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Quality optimization and cost of quality in manufacturing firm of Nagpur region.

Plan of analysis

Chapter Contents

1 Executive Summary
2 Introduction
3 Research Methodology
4 Analysis and Findings of study
5 conclusion and recommendation of study
6 Key Findings and Conclusions
References, Bibliography

Improving quality of product and services is considered by entities to be the best way to improve
customer satisfaction, to reduce manufacturing costs and to increase productivity. Any serious
attempt to enhance quality must take into account the costs related with achieving quality. Not
only quality does not suffice to just meet customer requirements but also it must be done at the
lowest possible cost as well. Reducing cost and expenses can only happen by identifying and
measuring the cost associated with improving quality (Schiffauerova and Thomson, 2006).There
isn’t any general agreement on a single broad definition of costs of quality. Quality Cost is
usually understood as the sum of conformance, the cost paid for prevention of poor quality (for
example, quality appraisal and inspection), plus non-conformance costs, the cost of poor quality
caused by service and product failure (for example, returns and rework) (Vaxevanidis and
Petropoulos, 2008).

The broad concept of the ‘’economics of quality’’ can be traced back to the early 1950s when the
quality cost was first propounded in Juran’s Quality Control Handbook and in Feigenbaum’s
Total Quality Control. Since then, many quality control experts have written about cost of quality
systems and the importance of quality related costs has been more and more recognized. Costs
related to the Quality represent a considerable amount of a company’s total costs and sales
(Vaxevanidis and Petropoulos, 2008).

No matter which quality costing approach is used, the main idea behind the cost of cost analysis
is the linking of improvement activities with associated costs and customer expectations, thus
allowing targeted action for reducing costs of quality and enhancing quality improvement
benefits. Therefore, a realistic estimate of quality cost, which is the appropriate tradeoff among
the levels of conformance and non-conformance costs, should be considered a very important
element of any quality initiative and a critical matter for any top manager. These days, many
organizations are seeking both theoretical advice and practical evidence about quality related
costs and the implementation of cost of quality systems (Schiffauerova and Thomson, 2006).
Almost all quality managers’ consultants have cost of quality plans as an integral part of their
repertoire (Campanella, 2003). When quality troubles are presented in the form of financial
language, managers understand these problems and they can assist managers evaluate the
importance of quality problems and also recognize opportunities for cost reduction (Rodchua,

2006). Monitoring and controlling costs of quality are becoming critical activities of quality
improvement programs.

In this paper, a new ant colony algorithm has been developed for the optimization of a tradeoff
between the Costs of Quality and the quality of the product. The algorithm will look to find the
optimal combination of product quality versus cost for the various businesses that now recognize
the importance of a quality cost control. This technique is helpful for both product designers and
manufacturing managers who want to create value for the organizations.

Quality costs provide the economic common denominator through which plant and company
management and quality control practitioners can communicate clearly and effectively in
business terms.

Quality costs for service and manufacturing firms have been skyrocketing over the past
several decades. For American businesses struggling to remain competitive in a global
economy, the staggering quality costs can spell disaster. Fortunately, corporations do not
have to resign themselves to this bleak outlook. By implementing an effective cost of
quality (COQ) program, they can lower their quality costs while improving the quality of
their products. According to Harrington, a company can (usually) save more money by
cutting poor-quality costs in half than it can make by doubling sales. Other experts agree.
Phil Crosby of Crosby and Associates states that "Quality is free; it's non-conformance
that costs!"
The cost of quality concept is not just a theoretical idea being bantered about in consulting
and academic circles. World class companies like Xerox, Westinghouse, and Motorola have
implemented COQ pro- grams with considerable success and have reduced their quality costs
from 30% of sales to as little as 2% to 3% over a period of time. However, Grant Thornton
International’s recent survey of mid-size manufacturing firms reveals that only 33% of the
respondents calculated quality costs. Similarly, a survey con- ducted by the American
Electronics Association set this number at 40%. Even more astounding are the findings of a
Government Accounting Office study which shows that even Baldrige finalists aren't doing
the calculations. According to the GAO study, only five of the 22 companies in the final round
of the 1991 Malcolm Baldrige National Quality Award competition calculated their quality

As companies search for ways to trim the fat and become leaner operations, COQ seems to
be a natural target. So why aren’t more companies controlling these costs by implementing
COQ programs? Why aren't they taking advantage of a concept that appears to offer the best
of both worlds-higher quality at a lower cost? In this article, we will attempt to provide
answers to these perplexing questions.


Quality is a confusing term understood differently by different people. It is sometimes defined as

activities designed to improve the organization and its services and also is known as achieving a
pre-defined standard. It is also believed that quality is the characteristics of a service or product
that bear on its ability to affect customers’ buying decisions and satisfaction which is a
determining factor influencing activities of entities (Rahnamayroodposhti, 2008). If a product
fulfills the expectations of customers, the customer will be pleased and consider that the services
and products are of acceptable or even high quality. If his or her expectations are not fulfilled,
the customer will consider that the services and products are of low quality. This means that the
quality of a product or service may be defined as its ability to fulfill the customer’s needs and
expectations. Quality needs to be defined first in terms of characteristics or parameters, which
vary from product to product. For example, for an electronic or mechanical product these are
performance, reliability, safety and appearance. For pharmaceutical products, parameters such as
chemical and physical characteristics, toxicity, medicinal effect, taste and shelf life may be
important. For a food product they will include nutritional properties, taste, texture, and shelf life
and so on (UNIDO, 2006). Customers seek for maximum quality and if they able to pay its price
then it would tell that quality is free. Because of the trade-off between cost and quality, to
maximize the profit this theory is not always true (Hilton et al., 2008).

It is believed that quality is a factor affecting decision making and paying attention to it can
make the decision economic. In other words, avoiding quality, as a worthwhile investment, is not
economic. Quality is not an abstract, instrumental, luxurious and unnecessary characteristic of
the business, but it is a culture, life style, paradigm and new approach to the managerial thinking.
Giving serious attention to quality is found to be the main success factor of those organizations
which are undisputed economic powers in today’s world and have a high share of the global
market (Rahnamayroodposhti, 2008). Quality management points to the strategic policies,

methods and procedures assuring production of high quality products and services covering
customers’ demands. It should be noted that quality measurement indicators include the
employer’s level of satisfaction, quality of the finished product and the extent to which the
customer’s needs and demands are satisfied.

A product specification is the minimum requirement according to which a service or producer

provider makes and delivers the service and product to the customer. In setting specification
limits, the following should be considered in order to gain marketing advantages: The user’s
and/or customer’s needs, requirements relating to product safety and health hazards provided for
in the statutory and regulatory requirements, international and/or national standards, and the
competitor’s product specifications. In designing the product, the capacity of machines and
processes should be kept in mind. It is also necessary to maintain a trade-off between value
realization and cost. The drawings and specifications produced by the designer should show the
quality standard demanded by the customer or marketplace in clear and precise terms. All
dimensions should have realistic tolerances and other performance requirements should have
precise limits of acceptability so that the production team can manufacture the product strictly
according to drawings and specification. To achieve good quality, those responsible for design,
production and quality should be consulted from the sales negotiation phase onwards. The
overall design of any product is made up of numerous individual characteristics. For example
these may be dimensions, such as diameter, length, thickness or area; physical properties, such as
volume, weight or strength; electrical properties, such as resistance, current or voltage;
appearance, such as finish, texture or color; functional qualities, such as output or kilometer per
liter; effects on service, such as feel, taste or noise level. Manufacturing drawings and
specifications are set by the designers and these should indicate to the production team precisely
what raw materials should be used and what quality is required. After the design, including the
manufacturing drawings, has been reviewed and finalized, it is time to plan for manufacture.
This will include deciding on the method of manufacture, providing the necessary plant,
machines, tooling and other equipment, obtaining satisfactory raw materials, obtaining and
training suitable operators, planning inspection and shop floor quality control.

Costs of Quality

Cost is traditionally known as price of making goods or doing the services by which cost
accounting considers various approaches and in a new paradigm, management accounting
deploys knowledge of cost management. There is a direct relationship between cost and
organization efficiency. From this perspective, efficiency means the ability to convert input to
the output with the lowest cost (Hilton et al, 2008). Cost management is an approach used to
realize decisions made for planning, controlling and developing competitive strategies and it is
noteworthy to say that making balance between this factor and other dimensions of competition
such as quality and time is required to apply management on it aim to help maximize profits and
value creation of the organization in current activities and future ones (Rahnamayroodposhti,
2008). Cost management is found to be a major tool to achieve strategic goals. Service or
product costs include direct and indirect (overhead) costs. Cost is the result of resource
consumption and actually is regarded as those resources sacrificed to gain value. To save
resources and costs in the course of this process, it is necessary to remove those activities
without value added and to strengthen and combine parallel activities seeking to create value. It
should also be noted that those activities required to improve and complete the quality of
services must be added to the organization’s activities.

After revenue, cost is one of the main characteristics of any business. All organizations are
seeking to reduce their cost to finally be able to optimize wealth of shareholders and to create
value. The cost of a given product or service is usually computed by enumerating its features.
You can’t reduce the cost without sacrificing features or deadlines. You can’t increase features
without incurring extra costs. Everyone likes to control the cost factor because it is the easiest to
see the effect on bottom-line profitability.

The American Society for Quality’s (ASQ) Quality Cost Committee, established in 1961,
worked to formalize the quality and to promote its use (Bottorff, 1997). ASQ recognizes four
categories of quality costs: (1) prevention cost (PC); (2) appraisal cost (AC); (3) internal failure
cost (IFC); and (4) external failure cost (EFC) (Bemowski, 1992). These categories have been
well accepted within the quality and accounting professions, and have been acknowledged
internationally. However, in many companies quality cost is not calculated explicitly but are
simply absorbed into other overheads (Shepherd, 2001). Cost of Prevention are the costs related
to all activities to prevent defects from occurring and to keep appraisal and failure to a minimum.

These costs include new product review, quality planning, supplier surveys, quality improvement
teams, education and training, process reviews and other like costs. Appraisal costs are the costs
incurred while performing measuring, evaluating, or auditing to assure the quality conformance.
These costs include first time inspection, checking, process or service audits, testing, calibration
of measuring and test equipment, receipt inspection, supplier surveillance and etc. Costs of
internal failure are the costs that would disappear if no defects existed prior to shipment to the
customer. These costs include rework, scrap, re-testing, re-inspection, redesign, material review,
corrective action, material downgrades, vendor defects, and other like defects. Costs of external
failure are the costs that would disappear if no defects existed in the product after shipment to the
customer. These costs include processing customer complaints, warranty claims and repair costs,
customer returns, product liability and product recalls. (Gary Zimak, 2000).


The cost of quality for an organization can be de- fined as any costs incurred due to
either bad quality or efforts to ensure good quality. More specifically, COQ is the
sum of four generally agreed upon categories: prevention (P), appraisal (A), internal
failure (IF), and external failure (EF). The first two categories represent discretionary
or control costs and the last two categories reflect consequential or failure costs.

Prevention costs, as the name implies, are the costs a company expends through up-
front efforts to prevent quality problems from occurring in the first place. In other
words, these are proactive costs associated with building quality into a product.
Examples of prevention costs include: quality planning, quality control systems,
quality reporting, new product development review, supplier quality assurances, and
training and improvement programs.

Appraisal costs, on the other hand, are the costs which a company expends to
ensure that its products or services meet quality standards. In other words, these
are the costs associated with inspecting problems with the product. Examples of
appraisal costs include: raw-materials inspections, calibration, testing, work- in-
process assessments, and final-goods inspections.

Finally, failure costs are the costs a company incurs when it fails to produce a
quality product. Internal failure costs are associated with defective products which
are discovered at some point before they leave the plant. Examples of internal
failure costs include: scrap, rework, bottlenecking, and downtime. External failure
costs are costs associated with unacceptable products which are not discovered
until after their shipment to the customer. Examples of this type of failure include:
complaint handling, warranty re- placement and repairs, customer loss, product
recalls, and lawsuits.
In mathematical terms, COQ = f (P, A, IF, EF). The objective is to minimize COQ
subject to constraints imposed by the company's policies, customers '
requirements, and process capabilities. The goal of a COQ program is to devise a
strategy in order to facilitate a continuous improvement effort. Campanella
proposes a strategy which consists of four steps: (1) take direct attack on failure costs
(IF and EF) in an attempt to drive them to zero; (2) invest in the right preventive
activities to bring about improvement; (3) reduce appraisal costs according to results
achieved; and (4) continuously evaluate and redirect prevention efforts to gain further

Allocation of COQ Dollars

The allocation of dollars across the four COQ categories is just as important as the
volume of dollars spent. Furthermore, allocation and volume are fundamentally
intertwined. The old adage "an ounce of prevention is worth a pound of cure" illustrates
the cost differential between a proactive approach and a reactive stance. The basic
wisdom in this age-old ad- vice rings true for COQ spending: experts agree that the
most cost-effective category for quality spending is prevention. Bohan and Horney
emphasize that most organizations could save $10 currently lost to internal failures and
up to $100 lost to external failures for every additional $1 invested in prevention.

Moreover, if a quality problem cannot be prevented, the next best thing is early detection.
The earlier the problem is detected, the less the effort required to re- solve it. A poignant
example showing how prevention or early detection versus late detection translates into

actual cost dollars was described by Richard W. Anderson, general manager of Hewlett-
Packard. His case in point involved a simple two-cent resistor:

If you catch the resistor before it is used and throw it away, you lose 2 cents. If you don't find
it until it has been soldered into a computer component, it may cost $10 to repair the part. If
you don't catch the component until it is in a computer user's hands, the repair will cost
hundreds of dollars. Indeed, if a $5,000 computer has to be repaired in the field, the expenses
may exceed the manufacturing costs. (20, p. 227)

Ideally, since quality cost dollars have the greatest impact in the prevention category, the
largest percentage of quality cost dollars should be expended in this category. Appraisal
costs, with emphasis on early detection activities, should be the next highest percentage.
The remaining category, failure costs, should constitute only a minor portion of the COQ
dollar volume.

Although spending levels vary across industries, Juran [13) asserts that the highest
percentage of the quality dollar (between 50% and 90%) is usually spent on the category with
the lowest payback-internal and external failures. Appraisal costs consume the second largest
portion of COQ dollars (between 10% and 50%). Finally, the prevention category, which
packs the biggest bang for the buck, typically receives a minuscule share of the quality
dollar (between 0.5% and 5%).

One reason for this seemingly illogical allocation of monies across the four COQ categories
is the cost differential involved in the resolution of quality problems for goods in various
stages of completion. Since defects in finished products are far more costly to rectify than
mistakes in earlier processing, even companies with low failure rates may be forced to spend
a disproportionate number of their dollars to resolve those failures. For example, one lawsuit
could increase failure costs by thousands of dollars.

Another explanation lies in the convenience of the methodology and the tangibility of the
results. Inspection is a relatively simple methodology to implement. Once in place, it can
enable a company to see concrete results by counting the number of defective products
detected. This, in turn, leads to a vicious cycle. As the number on inspections increases and
the number of external failures decreases, the number of internal failures (and money spent
for this category) also increases. Encouraged by the drop in external failures, the company
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allocates even more money for inspections. Therefore, both the internal failure category and
the appraisal category allotments continue to grow.

Prevention programs, by contrast, are more difficult to implement because they require vision,
innovation, and a break from the status quo. (Unfortunately, it is more likely that the managers
are rewarded for lowering costs.) Additionally, the results of a prevention program cannot be
easily measured, are not usually immediate, and may not be readily apparent. On the other
hand, prevention programs have the greatest potential for real savings because they eliminate
the core causes of problems instead of just treating surface symptoms. Prevention programs
decrease not only the external failure costs but the internal failure costs as well. Additionally,
prevention programs lower appraisal costs by eliminating the need for raw-materials
inspections and reducing the need for work-in-process and finished-goods inspections.
Furthermore, across a sufficient period of time, prevention programs improve the overall
quality of a product and promote a better quality image for the company. Recently, a number
of concepts (such as process capability, design of experiments, quality function deployment,
robust quality, and predictive analysis) have been developed in order to help shift quality costs
to prevention pro- grams. Table 1 provides an overview of these concepts.

TABLE 1: Some Examples of Quality Concepts for Prevention Programs

Process Capability (PC): PC is the inherent ability of the process which can be evaluated
through data collection and analysis. It is measured by the proportion of output that can be
produced within design specifications. Process capability is important to both product
designers and manufacturing engineers in order to predict how well a process will meet
specifications and to specify equipment requirements.

Predictive Analysis (PA): The purpose of predictive analysis (also known as failure mode
and effect analysis, FMEA) is to identify all the ways in which a failure can occur, to
estimate the effect and seriousness of the failure, and to recommend corrective design
actions. For each critical component, an FMEA specifies:

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1. Failure mode,
2. cause of failure,
3. effect on the production system,
4. corrective action and
Quality Function Deployment (QFD): QFD supports the concept of design and build a
product/service right the first time. It involves listening to customers and letting their input
direct the process from design to delivery to service. Implementing a QFD program takes
considerable amount of time to learn and use, and resources to apply. Generally, the greatest
benefits are gained when it is applied to new products rather than to existing ones. The
results should be measured and compared with similar product developments to document
the benefits.

Design of Experiments (DOE): DOE supports the concept of design and build a product
right the first time. DOE is useful in getting complex processes in control and in optimizing
complex processes. DOE is a process of conducting 'minimum number' of tests in order to
determine the best values of the parameters for product design and manufacturing process

Design for Manufacture (DFM): DFM is the process of designing a product so that it can be
produced efficiently at the highest level of quality. DFM is intended to prevent product
designs that may simplify assembly operations but require more complex and expensive
components; or designs that may simplify component manufacturing while complicating the
assembly process; or designs that are difficult and/or expensive to service/support.

Measuring Quality Costs

In order to determine the allocation percentages and the volume of dollars a firm spends on
COQ, its quality costs must be measured; and the task of measuring quality costs can be
quite a challenging experience. Nevertheless, the effort expended to accurately trace and
measure COQ costs is usually a worthwhile en- deavor. As Harrington points out: When all
COQ costs are combined, the dollar figure can be quite substantial. From past experience, he

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finds that "Most company presidents accept (the fact) that poor quality is costing them a
great deal of money, but they are absolutely shocked when they find out what the cost
(figure) really is."

The initial problem in measuring COQ is the selection of an appropriate team.

Representatives from various areas of the company (including operations/ production,
accounting/finance, purchasing, marketing, and engineering) should be integrated into
the COQ team.
Once the COQ team has been selected, the next problem is determining the source of the
necessary data. Some of the data needed to compute COQ is readily available from a standard
accounting system. Components like scrap and rework fall into this category. Costs for other
components (like warranty, customer complaint resolutions, and inspection costs) can be
obtained only by using a more sophisticated cost accounting system. Finally, some
components (like bottlenecking of systems or loss of customers) are extremely difficult to
capture and virtually impossible to quantify. Therefore, costs for these components will have
to be estimated from the information that the team assimilates through observation,
interviewing, and auditing.
Fortunately, a branch of accounting (i.e., management accounting) is producing
accountants who are specially trained to prepare costing reports for internal use. They
possess both the expertise to prepare credible reports and the flexibility to estimate figures
which are not readily available.

Role of Activity-Based Costing/Management (ABC/ABM)

Most accounting systems, designed primarily to value inventory for financial and tax
statements, have not kept pace with the profound changes occurring in modem
manufacturing (e.g., TQM, JIT and MRP II) and thus are incapable of providing
decision-making information (including cost of quality information) necessary for
strategic, as well as tactical, operational decisions (e.g., product planning, outsourcing,
process design, and technology investment).
Accounting systems usually break down overhead costs by functional area (like shipping,
receiving, or operations). They then allocate these costs back to products on the basis of
unit-based drivers, such as direct labor or machine hours. This process assumes that all

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overhead activities are consumed equally by all products relative to volume produced. It
accounts for all costs in aggregate and is fine for external reporting purposes; however, it
distorts individual product costs because it does not compensate for volume diversity,
product diversity, or non-unit-based activities.

High-volume products end up with a disproportionate share of the fixed overhead.

Consider the fixed costs generated as a result of production setup activities for a factory
which produces a high-volume product and a low-volume product. The traditional
method takes total setup cost and spreads it back to all products on a per-unit basis without
regard for how much setup the product actually required. Let's assume that, in actuality,
the low-volume product is responsible for half the setup costs. The high-volume product
is forced to pay part of the setup fee that the low-volume product generated. And the
higher the volume discrepancy, the greater the percentage it absorbs. This occurs be-
cause production setup is a non-unit-based activity that is being allocated on a per-unit
basis. Based on such inaccurate information, the company cannot even quantify the true
production costs for a product- much less the quality costs.

Activity-based management (ABM), on the other hand, is a management process which

integrates a modem cost accounting system, such as activity-based costing, with total quality
management. ABM focuses on the management of activities as the route to continuously
improving the value received by customers and the profit achieved by its provider. ABM
achieves its goals by systematically combining the power of an activity-based costing (ABC)
information system with other well-known tools such as value analysis, cost analysis, life-
cycle costing, and target costing.
An ABC information system, the heart of ABM, analyzes each overhead component to
determine what activities generated it. Activities which generate over- head costs are
referred to as cost drivers. Some cost drivers are related to volume (like direct labor hours
or machine hours). Others are transaction oriented (such as the number of production
setups, runs, or purchase orders). Once overhead is traced to a cost driver, the cost of
performing that activity is calculated. Finally, these costs are allocated back to the products
or processes which demanded the activity. In this way, production costs are allocated back
to products based on what each one actually demanded and used. In other words, each

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product is assigned its fair share of the production costs.

Obviously, determining a product's fair share of the production costs is an important first
step in calculating quality costs. But one should not stop there. Many experts advocate that
the ABC concept be taken be- yond this limited application. They suggest that ABC- type
methods be employed to trace quality costs back to their cost drivers as well. By tracing
both quality and production costs with ABC, a firm can minimize the misappropriation
of overhead and achieve a better approximation of the true cost of production and
quality at a product level. Tumey demonstrates how ABC/ABM was used in a
manufacturing plant to address COQ issues. The ABC system was used daily to
prepare a report on the cost of poor quality for each activity and to show graphically
the trends in physical defects and quality costs. The report directed an immediate
attention to the most significant quality problems. The ABC system also prepared a
"top ten offenders" list every day that reported the ten products with the highest cost
of poor quality for the previous day. Thus, it designated the poor quality products and
provided the greatest potential for redemption.
When determining whether to implement an ABC/ ABM system, a number of criteria must
be considered (e.g., traditional costs and information systems, the cost of errors, and the
product variety). The cost of errors may include the costs of making "poor" business
decisions (e.g., decisions regarding product planning, capital investment, and capital
budgeting). From a quality management viewpoint, Figure 1 offers another perspective
toward the traditional and modem cost management systems. It suggests that in traditional
costing systems, total costs increase (due to the cost of errors) with increases in quality
level; and moreover, it suggests that in modem costing systems (such as ABC/ ABM), total
costs decrease with an increase in quality levels-to a certain level. Therefore, if a company is
to the right of a required break-even quality level (BEQ), then an ABC/ ABM system may
be desirable. Thus, it may be possible to conceptualize the notion of marginal cost vs.
marginal benefits in implementing alternative accounting systems.

Failure to Calculate COQ

As one can see, calculating the cost of quality is a formidable task requiring a great deal of
time and effort toward tracing costs back to their originating sources. Additionally, since

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many costs have to be estimated, there is no guarantee that the results obtained are ac-
curate approximations of the actual figures. The subjectivity of the numbers and the burden
of collecting the data partially explain why many firms fail to calculate explicitly their cost
of quality.
In a survey of mid-sized manufacturers by Grant Thornton International, 83% of the
respondents considered improving quality as a top priority, but only one-third said they
currently calculate quality costs.

The failure to use COQ concepts may explain the partial success with TQM philosophy.
Douglas Air- craft's TQM program failed when another cost-cutting measure (massive
layoffs) sent a conflicting message to the employees. Other programs are slashed because
of lack of support from top management. Florida Power and Light's quality team was
eliminated because a new CEO "wasn't too sure about this quality stuff." Quality
programs in other companies amount to little more than slogans and symbols. Several
years ago, Humana passed out quality buttons and displayed quality banners. There was
no investigation into quality costs and no real commitment. A week later, the buttons were
in a drawer somewhere and it was business as usual.
Many times, companies fail to calculate, or they miscalculate, their COQ costs. Other times,
they fail to trace these costs back to their appropriate sources. As a result, they spend their
quality dollars inappropriately chasing guesses. Mathews and Katel note managers' common
complaint that TQM costs more than it is worth. Erickson, V.P. of Arthur D. Little, states that
one company invested so much money to- ward improving the quality of a 25-cent item that
its cost soared to $2.89.

Other firms believe that quality programs' impact on the bottom line is so tremendous that
calculating the cost of quality is a waste of time. Richard Levy, executive vice-president of
Varian Associates, explains his position: "These are no-brainers. If you're doing it right,
you're getting payoffs every day." Likewise, a vice-president of an automotive products
company concurs, stating that "We try not to get hung up on measurement for the sake of
measurement. We believe in our system and would rather use it to solve problems than to
report history." A few firms even believe that measuring is harmful. A quality
management executive of a chemical manufacturing firm ex- plains that "We have
totally abandoned all measures of poor quality. People feel threatened by these

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As Crosby states, COQ is a positive blessing and serves the unique purpose of focusing
attention on quality management only if it is used as a management tool. However, as
echoed by the above comments, if it is used as an accounting measure by unenlightened
management, it becomes a useless pain.
In the final analysis, the core reason that so many firms fail to calculate their quality
costs probably has more to do with their state of readiness. Many firms simply have not
evolved to the point where they are able to incorporate COQ ideas into their operations.
Stage-one companies are too busy with day-to-day operations: they are not ready to
look at long-range concepts. Stage-two companies are busy turning out new products
and are content with industry standards: they are not willing to commit resources to a
COQ program. Only the latter stage companies are ready for a program of long-term
proactive operational reform.


Before deciding on COQ or any other program, the executives must first determine if the
concept supports its corporate goals and its operational strategy. There are two different
types of operational strategies that a firm can choose to follow: cost leadership or
product differentiation. In order to compete in the world marketplace, a firm must either
cut costs and become the low-cost producer or differentiate its products and add more
value for its customers. Whatever the operational strategy, all activities within the
organization necessarily must revolve around the chosen strategy.
The survival of a cost leadership firm depends on its ability to manufacture low-cost
products. An excellent way to cut costs is to implement a COQ program. A firm that is
new to the quality concept can eliminate the core causes of poor quality and see an
immediate reduction of production costs. A firm that is already producing quality
products can further reduce production costs by eliminating non-value adding processes.
As a result of these savings, a company will be able to undercut the prices of its more
inefficient competitors.

On the other hand, a product differentiation company primarily focuses on adding value to its
products and giving that "extra something" to its customers. In this case, the cost factor is
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secondary because higher quality products can demand higher prices. Although the goals are
different, COQ can also help these firms produce results by ensuring that quality is built into
the initial design of products and that products are made right the first time.

Reduced cycle times and zero defects are a tremendous advantage for those
differentiating on the basis of dependability (i.e., time). Quality designs are essential for
those competing on new product development. Fewer setups and a streamlined process
mean greater flexibility. In addition, the elimination of non-value adding processes
means that 100% of the re- sources can be channeled into customer-focused activities.
Inevitably, the result will be a higher quality product and a more loyal customer base.

Therefore, COQ has something to offer firms regardless of their operational strategies. COQ
is like two sides of the same coin. A COQ program can help a company lower its production
costs dramatically without compromising the quality of its products, or it can assist a
company in building quality into its products without increasing the production costs. The
trick is to implement a COQ program designed with individual strategic goals in mind and
individually tailored to operations.

Case Studies Where COQ Was Used Successfully

A number of companies have integrated COQ pro- grams into their operations with
impressive results. Morse, Roth and Poston is an excellent source for gaining insight into
how costs of quality programs were implemented in companies such as ITT, Xerox, the
Federal Reserve Bank of Philadelphia, and North American Philips Consumer
Electronics Corp. The authors have also proposed a field interview questionnaire which
can be used to analyze the COQ pro- gram efforts of a company.
Realizing thaflts cost of quality was too high, Xerox form a cross-functional quality team
with representatives from sales, services, finance, administration, and personnel. The
team focuses on "meeting customer requirements the first time." Additionally, they
examine operational considerations, processes, and business plans. They attempt to
undercover the root causes of problems and propose solutions. Two places where the
team has made a big difference for the company are a high turnover rate and an

18 | P a g e
unacceptable _level of billion errors.
Because of high turnover, training for sales representatives and lost opportunities were
costing the company $90 million a year. In the past, the company would have increased
salaries in an attempt to remedy this situation. However, the team discovered that the
problem was not money, but a lack of communication and supervision. Management
training programs were increased and turnover was significantly curtailed. Likewise,
billing mistakes (which represented 4.5% of all invoices) were costing Xerox $18 million
a year. After the COQ team revised the billing process, the error rate dropped to only 1.5%.
Further decreases are likely to follow as the team strives for a zero defect rate. As a result
of these and other improvements in quality, Xerox has managed to add value for its
customers and save money at the same time. Xerox estimates its COQ savings for the past
three years at $190 million.
Following a different approach, Westinghouse has implemented quality circles to improve
communication and promote quality awareness. Assessments are done by an independent
team from the Quality and Productivity Center. Top management defines quality goals and
assists in the formulation of action plans to address specific quality concerns. In turn, all
departments submit more detailed descriptions of their individual roles in meeting the
quality goals, and employees at all levels are challenged to ensure the quality of
Westinghouse's products. As a result of quality improvements, Westinghouse has managed
to increase its productivity by 15%, reduce scrap by 58%, improve cycle time by 66%,
decrease returns by 69%, and improve service performance by 20%.
MBNA America, a credit card company, has adopted a zero defection goal. Their
customer retention pro- gram includes training sessions for solving customer problems
and incentives tied to customer retention rates. Paychecks at MBNA are imprinted with
the message "Brought to you by the Customer." Customer advocates sit in on planning
sessions. Because of these efforts, the company has lowered its defection rate to 5% in
an industry where the average is 10%, and its profits have increased sixteen fold.
Motorola has achieved its goal of 3.4 defects per million and is saving $250 million a year.
Again, pro- duction costs decreased as the number of defects went down. Essentially, these
successful companies are implementing the global management philosophy of JIT which
incorporates concepts that affect every aspect of the manufacturing environment.

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Review of literature

The saving of quality costs is believed to be vast from the evidences: the Department of Trade
and Industry quotes 5-25% of turnover as the total costs in its publication “Quality Costs”

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(Plunkett, Dale et al. 1985); a survey from PA consultancy even indicated that the total costs is
up to 40% of turnover (Carson 1986). Those levels have been demonstrated by quality gurus like
Deming, Juran and Crosby. There is a term called “quality leverage effect”. The rough idea is
that in terms of pursuing a specific amount of net profit, company would need to double its sales
to achieve the level. But company may easily earn the same amount of money by just halving its
failure costs. This concept shows the importance of cost of quality in an organization.
Dr.Jurancallsit“quickanddirty”approachbecausethereisnodoubtonthe effectiveness for focusing
on the potential cost-saving area directly. Even it is no need for an accurate estimation of quality
costs. An initial broad estimation give robust indicators like to where corrective action could
bring a great rewards (Carson 1986). The collection and analysis on cost of quality data is also
considered a benefit of being a performance measuring tool when company implements a
Quality Improvement Program. However, Crosby stated that he had never seen an organization
successfully bring a property usage of COQ into realization. He confessed that the failure of
promoting COQ to companies is one of his regrets in 30 year’s career of being a quality
professional (Crosby 1983). Most of companies have no realistic idea on the total loss caused by
poor quality.

In academia, not many quality cost literatures have been reviewed. A literature survey was
conducted by Plunkett and Dale (1987). Focusing on quality related cost measurement, collection
and usage, many published information was summarized by them. From country oriented, a
survey was conducted by Kumar et al. (1998) in various countries. The result shows the concept
of reporting quality cost data is not widely adopted by businesses in any part of the world. Some
surveys emphasizing on quality costing models also have been conducted. Five classifications of
literatures under P-A-F model were grouped by Plunkett and Dale in 1988. A more
comprehensive survey was present by Porter and Rayner (1992) with a detail elaboration of
quality cost models, but still mainly focusing on P-A-F model and its limitation. Hwang and
Aspinwall (1996) published a survey on a comparison of those various COQ models of a total
quality management environment. Tsai (1998) carried out a review based on activity-based cost
comparing with the known COQ models. Schiffauerova and Thomson (2006) surveyed on the
literatures of COQ models and summarized a great number of case studies of successful practices
in COQ field. Wang and Chen (2009) presented a more comprehensive survey, especially
elaborating on the new advances and emerging trends in COQ development.

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In the past few decades, different methods have been developed to optimize cost and quality of
productions or services. Many economic and mathematical models have been developed to find
the optimum cost of quality. The traditional model detailed by Brown and Kane (1984) (as
cited by Kazaz et al., 2005) has gotten widespread acceptance. According to this model there is
an inverse relationship between prevention and appraisal effort and failure cost. The optimum
conformance of quality or defect level is where the increasing costs of the prevention and
appraisal curve converges with the curve of decreasing failure costs. Total quality costs are
minimized to the point where the cost of prevention plus appraisal equals the cost of failure. The
total cost of quality curve represents the sum of the other two curves, and the location of the
minimum point on the total cost of quality curve, sometimes referred to as the optimum point
(Kazaz et al, 2005).

Boronico and Panayides (2001) focused on a service provider who, faced with competition,
must determine the optimal price and level of service quality to provide in order to maximize
profits. They believe service quality and price are assumed to impact jointly on demand for
services. Both demand and service quality impact on the cost of providing services. While
considerable literature exists on the impact of service quality on demand or cost, less work has
focused on the explicit impact of service quality jointly on both demand for and the cost of
providing services. A service quality constraint is appended to the formulation in order to
guarantee that a declared service standard is met. Conditions are developed which characterize
optimal solutions, together with comparative static. They developed a model through which both
price and quality of service may be determined, in addition to other variables more operational in
nature, such as capacity. The model developed (1) assumes that service quality impacts on both
demand for service as well as costs and (2) unifies both marketing and operations oriented
system components.

Sower et al. (2007) did a research on cost of quality usage and its relationship to quality system
maturity. The purposes of this study were to examine the relationship between the distribution of
quality costs and the level of maturity of an organization’s quality system, to assess the extent to
which effective COQ systems and maturing quality systems affect organization performance, and
to determine why some organizations do not utilize COQ systems. According to their research
external failure costs were found to decline as a percentage of total cost of quality (COQ) as an

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organization’s quality system matures. Total COQ was found to increase as an organization
moved from a very low level of quality system maturity to a higher level. Sales and profit growth
were not significantly correlated with the presence of a quality cost system or with the level of
maturity of the quality system. Lack of management support was found to be the most common
reason why organizations do not systematically track quality costs.

At the other hand, numerous studies have been done on time-cost optimization and multi-
objective optimization of time-cost-quality in case of construction projects. Feng et al. (1997)
and Burns et al. (1996) have suggested a standard technical construction projects sample for
optimizing time and cost and the solved it and tried to calculate the objective function. They used
a Hybrid LP/IP programming method. A same optimization research has been done by Zheng et
al. (2004) using Genetic algorithm to optimize these two factors. Using Ant Colony Algorithm,
Xiong and Kuang (2008) aimed to solve the problem of optimizing time and cost too. Hallak and
Sivadasan (2009) develop a two-factor heterogeneous-firm model. They introduce a factor,
which they call caliber, affecting the fixed costs of the product quality. They derive the cutoff
function showing the minimum level of caliber for a given productivity necessary to survive in
the market. On the plain of caliber and productivity, the cutoff function is a downward-sloping
curve. By introducing fixed cost of exports and iceberg transport cost, they show the cutoff
function of exporter. They show that two kinds of exporters, with low-productivity, high caliber
and high-productivity, low-caliber, may exist.

Although Rodchua (2006) believes that companies can lose money because they fail to use
significant opportunities to reduce their costs of quality. Her study identified important factors
and measures contributing to a successful quality cost program implementation and developed an
empirically based model for quality costs in the manufacturing environment. Also the study
presented the cause and effect diagram of difficulty that industrial professionals experienced in
their program implementation. Rodchua’s survey instrument collected descriptive data from
manufacturing and industrial professionals. She found the primary factors that aided the success
of a quality cost program were management support, effective application and system,
cooperation from other departments, and understanding the concepts of the cost of quality. As an
innovative research, the present study, in line with other related studies, aims to optimize Costs
of Quality and Quality using ACO algorithm.

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Development of COQ

The COQ concept was formally demonstrated with the parallelism “gold in mine” in the late
1940s. Juran (1951) indicated that there are two types of cost related to quality; they are
avoidable cost and unavoidable cost. Waste, rework and failure are included in avoidable cost;
and unavoidable costs are those cost associated with quality improvement measures. Now the
widely accepted COQ classification was firstly presented by Feigenbaum in 1956, the
Prevention-Appraisal-Failure model. Another quality guru Crosby simplified PAF classification
in his bibliography Quality in free. He defined prevention cost and appraisal cost as the cost of
conformance, and failure cost as non-conformance cost (Crosby, 1979). Ostrenga thought there
is added-value in prevention cost. Companies can save cost by investing in those activities with
added-value (Ostrenga, 1991). From the view of manufacturer, prevention and appraisal cost can
be grouped into control cost, and the costs left are out-of-control cost (Morse, Harold, & Poston,

PAF model

In 1962, J.M. Juran contrasted prevention plus appraisal costs with failure costs and then
proposed the traditional tradeoff. Normally in quality textbooks, this model will be discussed and
reproduced in the very beginning chapter. Many researches show that there are several
difficulties in this model even thought it had a factual basis (Bajpai and Willey 1989). No
general measure of quality is the first problem in the model. Quality was defined "the totality of
features and characteristics that bear upon its ability to satisfy stated or implied need" in BS
4778. However, this definition leaves room for further discussion. As a management principle,
"totality" would be fine. But the rough idea may confuse people in practical use. A single
product have separate scales and different units in terms of quality if measure at all. Only in
manufacturing the "de-merit ratings" are well developed to measure the totality of quality, and
they can't be claimed as a universal measure. Furthermore, a good performance on the totality of
quality does not represent "satisfy". The only one who decides "satisfy" is customer and this
concept has been considered as a basis index in proposed literatures (Bajpai and Willey 1989).
There are so many indices for the horizontal axis in the model. But for the vertical axis, it has
already been identified that the measure of quality costs are usually not kept. However, this
traditional tradeoff model cannot explain the economics of quality for products in other

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development stages and can only be applied to finished products because the limit to quality of

Kume (1985) and Schneiderman (1986) disputed the validity of this traditional tradeoff. They
raised a discussion on the traditional tradeoff model including some level of defectives to reach
the minimum total cost. In traditional tradeoff, people may put emphasis on inspection instead of
prevention by the time the model was developed. It would bring large expenditures on
inspection, and the benefits of prevention in this stage had not been recognized yet. Investments
in prevention are critical element nowadays in highly competitive business environment, but the
static traditional construct would obstruct additional investments in prevention activities.
Besides, empirical evidence was revealed against the traditional tradeoff model (Carr 1992). It
refuted that each curve represents 50% of the total cost of quality. Furthermore, the shape of
these curves would be varied with the corresponding shift with the optimal cost point if
intangible costs were taken into consideration (Harrington 1987). A modified model was
proposed which the optimum solution is at 100% of quality of conformance.

Process cost model

The concept of process cost model was first found in the study of Ross (1977) and developed by
Crosby (1980). Cost of quality (COQ) is the sum of cost of conformance (COC) and cost of non-
conformance (CONC). Thus, COQ = COC + CONC, where COC is defined as “under a given
specified process, the actual process cost of providing products or services to required standards
in a fully effective method” and CONC is “the cost of resources as wasted time, materials and
capacity associated with the process not being executed to required standards.” Understanding
the related process sufficiently is the first step in implementing the process cost model because
the cost element, like people, equipment, material and the environment, can be measured at any
step of the process as either COC or CONC (Hwang and Aspinwall 1996). The process cost
model can be used to determine whether high CONC reveals the need for investment on failure
prevention or whether the process should redesign to reduce the excessive conformance costs
(Porter and Rayner 1992). It pursues a continuous improvement on key processes and can be
applied to both service and manufacturing industries. A modeling method called IDEF, the
computer-aided manufacturing integrated program definition methodology, was developed for
experts use in system modeling (Ross 1977).However, it’s too complex for common use by

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supervisors or staff. In order to overcome this limitation, some simpler methods were conducted
(Crossfield and Dale 1990; Goulden and Rawlins 1995).It’s suggested that process cost model is
better than P-A-F model because it presents a more integrated approach to quality (Porter and
Rayner 1992) and quickly responds on quality problems and their causes. Although process
model helps the collection and analysis of quality costs effectively, it is not widespread use in
fact (Goulden and Rawlins 1995).

Opportunity cost model

Opportunity cost is one of the cost elements had been ignored in many literatures (Plunkett and
Dale 1987). Opportunity cost is a kind of intangible costs which can only be estimated like
profits not earned resulting from customer dissatisfaction and reduction in revenue because of
non-conformance. The importance of incorporating opportunity cost into quality costing model
has been emphasized recently. A generic model was proposed showing the COQ is the sum of
cost of prevention activity (CP), cost of appraisal activity (CA), cost of failure in failure items
(CF) and losses caused by opportunity factors, i.e. COQ = CP + CA + CF + CO. According to
this model, COQ is deemed the total of revenue lost and profit not earned; three components are
included in opportunity costs: underutilization of installed capacity, inadequate material handling
and poor delivery of service (Sandoval-Chavez and Beruvides 1998). The traditional PAF model
was also suggested to accommodate opportunity cost as extra dimensions which are the cost of
inefficient resource utilization and quality design cost (Modarress and Ansari 1987). The
perception of process cost incorporate with opportunity cost model as well. Three categories
which are cost of conformance, cost of non-conformance and cost of lost opportunity are defined
as quality costs elements and had a successfully implementation in a quality program (Carr

Activity-Based model

Since traditional cost accounting sets up a system of cost accounts by classifying the categories
in terms of expenses (Schiffauerova and Thomson 2006), neither the PAF model nor the process
cost model can serve as appropriate methods to cover overhead costs in cost of quality system
(Tsai 1998). Activity-based costing (ABC) which was first developed (Cooper and Kaplan 1988)
to identify and assign every cost activity (such as departments, products, customers and so on) to
products and services in a company and to assist executives to make decisions, for example,

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pricing, outsourcing, identification and measurement of process improvement strategies. It
assigns more overhead expenditures into direct costs.

In order to understand more clearly the processes in an organization, activity-based management

(ABM), an extension of ABC, was introduced to monitor continuous improvement and manage
the business from the standpoint of process, instead of departments (Letza and Gadd 1994).
ABM chooses the cost and nonfinancial/operational information acquirement from ABC in
various analyses (Tsai 1998).

Taguchi loss function

In traditional perspective, only when the products fall outside the specification range or services
incur customers’ dissatisfaction, the quality losses occurred. Differ with traditional view,
Taguchi loss function emphasizes that the failure costs occurred when products or services didn’t
hit the target value or standards accurately. Taguchi (1987) developed these failure losses into a
loss function according to his industrial experiences. The generic formula is that L = C(X - T) 2;
where L = loss, C = constant coefficient, X = quality characteristic and T = target.

However, Taguchi loss function only reflects the influenced by finished product. Avoidable costs
and quality costs incurred within the manufacturing firm were not included in this loss function.
Further, this function is hard for applying because the probability distribution of product defects
is difficult to identify accurately, especially it influences the loss after delivering to customer
(Hwang and Aspinwall 1996).

Cost-benefit model

Benefit enhancement from the increased market share and reduction of quality costs are the
ultimate goal of quality improvement. Studies show that a modified level of quality incurs a large
market share and higher profits (Schoeffler 1974). Quality related costs would decrease if quality
is improved and it results in improved productivity, market share growth, stability (Deming
1986). Since quality improvement is a gradual procedure, the investment in TQM would not
bring quality improvement for a product or a service in a short term (Kanji 1990; Berry 1991).
According to this principle, together with a quality and a management accounting element,
Baston (1988) structured a dynamic flow system for a quality cost system including complaints
and managerial pressure. A simulation model with system dynamics techniques was developed

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by Bajpai (1989) in a manufacturing company with different costs and benefits parameters
relating to preventive activities. A simple cost-benefit model was proposed by Porter and Rayner
(1992) to monitor the effect of a TQM program but didn’t reflect the dynamics of quality

Return on investment (ROI) has been used to estimate the effect while the investment in
prevention and appraisal activities increased and the reaction to failure activities. However, the
concept of ROI only copes with a part of many benefits incurring from investment in a TQM
program. Most models only handle the quality costs related to single produce, service or process
and the long-term benefit by investing in a TQM program doesn’t been explained. In addition,
the model inspects activities or departments independently. The interacting effect is hard to be
revealed among those activities or departments especially a few detailed cost elements are
included. Moreover, the life cycle of product or service is too short to do cost and benefit data
collection; and because of both quality costing systems and traditional accounting departments
make no provision for a long-term investment for quality improvement, it’s difficult to access the
real cost data (Bajpai and Willey 1989; Porter and Rayner 1992). Nevertheless, it has been
demonstrated that cost-benefit model helps firms on decision making; where, when and how to
do preventive activities and equipment investment. This enables related departments or business
units to take part in strategic programming. Although a high level of investment only results in a
slow progress on quality improvement, a simulation is suggested to be necessary after modeling
the system dynamic flows.

COQ elements categories

This study investigates the cost items in different companies and industries based on the PAF
Model and the PAF constituent components are revised from the book, Quality (Summers 1997).
Originally, Summers (1997) categorized cost of quality into prevention costs, appraisal costs,
internal failure costs, external failure costs, and intangible costs. However, most of the
companies do not look into intangible items due to the fact that it is hard to calculate those items,
for example, customer dissatisfaction, company image, loss sales, and loss of customer goodwill.
The COQ parameters (Table 1) are summarised as follows (Wang and Chen 2009):

Table 1. COQ parameters of PAF model

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Prevention - Quality Planning/Quality Meeting
Costs - Quality Program Administration
- Supplier-rating Program Administration/Purchasing/Vendor Quality
- Customer Requirements/Expectations Market Research
- Product Design/Development Reviews/Process Improvement
- Quality Education Programs/Training
- Equipment and Preventive Maintenance
Appraisal - In-process Inspection
Costs - Incoming Inspection
- Testing/Inspection Equipment
- Audits
- Product Evaluation
Internal - Reworking
Failure - Scrape/Waste
Costs - Repair
- Material-failure Review/Re-inspection
- Design Changes to Meet Customer Expectations
- Corrective Actions/Trouble Shooting
External - Returned Goods
Failure - Corrective Actions
Costs - Warranty Costs
- Customer Complaints
- Liability Costs/Litigation
- Penalties

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Need and Rationale of the Study

This research study upon conclusion shall have a critical contribution to the already available
theories on cost of quality concept especially on how the various COQ dimensions may
individually or collectively impact organizational performance through resource allocation, in an
attempt to influence product quality, hence customer satisfaction. Management of the
manufacturing firms in Nagpur upon appreciation of this study finding, may endeavor to audit
their processes in respect to COQ concept and its routine influence on performance, with the
view to adopting some of the available COQ evaluation models for identifying and measuring
the four categories for continuous process improvement decision making as a practice. The study
findings, are significant, and shall draw attention of policy formulators in the manufacturing
sector to strategically generate a guide that shall be standard and general to all firms in line to
adopting and implementing COQ system as one of the means to evaluating organizational

Objectives of the Study

 To establish the relationship between cost of quality and quality optimization in the
manufacturing firms in Nagpur.
 To epitomize how to optimize the COQ for a legacy system and its benefits in the long
 Understand the difficulties of defining quality in manufacturing firms.
 To optimize the cost of quality in a legacy system.

Scope of the Study

The research would wish recommend further studies in this area especially in establishing an
appropriate cost of quality application model to the manufacturers in Nagpur as a means to
prompting of cost of quality systems establishment in the various organizations, for improved
performance enabled by accurate process decision making.

It is clear that the goals of achieving quality, implementing continual improvements, and cutting
operational costs are common to modern industry. It is also clear that the approach industry takes
to achieve these goals is often limited to the implementation of Quality Systems and the

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application of Lean manufacturing principles. The unfortunate reality is that, another
program that shares these lofty goals, quality costing (a program dedicated to understanding,
measuring, and controlling the total COQ), seems to be less widely practiced. The absence of
quality costing programs is a function of the difference between systems to track costs of
quality activities, as opposed to those traditionally developed to track the expenses of
production. The increased importance of COQ can be explained by the changed customer
behavior from buying whatever is offered into buying only products that matches their functional
requirements and desired price, caused by the global competition. This has made the customer
orientation much more important for companies and therefore also increased the importance of
reduction and financial measurement of non-conformance.

Significance of Study

This research study upon conclusion shall have a critical contribution to the already available
theories on cost of quality concept especially on how the various COQ dimensions may
individually or collectively impact organizational performance through resource allocation, in an
attempt to influence product quality, hence customer satisfaction. Management of the
manufacturing firms in Nagpur upon appreciation of this study finding, may endeavor to audit
their processes in respect to COQ concept and its routine influence on performance, with the
view to adopting some of the available COQ evaluation models for identifying and measuring
the four categories for continuous process improvement decision making as a practice. The study
findings, are significant, and shall draw attention of policy formulators in the manufacturing
sector to strategically generate a guide that shall be standard and general to all firms in line to
adopting and implementing COQ system as one of the means to evaluating organizational

31 | P a g e

This section provided for the nature of the research design, the population of the organizations of
the manufacturers surveyed, population sample design, data collection means and analysis
appropriate for the study.

Research Design

The research work employed descriptive cross-sectional survey as the most suited research
design, which Olsen and Marie (2004), held as being a type of observational study that analyzes
data collected from either the entire population, or a representative subset, at a specific point in
time, for data collection and analysis to help answer the research questions of interest. It is useful
in examining one variable in different groups that are similar in all other characteristics as for the
case of manufacturing firms in the Nagpur, it is not costly, useful in approving or disapproving
assumptions and its findings and outcome are analyzable creation of new theories or studies for
in-depth research. This justified the appropriateness of the methodology for the study.

The Population

The research study drew its population from the 35 operational manufacturing firms in the
Nagpur, as listed and attached under appendix1.

Data Collection

This research work majorly employed the use of secondary data, which was obtained through
administration of structured questionnaire by the researcher. Targeted participants were senior
managers of the organizations as: Procurement Manager, Production Manager, Quality Control
Manager, Maintenance Manager and Management Accountant from the respective firms.

The questionnaire had two parts. Part A provided for the cost of quality categories recognition
data collection, Part B organizational cost of quality actual expenditures and Part C,
organizational performance as underproduction, sales and profitability figures.

Data Analysis

The study data are quantitative, hence statistical data analysis method consumption, especially
the exploratory data analysis, which provided for establishment of the variables relationships.

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Part A observed the application of correlation analysis and Part B and C having regression
analysis being employed as the most appropriate statistical data analysis method. The research
work had four categories of COQ as independent variables as predictors and organizational
performance, as the dependent variable. This therefore demanded for the use of multiple
regression analysis model, with the regression model formula appearing as below:

Y= a + b1X1 + b2X2 + b3X3 + b4X4

The elements of the above multiple regression equation are as:

Y Organizational performance as the dependent variable

a (Alpha) is the Constant or intercept, when value of Y is as expected

b1 the Slope (Beta coefficient) for X1

X1, Prevention Cost variable (Cost of Quality category independent variable)

b2 the Slope (Beta coefficient) for X2

X2 Appraisal Cost (Cost of Quality category independent variable)

b3 the Slope (Beta coefficient) for X3

X3 Internal Failure Cost (Cost of Quality category independent variable)

b4 is the slope ( Beta coefficient) for X4

X4 External Failure Cost (Cost of Quality category independent variable)


The successful cases cited in current literature inspire hope for the future competitiveness of
our nation. The stories of failure point out the obstacles in our path. Implementing a
successful COQ program requires that the COQ program:

• Supports the corporate strategy

• Is a fully integrated part of the operational strategy
• Has top management support and commitment

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• Treats the source of the quality problems and not the symptoms
• Is based upon an accurately calculated cost of quality
• Is tied to the reward and incentive programs
• Is long range in nature with an eye over the next horizon
• Is well thought out and well planned.
A cost of quality program can be a valuable competitive tool, but attending a COQ seminar
will not solve all business problems. COQ has nothing to offer those searching for a quick
fix or an easy answer. But for corporations willing to go that extra mile, COQ sets the stage
for continuous improvement and cost- effectiveness.

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1. Name of the company:

2. Type of Organization:

Co-Operative Public Ltd. Others

3. Nature of Holding:

Government Semi-Government Private

4. Unit (Facilities) Name :

5. Types of Manufacturing:

6. Name and position of respondent (optional):

COST OF QUALITY CATEGORIES RECOGNITION (Tick where appropriate i.e. only

once per row)
1. Listed below are four categories of cost of quality dimensions which cumulatively may
find use for specific performance measure. To what extent has your company had
recognition of the dimensions elements as guided by the statements? Please rank them
using the key guideline below; [5] – Very great extent, [4] – Great extent [3] – Moderate
extent, [2] – Small extent, [1] – Very small extent.

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7. Organization quality plan developed and applied
8. Suppliers quality pre-qualification observed
9. Production quality control and assurance observed

10. Incoming supplies and process inspection plan

developed and routinely observed.

11. Quality control appliances routinely standardized

12. Quality training and development plans observed

2. Should you have any comments as to the extent of implementation of such a particular
program in your company, place them under the “Remarks” portion.

Strongly Agree

Program Component 1: Top Management Commitment Neutral

13 The company prioritizes quality considerations as
early as the product/ service development phase.

14 Customers’ requirements and suppliers’ feedback

are incorporated in product/ service development.
The company ensures its benchmarking activities
15 result to significant improvement in the company’s
quality performance.
Top management is actively involved in
16 establishing and communicating the company’s
vision, goals, plans, and values for quality program.

17 Top management is personally involved in planning

quality management programs.

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18 Top management provides substantial financial
support for the company’s quality management and
productivity improvement programs.

19 Top management is involved in the implementation

and follow-up of its quality management program.

20 The company has a program / system to improve

customer service.

Bemowski, K. (1992). The quality glossary. Quality Progress, 25(2), 18-29.
Boronico, J. S., &Panayides, A. (2001). The Joint Determination of Price, Quality, andCapacity:
An Application to Supermarket Operations. Journal of Applied Mathematics and Decision
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