1. COMPANYWIDE ASSESSMENT OF QUALITY
LECTURE (3)
COMPANYWIDE ASSESSMENT OF QUALITY

2. Major Topics Why Assessment? Assessment of Quality
Cost of Poor Quality
Optimum Cost of Quality
Standing in the Marketplace

3. Why Assessment?
To help develop a quality strategy a formal assessment of quality provides a guide for improvement by telling us :
(1) The size of the quality issue
(2) The areas demanding attention

4. Assessment of Quality Assessment of quality comprises four elements :
1. Cost of poor quality
2. Standing in the marketplace
3. Quality culture in the organization
4. Operation of the company quality
system

5. Cost of Poor Quality (1) Cost of poor is the cost of attaining quality
Cost of poor quality is the annual monetary loss of products and processes that are not achieving their quality
Cost of poor quality is one of the component of assessment in reducing costs and customer dissatisfaction

6. Cost of Poor Quality (2) reasons:
Companies estimate the cost of poor quality for several
reasons:
1. Quantifying the size of the quality problem in the language of
money improves communication between middle managers and
upper managers.
2. Major opportunities for cost reduction can be identified.
3. Opportunities for reducing customer dissatisfaction and associated
threats to product salability can be identified.
4. Measuring this cost provides a means of evaluating the progress of
quality improvement activities and spotlighting obstacles to
improvements.
5. Knowing the cost of poor quality leads to the development of a
strategic quality plan that is consistent with overall organization
goals.

7. inefficient processes
Cost of Poor Quality (3)
Cost of Poor Quality
Cost of
nonconformities
inefficient processes
Lost opportunities
of sales revenue

8. Categories of Quality Costs
Internal Failures Costs
External Failures Costs
Appraisal Costs
Prevention Costs

9. Internal Failures Costs
Failure to meet customer requirements and needs:
(scrap, rework, lost or missing information, failure analysis, scrap and rework-supplier)
Cost of inefficient processes
(variability of product characteristics, unplanned downtime of equipment, inventory shrinkage)

10. External Failure Costs
Failure to meet customer requirements and needs :
(warranty charges, complaint adjustments, returned material, allowances, penalties due to poor quality, rework on support operations, revenue losses in support operations)
Lost opportunities for sales revenue
(customer defections, new customers lost because of lack of capability to meet customer needs)

11. Appraisal Cost Incoming inspection and test
In-process inspections and test
Final inspection and test
Document review
Balancing
Product quality audits
Maintaining accuracy of test equipment
Inspection and test materials and services
Evaluation of stocks

12. Prevention Costs Quality planning New products review Process planning
Process control
Quality audits
Supplier quality evaluation
Training

13. HIDDEN QUALITY COSTS Potential lost sales
Costs redesign of products due to poor quality
Costs of changing processes due to inability to meet quality requirements for products
Costs of software changes due to quality reasons
Costs of downtime of equipment and systems including IS
Costs included in standards
Extra indirect cost due to defects and errors
Scrap and errors not reported
Extra process costs due to excessive product variability
Costs of errors made in support operations
Cost of poor quality within a supplier’s company

14. Language of Management
Money (annual cost of poor quality)
- 24% of sales revenue
- 15% of manufacturing cost
- 13 cents per share of common stock
- $ 7.5 million per year for scrap and rework compared to a profit of
$1.5 million
- 40% of the operating cost of a department
Other languages
- 32 % of engineering resources spent in finding and correcting design
weaknesses
- 25 % of manufacturing capacity devoted to correcting quality
problems
- 13% of sales order canceled
- 70% of inventory carried attributed to poor quality levels
- 25% of manufacturing personnel assigned to correcting quality

15. Optimum Cost of Quality
Cost of appraisal plus prevention
Failure costs
Total
Quality costs
Cost per good unit of product
Quality of conformance,%
100
Model for Optimum Costs

16. Standing in the Marketplace
Billing
Sales
Product
Repairs
Add resources
Leverage
Status quo
Ignore
Importance
Performance (% satisfied 70 20
100

17. Quality TIP
“In fact, customer satisfaction is regarded as the only relevant objective for ensuring stable and continuously increasing business”