Quality cost
The concept of quality costs
Quality costs are the sum of costs incurred in the production organization to ensure that the product is provided to the consumer according to his requirements and desires.
It is the sum of the costs incurred by the product related to determining the level of product quality, achieving and controlling it, and evaluating the extent to which the product specifications conform to the requirements and desires of the consumer.
These costs include costs for failures that occur as a result of non-fulfillment of quality requirements at the internal or external level of the organization.
Quality costs study
The study of quality costs is among the most important ideas in Total Quality Management, and it is an important part of any quality program in productive organizations.
The study is a strong indicator to motivate senior management in applying and implementing the concept of quality costs
Reducing these total costs of the product and controlling and controlling them effectively, thus increasing profits.
More accurate in evaluating and estimating costs and realistic budgeting.
Converting quality into numbers through loss ratios helps management and employees understand the importance of doing the right thing the first time.
The importance of studying quality costs
One of the management managers at the computer industry company Hewlett Packard says: The sooner you discover the error or before it occurs, the more savings will be. For example, if you discover an error in a resistor that costs two dirhams and decide to get rid of it, you have lost two dirhams. But if the error was not discovered and I used this resistor in the computer industry, this might cost me 10 riyals for the cost of repairing the part. Depending on the number of computers produced in this way and that must be repaired, the cost of repair will exceed the cost of manufacturing.
The importance of studying the economics of quality and its costs
The study of quality costs is a continuous quality improvement tool, as it helps to identify areas of failure and failure and sources of defects, using statistical tools.
Poor quality increases costs to the organization, especially those related to:
Defective units of production.
recycle.
Examination and testing
Dealing with complaints from customers and dissatisfied customers
Discount costs for poor-quality products.
Types of quality costs
Direct costs: The direct costs include both the quality control costs (prevention costs, evaluation costs) and failure costs in quality control (internal failure costs, and external failure costs).
Indirect costs: They are the costs of losing customers or losing the customer’s confidence in the company’s products, the cost of losing the company’s reputation, the cost of losing the company’s market share, and they are called intangible costs. It is an expense that is difficult to measure and determine and its impact on the total costs of quality in a quantitative form because it affects the increase in total costs in an invisible way.
Quality Control Costs or Conformance Costs: Conformance costs include the sum of prevention costs and evaluation costs, that is, all preventive costs that ensure that the product will be produced without defects that affect its quality level.
Non-conformance costs: Non-conformance costs include the sum of internal failure costs and external failure costs, which includes all costs incurred due to defects in quality that occur in the first time of production.
Prevention Costs
They are the costs incurred to prevent the occurrence of defects in the product and to prevent the products from not conforming to the required specifications. These costs are related to the design, implementation, and maintenance of the quality system in the organization and the prevention of defects and failures in the product or service such as:
Quality planning, design, and system development costs
Production process control costs
Costs of training quality personnel
Supplier Quality Assurance Costs
Costs of reviewing and analyzing quality data
Costs related to quality improvement programs
Appraisal Costs
Are the costs spent on testing and inspection processes to assess the level of product quality and identify problems in the production process? Any costs associated with measuring, evaluating, auditing, and examining products or materials to ensure their compliance with quality requirements or standards and specifications followed during production for the first time:
Costs of checking supplies of raw materials and semi-finished products
Costs of testing and inspection during production processes
Test and inspection equipment costs
Costs of materials consumed through inspection and testing
Analyze and report test and inspection results
Field performance testing costs (product operation in the consumer facility)
Costs related to inventory valuation
Internal failure costs
Are all costs associated with a product whose production fails to meet quality specifications and were discovered in the organization before it goes out to the consumer, and includes the following examples:
Costs of re-inspection and testing of products within the organization.
Defective product classification costs include a category that can be repaired and a category that cannot be repaired.
Restarting costs
Lost costs that cannot be repaired.
The costs of problem-solving or error analysis.
The costs of injury to workers during the test and the resulting compensation.
External failure costs
It is the sum of the costs of a defective product discovered after delivery to the customer or consumer and includes:
Costs for handling customer complaints
Replacement and return of defective products
Privileges
loss in sales
Liability costs resulting from accidents
Costs of paying guarantees and compensation.
Hidden Quality Costs
There are four types of visible or visible quality costs, but these costs are not the only ones borne by the organization, there are other invisible or hidden costs borne by the organization.
The iceberg model confirms that the measurable and identifiable quality costs represent only 10% of the total cost
All quality costs (visible and invisible) are incurred by the organization. And 90% are hidden costs that do not appear clearly or quantitatively - such as the costs of obsolete and surplus inventory, the costs of customer complaints and grumbling, the costs of delays in delivery, and others.
To reduce these costs, it is necessary to adopt modern scientific methods in quality management, resource management, and scheduling, apply the principles of constraint theory, and apply lean production and statistical methods for quality control.
Methods and methods for analyzing and measuring quality costs
The Quality Costs Report is the basis for these methods and methods, through which all costs related to product quality are counted. This process is considered a specialty of the quality and accounting departments in the organization.
Trend Analysis: This is by comparing current levels of costs with past levels, from which useful information can be extracted for future planning to improve the level of quality.
Pareto Analysis: They are among the most effective techniques in analyzing the costs of quality, through which it is possible to identify the important few that can be worked on in order to reduce their costs. In other words, focus more on the improvement process on the important few and leave the unimportant many.
Trend Analysis
Production cost index: Here, the quality costs of each monetary unit are compared with the production cost (direct materials costs, labor wages, and administrative expenses). Production cost index = total quality costs ÷ production costs
Sales Indicator: It compares the quality costs per unit of cash with sales and is a good tool for making the right decisions by the top management. Sales Index = (Total Quality Costs ÷ Sales)
Produced unit indicator: Quality costs are compared with the units produced. This indicator is characterized by comprehensiveness and accuracy in comparison, especially if the production lines are similar.
The unit produced index = (total quality costs ÷ production quantity)
Pareto chart:
It is among the best techniques in analyzing the costs of quality, through which it is possible to identify the few that affect them first, treat them, and then move to the few that have a low impact, which can be worked on in order to reduce their costs. Focusing in the improvement process on the important and influential few, by addressing them, the organization can find the solution to the largest proportion of quality problems.
The effect of quality management on productivity
Productivity: A measure of the organization's effectiveness in converting inputs into outputs, and it is usually calculated by the following equation:
Productive Efficiency = Output ÷ Input
Outputs: the final products from the processes of producing goods or services, such as in automobile factories and restaurants.
Inputs: the parts, materials, working hours, and others that are included in the production process.
Improving quality by reducing defects will increase the amount of valid output (the numerator of the equation) and reduce the amount of input (the denominator of the equation), and this leads to an increase in production efficiency.
The impact of quality management on productivity can be clarified by measuring the final product and productivity. The final product is a measure of the inputs used as an indicator of productivity. It can be calculated for all production processes in the organization or for one of the production stages, as follows:
Final product (Y) = (sum of inputs) (% of valid product) + (total of inputs) (1-% of valid product) x (% of rework) or Y = (I) (%G) + (I) (1% - G)(%R) ....(3-7)
I = Input quantity
%G = Good Production Ratio
R% = rework percentage