Cost Reduction using QMS-1
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This document discusses categories of quality costs including conformance costs (prevention and appraisal) and non-conformance costs (internal and external failure). Prevention costs aim to avoid defects through activities like quality planning, supplier evaluation, and calibration. Appraisal costs detect defects through inspection and testing. Internal failure costs occur when defects are found before delivery, while external failure costs happen when customers find defects. The document advocates reducing non-conformance costs through prevention rather than increasing prevention costs. Total quality costs can be 25-35% of sales, but many costs are hidden. Implementing total quality management can significantly reduce costs over time.
![FICCI CE
Slide- 27
Cost of Poor Quality in Rupees.
Cost Of Poor Quality= [{Cost of Internal Rejection + Cost of External Rejections + QAAppraisal
Cost(wages of QA persons) + Expenses incurred on account of Travel to attend quality complaint + Cost of
prevention (cost incurred on calibration of instruments/equipments + cost of new instruments+ cost of repair
of instruments) + Opportunity cost.(cost of opportunity lost for making good forgings due to rejections
produced) + Rework/salvage cost + Transportation cost incurred for incoming rejection and replacement}÷
Total sales ] X 100
Month 1st
Month 2nd
Month 3rd
Month 4th
Month
Target for Internal Rejection <1.50% <1.50% <1.50% <1.50%
Actual Internal rejection 1.21% 1.22% 1.24% 1.20
Costs not included to
compute COPQ
Calibration Cost+ Opportunity
cost+ cost of RW at
hammer+Salvage cost by
machining or Grinding.
Opportunity cost+ Salvage
cost by Machining /
grinding+ Cost of RW at
hammer.
Opportunity cost+
Salvage cost by
machining or grinding.
Opportunity cost
Cost of Internal Rejection 4.84 Lacs 6.3 Lacs 7.75 Lacs 9.0 Lacs
Cost of Poor Quality
12.80 Lacs
(Air Freight-0.69 Lacs)
11 Lacs
(Air Freight-0.12 Lacs)
10.8 Lacs.
(Air Freight-0.12 Lacs)
10.5 Lacs
(Air Freight-0.10 Lacs)
Difference(∂) between
COPQ and cost of Internal
rejection
7.96 Lacs 5.3 Lacs 3.05 Lacs 1.5 Lacs](https://image.slidesharecdn.com/6f59c590-92c1-4ef3-bf68-072a42ada736-150820175725-lva1-app6891/85/Cost-Reduction-using-QMS-1-27-320.jpg)
Cost Reduction using QMS-1
- 1. Cost Reduction by QMS
- 2. Categories of Quality Costs Conformance Non-Conformance Quality Costs AppraisalPrevention External failureInternal failure
- 3. FICCI CE Cost of quality Cost of quality = Cost of conformance + Cost of non-conformance • Cost of conformance is the cost of providing products or services as per the required standards. This can be termed as good amount spent. (Prevention & Appraisal costs) • Cost of non-conformance is the failure cost associated with a process not being operated to the requirements. This can be termed as unnecessary amount spent.( Internal & External failure costs)
- 4. Prevention Costs Prevention costs are associated with Tool design & Simulation, Equipment Maintenance, Strategies for Die Care & HT process validation and planning prior to actual operation in order to avoid the occurrence of defects. The emphasis is on the prevention of defects so as to reduce the probability of occurrence of defective products. Prevention activities lead to reduction of appraisal costs and both type of failures (Internal and external).The motto is “Prevention rather than appraisal”.
- 5. Activities associated with Prevention costs 7.1 Quality Planning – Determine Manufacturing process and inputs required, Decide check points – Quality Plan / Process Plan 7.2 Market research – Determine customer requirement 7.2 Contract review 7.3 Design review 7.4 Supplier evaluation, selection, performance monitoring 7.4 Purchasing specification - Clear communication 7.5 Production Planning, Job Set up process, Correct Input 7.6 Calibration 8.2.4 Field trials Process capability review Design and manufacture of jigs and fixtures Preventive maintenance Quality training programs
- 6. FICCI CE Should we try to reduce Prevention Costs to Bring down Cost of Quality ? No Why Better take Preventive Actions to reduce the Cost of Non- Conformance
- 7. FICCI CE Should we try to Increase Prevention Costs To Improve Quality & Reduce Non-Conformance Yes/No Right approach would be to optimize Prevention Costs By Focusing on: a) Quality Planning (7.1) –Horizontal deployment of actions while preparing QUALITY PLAN / PROCESS PLAN of similar successful products . d) Jigs & Fixture(7.1)- 1)Commonising non critical components of Jigs & Fixtures, 2)video shoot set up and eliminate waste operations. b) Supplier Evaluation, Performance(7.4)- Upgrading, Educating & Standardizing Supplier Base. c) Calibration (7.6)- Usage based frequency, Replacement Strategy.
- 8. Appraisal costs Appraisal costs are spent to detect defects to assure conformance to quality standards. Appraisal cost activities sums up to the “cost of checking if things are correct”. The appraisal costs are focused on the discovery of defects rather than prevention of defects.
- 9. FICCI CE How to Reduce Appraisal Costs? 7.4.2- Vendor Surveillance- - Standardize Product/ Grade specific Machining/Raw material vendors based on their Quality & Delivery Performance. - Motivate standardized product/ Grade specific vendors by giving regular & sustained long term business. 7.4.3- Incoming Material Inspection- - Introduce self certification policy for suppliers by intensive education training & support to improve their processes. Take Experts Help. - Price incentive & business guarantee for self certified suppliers. -Motivate & reward self certified suppliers at regular intervals. 8.2.2 & 8.2.4- Process Design & Product Inspection- -Design idiot proof process & controls. Validate all special processes e.g HT. -Cover all critical processes by mistake proofing-Pokayoke --Reduce 100% part inspection by validating & stabilizing Mfg. Processes
- 10. Activities associated with Appraisal costs 8.2.4 Proto type measurement & testing 7.4.2 Vendor surveillance 7.4.3 Incoming material inspection 8.2.2 Process Design /control 8.2.4 Product Inspection 7.6 Laboratory testing / measurement 8.2.2 Quality audits.
- 11. Internal failure costs Internal failure costs occurs when results of work fail to reach designated quality standards , and are detected before transfer to the customer takes place. ZERO
- 12. Activities associated with Internal failure costs Design changes/ corrective action Scrap due to tool / process design changes Excess inventory Rectification / disposition of purchased raw material Rework/rejection in manufacturing Downgrading of end product Downtime of plant & machinery Trouble-shooting & investigation of defects
- 13. FICCI CE Is it possible to have zero internal failure cost?? NO Strive to consistently reduce till it is minimized to best industry practices Design Changes/ Corrective Actions (7.3.3.2 & 7.3.5 & 7.3.6) 1) Conduct design simulations to validate die design, Validate HT process for all new parts at development stage. TO AVOID a) Scrap cost due to design changes , b) Rework cost, c) set up cost d) Inspection & re-inspection cost, e) HT rework & Retesting cost, f) Opportunity Cost etc. etc. But How? 2) Improve designs & HT processes upfront from lessons learnt & wrongs done in designing, manufacturing & heat treatment of similar products & similar material grade in past.
- 14. External failure costs External failure costs occur when the product or service from a process fails to reach designated quality standards , and is not detected/ recogonised until informed by the customer.
- 15. Activities associated with External failure costs Processing / investigation of customer complaint Repair/replacement of sold goods Warranty claims Premium Freights due to delays associated with quality problems Loss of customer goodwill & sales.
- 16. FICCI CE Is it possible to have zero external failure cost?? NO Strive to consistently reduce till it is minimized & close to best industry norms. Processing/ Investigation of customer complaints (8.5.2 & 8.5.3) 1. Conduct thorough , sincere & honest root cause analysis fearlessly using simple QC tools e.g. 3-legged , why-why analysis, But How? 2. Arrive at achievable corrective & preventive actions 3. Ensure implementation of CAPA. 4. Measure effectiveness of CAPA by conducting Surprise Audits. 5. Standardize CAPA by modifying work instructions supported by pictorials 6. Train & motivate operating level persons to rigorously follow CAPA and by appraising them the tangible results & benefits of CAPA.
- 17. FICCI CE This Will have Direct Impact on a. Repair/ Replacement of sold goods. b. Warranty Claims. ↓ ↓ c. Premium Freights. ↓ d. Customer good will & sales. ↑
- 18. Size of four categories of quality costs. The organizations which do not follow TQM, give less emphasis on prevention and their main quality efforts are on appraisal with very little control on internal and external failure costs. Various studies have shown that quality cost in manufacturing companies the world over range from 20 % to 30 % of turnover and in the case of service companies it can go up to 40 % as illustrated in graph on the next slide.
- 19. Size of various quality cost elements Preventive 1% Appraisal 4-6% Internal Failure 10-12% External Failure 10-15% The total quality costs 25-35 % of turnover. Qualitycostsin%ofsales
- 20. Impact of TQM on costs. TQM is primarily aimed to improve the quality of the product , higher customer satisfaction and better working environment for the employees. The most dramatic impact of TQM is on reduction of quality costs which directly reflect in profitability in balance sheets . Results of TQM program followed in Xerox Corp is demonstrated. Change in various elements of quality cost before and after launching TQM by Xerox Corp is shown on the next slide.
- 21. Impact of TQM on costs. prevention Appraisal Internal Failure Prevention Appraisal Internal Failure 0 5 10 15 20 25 30 35 %ofsales An example from Xerox Corp. Before TQM After TQM
- 23. FICCI CE cost of quality Traditionally recorded quality cost generally account for only 4 to 5 percent of sales which mainly comprise of cost of scrap, re-work and warranty. BUT IS IT ACTUALLY SO???
- 24. FICCI CE Hidden costs of quality There are additional costs of quality which are hidden and do not appear in the account books of the company, as they are intangible and difficult to measure. These additional costs could be as high as 20-25% of sales and comprise of low conversion efficiency of materials, cost of resolving customer problems, inadequate resource utilization, high inventory, long cycle times, more set-up times, penalties due to late delivery and lost customer loyalty and goodwill.
- 25. •Scrap •Rework •Warranty costs Hidden Costs Visible costs • Excessive use of material • High inventory • Inadequate resource utilization • Cost of redesign and re-inspection • Cost of resolving customer problems • Lost customers / Goodwill Visible and hidden costs • Conversion efficiency of materials
- 26. FICCI CE 10 Steps to reduce hidden costs. Identify Hidden Costs Measure Hidden Costs Appraise Impact of Hidden costs to CFT Explore solutions to reduce Hidden costs Get sanctions for investments if any Implement &Evaluate effectiveness of solutions Share the Impact with CFT Appraise tangible benefits to Top Management Identify new opportunities. Repeat the cycle
- 27. FICCI CE Slide- 27 Cost of Poor Quality in Rupees. Cost Of Poor Quality= [{Cost of Internal Rejection + Cost of External Rejections + QAAppraisal Cost(wages of QA persons) + Expenses incurred on account of Travel to attend quality complaint + Cost of prevention (cost incurred on calibration of instruments/equipments + cost of new instruments+ cost of repair of instruments) + Opportunity cost.(cost of opportunity lost for making good forgings due to rejections produced) + Rework/salvage cost + Transportation cost incurred for incoming rejection and replacement}÷ Total sales ] X 100 Month 1st Month 2nd Month 3rd Month 4th Month Target for Internal Rejection <1.50% <1.50% <1.50% <1.50% Actual Internal rejection 1.21% 1.22% 1.24% 1.20 Costs not included to compute COPQ Calibration Cost+ Opportunity cost+ cost of RW at hammer+Salvage cost by machining or Grinding. Opportunity cost+ Salvage cost by Machining / grinding+ Cost of RW at hammer. Opportunity cost+ Salvage cost by machining or grinding. Opportunity cost Cost of Internal Rejection 4.84 Lacs 6.3 Lacs 7.75 Lacs 9.0 Lacs Cost of Poor Quality 12.80 Lacs (Air Freight-0.69 Lacs) 11 Lacs (Air Freight-0.12 Lacs) 10.8 Lacs. (Air Freight-0.12 Lacs) 10.5 Lacs (Air Freight-0.10 Lacs) Difference(∂) between COPQ and cost of Internal rejection 7.96 Lacs 5.3 Lacs 3.05 Lacs 1.5 Lacs
- 28. FICCI CE Slide- 28 Cost of Poor Quality(COPQ) Calculation Sheet –of Forging Industry Red Box- Focus Area to reduce COPQ Sr. No. Cost Heads 1st Month 2nd Month 3rd Month 4th Month 5th Month 6th Month 1 Cost of Appraisal a QA & QC salary 281534 285000 286500 283450 b Cost of Calibration of measuring Equipments( Dimensions+ Metallurgy) 247950 140230 98405 56490 0 0 A=a+b TOTAL SALE VALUE 529484 425230 384905.00 339940.00 #REF! #REF! % =(A/G)100 % of A W.R.T. SALE VALUE 0.75% 0.60% 0.52% 0.43% #REF! #REF! 2 Internal Cost c Sale Value of internal Scrap 484245 630243 775200 906500 b Recovery from scrap d Cost of In-house Re-work Forge 0 41900 34900 e Opportunity cost (cost of opportunity lost by producing rejected parts i.e cost of lost shifts to recover scrap parts f Cost incurred for salvaging by Machining / grinding 0 0 0 24510 0 0 B=c+d+e+f TOTAL SALE VALUE 484245 630243 817100 965910 0 0 % of B W.R.T. SALE VALUE 0.68% 0.88% 1.11% 1.21% #DIV/0! #DIV/0! 3 External cost f Sale price of rejections received in plant & Scrapped 154050 149900 150690 132740 0 0 g Sale price of parts scrapped at cust end 0 0 0 0 0 0 h Cost incurred to travel to attend customer complaint 5060 3600 2900 2500 0 0 i Cost Incurred for rework at customer end 35090 21860 22750 12450 0 0 j Debit Note Values( export + domestic) 285096 104906 37068 21654 0 0 C=f+g+h+i TOTAL SALE VALUE 479296 280266 213408 169344 0 0 % of C W.R.T. SALE VALUE 0.68% 0.39% 0.29% 0.21% #DIV/0! #DIV/0! D= A+B+C SUB TOTAL 1493025 1335739 1415413 1475194 #REF! #REF! E Recovery from scrap 212450 235650 334950 425090 F= D--E Final Cost for calculating COPQ 1280575 1100089 1080463 1050104 G SALE VALUE 70978000 71250000 73690000 79980000 5=F÷Gx100 COST OF POOR QUALITY(COPQ) 1.80% 1.87% 1.92% 1.84% #REF! #REF!
- 29. FICCI CE Conclusion. Cost Reduction with Systemic approach is simple Use Quality Management Systems to your advantage OK is no longer OK Race against time and strive to be the best Be your own critic Do not keep systems bound in manuals for audits Success Guaranteed Thanks