8 Strategic decision making - Cost of quality, throughput accounting Flashcards
What is waste
- Waste is a non value add step
- Focusing on quality will help remove waste
- Reducing waste increases efficiency, reduces cost and provides customer value
What is quality of design and quality of conformance
- How well it matches with what the customer is expecting
- Need to understand customer value with respect to product/service attributes, delivery schedules, reliability, operating functions and customer service
What is the quality of design
Quality of design: the degree to which the product’s design specifications meet customers’ expectations
What is the quality of conformance
Quality of conformance: the degree to which the product meets its design specifications
What is total quality management
- A system where there are zero defects and zero tolerance for defects
- Ultimately this will eliminate internal and external failure costs
What is a cost of quality report
A method through which organizations can determine the costs they incur in the prevention of poor quality. These are classified as,
* Prevention costs
* Appraisal costs
* Internal failure costs
* External failure costs
What does a cost of quality report enable
The cost of quality reports enables an organization to have a strategic overview of how much it can save through improving in its quality assurance processes
What are appraisal costs
These costs relate to measuring and monitoring quality related activities.
* They are incurred to determine whether products or services are conforming to specifications
* These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications.
* They involve, inspection and testing of raw materials, packaging inspection, supervising appraisal activities, product and process acceptance, supplier verification, and field testing, quality audits
What are prevention costs
- Incurred to prevent defects in products or services being produced
- Quality engineering, quality training programs, quality planning and reporting, supplier evaluations, quality audits, quality
What are internal failure costs
- Incurred because nonconforming products and services are detected prior to being shipped to outside parties (detected by appraisal activities)
- Scrap, rework, downtime due to defects, re-inspection, retesting, and design changes
What are external failure costs
- Incurred because products/services fail to conform to requirements after being delivered to customers
- Returns, Warranties, Repairs, Product liability, Compliant adjustments, and LOST SALES!
What are the four parts of a cost of quality report
- Prevention costs
- Appraisal costs
- Internal failure costs
- External failure costs
What is the problem with internal and external failure
- The cause of high failure costs is a lack of investment in the prevention of defects
- External failure costs are far more costly than internal scrap or rework
- A poor experience by a customer can lead to the loss of customers and a widespread perception of poor-quality outputs when disappointed customers mention this to others.
- Hence an underestimated external failure cost results from not including the impact from losing future sales
- A major strategic priority should be to prevent nonconforming goods from being shipped to customers
What is the importance of appraisal and prevention
- High appraisal costs should lead to a higher percentage of defects being identified earlier in the manufacturing process, reducing failure costs
- Higher appraisal costs also reduce the percentage of failures that reach the customer, thus making even greater savings in failure costs
- High prevention costs lead to an expectation that fewer defects will arise, hence failure costs will decrease – Do it right the first time!
- Usually the decrease in failure costs is greater than the increase in prevention costs
- There is usually a lag between investing in prevention and reducing external failure costs (which are related to past period production) so total quality costs may rise initially
How can you apply ratio analysis to a cost of quality report
- Need to look at the buckets as a ratio of total costs
- If external costs are much higher it is because of a deficit in prevention and appraisal and more needs budgeting to them
