CASE STUDY Applyng Cost of Qualty to Total Qualty Management PAKISTAN INSTITUTE OF QUALITY CONTORL 304, 3 rd Floor, Eden Centre, 43 Jal Road Lahore Pakstan Ph: (+92 42) 7563645-7562260 Fax: 7552656 E-mal: pqc@bran.net.pk; Web Ste: http:///www.pqc.com.pk Pakstan Insttute of Qualty Control ( ICQI'2000) 1
APPLYING COST OF QUALITY TO TOTAL QUALITY MANAGEMENT by Johnson Tan Swan San Sngapore 1.0 THE IMPORTANCE OF QUALITY 1.1 THE DEFINITION OF QUALITY Qualty has been defned n a varety of ways: Qualty s ftness for use ------------------------------------------------------------------- Juran Qualty s conformance to requrements -------------------------------------------- Crosby Qualty s correctng and preventng loss, not lvng wth loss ----------------- Hoshn Qualty s a predctable degree of unformty and dependablty, at low cost and suted to the market --------------------------------------------------------- Demng The totalty of features and characterstcs of a product, servce or process, whch bear on ts ablty to satsfy a gven need from the customer s vewpont ------------------------------------------------------------------------ Brtsh Standard 1.2 THE REAL CHALLENGE OF QUALITY The challenges n Qualty Technology and Management are ncreasng yearly. In the 1990s, all organzatons faced the ssues of mprovng product and servce qualty and enhance nnovaton. The dscplne of qualty has evolved and expanded rapdly from nspecton to company-wde qualty management. 1.3 THE RETURN ON QUALITY Globalsaton s one of the key trends n the busness world today. As busness operatng costs contnue to rse and nternatonal competton grows more ntense, all organsatons wll fnd t ncreasngly dffcult to compete on prce. They must mantan ther cost compettveness and ensure that the qualty of ther products and servces are meetng ther customer s requrements. COST OF QUALITY provdes a means to gauge the RETURN OF QUALITY n an organsaton, and how ths return mpacts the bottom lne. It can serve as a useful platform to reduce busness cost and ncrease compettveness. Pakstan Insttute of Qualty Control ( ICQI'2000) 2
1.4 COST OF QUALITY Cost of Qualty s recognsed as a major tool used to quantfy the qualtatve mprovements of an organsaton durng the TQM Implementaton Process. TQM IMPLEMENTATION PROCESS 14. Implementaton For TQM 13. Tranng For Qualty 12. Team work For Culture Change 11. Communcaton For Qualty 10. Organsaton For Qualty 9. Capablty & Control 8. Tools & Technques For Improvement 7. Cost Of Qualty 6. Measurement 5. Systems For Qualty 4. Plannng For Qualty 3. Desgn For Qualty 2. Commtment & Leadershp 1. Understandng Qualty COST OF QUALITY forms an ntegral part of an effectve TQM Model Pakstan Insttute of Qualty Control ( ICQI'2000) 3
2.0 INTERPRETATION OF COST OF QUALITY 2.1 GENERAL INTRODUCTION Cost of Qualty s generally known as the sum of costs ncurred to prevent nonconformances from happenng (Cost of Conformance) and the costs ncurred when nonconformance n products and system occurs (Cost of Non-Conformance). It was commonly known that poor qualty costs can go as hgh as 40% of sales. Planned mprovement actons can be taken to prevent these qualty problems and reduce the COST OF QUALITY sgnfcantly (COQ) through the adopton of such actons over a perod of one to two years. The savngs n COQ wll boost the bottom lne of the organsaton. 2.2 MAJOR COMPONENTS OF COST OF QUALITY (COQ) COQ s generally dvded nto costs assocated wth four categores of actvtes : PREVENTION COST These are the cost of any acton taken to nvestgate, prevent or reduce the rsk of non-conformty or defect. Example : Plannng, Preparaton, Tranng, Preventve Mantenance and Evaluaton. APPRAISAL COSTS These are the costs of evaluatng the achevement of qualty requrements ncludng the cost of verfcaton and control performed at any stage of the qualty loop. Example : Producton Tral, Test and Measurement. INTERNAL FAILURE COSTS These are the costs arsng wthn organsaton due to non-conformty or defects at any style of the qualty loop. Example : Costs of Scrap, Rework, Retest, Re-nspecton, Modfcaton, Downtme, Overtme, Correctve Acton and Redesgn. Pakstan Insttute of Qualty Control ( ICQI'2000) 4
EXTERNAL FAILURE COSTS These are the costs arsng after delvery to the customer due to non-conformtes or defects. Example : Equpment Falure, Downtme, Warranty, Admnstratve Costs n dealng wth Falure and Loss of Customer s Goodwll. 2.3 COST OF CONFORMANCE ( COC ) Both Preventve and Apprasal Costs are known as the Costs of Conformance..e. : The cost of dong thngs rght the frst tme. 2.4 COST OF NON-CONFORMANCE ( CONC ) Both Internal and External Falure Costs are known as the Costs of Non- Conformance..e. : The cost ncurred as a result of thngs not beng done rght the frst tme. 3.0 IDENTIFICATION OF COST OF QUALITY 3.1 IDENTIFICATION OF COST OF CONFORMANCE ( COC ) ITEMS Step 1 : Develop and Prepare Cost of Conformance ( COC ) Checklst : Preventon Plannng and Wrtng of Procedures and Instructons Apprasal In-comng Inspecton Vendor Assurance In-process Inspecton Process Capablty Studes Fnal Testng and Inspecton Qualty Tranng Producton Tral Qualty Improvement Programs Collecton, Analyss & Reportng of Qualty Data Materals consumed durng Inspecton and Testng Feld Performance Testng Step 2 : Evaluate The Identfed Cost of Conformance ( COC ) Items. Pakstan Insttute of Qualty Control ( ICQI'2000) 5
3.2 IDENTIFYING COST OF NON-CONFORMANCE ( CONC ) ITEM Step 1 : Develop and Prepare Cost of Non-Conformance ( CONC ) Checklsts - Internal Falure Rework Scrap Obsolescence Downtme Sub-contractor faults Replacement Defect / Falure Analyss Re-nspecton and Re-testng Downgradngs Accdents Improper Invocng External Falure Complants Warranty Clam Bad Debts Returned Products Concessons Loss of Sale Product Lablty Extended Warranty Product Recall Overdue Accounts Recevable Step 2 : Evaluate The Identfed Cost of Non-Conformance ( CONC ) Items. 4.0 QUANTIFICATION OF COST OF QUALITY ( COQ ) Step 1 : Source of COC and CONC Data Producton Records QC Records Operaton Records Accountng Records Step 2 : Develop and Formulate Accountng Bass Step 3 : Execute Costng of COQ Items Pakstan Insttute of Qualty Control ( ICQI'2000) 6
Whole Account Ths method requres gatherng exstng fnancal data from company accounts. If accounts are set up to capture costs, such as tranng and rework, nformaton from the accounts can be used to measure COQ. Unt Prcng Ths method s effectve when a defect or problem s recurrng. To use defect prcng, smply multply the cost of one defectve unt by number of defectve unts. Whole Person Ths method s used when people are employed strctly for the purpose of workng on or handlng defects. Labour / Resource Clamng Ths method nvolves calculatng actual expendture on a specfc actvty, such as the amount of tme spent by an employee performng a task or the amount of fnancal outlay for a one-tme expense. Ths nformaton mght come from tme sheet, vouchers or any other method for determnng exactly how much was spent. 5.0 BENEFITS ACHIEVED IN IMPLEMENTING COST OF QUALITY SYSTEM Acts as method for assessng the overall effectveness of the qualty programmes Act as a method for determnng problem areas and acton prortes Provdes a platform for measurement of return on nvestment Converts the varous performance ndcators used n the company nto a sngle unt-dollar Act as a common method for quantfyng qualtatve mprovements 6.0 DOCUMENTATION, TRAINING, COMMUNICATION AND IMPLEMENTATION It s necessary to document the requred changes of qualty actvtes n a recognsed Qualty Assurance Model or ISO 9000 Qualty System or an In-house TQM Manual wth a vew to tran and communcate wth all relevant personnel n mplementng the changes effectvely. Pakstan Insttute of Qualty Control ( ICQI'2000) 7
7.0 PERFORMANCE INDICATIONS AND MEASUREMENT Step 1 : Outlne the busness processes and dentfy approprate Performance Indcators Step 2 : Establsh and Defne the proposed Performance Indcators Example: Performance Indcators Common Performance Indcators are : General Indcators Productvty Labour Productvty Captal Productvty Space Productvty ISO 9000 related ndcators No. of Complants per Month Internal Rejecton Rate External Rejecton Rate Producton Yeld Cost of Qualty ISO 14000 related ndcators Waste Reducton / Mnmsaton Increase Level of Recyclng Improve Energy Effcency Reduce Envronmental Impact Step 3 : Collect the necessary Data to evaluate the Performance Indcators 8.0 AUDIT AND REVIEW Conduct qualty audt and management revew regularly n order to assess the effectveness of the quantty system. Intate approprate correctve and preventve acton as and when necessary. 9.0 A PRACTICAL APPROACH IN IMPLEMENTING COQ ACTIVITIES IN AN ORGANISATION Phase 01: Phase 02: Phase 03: Phase 04: Phase 05: Project Intaton and Preparaton Assessment of Current Busness Performance Project Organsaton and Assgnments Identfcaton of Major Cost of Conformance (COC) and Cost of Non-Conformance (CONC) Items. Identfcaton and Provson of Addtonal Tranng Needs. Pakstan Insttute of Qualty Control ( ICQI'2000) 8
Phase 06: Collect, Comple and Process Cost of Qualty Data Phase 07: Analyse Cost of Qualty To Identfy Opportuntes for Improvements. Phase 08: Organse and Implement Qualty Improvement and Cost Reducton Programmes. Phase 09: Establsh Contnuous Improvement of The Cost of Qualty Performance. Phase 10: Conduct Qualty Audts regularly and Intate Document Changes In Response To Improvements made In Varous Processes. 10.0 CONCLUSION The goal of usng COQ s to ncrease preventon actvtes n order to elmnate nternal and external falures and to reduce apprasal actvtes. Reducton of COQ must be part of a sustaned qualty mprovement process n an organsaton headed by top management through a TQM Programme. 11.0 REFERENCES Introducton To Qualty Management, Assurance and Control By Gregory B. Hutchns Qualty Control By Dale H. Besterfeld, Ph.D., P.E Total Qualty Management By John S. Oakland Pakstan Insttute of Qualty Control ( ICQI'2000) 9
BRIEF BIO-DATA OF THE AUTHOR MR. JOHNSON TAN SWAN SAN Holder of a Bachelor of Scence (Chemstry), Sngapore. Johnson also holds Postgraduate Qualfcatons n Advanced Dploma n Busness Admnstraton (UK) and ACCA Certfed Dploma n Accountng and Fnance (UK). He was certfed as Manufacturng Management Specalst by Sanno Insttute of Busness Admnstraton (Japan). He was also traned overseas n US FDA Regulatory Complance. He s a Regstered Senor Audtor wth IQA Internatonal Regster of Certfcated Audtors and qualfed member for The Insttute of Qualty Assurance (UK), Sngapore Qualty Insttute and The Amercan Insttute of Industral Engneers. Furthermore, he has completed a course of study n Asan Assocate Envronmental Audtors approved by Envronmental Audtors Regstraton Assocaton (UK). He s currently a Regstered Assocate Envronmental Audtor wth the Insttute Of Envronmental Management & Assessment (UK). Johnson was awarded to attend The 1998 AOTS World Busness Network Program For SME Entrepreneurs n Japan. He was also an apponted lecturer for The AOTS World Busness Network Program n Sngapore for Bangladesh & Nepal Enterpreneurs (WBNP 05). He has extensve ndustral workng experences n varous mult-natonal companes engaged n the manufacture of h-tech medcal, food, constructon, electroncs, plastc and chemcal products and has held varous techncal and management postons. One of hs notable achevements ncludes leadng the frst Dagnostcs Botechnology company n the Asa Pacfc to obtan ISO 9002 Qualty System Certfcaton awarded by the Sngapore Insttute Of Standards and Industral Research (SISIR) and Brtsh Standards Insttute (BSI). He lectures part-tme n Ngee Ann Polytechnc, Sngapore Polytechnc and the Natonal Unversty of Sngapore n the area of ISO 9000 Qualty Systems and ISO / IEC 17025 Qualty System. To-date, he has more than 25 years of practcal hands-on experences n varous techncal, manageral and consultng practces, specalses n areas of Good Laboratory Practces (GLP), Good Manufacturng Practces (GMP), Qualty Assurance Management, ISO 9000 Qualty Systems, QS 9000 Qualty Systems Requrements, ISO 14000 Envronmental Management System, EN 46000, ISO / IEC 17025 and Total Qualty Management (TQM). In vew of hs extensve experences, he s beng engaged by several local enterprses as well as mult-natonal companes as ther Management Consultant. He s also currently engaged by Thrd Party Certfcaton Bodes to conduct certfcaton audts n South East Asa. Currently, he s beng engaged by JQ Management Pte Ltd as Managng Drector/ Prncpal Consultant n Sngapore. Pakstan Insttute of Qualty Control ( ICQI'2000) 10