Quality Costing
Manufacturing cycle time / manufacturing lead time
time it takes from the moment an order is received by manufacturing to the time it becomes a finished good
The objective of quality costing is
to help management maximize the value customers receive from a product
Pareto diagram
Chart that indicates how frequently each type of defect occurs. Most frequent --> less frequent
Performance failure costs
Company and customer costs go up. Ex: recall, warranty, fixing problems, operating costs, repairs, maintenance
Cause and effect diagram
Root Analysis
Manufacturing cycle efficiency
Value added manufacturing time / manufacturing cycle time
Quality of conformance
a product that meets its design specifications and is free of defects that mar its appearance or degrade its performance is HIGH in this
Value-added activities
activities that customers perceive has adding value to the product
Time driver
any factor that causes a change in the speed of an activity when the factor changes
Quality costs & dimensions
are costs incurred to ensure that a product or service meets customers' expectations. Customers' satisfaction with total experience of a product or service. Quality has two dimensions—features and performance
Average waiting time
average amount of time that an order waits in line while the machine is set up and the order is processed
Three positive behavioral consequences of measuring quality costs
(1) greater responsiveness to customer requirements (2) improved attitudes and aspirations about quality (3) better management of quality costs through visibility. A possible dysfunctional behavioral consequence is creating an incentive to pad budgets.
**LOOK AT CHART**
**LOOK AT CHART**
Properties of a Quality Costing System (TECHNICAL)
- Decision Relevance: quality spending = how much? where? purpose? impact on profitability? - Process Understanding: horizontal flow of info = problems in on department may affect quality problems in another department
Properties of a Quality Costing System (BEHAVIORAL)
- Focus on a customer requirement - Improved attitudes and aspirations about quality - Better management through visibility: how does this impact financial stability? - Budget Padding: Future reduction in failure costs may be used to increase the budget today. Quality cost may be used to pad budget
Nonfinancial Measures of internal business process quality
- Percentage of defective products manufactured - Percentage of reworked products - Number of different types of defects analyzed using control charts (Pareto diagrams) and cause and effect analysis - Number of design and process changes made to improve design quality or reduce the costs of quality
Total quality costs categories
- Prevention Costs - Appraisal costs - Internal Failure Costs - External Failure Costs
Properties of a Quality Costing System (CULTURAL)
- Quality as a way of life - Quality as an ethical value
Advantages of COQ (financial) Measures
- measures focus managerial attention on the effects of poor quality on operating income - total costs of quality help managers evaluate the costs / benefits of incurring prevention and appraisal costs to eliminate internal and external failures - measures assist in problem solving by comparing costs / benefits of different quality improvement programs and by setting priorities for cost reduction
How to construct value index
1. Develop customer ranking of performance dimensions 2. Estimate quality costs related to each performance dimension 3. Compute the Value Index
Steps of the Quality-Management System
1. Understanding customer requirements 2. Establish quality goals 3. Set work processes to meet quality goals 4. Perform work and monitor output 5. Deliver product and monitor customer experience 6. Perform root cause analysis
80-20 Rule
80% of the problems are caused by the 20% defects you have
Step 5. Deliver Product and Monitor Customer Experience
Any costs related to correcting defects discovered by customers are called external failure costs.
Prevention Costs
Cost to avoid quality problems from occurring. Ex: employe trainings, seminars, setting up machines, etc.
Internal Failure
Cost to fix defects before product is delivered. If when we are monitoring, we find an error BEFORE sending it to customers Ex: disposal of defective parts, cost to rework defective units
External Failure
Cost to fix defects discovered by customers. Customer finds an error/defect in the product. Ex: product recalls, warranty repairs
Appraisal costs
Cost to measure and monitor activities. Ex: monitoring costs and inspection / quality controls
Step 1. Understanding Customer Requirements
If customer requires something, then you need to provide that WITH quality performance
Quality includes
Features that customers desire & that the performance level of these features is high
A control chart
Graph of series of successive observations of a particular step, procedure, or observation taken at regular intervals of time. Each observation is plotted relative to specific ranges that represent limits within which observations are expected to fall when caused by random events. Observations that fall outside the control limits are nonrandom and WORTH investigating
Step 2. Establish Quality Goals
How do you make these requirements possible? Establish goals based on what your customers require from you. - 3 sigma = 3 defective / 1,000 = 99.97% nondefective - 6 sigma = 3.4 defective / 1,000,000 = 99.99966% nondefective
Step 6. Perform Root Cause Analysis
If you find out there's a problem with customer's satisfaction, perform root cause analysis for all internal and external failure costs to determine WHY. (tree diagram)
Time
Improving quality so that we build quality in, instead of inspecting quality in, avoids nonproductive time spent in inspection, rework, and product recalls. Time spent on quality related issues.
Step 3. Set Work Processes to Meet Quality Goals
Prevention Costs
Value Index
The ratio of a customer's perceived importance of a performance dimension to a firm's spending on that dimension. When the Value Index is GREATER than one, the importance of that performance dimension to customers is relatively larger than the firm's quality spending for that dimension When the Value Index is LESS than one, the importance of that dimension to customers is relatively lower than the firm's quality spending for that dimension
Traditional costing system vs. Quality costing system
Traditional: - No way to aggregate quality costs in different departments - Usually included in other accounts like overhead. - Stolen or broken units costs are assigned to spoilage --> OVERSTATING quality costs
Life-cycle cost / cost of ownership
cost incurred by customers over the life of the product
on-time performance
delivery of a product / service by the time it is scheduled to be delivered
Quality Cost Report
details the prevention, appraisal, internal and external failure costs that arise from the company's current quality control efforts
An effective quality-management program can provide a positive financial return by
improving quality, reducing cost, and speeding time to market
Statistical Quality Control (SQC) / Statistical Process Control (SPC)
means to distinguish between random and nonrandom variations in an operating process Random: chance fluctuations in the speed of the equipment cause defects to be produced Nonrandom: when defective products are produced as a result of a systematic problem (e.g. mishandling in the design, incorrect speed setting, etc.)
The total cost of a product includes
not only the cost of production, but any additional costs incurred due to quality problems (manufacturer and consumer side)
Quality circles
people that meet on a regular basis to discuss quality
Root Cause Analysis
systematic method of linking a problem, as perceived by the customer, to the underlying causes in order to identify the appropriate corrective action
Statistical process control
technique that is used to detect whether a process is in or out of control
Quality Costing
the measurement and management of costs related to providing a customer's required level of product or service performance. Includes all costs incurred to monitor and prevent problems in product performance, and costs incurred to remedy problems that do occur
Step 4. Perform Work and Monitor Output
to perform work and monitor the output produced to see if quality goals are being met. Example: inspection of output to detect errors. --> Appraisal costs. When defective units are discovered, any costs incurred for correcting the defectives, are internal failure costs
