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Cost of Quality

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Manufacturing specifications specify in detail how the product is to be produced ... Manufacture the product using the manufacturing specifications ... – PowerPoint PPT presentation

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Title: Cost of Quality


1
Cost of Quality
2
What are Quality Costs?
  • A quality product or service is one that conforms
    to customer expectations.
  • Assume that
  • Design specifications are for product
  • Product meeting specifications meet customer
    expectations
  • Can determine adherence to specifications

3
  • Quality costs are costs incurred because poor
    quality may or does exist
  • Broad categories of quality costs
  • Prevention costs
  • appraisal costs
  • Internal failure costs
  • External failure costs

4
Uses of Quality Cost Information
  • Alerting executives to potential impact
  • Motivating action to improve quality
  • Help determine types of activities to reduce
    quality costs
  • Prioritize quality improvement efforts

5
Concepts of Quality
  • Common misconceptions
  • Productivity and quality are incompatible
  • Higher quality can only be obtained at higher
    cost
  • Websters Dictionary defines quality as
  • that which makes something what it is
    characteristic attribute
  • basic naturecharacteristic kind
  • the degree of excellence which a thing possesses
  • excellence superiority

6
Grade, Expectations, Specifications, and Actual
Results
  • Quality - Conformance to customer expectation
    or fitness for use
  • Three primary determinants
  • Customer expectations
  • Product Specifications
  • Actual results

7
  • Grade relates to the difference in customer
    expectation between products having the same
    functional use.
  • Customers compare products having the same
    functional use and develop expectations for the
    relative performance of alternative products.

8
Designing a New Product
High Grade
Step 1
Step 2
Step 4
Step 3
Customer Expectation
Functional Specification
Manufacturing Specification
Actual Results
Design Specification
Low Grade
9
Step 1 in the Design of a New Product
  • Restate customers qualitative expectations into
    quantitative functional specifications
  • Functional Specifications are quantitative
    statements regarding the capabilities of the
    product

10
Step 2 in the Design of a New Product
  • Develop design specifications that meet the
    functional requirements
  • Design specifications will include statements
    regarding the physical characteristics of the
    product (engineering drawings)

11
Step 3 in the Design of a New Product
  • Develop manufacturing specifications
  • Manufacturing specifications specify in detail
    how the product is to be produced and what its
    physical characteristics should be at each step
    of the production process

12
Step 4 in the Design of a New Product
  • Manufacture the product using the manufacturing
    specifications
  • If all steps have been carried out perfectly, the
    actual results is a product that meets customer
    expectations

13
Quality of Design/Conformance
  • Ultimate test - compare customer satisfaction
    with actual product
  • Seldom possible expectations are qualitative
  • Design specification often used as standard
  • Two possible sources of error
  • Differences between customer expectations and
    design specification
  • Differences between design specifications and the
    actual product

14
Quality of Design
  • Refers to the degree of conformance between
    customer expectations and design specifications
    for product
  • Ensuring conformance is critical to proper
    evaluation of product quality

15
Quality of Conformance
  • Degree to which a product or service conforms to
    its design specification
  • If specification allows no dents
  • If specification allows one 1/2 scratch
  • What about customer?

16
Determination of Grade
  • Decisions regarding grade are based on
  • Organizational choice
  • Market identification
  • Higher grade is attained at greater cost to
    producer and consumer
  • High grade does not ensure high quality or high
    conformance

17
  • If quality refers to grade
  • positive correlation with cost
  • If quality refers to conformance
  • negative correlation with cost

18
Productivity
  • A measure of the efficiency of resource use
  • Not the same as production - volume of output
  • Ratio of outputs to inputs
  • Increased productivity is the source of increases
    in real wealth
  • Changes in national productivity
  • Government policy
  • Management decisions

19
Improving Quality Through Quality
  • The relationship between quality of conformance,
    productivity, and production costs
  • Higher quality of conformance - lower rejection
    rates
  • Lower rejection rates - less waste of materials,
    labor, and/or equipment time

20
Quality, Productivity, and Profitability
Higher Unit Margin
Increased Profit
Lower Unit Costs
Higher Selling Price For Quality Premium
Consistent Sales Volume
Increased Profit
Selling Price Unchanged Higher Margin
Increased Quality
Lower Unit Costs
Higher Sales Volume
Increased Profit
Lower Selling Price
Increased Sales Volume
Lower Unit Costs
Increased Profit
21
Profitability
  • Quality costs - basis for evaluating investments
    in quality programs
  • Cost Improvement
  • Profit Enhancement
  • Other Benefits

22
Why Measure Quality Costs?
  • Dollars can be added across departments/products
  • Total dollars more meaningful to top management
  • Helps identify quality problems and opportunities
  • Helps evaluate relative importance of quality
    programs
  • Demonstrate the worth of improvement programs
  • Aid in budgeting quality costs
  • Evaluate companys success in achieving quality
    goals

23
Quality Cost Reports
  • Periodic summaries by
  • Organization unit
  • Product
  • Other segments of interest
  • Organization as a whole
  • Prepared
  • Monthly
  • Annually
  • Other period of time

24
  • Reports may contain
  • Data for current period
  • Data for corresponding period last year
  • Budgeted quality costs for current period
  • Year-to-date information

25
Quality Cost Trend Analysis
  • Pie chart shows relative cost distribution for a
    single period
  • Bar/line charts better for showing changes with
    time
  • Trends of more interest to management

26
Quality Cost Trend by Quarters
27
Relating Quality Costs to the Level of Activity
  • Changes in level of activity can make
    interpretation difficult
  • Restate quality costs as a of some standard
    measure
  • Standard manufacturing costs
  • Standard direct material
  • Standard direct labor costs
  • Standard direct labor hours

28
Relating Quality Costs to Financial Performance
  • Methods vary widely
  • Income statement approach bottom line
  • of Sales
  • of profit
  • Example (Hartford Insurance Group)
  • Expressed in terms of labor-hours devoted to each
    element
  • Then restated in terms of number of persons
    needed
  • Ultimately - number of persons needed because of
    poor quality

29
Uses of Quality Cost Information
  • Indicating the financial significance of quality
    costs
  • Helping identify relative importance of quality
    problems
  • Indicating if there is a maldistribution of
    quality costs
  • Establishing goals or budgets for quality costs
  • Evaluating the performance of quality improvement
    projects
  • Evaluating capital expenditure proposals

30
Limitations of Quality Cost Information
  • Quality cost measurements do not solve quality
    problems
  • Quality cost reports do not suggest specific
    actions
  • Quality costs are susceptible to short-term
    mismanagement
  • It is difficult to match effort and
    accomplishment
  • Important costs may be eliminated from reports
  • Inappropriate costs may be included in reports
  • Many quality costs are susceptible to measurement
    error

31
Twelve Steps to System Installation
  • Obtain management commitment and support
  • Establish an installation team
  • Select a single organization segment as a
    prototype
  • Obtain cooperation and support of the
    users/suppliers of information
  • Operationally define quality costs and quality
    categories
  • Identify quality costs within each category
  • Determine sources of quality information
  • Design quality cost reports and graphs
  • Establish procedures to accumulate information
  • Accumulate information, prepare and distribute
    reports
  • Eliminate bugs
  • Expand system
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