Presentation on theme: "Quality Costs and Productivity: Measurement, Reporting, and Control"— Presentation transcript:
1 Quality Costs and Productivity: Measurement, Reporting, and Control CHAPTERQuality Costs and Productivity: Measurement, Reporting, and Control
2 After studying this chapter, you should be able to: Objectives1. Identify and describe the four types of quality costs.2. Prepare a quality cost report and explain the difference between the conventional view of acceptable quality level and the view espoused by total quality control.3. Tell why quality cost information is needed and how it is used.4. Explain what productivity is, and calculate the impact of productive changes on profits.After studying this chapter, you should be able to:
3 Quality DefinedA quality product or service is one that meets or exceeds customer expectations...
4 Quality Defined … on the following eight dimensions: Performance AestheticsServiceabilityFeaturesReliabilityDurabilityQuality of conformanceFitness for use
5 Quality Defined … on the following eight dimensions: Performance How consistently and well a product functionsPerformanceAestheticsServiceabilityFeaturesReliabilityDurabilityQuality of conformanceFitness for useThe appearance of tangible products (style, beauty)Measures the ease of maintaining and/or repairing the productCharacteristics of a product that differentiate functionally similar productsThe probability that the product or service will perform its intended function for a specified length of time
6 Quality Defined … on the following eight dimensions: Performance The length of time a product functionsPerformanceAestheticsServiceabilityFeaturesReliabilityDurabilityQuality of conformanceFitness for useA measure of how a product meets its specificationsThe suitability of the product for carrying out its advertised functions
7 A defective product is one that does not conform to specifications. Quality DefinedA defective product is one that does not conform to specifications.
8 Zero defects means that all products conform to specifications. Quality DefinedZero defects means that all products conform to specifications.
9 Quality DefinedThe definition of quality-related activities imply four categories of quality costs:Incurred to prevent poor quality or services being producedIncurred to determine whether products and services conform to requirementsPreventive costsAppraisal costsInternal failure costsExternal failure costsIncurred when products and services do not conform to specificationsIncurred when products and services fail to conform to requirements after being delivered
10 Examples of Quality Costs Prevention costsQuality engineeringQuality training programsQuality planningQuality reportingSupplier evaluation and selectionQuality auditsQuality circlesField trialsDesign reviews
11 Examples of Quality Costs Appraisal CostsInspection of raw materialsTesting of raw materialsPackaging inspectionSupervising appraisalProduct acceptanceProcess acceptanceInspection of equipmentTesting equipmentOutside endorsements
13 Examples of Quality Costs External failure costs Cost of recallsLost salesReturns/allowancesWarrantiesRepairsProduct liabilityCustomer dissatisfactionLost market shareComplaint adjustment
14 Measuring Quality Costs Hidden Quality Costs are opportunity costs resulting from poor quality.The Multiplier MethodThe Market Research MethodTaguchi Quality Loss Function
15 The Multiplier MethodThe multiplier method assumes that the total failure cost is simply some multiple of measured failure costs:Total external failure cost = k(Measured external failure costs)where k is the multiplier effectIf k = 4, and the measured external failure costs are $2 million, then the actual external failure costs are estimated to be $8 million.
16 The Market Research Method The market research method uses formal market research methods to assess the effect of poor quality on sales and market share.Customer surveys and interviews with members of a company’s sales force can provide significant insight into the magnitude of a company’s hidden costs.Market research results can be used to project future profit losses attributable to poor quality.
17 The Taguchi Quality Loss Function The Taguchi loss function assumes any variation from the target value of a quality characteristic causes hidden quality costs.Furthermore, the hidden quality costs increase quadratically as the actual value deviates from the target value.
18 The Taguchi Quality Loss Function $ CostLower Specification LimitUpper Specification LimitTarget Value
19 The Taguchi Quality Loss Function L(y) = k(y – T)²k = A proportionately constant dependent upon the organization’s external failure cost structurey = Actual value of quality characteristicT = Target value of quality characteristicL = Quality loss
20 Quality Cost Report Unit Actual Diameter (y) y-T (y –T)² k(y-T)² $ 4.00Total $40.00Average $10.00
21 For the Year Ended March 31, 2004 Image ProductsQuality Cost ReportFor the Year Ended March 31, 200411-22Quality Costs % of SalesPrevention costs:Quality training $35,000Reliability engineering 80,000 $115, %Appraisal costs:Materials inspection $20,000Product acceptance 10,000Process acceptance 38,000 68,Internal failure costs:Scrap $50,000Rework 35,000 85,External failure costs:Customer complaints $25,000Warranty 25,000Repair 15, ,Total quality costs $333, %
22 Relative Distribution of Quality Costs External Failure (19.5%)Prevention (34.5%)Internal Failure (25.6%)Appraisal (20.4%)
29 Productivity: Measurement and Control Productivity is concerned with producing output efficiently, and is it specifically addresses the relationship of output and the inputs used to produce the outputs.
30 Productivity: Measurement and Control Total productive efficiency is the point at which two conditions are satisfied:1. for any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output2. given the mixes that satisfy the first condition, the least costly mix is chosen.
31 Technical EfficiencyTechnical Efficiency is the condition where no more of any one input is used than necessary to produce a given output.Technical efficiency improvement is when less inputs are used to produce the same output or more output are produced using the same input.Current productivityInputs:LaborCapital4Outputs:6
32 3 6 4 8 Technical Efficiency Same Output, Fewer Inputs Inputs: LaborCapital3Outputs:6More Output, Same InputsInputs:LaborCapital4Outputs:8
34 2 8 Technical Efficiency Technically Efficient Combination II: Inputs: LaborCapital$25,000,0002Outputs:8Of the two combinations that produce the same output, the least costly combination would be chosen.
35 Partial Productivity Measurement Partial Productivity Measurement: Measuring productivity for one input at a time.Partial Measure = Output/InputOperational Productivity Measure: Partial measure where both input and output are expressed in physical terms.Financial Productivity Measure: Partial measure where both input and output are expressed in dollars.
36 Profile measurement provides a series or a vector of separate and distinct partial operational measures.
37 Profile Productivity Measures Example 1:The productivity of both labor labor and materials moves in the same direction:Number of motors produced 120, ,000Labor hours used 40,000 37,500Materials used (lbs.) 1,200,000 1,428,571150,000/37,500150,000/1,428,571Partial Productivity Ratios2003 Profile ProfileLabor productivity ratioMaterial productivity ratio
38 Profile Productivity Measures Example 2:Assume the same data as Example 1 except the material used is 1,700,000 pounds.Number of motors produced 120, ,000Labor hours used 40,000 37,500Materials used (lbs.) 1,200,000 1,700,000150,000/37,500150,000/1,700,000Partial Productivity Ratios2003 Profile ProfileLabor productivity ratioMaterial productivity ratio
39 Profit-Linked Productivity Measurement Profit-Linkage Rule: For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change, and compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes.To compute the inputs that would have been used (PQ), use the following formula:PQ = Current Output/Base-Period Productivity Ratio
40 Profit-Linked Productivity Measurement Example: Kunkul provided the following data:Number of motors produced 120, ,000Labor hours used 40,000 37,500Materials used (lbs.) 1,200,000 1,700,000Unit selling price (motors) $50 $48Wages per labor hour $11 $12Cost per pound of material $2 $3
41 Profit-Linked Productivity Measurement PQ (labor) = 150,000/3 = 50,000 hrs.PQ (materials) = 150,000/0.100 = 1,500,000 lbs.Cost of labor: (50,000 x $12) $ 600,000Cost of materials: (1,500,000 x $3) 4,500,000Total PQ cost $5,100,000Cost of labor: (37,500 x $12) $ 450,000Cost of materials: (1,700,000 x $3) 5,100,000Total current cost $5,550,000The actual cost of inputs:
42 Profit-Linked Productivity Measurement Profit-linked effect= Total PQ cost - Total current cost= $5,100,000 – $5,550,000= $450,000 decrease in profitsThe net effect of the process change was unfavorable. Profits declined $450,000 because of productivity changes.
43 Price-Recovery Component The difference between the total profit change and the profit-linked productivity change is called the price-recovery component.DifferenceRevenues $7,200,000 $6,000,000 $ 1,200,000Cost of inputs 5,550, ,840, ,710,000Profit $1,650,000 $3,160,000 $-1,510,000Price recovery= Profit change – Profit-linked productivity change= $1,510,000 – $450,000= $1,060,000