When rework occurs because of some internal failure the cost of the rework should be charged to?

8.3 The Categories of Quality Costs

Quality costs are defined as the costs associated with falling short of product or service quality as defined by the requirements established the organization, customers, and society.

Juran in his book, Quality Planning and Analysis, and subsequently, several authors have classified these quality costs associated with making, finding, repairing, or preventing defects. The summary of these costs is represented in Fig. 8.1. As elaborated in later sections, these three costs are known as Prevention, Appraisal, and Failure (PAF) costs.

Internal failure costs are those that would exist before sorting out and removal of the defects prior to shipment. These are the costs of coping with errors discovered during development and testing and would be comprised of:

Scrap: The net loss in labor and materials resulting from defective products which cannot economically be repaired or used.

Rework: The cost of correcting defects to make them fit for use. Sometimes this category is broadened to include extra operations done to rectify them.

Retest: The cost of reinsertion and retest of products which have undergone reworking.

Downtime: The cost of idle facilities resulting from defects, like a rejected heavy casting being unloaded from the machine and carried to a test rig, as well as the discussions that take place. In some industries, this downtime is large and is quantified. But in most cases, this is ignored, adding to the total quality cost.

Yield losses: The cost of elemental time added due to ineffective controls of operation. For example, the overfilling of containers such as soft drinks due to variability in the filling and measuring equipment.

Disposition: The effort required to determine whether the nonconforming products can be used or not. This includes the individuals’ time and material review boards.

External failure costs are those that arise from defects that are noticed after the products leave the factory premises. They are distinguished from internal failure costs by the fact they are found after shipment to the customers. These could be comprised of:

Complaints: All investigations made after receipt of complaints from the customer.

Warrantee costs: This forms a major cost in the case of defective goods reaching the customer and includes testing and replacement of defective parts.

Recall costs: In case of recall of the products, the handling and other costs play a major role. Recently Maruti Udyog, Ltd. had recalled a certain lot of cars due to several complaints received about the petrol tanks.

Concessions: Some concessions such as discounts may have to be made to the customer in view of the substandard products being accepted by the customer.

Loss of sales: Poor quality supply would affect customer satisfaction and result in loss of reputation and loss of sales.

Litigation: If the customer is still not satisfied with the after-sales service or the above cited replacement, it may lead to his suing the company. This would entail substantial losses due to litigation expenditure incurred by the company.

Appraisal costs include the cost of determining the degree of conformance to the required quality levels. They are incurred to measure, inspect, test, and audit products and performance to determine conformance with acceptable quality levels, standards of performance, and specifications. The four elements of appraisal costs are

Manufacturing appraisal costs including product design, qualification, and conformance test costs, which are the costs incurred in checking the conformance of the product during the design stage, as well as throughout its progression in the factory, including the final acceptance and check of packing and shipping.

Purchase appraisal costs including supplier product inspection cost, incoming inspection, testing costs, etc.

External appraisal costs when there is a need for field trials of new products and services, including the field setup and checkout before official approval.

Miscellaneous quality evaluation costs that include the cost of all supports to enable continual customer satisfaction, such as the quality of packing, shipping process, promotions, and audits.

Preventions costs are those that are involved to rectify the processes that lead to the above losses. They include:

Quality planning

Design for quality

New product review

Process control

Equipment calibration

Database maintenance

Improvement projects

Staff training

Employee awareness

System development

System management

Requirement analysis

Reliability of development tools

Vendor evaluation

The traditional model

The variations of the traditional PAF model all divide the cost of quality into three separate areas, i.e. prevention, appraisal and failure (PAF). In addition, most of the models divide the cost of failure into internal and external failure because these are very different in their magnitude and their accuracy, i.e. internal failure costs can often be assessed reasonably accurately whereas some of the external failure costs, especially the opportunity type of cost, can be very difficult to assess and collect.

As shown in Section 1.6, in most companies only 5% of costs are in prevention and 95% of quality costs are in failure and appraisal. Increasing the money spent on prevention and appraisal will save money in failure costs and change the ratios of the costs as well as reduce the overall costs. Re-assigning the costs and efforts to prevention can reduce the overall cost of quality from 20% of sales to 10% of sales and reduce the overall cost of quality by up to 50%.

Cost of Quality Summaries

The cost of quality is yet another important quality measurement index. Quality costs will be defined in the following paragraphs, but for now, consider this radical thought: The cost of quality in a perfect organization should be zero. Why? In an ideal environment, everyone would do his or her job perfectly. In an ideal company, the design would contain no flaws (the engineers did their jobs perfectly), the materials and purchased parts used in building the product would meet all requirements (all of the suppliers performed perfectly), and the product would be perfectly manufactured (the factory technicians and assembly personnel would do their work without error). In such an environment, would there be a need for any inspectors? Or technicians to perform rework? Or engineers to adjust the design as design flaws emerge in production? The obvious answer, in our idealized and perfect environment, is no. None of the above activities would be needed. As a goal, there should be zero expenditures for quality.

As a practical matter, we live in an imperfect world. It would be naive to assume that any company could afford to spend nothing on quality. Can the last sentence be turned around, though? If the goal is to provide a quality product, can one expect to make the costs of quality approach zero? Our experience confirms that within limits, the answer is yes. That's good news, because companies become more profitable and consumers receive better goods and services. (The practical limits are driven by costs associated with preventive quality measures intended to curtail larger detection-based costs, as will be explained below.)

Given all of the above, how should one capture and measure the cost of quality? Many of the concepts have been mentioned already in the sections in which we discussed the preparation of Pareto charts based on not only the quantities, but also costs of scrap, rework, repair, and other nonconformances (see, for example, Figure 4-5). In addition to these quality cost indices, many organizations capture, segregate, and track quality costs in three areas: failure costs, appraisal costs, and preventive costs. Each category is explained below.

Failure Costs. Failure costs are those associated with correcting nonconforming material, including scrap, rework, repair, warranty actions, and others related to the correction of nonconformances. Many organizations further subdivide this category into internal and external failure costs. One reason for doing so is that internal failure costs are a measure of a company's operating efficiencies, while external failure costs provide measures of both product quality and customer satisfaction. Ideally, failure costs should approach zero. Failure costs typically comprise between 70 and 85 percent of an organization's total quality costs.

Appraisal Costs. Appraisal costs are those related to the detection of defects. This cost category includes the costs of inspection, testing, and other measures used to separate good product from bad. Failure analysis and other activities focused on identifying underlying nonconformance causes should also be included in this category. Our experience (as well as that of others) shows that appraisal costs average around 15 percent of an organization's quality budget.

Preventive Costs. Preventive costs are those associated with activities designed to prevent defects. This is the area one would hope to have dominate an organization's quality budget. Such costs include participation in the design process to eliminate potential failure modes, process improvements designed to prevent production of nonconforming hardware, generation of Quality Function Deployment data (this concept will be addressed in Chapter 11), and others. Unfortunately, most organizations' preventive costs are relatively insignificant when compared to the failure and appraisal costs. The intent of any organization should be to lower failure and appraisal costs as a result of an intelligent investment in prevention-oriented activities. As will be covered elsewhere in this book, the costs of preventing nonconformances are trivial compared to the costs of detecting or correcting them.

We recommend presenting cost of quality data on a monthly basis in four formats. The first is a pie chart to show the organization's monthly failure, appraisal, and preventive cost (an example for PNB Electronics is shown in Figure 4-9). This chart is somewhat redundant to the other charts we'll describe below, but we believe it's useful because it provides a simple and quick portrayal of an organization's quality cost structure.

Figure 4-10 shows quality costs in each of above categories over time. Figure 4-11 shows total monthly quality costs as percentages of other costs over time, which further helps to put quality costs in perspective. These relative displays (as shown in Figure 4-11) typically should include total quality costs as a percentage of total sales, rework and repair costs as a percentage of total labor costs, and scrap costs as a percentage of total material costs.

In addition to showing the relative makeup of quality costs (as seen in Figure 4-9), it is a good idea to show quality cost trends, as shown by Figures 4-10 and 4-11.

We've heard people say that cost of quality industry averages in the manufacturing sector average around 30 percent, but little hard data is available. (Such data is competition sensitive, and many companies do a poor job capturing and recording quality data).

A month-to-month review of the trend charts such as those shown in Figures 4-10 and 4-11 will indicate if the organization's cost of quality is increasing or decreasing. This provides indications to guide the implementation of continuous improvement efforts.

These indicators are quite helpful, as they allow management to visualize the comparative size of the hidden factory mentioned earlier in this chapter, and to determine if the costs of the hidden factory are moving in the right direction.

There's one other cost of quality chart we recommend, and it's a monthly summary Pareto chart showing the dominant costs in each of the quality cost categories. This a good idea, as it allows one to rapidly determine the drivers in each quality cost category, and therefore, where it makes sense to apply actions to reduce these costs. The concept is illustrated in Figure 4-12. Again, the thought is to appropriately focus continuous improvement efforts.

APPRAISAL COST

Appraisal costs are described as the effort expended in inspecting a product process during manufacture, to prevent defects.

Internal failure describes a product or process that will not pass final inspection and is usually scrapped or reworked. Does this mean if the part can be reworked it is not considered as scrapped? Or is it counted as a defect, which it was, at the station it was found to not meet requirements.

How charges are determined, the rate charged and the time and parts accounted for is very important. Is it counted as a loss in sales and subtracted at the sell price to the profit line? These are decisions that management must make when determining their true defect cost and COQ bottom line. Each company establishes their own rules as to how quality costs are determined. My recommendations are, counting any defect in the operation even if it is reworked and saved. If this is not done, management will never know the true capability of their suppliers and their own internal business and manufacturing operations.

One quality-consulting author recommended putting responsibility for internal and external failure cost on the manufacturing department. This ensures responsibility is assigned to manufacturing for the defect. This would assign the quality accounting dollars charged are reassigned to the quality department for defect prevention at the point of discovery, which will be directed to the point of origin in the manufacturing operation for prevention.

The cost of quality is assigned to the department where the defect originated and was recorded as a loss or rework cost. Owning the responsibility of how, and where, the defect occurred is good as far as the assigned cost to the company, as this is where the costs originated and must be assigned. But, likewise the cost of corrective and preventive action to ensure the problem is solved is shared by both manufacturing and quality to solve and then eliminate the problem in the future. Each department will have to spend money to find and implement a fix. This is in the area of correction and prevention. Assigning cost of responsibility is key to determining where the costs originated and where quality dollars are spent for corrective or preventive actions. The company must know and accurately determine where the costs of quality originate to accurately assign the cost of quality to the total cost of the product.

This places the origin of the problem where it belongs so the quality department, with the assistance of the affected, problem originating department personnel, can spend their budget dollars to permanently fix the problem. Either way, it is a cost of quality improvement, no matter where the problem originated and is finally resolved and prevented. Quality must team with manufacturing to assist in preventing problems by being very proactive versus reactive, as that is too costly to the company.

Each department in the company should develop a continuous improvement plan. The cost for this will be charged as either corrective or preventative quality costs. The only difference is how these costs are identified, reported, and assigned. It is a CPQ (cost of product quality) deficit being turned into an asset. Therefore, remove the blame and focus on the cure with the dollars being spent for the most advantageous actions by the department making or implementing the improvements.

Quality Management

Referring to management operations, quality management is an important aspect for the technology executive to understand, as the ultimate output of product development is the manufacture and sale to an end user. This encompasses the avoidance of waste, efficiency of production, and implementation of programs designed to achieve highest total quality. This needs to be an organizational commitment at all levels, rather than just one from the manufacturing part of the organization, toward adherence to processes and products at the highest level of quality. Indeed, quality is reflected within the efficiently produced products with well-designed processes, to that which meet consumer needs. Estimating resources necessary for quality costs includes appraisal costs, prevention costs, internal and external failure costs. Lean manufacturing is a concept derived from the total quality management approach, wherein the elimination of waste, manifest by consistency of operations, decreasing complexity of process flow, and minimization of variation. Finally, six sigma is another term of which to be familiar within this context; it represents the statistical aspects of process capability improvement, emphasizing the prevention of defects – such quality performance is to the point of no more than 3.4 defects per million iterations, and similar to other total quality management approaches, relates to reduction of variability and waste.

Deadly Results in Loss of Quality

In mid-September 2012, an astute clinician in Tennessee reported a case of fungal meningitis in a patient with a normal immune system, a very rare occurrence. The patient had received an injection of steroids in the space around the covering of the spinal cord (“epidural injection”). The steroid was obtained from a compounding pharmacy, which combines and/or mixes different ingredients of drugs by a licensed pharmacist to produce a drug specific for a given patient or clinic’s needs, based on a prescription from a medical practitioner. However, unlike brand name and generic drugs, these compounded drugs are not evaluated by the Food and Drug Administration (FDA) and thus do not receive the scrutiny around manufacturing the former do; states are responsible for the licensing of such pharmacies within their borders. This patient finding prompted an investigation by the Department of Health, who found two other patients who had received similar injections at the same clinic had also contracted meningitis, but (at the time) of unknown cause. The clinic was investigated and revealed no etiologic causes for these cases. By the end of September, eight patients had been identified with meningitis who had received epidural injections of steroid from the clinic. Further investigation noted that the steroids were obtained from a single pharmacy, the New England Compounding Center, in Framingham, MA (NECC). After obtaining distribution records from NECC, the FDA obtained samples from previously unopened vials of the steroid; evaluation revealed that there was fungal contamination from these materials from NECC. The FDA then inspected the facility where the compounding of the steroid was performed. There were a number of quality failures noted; the clean room was found to be contaminated, as was the adjacent transition room; the air conditioners were not running throughout the night, which was standard operating practice to maintain humidity and temperature control; and there was foreign material in some of the vials of the injectable steroid. The conclusion from the Bureau of Health Care Safety and Quality at the Massachusetts Public Health Department was that there were “significant issues with the environment in which medications were being compounded”, with a total failure of quality and systems controls for pharmaceutical grade products. The result has been that over 30 people have died who received the tainted product, and over 400 become ill. It is estimated that over 14,000 patients may have received steroid injections of material from NECC.

Kainer MA et al. Fungal Infections Associated with Contaminated Methylprednisolone in Tennessee. New England Journal of Medicine, November 6, 2012.

9.5 Controlling the costs

The only purpose of reporting costs is to provoke action. Without action the money spent on deriving and reporting data is a waste. Action is required whenever there is a significant difference between an actual cost and the budget, to discover the reason for the difference and to eliminate it. If cost reports are to be effective in provoking this type of action they must be presented at suitably short intervals quickly following the period they represent in simple, direct, intelligible form to the people who have the authority and knowledge to act effectively. It is often effective if the reports are sent both to the person who is expected to take action and also to his immediate superior.

Effective quality cost control depends upon good cost reporting, which should identify the areas of expense, show actual expenditure compared with that planned, facilitate the comparison of benefits with the price that is being paid, and indicate the causes of excessive costs.

The data should be so organized that further investigations into specific excesses can proceed logically and without the need for re-analysis of basic documents.

Cost reports commonly are in one of three main forms, corresponding to the main divisions of quality costs viz. failure cost report, appraisal cost report and prevention cost report.

The failure cost report reports the level of failure costs like scrap, repairs, test rejections, after-sales service and customer returns etc. The essential data includes the cause of failure, the value lost and the department or process responsible. Supporting data for this report may include reporting point, description of product, part etc., and the responsible machine group or operative. Such supporting data is not needed to include in the reports for executive action but in daily reports for information and action at “shop-floor” level.

The appraisal cost report reflects the cost of operating the quality and reliability surveillance, as compared with budgeted expenditure. The division of account headings may sometimes make it difficult to include the appraisal costs incurred by production operatives carrying out additional operations such as the inspection, testing or grading of piece parts, but such costs can sometimes be derived from a comparison of actual and standard times for the tasks, and included in a separate section of the report. Also it is seen that finding the cost for sample development for a new style, and sample developed for a running style becomes difficult to be distinguished as both are done by the same team and same activities are involved. The appraisal is done for both.

Third type is a prevention cost report. Many functions of the typical business can be interpreted as contributing to prevention costs. It is normally suggested to restrict reports to those areas which are being deliberately varied as part of the overall cost reduction project. The scope of such ad hoc reports can be enlarged to include data from which changes in quality tactics can be planned. Such reports might include an analysis of the effects on profits of changes in the system of setting manufacturing tolerances, the probable cost effects of introducing a vendor rating scheme, recommendations on the most economical points for inspection in a sequence of operations and an investigation into the economics of buying new testing facilities.

Here are ten steps that can be taken as guidance to reduce quality costs;

Find out what failure costs are. The cost headings might include as listed below:

A - “Prevention costs”, i.e. costs of attaining reliability :

Quality engineering and testing through pre-production stages; material specifications and design tolerance.

Training quality and production personnel in quality attainment.

Preparing test specifications and quality standards.

Specifying test and inspection equipment.

Advising on specifications of the production facilities needed to maintain quality standards.

Testing and calibrating inspection and production facilities.

Quality administration.

Replacement of hand by machine operations.

Providing mechanical handling facilities.

Providing adequate protective packing.

Providing adequate protective storage.

Providing bins etc. to protect components during process.

B - “Appraisal costs”, i.e. costs of maintaining reliability

Vendor and incoming inspections.

Inspecting and testing products and facilities.

Maintaining, re-testing and calibrating inspection and production facilities.

C - “Failure costs” internal and external

Work scrapped: material and labour costs.

Sorting out bad work.

Reprocessing.

Re-inspection and re-testing.

Technical and clerical effort spent investigating faults and complaints.

Warranty claims, and gratuitous after-sales service.

Loss due to sale as second-grade product.

Delay in payment by customer - interest on outstanding money.

Additional handling charges.

Additional transport charges.

Additional packing charges

Decide, from the size of the preventable failure costs, the scale of extra quality control effort devoted to prevention and appraisal which can be justified.

Nominate a senior member of the organisation to have responsibility for quality control who is familiar with and able to lead and train his staff in all aspects of quality control.

Obtain a list of actions which can be taken, in the particular circumstances of the organisation, to reduce systematically the failure costs.

Evaluate the probable benefit of each action in reducing failure costs.

Evaluate the probable cost of each of actions separately.

Choose the one or two actions which are seen to offer the probability of largest return for the cost to be incurred.

Make the quality controller responsible for seeing that these actions are taken and that the forecast benefits are actually secured. Allot works that are accomplishable and a firm date for completion that is reasonable. Get regular report of progress in cost terms, but don’t interfere with the authority that you have delegated to him.

As benefits are seen to flow from the first few actions, initiate a few more from the original list and insist that extra possibilities are constantly added to the list so that the process never comes to an end.

Find out what the appraisal costs are and, in an exactly similar way, initiate actions designed to reduce specific costs by improving prevention activities.

9.5.2 Controlling wastes

Waste can be defined as the process or product for which the customer is not ready to pay. Waste minimisation is the process of reducing the amount of waste produced by a person, a system or a society. Waste minimisation is also strongly related to efforts to minimise the use of resource and energy. For the same commercial output, if fewer materials are used, then less waste is produced. Waste minimisation usually requires knowledge of the production process, cradle-to-grave analysis (the tracking of materials from their extraction to their return to earth) and detailed knowledge of the composition of the waste. The main sources of waste vary from place to place. Where the processes are fully automated and costly, a slight inefficiency in labour increases the waste to a great extent.

Waste minimisation often requires investment, which is often compensated by the resulting savings. Waste reduction in one part of the production process may create waste production to another part. Figure 9.4 shows the hierarchy of waste management.

9.4. Hierarchy of waste management

The following is a list of waste minimisation processes:

➢

Resource optimisation – Minimising the amount of waste produced goes hand-in-hand with optimising their use of raw materials. For example, a dressmaker may arrange pattern pieces on a length of fabric in a particular way to enable the garment to be cut out from the smallest area of fabric.

➢

Reuse of scrap material – The introduction of techniques or processes that enable production scrap to immediately be re-incorporated at the beginning of the manufacturing line. For example, in cotton spinning mills any soft wastes generated is returned to the mixing, i.e. beginning of the production line.

➢

Improved quality control and process monitoring – Taking steps to ensure that the number of reject batches is kept to a minimum, by increasing the frequency and the number of points of inspection and by providing adequate training to the operators. For example, inline inspection in a garment sewing batch.

➢

Waste exchanges – Wastes can be exchanged where the waste product of one process becomes the raw material for a second process. Waste exchanges represent another way of reducing waste disposal volumes for waste that cannot be eliminated. Example: The comber noils are given to a lower mixing.

➢

Ship to point of use – Making deliveries of incoming raw materials or components direct to the point where they are assembled or used in the manufacturing process can minimise handling and the use of protective wrappings or enclosures.

➢

Product design – Waste minimisation and resource maximisation for manufactured products can most easily be done at the design stage. Reducing the number of components used in a product or making the product easier to take apart can make it easier to produce with less wastes. In some cases, it may be best not to minimise the volume of materials used to make a product, but reduce the toxicity of the waste created or the environmental impact of the product’s use.

➢

Fitting the intended use – A product manufactured for “one off use” should be designed to meet its intended use. This applies especially to non woven diapers, packaging materials, etc., which should only be as durable as necessary to serve their intended purpose.

➢

Durability – Improving product durability, can reduce waste and improves resource optimisation. But in some cases it has a negative environmental impact. If a product is too durable, its replacement with more efficient technology/product is likely to be delayed. View any manufactured product at the end of its useful life as a resource for recycling and reuse rather than waste. Recycling a product is easier if it is made of fewer materials. One has to study between minimising the resources used to make a product and the possibility of reusing or recycling it.

In contrast to waste minimisation, waste management focuses on processing waste after it is created, concentrating on re-use, recycling, composting and waste-to-energy conversion. In industry, waste is generally reduced by using more efficient manufacturing processes and better materials. The application of waste minimisation approaches has led to the development of innovative and commercially successful replacement products. Waste minimisation has proven benefits to industry and the wider environment as it reduces raw material costs, the cost of transport and processing raw materials and the finished product and the waste disposal cost to other parties (including collection, transport, processing and disposal). Proper collection of wastes, not allowing them to get mixed with other wastes, disposing it off at the earliest are very important if we need to get better realization from the wastes generated.

3.2 Objective function

In the inspection allocation problems, the most common treatment that the models are developed with objective of minimising the total cost per unit produced. The total cost includes some or all of the following costs: internal failure cost and external failure cost, inspection cost, and manufacturing cost. Table 1 shows these costs regarding to each paper. However, not all the papers try to minimise the total cost, a few papers for example (Rebello et al., 1995) and (Valenzuela, Smith, & Evans, 2004) have decided to maximise the production capacity. This usually occurs when an inspection scheduling problem and the allocation problem is concurrently considered (Mandroli, Shrivastava, & Ding, 2006).

Constraints that were used by the researchers in the optimisation of an inspection are mostly related to the characteristics of the manufacturing system such as the structure of the system, the type of defect and the type of inspection. As shown in Table 1 not all the surveyed papers have addressed the constraints. Limited number of inspection station has considered by most of the researchers and some other authors have addressed AOQL and rate of inspection.