5.3 Quality Costs
Models for arriving at costs incurred in preventing poor quality have been developed under four main categories:
- prevention, appraisal, failure (PAF) model
- process cost model
- cost-benefit model
- Taguchi loss function
- The PAF mode l classifies costs into three categories:
- prevention : this includes functions such as training, design, maintenance of the system, and Quality Assurance;
- appraisal : this includes inspections, testing, audits, etc. - functions aimed at collecting information about the quality of output;
- failure : re-work, spoilage, complaints, warranty, etc. - the result of quality failure.
This model indicates that the larger the quality system the greater the cost.
- The process cost model states:
Cost of Quality (COQ) = price of conformance (POC) + price of non-conformance (PONC)
BS 6143, part 1 (1992) used this model but changed the word "cost" to "price". The standard says:
cost of conformance = "the intrinsic cost of providing goods and services to declared standards by a given specified process in a fully effective manner."
cost of non-conformance = "the cost of wasted time, materials and capacity (resources) associated with a process in the receipt, production, despatch and correction of unsatisfactory goods and services."
The process cost model identifies various inputs into the final production, such as people, equipment, materials and the environment and aims at improvement based on the Plan-Do-Check-Act cycle.
- The cost-benefit model has seen many interpretations.
- Bajpai (1989) developed a simulation model that incorporated various factors of costs and benefits of the activities that contributed to prevention of poor quality in manufacturing. This model included simulation over time.
- Baston (1988) devised a flow of quality costs that combined customer complaints and pressure from management with a cost and accounting element.
- Merino (1988) considers the different types of problems that occur in a pursuit of quality, and their possible solutions as suggested by his model.
Most cost-benefit models stress costs more than benefits because the former are easier to measure than the latter. Benefits are arrived at by using Return on Investment (ROI) to compare investment in prevention activities and the reduced cost of failures. Long term (direct and indirect) benefits may not be identified by this technique. The model does, however, allow decisions to be taken and does contribute to long term planning. Difficulty in achieving and identifying long term benefits is expected because quality improvement progresses slowly.
- Taguchi's loss function model is based on his engineering background. He describes the loss as a function of the variance from the target value; production at target value having zero loss function. As variance from target value occurs, the loss increases. Taguchi uses the equation:
L = k s ²
where L = loss,
k = coefficient of the loss function, which Taguchi calculates as
![Text Box: cost to society when tolerance is exceeded [A0] customer tolerance [?0]](images/m5three_clip_image001.gif)
s = variance from target value.
Taguchi (1986, p.4) suggests that tolerance levels (?) set by the "manufacturer" be calculated by using the formula:
? = Ö (A/A 0 ) x ? 0
where, A = cost to the manufacturer when the product is rejected,
A 0 = cost to society when the tolerance is exceeded,
? 0 = customer tolerance.
There is a parallel between this equation and figure 5.1. The customer tolerance range, on both the costs and the benefits axes, is important to organisations for the planning, execution and monitoring of operations, particularly in the transport sector where costs and quality of service are both important factors that customers consider.
Activity 5.3
How would you work out the cost of quality in your organisation?
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