put your customers' needs first, rather than react to competitive pressure – and
design products and services to meet those needs.
 Be prepared for a major change in the way business is done. It's about leading,
not simply managing.
 Create your quality vision , and implement it.

3. Stop Depending on Inspections

 Inspections are costly and unreliable – and they don't improve quality, they
merely find a lack of quality.
 Build quality into the process from start to finish.
 Don't just find what you did wrong – eliminate the "wrongs" altogether.
 Use statistical control methods – not physical inspections alone – to prove that
the process is working.
4. Use a Single Supplier for Any One Item

 Quality relies on consistency – the less variation you have in the input, the less
variation you'll have in the output.
 Look at suppliers as your partners in quality. Encourage them to spend time
improving their own quality – they shouldn't compete for your business based
on price alone.
 Analyze the total cost to you, not just the initial cost of the product.
 Use quality statistics to ensure that suppliers meet your quality standards.

5. Improve Constantly and Forever

 Continuously improve your systems and processes. Deming promoted the Plan-
Do-Check-Act approach to process analysis and improvement.
 Emphasize training and education so everyone can do their jobs better.
 Use kaizen as a model to reduce waste and to improve productivity,
effectiveness, and safety.

6. Use Training on the Job

 Train for consistency to help reduce variation.

 Build a foundation of common knowledge.
 Allow workers to understand their roles in the "big picture."
 Encourage staff to learn from one another, and provide a culture and
environment for effective teamwork.

7. Implement Leadership

 Expect your supervisors and managers to understand their workers and the
processes they use.
 Don't simply supervise – provide support and resources so that each staff
member can do their best. Be a coach not a policeman.
 Figure out what each person actually needs to do their best. For example,
hardware, software, other tools, and training.
 Emphasize the importance of participative management and transformational
leadership .
 Find ways to reach full potential, and don't just focus on meeting targets and
quotas.

8. Eliminate Fear

 Allow people to perform at their best by ensuring that they're not afraid to
express ideas or concerns.
 Let everyone know that the goal is to achieve high quality by doing more things
right – and that you're not interested in blaming people when mistakes happen.
 Make workers feel valued, and encourage them to look for better ways to do
things.
 Ensure that leaders are approachable and that they work with teams to act in the
company's best interests.
 Use open and honest communication to remove fear from the organization.

9. Break Down Barriers Between Departments

 Build the "internal customer" concept – recognize that each department or

function serves other departments that use their output.
 Build a shared vision.
 Use cross-functional teamwork to build understanding and reduce adversarial
relationships.
 Focus on collaboration and consensus instead of compromise.
10. Get Rid of Unclear Slogans

 Let people know exactly what you want – don't make them guess. "Excellence
in service" is short and memorable, but what does it mean? How is it achieved?
The message is clearer in a slogan like "Always be striving to be better."
 However, don't let words and nice-sounding phrases replace effective
leadership. Outline your expectations, and then praise people face-to-face for
doing good work.

11. Eliminate Management by Objectives

 Look at how processes are carried out, not just numerical targets. Deming said
that production targets can encourage high output but result in low quality.
 Provide support and resources so that both production levels and quality are
high and achievable.
 Measure the process rather than the people behind the process.

Tip:

There are situations in which approaches like Management By Objectives are

appropriate, for example, in motivating sales-people. As Deming points out,
however, there are many situations where a focus on objectives can lead people to
cut corners with quality.

You'll need to decide for yourself whether or not to use these approaches. If you
do, make sure that you think through the behaviors that your objectives will
motivate.
12. Remove Barriers to Pride of Workmanship

 Allow everyone to take pride in their work without being rated or compared.
 Treat workers equally, and don't make them compete with colleagues for
monetary or other rewards. Over time, the quality system will naturally raise the
level of everyone's work to an equally high level.

13. Implement Education and Self-Improvement

 Improve the current skills of workers.

 Encourage people to learn new skills to prepare for future changes and
challenges.
 Build skills to make your workforce more adaptable to change, and better able
to find and achieve improvements.

14. Make "Transformation" Everyone's Job

 Improve your overall organization by having each person take a step toward
quality.
 Analyze each small step, and ask yourself how it fits into the bigger picture.
 Use effective change management principles to introduce the new philosophy
and ideas in Deming's 14 points.

Key Points

To achieve this Deming created a 14-Point strategy (also known as Deming's 14-
Point Philosophy) that organizations can use to improve quality across their
business. It includes the following:

1. Create a constant purpose toward improvement.

2. Adopt the new philosophy.
3. Stop depending on inspections.
4. Use a single supplier for any one item.
5. Improve constantly and forever.
6. Use training on the job.
7. Implement leadership.
8. Eliminate fear.
9. Break down barriers between departments.
10.Get rid of unclear slogans.
11.Eliminate management by objectives.
12.Remove barriers to pride of workmanship.
13.Implement education and self-improvement.
14.Make "transformation" everyone's job.

Jurans Triology
Juran, like Deming, was invited to Japan in 1954 by the Union of Japanese Scientists and
Engineers (JUSE). His work pioneered the management dimensions of planning,
organizing, and controlling and focussed on the responsibility of management to achieve
quality and the need for setting goals.

Juran defines quality as fitness for use in terms of design, conformance, availability, safety,
and field use. His approach is based customer, top-down management and technical
methods.

The Juran Trilogy is an improvement cycle that is meant to reduce the cost of poor quality
by planning quality into the product / process.

1. Quality Planning: In the planning stage, it is critical to define who the customers are and
to define their needs (voice of the customer). Once the customer needs are identified,
define the requirements for the product / process / service / system, etc., and develop
them for operations along with the respective stakeholder expectations. Planning
activities are done through a multidisciplinary team, with the involvement of key
stakeholders.
2. Quality Control: During the control phase, determine what needs to be measured (what
forms of data and from which processes?), and set a goal for performance. Obtain
feedback by measuring actual performance, and act on the gap between performance
and the goal. In Statistical Process Control (SPC), there are several tools that could be
used in the control phase of the Juran Trilogy: such as the 7 QC tools and other
statistical process control methods.
3. Quality Improvement: There are four different strategies to improvement that could be
applied for improvements:
4.
  Repair: reactive approach - fix what is broken
 Refinement: proactive approach - continually improve a process that isn’t broken
 Renovation: improvement through innovation or technological advancement
 Reinvention: most demanding approach – abandon the current practices and start
over with a clean slate.
Quality improvement can be an arduous journey for organizations, as they are up against
various constraints that include customer / stakeholder expectations and interests, some of
which could be inherently conflicting.

Juran advocated a ten-step process for quality improvement programmes.

1. Build awareness of need and opportunity for improvement

 Survey the employees / personnel, find why errors / mistakes / deviations are
made
 After a week, select the top ten reasons
 Decide how to make sure those mistake-causing steps aren't repeated
 Keep track of the number of mistakes being made, make sure they are decreasing
2. Set goals for improvement
 Establish specific goals to be reached

 Establish plans for reaching the goals

 Assign clear responsibility for meeting the goals
 Base the rewards on results achieved
3. Organize to reach the goals
 Establish quality councils

 Identify problems
 Select projects
 Appoint teams
 Designate facilitators
4. Provide training
 Investment in education and training will fetch rewards

5. Carry out projects to solve problems

 Large, break-through improvements through interdepartmental or even cross-
functional teams
 Tackle the chronic problems for break-through improvements
 Vital few problems create the breakthroughs
6. Report progress
 Progress expected and the actual progress achieved
  Act to improve the operational status to reduce variance
 Information on progress provides confidence on quality improvement projects
7. Give recognition
 Morale booster

8. Communicate results
 Lesson learnt

 Awareness of the approach taken, possibility to learn and improve further

 Improvement outlook for people in other areas, to emulate success
9. Keep score
 Track progress

 Report achievements, short-falls

10. Maintain momentum by making annual improvement part of the regular processes
 People oriented

 Team-work
Juran’s steps for improvements in quality have been widely accepted, practiced and
evolved over time to suit different organizations and segments.