1. The Cost of Quality Presented by Dr. Joan Burtner Certified Quality Engineer Associate Professor of Industrial Engineering and Industrial Management Mercer University

2. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 2 Introduction to the Cost of Quality A method used by organizations to show the financial impact of quality activities A method used by organizations to show the financial impact of quality activities Juran – advocated measuring quality in terms best understood by upper management Juran – advocated measuring quality in terms best understood by upper management Feigenbaum – promoted the value of a measurement reporting system that focuses on quality costs, their causes, their effects Feigenbaum – promoted the value of a measurement reporting system that focuses on quality costs, their causes, their effects Crosby – asserted that it is the absence of quality that increases costs Crosby – asserted that it is the absence of quality that increases costs

3. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 3 Quality is Free - Crosby Quality does not cost money Quality does not cost money Absence of quality increases total cost of goods and services Absence of quality increases total cost of goods and services –Non-conformances and failures cost money Popularized the term “Cost of poor quality” Popularized the term “Cost of poor quality” –Must spend money up front on prevention and appraisal

4. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 4 Quality Cost Categories Prevention Prevention Appraisal Appraisal Internal failure Internal failure External failure External failure Total cost of quality = sum of the costs associated with the four categories listed above Total cost of quality = sum of the costs associated with the four categories listed above

5. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 5 Prevention - Definitions All activities specifically designed to examine the overall experience gained from the identification and elimination of specific causes of failure and their costs in an effort to prevent recurrence of the same or similar failures in other products or services Costs incurred in minimizing failure and appraisal costs throughout an entire organization’s processes Costs incurred in minimizing failure and appraisal costs throughout an entire organization’s processes

6. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 6 Prevention - Examples 1.1 Marketing/customer/user – –Marketing research, customer surveys and focus groups, contract and document review 1.2 Product/service/design/development – –Translate customer and user needs into reliable quality standards prior to the release of authorized documentation for initial production – –Design quality progress reviews, product design qualification tests, field trials 1.3 Purchasing prevention costs – –Costs incurred to assure conformance to requirements of supplier parts – –Includes activities prior to and after finalization of purchase order commitments, such as purchase order reviews, supplier review, supplier rating 1.4 Operations prevention costs (manufacturing or service) – –Quality education of operating personnel, design and development of quality measurement and control equipment, operations support quality planning 1.5 Quality administration – –Administrative salaries and expenses – –Quality education – –Documenting and evaluating quality costs – –Quality system audits 1.6 Other prevention costs

7. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 7 Appraisal - Definitions   Evaluation of product or service at sequential stages, from design to first delivery and throughout the production process. The purpose is to determine the product or service’s acceptability for continuation in the production or life cycle.   Costs associated with measuring, evaluating, or auditing products or services to ensure conformance to quality standards and performance requirements

8. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 8 Appraisal - Examples 2.1 Purchasing appraisal costs – –Incoming inspections and tests – –Could be conducted at receiving or at supplier’s facility – –Measurement equipment* 2.2 Operations (manufacturing or service) appraisal costs – –Planned operations inspections, tests, audits – –Product or service quality audits – –Inspection and test measurement equipment* – –Outside endorsements and certifications 2.3 External appraisal costs – –Field performance evaluation – –Setup and inspection before customer accepts product 2.4 Review of test and inspection data 2.5 Miscellaneous Quality Evaluations

9. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 9 Internal Failure - Definitions Internal failure – all costs required to evaluate, dispose of, and either correct or replace nonconforming products or services prior to delivery to the customer. This category includes cost to replace incorrect or incomplete product or service description (documentation). Costs that occur before the product is delivered to the customer

10. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 10 Internal Failure - Examples 3.1 Product or service design failure costs – –internal corrective action – –Scrap and rework due to design changes* 3.2 Purchasing failure costs – –Purchased material disposition/replacement cost – –supplier corrective action – –rework of supplier rejects 3.3 Operations (product or service) failure costs – –Material review and corrective action – –Operations rework and repair costs – –Troubleshooting or failure analysis costs – –Internal failure labor losses – –Scrap costs* 3.4 Other internal failure costs

11. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 11 External Failure - Definitions External failure – all costs due to actual or suspected nonconforming product or service after delivery to customer Costs that occur after the delivery of product or while furnishing a service to the customer

12. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 12 External Failure - Examples 4.1 Complaint investigations of customer or user service 4.2 Returned goods 4.3 Retrofit and recall costs 4.4 Warranty claims 4.5 Liability costs 4.6 Penalties 4.7 Customer or user goodwill 4.8 Lost sales 4.9 Other External Failure Costs

13. ETM 627 Fall 2008Dr. Joan Burtner, Associate Professor of Industrial Engineering Slide 13 Contact Information Email: Burtner_J@Mercer.edu Email: Burtner_J@Mercer.edu US Mail: US Mail: Mercer University School of Engineering 1400 Coleman Avenue Macon, GA Phone: (478) 301- 4127 Phone: (478) 301- 4127