1. Quality Cost Management

2. If you don’t measure results, you can’t tell success from failure
If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure
If you can’t recognize failure, you can’t correct it

3. Economic Analysis of Quality
W. A. Shewhart: 《Economic Control of Quality of Manufactured Product 》——relationship between quality and economy
A．V．Feigenbaum: Definition of TQC——at the most economical level…
J．M．Juran：focus on strengthening QM through financial management
-- Evolution of quality concept: conformity to customer satisfaction
-- The economy of quality has been more and more important.

4. T1 T2 T3 P’(T)=C’(T) Sales & Quality level
Product cost and quality cost
Sum
Quality level-T T1 T2 T3
Loss
Profit
P’(T)=C’(T)
当质量很低时，成本也较低，这时，稍加改进，质量就会显著提高，而增加的成本并不多；当质量达到相当高的水平时，再要提高质量，成本的增加就会显著递增了，因为需要更先进的技术和更好的工艺装备
销售额与质量水平正相关，售价提高的变化率将随着质量水平的提高而下降，到一定程度后再提高质量也不会代爱售价的提高，因为用户对产品使用价值的支付意愿有限，这是高昂的界个是的销售量减少而出现销售额减少的情况
最佳质量水平（T2）：当价格对质量水平的变化率与成本对质量水平的变化率相等时，能获得最大利润，经济上最合算。

5. Quality Cost
The cost of avoiding poor quality, or incurred as a result of poor quality
Translates defects, errors, etc. into the “language of management” – $$$
Provides a basis for identifying improvement opportunities and success of improvement programs

6. Quality Cost Classification
Assurance cost：All expenses spent on preventing product defects and appraising whether the output satisfies the specified quality requirements. It can be divided into Prevention Cost and Appraisal Cost.
Failure cost：The costs resulting from products or services not conforming to requirements or customer/ user needs. It can be divided into Internal Failure Cost and External Failure Cost.

7. PREVENTION COST
Costs associated with designing, installing, maintaining and auditing plans for control of manufacturing products and services to prevent the creation of defects and failures or the creation of process wastes.

8. PREVENTION COST--Examples
Personnel associated with preventing poor quality
Quality training and education
Contract reviews
Design reviews
Defect prevention activities (Quality improvement)
Reliability engineering and testing
Capability studies
Preventive efforts with supplier
Supplier evaluation
Supplier selection
Supplier surveillance
Surveillance:监视监督

9. APPRAISAL COST
Costs associated with the measuring, evaluating, or auditing of goods, components, services and purchased materials to verify conformance with quality standards and performance requirements. the cost of evaluating processes and their outputs to ensure quality

10. APPRAISAL COST--Examples
Inspection and Test
Set-up
Materials
Personnel
Equipment/tools
Energy
Product quality audits
Any activities associated with checking previously performed work
Any activities associated with checking previously performed work: Logistics, administration

11. INTELNAL FAILURE COST
Costs associated with defective products, components, and materials which fail to meet quality requirements and found before delivery to the customer, namely costs incurred to correct an identified defect before the customer receives the product

12. INTELNAL FAILURE COST--Examples
Scrap and Rework
Material
Labor
Failure investigations
Overtime to correct internal failures
Downtime, Delay Time
Corrective action to eliminate the internal failures
Design and development of rework/repair techniques

13. EXTERNAL FAILURE COST
Costs associated with deficiencies found to the customer and with customer dissatisfaction
Costs that relate to all errors not detected and corrected before delivery to the customer

14. EXTERNAL FAILURE COST--Examples
Repair, Replacement Expenses under Warranty
customer complaint
Product liability claims
Failure investigations
Corrective actions Downtime charges
Modification delays and costs
Product recalls

15. 0% %
Defective Rate
Quality
Cost in $
Failure cost
Control cost
Total cost
Minimum
Optimal
Acceptable Quality Level

16. Calculating the Total Quality Cost
Prevention
Cost
Appraisal
Cost
Failure
Cost = + +

17. Benefits of Quality Cost Management
Ability to identify the nonconformities and opportunities to reduce costs
Enables quality improvement efforts to be measured
-- Improvements in quality often result in
lower total cost
improved productivity
Ability to track progress over time
Ability to identify areas to focus on where the result may be increased customer satisfaction
Provides a common denominator: currency language
不合格包括不合格工作和不合格产品。

18. Organization and responsibility in QCM
To establish a QCM system to organize and coordinate the work concerning QCM, in which the policy and contents could be decided jointly by the QM and finance department
All the departments should be involved in the QCM since quality issue concerns each department.

19. Track the costs of quality
Every kind of work misplay in each department and post will lead to quality cost,
It is necessary to study the source of quality cost.
Quality cost problems in the departments?

20. Quality Cost Management Tools
Cost indexes
Pareto analysis
Sampling and work measurement
Activity-based costing

21. Return on Quality (ROQ)
ROQ – measure of revenue gains against costs associated with quality efforts
Principles
Quality is an investment
Quality efforts must be made financially accountable
It is possible to spend too much on quality
Not all quality expenditures are equally valid

22. Managing Data and Information
Validity – Does the indicator measure what it says it does?
Reliability – How well does an indicator consistently measure the “true value” of the characteristic?
Accessibility – Do the right people have access to the data?

23. Analysis Basic Advanced Statistical summaries and charts
Trends over time
Comparisons with key benchmarks
Aggregate summaries and indexes
Cause-and-effect linkages and correlations (interlinking)
Data mining
Basic
Advanced

24. Quality Cost Indexes ——structural cost indexes
prevention cost ratio, appraisal cost ratio, internal failure cost ratio, external failure cost ratio
——indexes concerning quality cost
Ratio of quality cost to total cost, sales or profit, ratio of internal failure cost to man-hour, ratio of external failure cost to sales

25. Annual loss for quality failure （ 1000$ ）
Pareto analysis based on quality failure cost types
Failure types
Annual loss for quality failure （ 1000$ ）
Percentage in total
quality failure cost
Proportion
(100%)
Accumulated prop. (100%)
Rework
5560 61
Customer complaint
1220 14 75
Scrap
780 9 84
Material quality problem
670 7 91
Sales discount
370 4 95
Failure investigation
280 3 98
Downtime
190 2
100 合计
9070

26. Pareto analysis of Rework based on product types
Annual rework loss（1000$）
Proportion (100%)
Accumulated prop. (100%) A
1320 24 B
960 17 41 C
720 13 54 D
680 12 66 E
470 8 74 F
330 6 80
Other kinds
1080 20
100 合计
5560

27. 41
53.9
66.1
74.6
80.5
100
Other kinds
100

28. Setting up proper quality cost subjects
SMEC quality failure costs collecting table
1st
2nd
3rd
Sum (RMB)
Last year
This year
Growth rate
Quality failure costs
Internal failure cost
Scrap failure
Repair failure
Failure analysis and recheck
Downtime failure
External failure cost
Guarantee fee
Lawsuit fee
Claim fee
Sales discount
SHANGHAI MITSUBISHI ELEVATOR CO.,LTD

29. Summary Purpose of quality cost management
to be more effective in finding out the reasons behind those quality problems, instead of finding out whose fault it is, thus helping relevant departments and people prevent the similar problems, or address them as soon as possible
It is objective for quality costs to exist
Problems of nonconformity are hard to avoid, and the loss concerned and expenses on prevention would occur consequentially.
Quality cost is relevant to quality requirements
It is quality requirements that constitute the basis for judging the conformity and nonconformity.