Carillon Technologies Limited  Quality Costs

Quality Costs also known as the "cost of unquality" Where every department can contibute to the compnay losses

A Quality Management Program based on the use of cost of quality data:

But the problems to be solved and the priority of solving problems is based on quality costs.

Use of Quality Cost Data Will Help You . . .

1. Identify "quality" losses

2. Begin corrective action

3. Achieve cost reductions

4. Increase productivity

5. Improve customer relations

Cost of Quality Studies Transform

Q.C. Terminology To	$ To Upper Management
% Defective $ /Part --- L.T.P.D. --- P,U --- X BAR.R $/Dept. --- A.Q.L. --- A.O.Q.L. ---	$ $ $
	__________________ $ Profit/Loss

Key Point: To best communicate quality problems and results of quality studies to management and production talk with the universal language $$$$.

Types of Quality Costs

Prevention

1. Quality planning

2. Data analysis and corrective action

3. Development of measurement and other control equipment

4. Training

5. Quality systems audits

6. SPC team meetings

7. Development of standardized production systems

8. Improved communications of quality standards and information

9. Other prevention expenses

Appraisal

1. Inspection and test-purchased material

2. Laboratory acceptance testing

3. Maintenance and calibration of equipment

4. Inspection

5. Testing

6. Set-up of inspection and test equipment

7. Process and product audits

8. Checking labor

9. Data collection costs

10. Inspection and test material

11. Field testing and inspection

12. Outside endorsement

Internal Failure

1. Scrap - company caused

2. Rework - company caused

3. Production reruns

4. Equipment downtime due to nonstandard materials

5. Vendor caused losses

6. Troubleshooting

7. Retest and reinspecti

8. Extra production operations

External Failure

1. Rejected jobs

2. Field service

3. Lost customer goodwill

4. Damaged reputation

Typical Distribution of Quality Costs

Manufacturer	Prevention	Appraisal	Internal Failure	External Failure
All "Quality" Magazine June, 1977	10.%	26.%	43. %	21.%
U.S. Steel Bar & Plate Division Gary Works 1981	1.5%	16.%	79.5%	3.%
Fisher Body Metal Fabrication 1982	6.%	14.%	73.%	7.%
Heavy Equipment Mfg. 1984	10.%	Combined	26.%	64.%

Manufacturer	% of Sales	Opt. % of Sales	Quality Costs/yr.	Annual Improvement $./yr.
"Crosby"	15.%	5.%
U.S. Steel	17.%	5.%	$1.7 Billion	$750. Million
Detroit Diesel Allison	10.%	5.%	$300. Million	$150. Million
Fisher Body Division	10.%	5.%	$26. Million	$13. Million

"Hidden" Quality Costs

Many quality costs studies have shown that in addition to the "normal", known costs of poor quality (i.e. scrap and rework) many hidden costs are caused by poor quality.

These costs are hidden because the typical cost accounting system classifies them by the type of cost, not by their cause.

Some studies show that in the typical manufacturing company for each known $1 of scrap and rework there is an additional $6 to $7 in "hidden" costs.

Examples of "Hidden" Quality Costs Include:

1. Extra setups

2. Emergency material purchases in small lots

3. High labor costs due to emergency production runs

(especially short runs)

4. Lost machine capacity

5. Disrupted production schedules

6. Re-inspection and re-re-work

7. Extra wear and tear on machines, dies, tools, gauges, etc.

8. Lost management time

9. Un-expected overtime

10. Extra shipment costs of small jobs on an emergency basis

11. Extra inventory

 

Reductions in Quality Costs Are Improvements in Productivity and Capacity

Assume a company has a 10% scrap rate.

If through the use of SPC the scrap rate can be lowered to 3%, then 8 fewer parts must be produced to ship every 100 parts in the order.

This improvement in quality has a net effect that is the same as a productivity and capacity increase of 7%. This is in addition to the associated reduction in quality costs.

How Reductions in Quality Costs Affect Profitability

Assumptions . . .

1. To raise profits by $100 after taxes.

2. You are in a 33% tax bracket.

3. Your profit rate is the same as the national average (about 5%)

Two ways to raise your profits:

Increase sales and reduce costs.

Much additional sales and costs savings are necessary to generate the additional $100 profit?

Using Additional Sales

$2000.00 X .05 = $100

Conclusion: You must generate $2000.00 in sales to make an additional $100 after taxes.

Using Cost Reduction

$149.25 X (1 - .33) = $100

Conclusion: You must only save $149.25 to make an additional $100 after taxes.

Question

Which is easier to do, sell an additional $2000.00, or save $149.25?

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