Chapter 2

CHAPTER 2
Why Quality Management

Week 3
Learning Objectives :
• After following this subject, students understand the

things that relate to :
• What is Wrong with Traditional Approaches?
Lack of Leadership
• Leadership is not management. Management is concerned with
producing order and consistency through actions such as
planning, budgeting, organizing and controlling, while leadership
is concerned with producing change and movement by vision
building, motivating, aligning people and communicating (Kotter,
1990).
• This is not to imply that leadership is good’ and management ‘bad’
but to recognise that they serve different purposes and require
different skills.
• Management serves us well in static situations (one might think of
the situation of Ford in the early 20th Century) however, more
dynamic situations require leadership.
Short Term Focus
• Most organizations are unable to take a long term view.

• This is often driven by the stock market where companies
are expected to declare a profit for the year, half-year, or
even quarter.
• With share prices, liquidity and senior management
bonuses dependent on these results it is inevitable that
short-term priorities win out.
Lack of Customer Focus
• The first principle “customer focus” is very important. Everyone
will agree that an organization depends on its customers, and that
the organization cannot exist unless there are clients who buy its
products and services. For this reason, the organization must
understand the requirements of its customers and should focus to
exceed those expectations and understand their requirements
even further.
Cost/Quality Trade-of
• It has long been assumed in traditional organizations that

better quality costs more money.
• This myth has been effectivel debunked by a number of
eminent thinkers (Crosby, 1979; Deming, 1990; Imai,
1986) but has retained a disconcerting currency.
• The material below on ‘Cost of Quality’ addresses this
issue further.
Lack of Systems Thinking
Human Resources’ Mentality
• There is no doubt that traditional attitudes have led to a serious
underestimation of the potential and contribution of employees
across the organization, particularly in blue-collar positions.
• This is a direct result of industrialization; in years gone by the
craftsman (or woman) was a respected figure, but the work of
Taylor and Ford amongst others reduced them to labourers
completing simple repetitive tasks as quickly as possible.
• Accordingly, respect diminished until most employees of an
organization were expected to use their hands but not their brains.
• The best known quote on this phenomenon
Tangible Benefit
• Tangible benefits refer to items which have a direct

financial value or are ‘monetisable’ in some sense.
• The basic idea is that improved quality brings improved
financial performance
Cost of Poor Quality
• Perhaps the most obvious tangible benefit of quality

improvement is the reduction of cost associated with non-
quality.
• If we have to throw a product away because we have
made an error in its manufacture, it is clear that there is
an immediate financial impact.
Cost of Poor Quality
Understand Quality Costs
• Understand quality costs enables you to
– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
• Quality costs are real and estimated at:

– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to enable better
understanding
Total Quality Management - Spring 2010 - IUG 13

Why calculate Quality Cost
• Management will give special attention when quality is measured in

monetary terms
• Quality costing is one of the tools
– to provide initial assessments and hard evidence that
improvement is needed or had been made
– To monitor the effectiveness of quality improvement initiatives
– To be used in a generic term by senior management,
shareholders and financial institutions, so that they can readily
understand implication of quality in the term of money
– Cost of quality failure is calculated as a percentage of profit or
annual turnover
– It is easy to understand
• By front-line operator
• By middle management

Benefits of using quality costing
• Greater accuracy in the evaluation and forecasting of

resource use
• Justification for investment in the prevention and appraisal of

failures
• Ability to cost and compare performance across all

departments functions and activities
• Identification and prioritization of activities, processes and

departments in terms of corrective action, investment, or
quality improvement initiatives

Benefits of using quality costing (2)
• Ability to set cost-reduction targets and then to measure and report

progress
• Ability to produce “local” data which improves understanding of

resource utilization objectives and targets at all levels throughout the
company
• Provision of data to support formal quality management system

(including, especially; those based upon the ISO9000)
• Enable decisions about quality to be made in an objective and

systematic manner
• Promoting TQM and a company-wide quality improvement culture

COST OF QUALITY
 Quality costs are defined as costs associated with

non-achievement of product/service quality. In
simple terms, quality cost is the cost of poor
products/services.
 The cost of poor quality can add to other costs

such as design, production, maintenance,
inspection, sales, etc. Quality costs cross
department boundaries by involving all activities of
the organization – marketing, purchasing, design,
manufacturing, service, etc.
 The price of nonconformance (Philip Crosby) or

the cost of poor quality (Joseph Juran), the term
'Cost of Quality', refers to the costs associated
with providing poor quality product or service.
Founders Point of View
• Phillip B. Crosby (Quality is free . . . ):
• The system for causing quality is prevention, not
appraisal – Quality is Free
• The performance standard must be Zero Defects,
not "that's close enough"
• The measurement of quality is the Price of Non-
conformance.
• Cost of quality is only the measure of operational
performance
• “Quality is free. It’s not a gift, but it is free. What
costs money are the unquality things -- all the
actions that involve not doing jobs right the first
time.”
Total Quality Management (TQM)
Customers will seek Improved quality that exceeds

out the highest quality customer expectations will
product. generate more revenues that
exceed the cost of quality.
Therefore,
quality is
“free”.
Total Quality Management (TQM)
W. Edwards Deming proposed that
improving quality reduces cost and Quality can be and should be
improves profitability. improved continuously.
Revenues
Total Revenues & Costs
Max Profit
Cost
Max Quality
Quality
Return on Quality (ROQ)
Profit is maximized at the The optimum quality level is always achieved

optimum quality level. before maximum attainable profit is reached.
Cost
Total Revenues & Costs
Revenues
Max Profit
Optimum Quality
Total QualityQuality
Management - Spring 2010 - IUG 21
Founders Point of View
• Feigenbaum (Originator of ‘Total Quality’
concept)
Definition of Quality costs (1956)
Appraisal costs
Prevention costs
Failure costs

Cost of Quality
Biaya-biaya yang timbul dalam penangan masalah kualitas (Mutu, baik dalam
penanganan masalah kualitas (mutu), baik dalam rangka meningkatkan kualitas
maupun biaya yang timbul akibat kualitas yang buruk (Cost of Poor Quality).
Dengan kata lain biaya kualitas (quality cost) adalah semua biaya yang timbul
dalam manajemen kualitas (quality manajemen)
• Cost of Achieving Good Quality
– Prevention costs
• costs incurred during product design
– Appraisal costs
• costs of measuring, testing, and analyzing
• Cost of Poor Quality
– Internal failure costs
• include scrap, rework, process failure, downtime, and price
reductions
– External failure costs
• include complaints, returns, warranty claims, liability, and lost
sales
Prevention Costs
Biaya yang dikeluarkan dalam mencegah terjadi kegagalan pada
proses pertamanya
• Quality planning costs • Training costs

– costs of developing and implementing – costs of developing and putting on
quality management program quality training programs for employees
• Product-design costs and management
– costs of designing products with quality • Information costs
characteristics
– costs of acquiring and maintaining data
• Process costs related to quality, and development of
– costs expended to make sure productive reports on quality performance
process conforms to quality specifications
24
Examples of prevention Cost
– Application screening – Job descriptions
– Capability studies – Market analysis
– Controlled storage – Pilot projects
– Design review – Procedure writing
– Prototype testing
– Equipment maintenance &
repair – Procedure reviews
– Quality incentives
– Field testing
– Safety reviews
– Fixture design and
– Time and motion studies
fabrication
– Survey
– Forecasting
– Quality training
– Housekeeping – salesperson evaluation and
selection
– Personnel reviews

Appraisal Costs
• Biaya yang timbul saat melakukan pneyaringan atau

pendeteksian kegagalan produk:
• Inspection and testing

– costs of testing and inspecting materials, parts, and product at various stages and
at the end of a process
• Test equipment costs
– costs of maintaining equipment used in testing quality characteristics of products
• Operator costs
– costs of time spent by operators to gather data for testing product quality, to make
equipment adjustments to maintain quality, and to stop work to assess quality

Examples of appraisal cost
• Audit • Laboratory test

• Document checking • Personnel testing
• Diagram checking • Procedure testing
• Equipment calibration • Prototype inspection
• Final inspection • Receiving inspection
• In-process inspection • Shipping inspection

Internal Failure Costs
• Scrap costs • Process downtime
– costs of poor-quality costs
products that must be
discarded, including – costs of shutting down
labor, material, and productive process to fix
indirect costs
problem
• Rework costs
– costs of fixing defective • Price-downgrading
products to conform to costs
quality specifications
– costs of discounting
• Process failure costs poor-quality products—
– costs of determining that is, selling products
why production
process is producing as “seconds”
poor-quality products

External Failure Costs
• Customer complaint costs • Product liability
– costs of investigating and costs
satisfactorily responding to
a customer complaint – litigation costs
resulting from a poor- resulting from
quality product product liability and
• Product return costs customer injury
– costs of handling and • Lost sales costs
replacing poor-quality – costs incurred
products returned by because customers
customer
are dissatisfied with
• Warranty claims costs poor quality products
– costs of complying with and do not make
product warranties additional purchases

Defects, Scrap, Rework, Inspection,
Returns, Warranty, Quality Assurance
Prevention Appraisal
Design Review, Zero Defects Vendor Surveillance, Receiving
Program, Supplier Training, Supplier Inspection, Product Acceptance, Process
Evaluation, Specification Review, Control, Inspection Labor, Quality
Quality Audits, Preventive Control Labor, Testing Equipment Costs
Maintenance, Engineering Changes,
Product Liability, Increased Overhead
Internal Failure External Failure

Downtime, Engineering Changes, Consumer Affairs, Purchase Changes,
Excess Inventory, Disposal Costs, Service after Sales, Product Liability, Lost
Reinsertion Market Share Delivery Delay

Classifying Quality Costs

Preventing Poor Quality (Comparison)
Prevention Costs
Benefit
Appraisal Costs
$ Repair Costs Prevention Costs
Failure Costs Appraisal Costs

• Internal Repair Costs
• External
Failure Costs
Before Quality After Quality

Cost Cost
Alignment Alignment
Cost of Quality (other version)
1. Like all things there is a price to pay for quality. This total cost
can be split into two fundamental areas:
• a. Non Conformance. This area covers the price paid by not
having quality systems or a quality product. Examples of this
are:
(1) Rework. Doing the job over again because it wasn't right the first time.
(2) Scrap. Throwing away the results of your work because it is not up to the
required standard.
(3) Waiting. Time wasted whilst waiting for other people.
(4) Down Time. Not being able to do your job because a machine is broken.
• b. Conformance. Conformance is an aim of quality assurance.
This aim is achieved at a price. Examples of this are:
(1) Documentation. Writing work instructions, technical instructions and
producing paperwork.
(2) Training. On the job training, quality training, etc.
(3) Auditing. Internal, external and extrinsic.
(4) Planning. Prevention, do the right thing first time and poka yoke.
(5) Inspection. Vehicles, equipment, buildings and people.

Cost of Quality (other version)
2. These two main areas can be split further as shown below:

FIGURE 1.3

1-10-100 Rule
1
Prevention
10
$ $
Correction
$ $
100
Failure $
$
$
$
$
$

The 1:10:100 rule:
 Re.1 spent on prevention will save Rs.10 spent on
appraisal and Rs.100 on failure costs.
 One dollar spent on prevention will save $10 on

appraisal and $100 on failure costs.
 This rule helps one to prioritize expenditure on prevention,

which is sure to bring in greater returns.
 “The earlier you detect and prevent a defect the more

you can save. If you catch a two cent resistor before
you use it and throw it away, you lose two 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 the computer
user’s hands, the repair will cost hundreds of dollars.
Indeed, if a $5000 computer has to be repaired in the
field, the expense may exceed the manufacturing
cost.”
Difficulties in using Quality costing
 Management have not believed in the possibilities of improvement
 Quality costing is demanding

◦ It requires a lot of data of each activity related to quality
 Other limitations
◦ Does not resolve quality problems

◦ Does not provide specific actions
◦ vulnerable to short-term mismanagement
◦ difficult to match effort and accomplishment
◦ subject to measurement errors
◦ may neglect important or include inappropriate costs

Steps in implementing quality cost
1. Involve accountants right from the start

2. Decide purpose and objectives
3. Decide how to deal with overheads
4. Distinguish between basic work and quality related activities
5. Collection data which offers the prospect of real gains
6. Start by examining failure costs
7. Evaluate the costs of inspection
8. Analyze and use the data
9. Collecting and reporting quality cost data

Preventing Poor Quality
• Would it not make sense to prevent poor
quality products from happening?
• How can this be done?
• Whose responsibility is this?

How to Prevent Poor Quality
• Prepare to measure costs of quality
– Determine categories of quality costs
– Create measurement system that
captures categories of quality costs
• Assign responsibility to collect data
• Analyse collected data

Determine Quality Cost Categories
• Understand your product

• Understand your process
• Understand where problems occur
• Determine precisely what goes wrong
• Determine what costs represents each
problem

Creating Data Collection System
• Create measurement system
– Attempt to harness existing financial
accounting system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are
accurate

Assign Responsibility
• Make individuals at all levels responsible

for collecting quality cost data:
– If quality cost data is required then
make it the responsibility of the person
who creates the cost to collect the
data
• If no one is responsible no one will bother

Analyse Collected Data
• Data on its own is useless
• You must have it analysed to be able to
extract meaning
• Determine what knowledge you require
• Develop an analysis system that provides
the knowledge you require

Useful Quality Cost Knowledge
• What you need to know is useful
• What you do not need to know is useless
• Only ask for knowledge you need to know
• Demand that knowledge is presented so
that it can be understood easily

Management is Responsible
• Management decides what to produce in
terms of Products (goods and / or services)
• Management assigns responsibilities to
produce products
• Management is accountable for effectively
using resources to produce products

History of Activity-Based Costing
 Term “activity-based costing” created in 1975 by Dr. Robert

Kaplan
 Resulted from dissatisfaction with traditional accounting

categories
 Identifies activities as the fundamental cost object of an

organization
 Widely used in industries (e.g. FedEx, Texas Instruments…)

Benefits Associated With ABC
 More precise cost information
 Improved cost control and management
 Improved insight into cost causation
 Better performance measures

Definitions
• Activity Based Costing (ABC) is a methodology that

measures the cost and performance of resources, activities
and cost objects. Cost objects consume activities, and
activities consume resources.
• Activity Based Management (ABM) is the broad discipline

that focuses on achieving customer value through the
continuous management of activities. ABM draws on ABC
cost information and performance measurement as a major
(but not only) source of information.

The Link Between Quality and
Productivity
 Effective quality improvement can be
instrumental in increasing productivity and
reducing cost.
 The cost of achieving quality improvements and

increased productivity is often small.

Summary Slide
• The following Slides are for understanding only (subject to

indirect Questions): “ 37, 38, 39, 40”
• Other slides are required and subjects to any type of

Questions
Total Quality Management - Spring 2010 52

• Although anyone who works in an organization will be
familiar with many examples of both of these issues,
business accounting systems are not set up to capture
these costs.
• Traditional accounting approaches are designed to track
the inflow and outflow of money in an organization (and,
by extension, to product lines or departments).
• There is little emphasis on whether the money in the
department is spent effectively
• The lack of clarity of the cost of poor quality in
organizations led to a lack of focus on improvement for
many years.
• It was only with the advent of the “Cost of Quality”
approach in the 1950’s (Defoe and Juran, 2010;
Feigenbaum, 1961) that organizations had a financial tool
to assess the costs associated with quality failures and
thus focus on the most important areas for improvement.
The principal benefits of the Cost of Quality system
1. By translating quality issues into financial measures it
facilitates senior management commitment to
improvement activities and, if sufficiently detailed,
suggests priority areas for improvement.
2. It provides a clear indication of the scale of the
opportunity presented by current poor quality
performance and a guide as to the level of resources
which can be committed.
3. Provides an effective measure of improvement if re-
calculated after the improvement has been made.
issues with the use of quality costs
1. The costs are not likely to be accurate to the last penny, include
the time spent reworking an item, or meeting with unhappy
customers.
2. These will always be estimates, especially in the case of white
collar work where the balance of time spent on prevention,
appraisal and failure activities will be open to interpretation.
3. Cost of Quality systems require trust to be effective. If
departments or individuals are criticised for high quality costs
they may subsequently under-report, whereas if an improvement
project team is incentivised on the amount of money they save it
may be tempting to be generous in their assumptions
4. To be effective in supporting improvement it is important
that the outcomes of cost analysis are seen to be
beneficial. In many cases part of the identified cost
opportunity will be the cost of employing people to do
activities associated with failure
5. When re-calculating you need to make sure the
comparison is fair and consistent.
6. It is also worth noting that some costs are recurring;
these would include salaries of those involved in
embedded rework activities or calibration of inspection
equipment.
7. Finally, as Deming (1990) suggested, many of the
important elements of the cost of poor quality are
unknown and unknowable.
8. Although we may seek to take into account things like
customer satisfaction the financial impact of poor
reputation (for example) is practically impossible to
quantify and as a result it is usually ignored
Waste
• Waste is bad and should be eradicated (reduced)

• Seven wastes were identified by Toyota Production
System
• And have since been widely applied to process
improvement, becoming particularly associated with the
principle of lean manufacturing.
Waste
• Waiting: A typical example of this form of waste is found

when dealing with components or paperwork in batches.
The first item in a batch has to wait for the remainder of
the batch to complete that operation before the whole
batch can move on to successive operations. This has a
significant effect on increasing lead times.
• Correction: Put simply, this is the waste resulting from a
failure to achieve a ‘right-first time’ way of working. Having
to rework or scrap components or paperwork, add
additional processing cost as well as introducing delays
that affect lead-time.
• Over-production: This is where more than is required is produced,
usually under the misapprehension that the company is ‘saving’
set-up time. It fails to appreciate the extra costs involved in
working capital, storage space and the delays affecting following
jobs by doing more than is required.
• Processing: Over-engineering, a good example of this form of
waste, is where additional operations are performed that do not
add any value for the customer.
• Conveyance: This is the movement of materials, components or
paperwork around a business; in order that the various value
adding operations can be performed.
• Inventory: This not only ties up working capital, but adds
storage costs and reduces the businesses flexibility in
being able to bring in new products.
• Motion:This is an ergonomic factor where employees are
forced to undertake unnecessary movement in order to
perform their tasks. Examples include ill-considered
positioning of equipment and material in relation to the
workplace.
Intangible Benefit
• Increased Customer Satisfaction

• Increased Workforce Satisfaction and Motivation
• Improved Environmental Impact
Benefits of Using Quality Control
Summary and Impact
• Much empirical work has been carried out which supports

the practical impact of Quality Management on business
performance.
• Corredor and Goni (2010) conducted a study in Spain
which showed higher mean performance (in terms of
profitability) for leaders in TQM implementation than a
control group.
• Bendell and Boulter (2008) found that two years after
winning a national quality award the award winners
outperformed comparison companies by 24 percent for
share value.
• It is also interesting to note that ‘Quality’ remains at the
top of the agenda for many organizations.
• Burcher et al (2010) conducted a study in Australia and
Britain noted that ‘Quality Lives On’ as a business
challenge in both countries and that a high proportion of
firms surveyed were implementing new quality initiatives.

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Chapter 2

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CHAPTER 2

Why Quality Management

• After following this subject, students understand the

• Most organizations are unable to take a long term view.

• It has long been assumed in traditional organizations that

• Tangible benefits refer to items which have a direct

• Perhaps the most obvious tangible benefit of quality

• Quality costs are real and estimated at:

Total Quality Management - Spring 2010 - IUG 13

• Management will give special attention when quality is measured in

Total Quality Management - Spring 2010 - IUG 14

• Greater accuracy in the evaluation and forecasting of

• Justification for investment in the prevention and appraisal of

• Ability to cost and compare performance across all

• Identification and prioritization of activities, processes and

Total Quality Management - Spring 2010 - IUG 15

• Ability to set cost-reduction targets and then to measure and report

• Ability to produce “local” data which improves understanding of

• Provision of data to support formal quality management system

• Enable decisions about quality to be made in an objective and

• Promoting TQM and a company-wide quality improvement culture

Total Quality Management - Spring 2010 - IUG 16

 Quality costs are defined as costs associated with

 The cost of poor quality can add to other costs

 The price of nonconformance (Philip Crosby) or

Customers will seek Improved quality that exceeds

Profit is maximized at the The optimum quality level is always achieved

Total Quality Management - Spring 2010 - IUG 22

• Quality planning costs • Training costs

Total Quality Management - Spring 2010 - IUG 25

• Biaya yang timbul saat melakukan pneyaringan atau

• Inspection and testing

Total Quality Management - Spring 2010 - IUG 26

• Audit • Laboratory test

Total Quality Management - Spring 2010 - IUG 27

Total Quality Management - Spring 2010 - IUG 28

Total Quality Management - Spring 2010 - IUG 29

Internal Failure External Failure

Total Quality Management - Spring 2010 - IUG 30

Total Quality Management - Spring 2010 - IUG 31

$ Repair Costs Prevention Costs

Failure Costs Appraisal Costs

Before Quality After Quality

Total Quality Management - Spring 2010 - IUG 34

2. These two main areas can be split further as shown below:

Total Quality Management - Spring 2010 - IUG 35

Total Quality Management - Spring 2010 - IUG 36

 One dollar spent on prevention will save $10 on

 This rule helps one to prioritize expenditure on prevention,

 “The earlier you detect and prevent a defect the more

 Management have not believed in the possibilities of improvement

 Quality costing is demanding

◦ Does not resolve quality problems

Total Quality Management - Spring 2010 - IUG 38

1. Involve accountants right from the start

Total Quality Management - Spring 2010 - IUG 39

Total Quality Management - Spring 2010 - IUG 40

Total Quality Management - Spring 2010 - IUG 41

• Understand your product

Total Quality Management - Spring 2010 - IUG 42

Total Quality Management - Spring 2010 - IUG 43

• Make individuals at all levels responsible

Total Quality Management - Spring 2010 - IUG 44

Total Quality Management - Spring 2010 - IUG 45

Total Quality Management - Spring 2010 - IUG 46

Total Quality Management - Spring 2010 - IUG 47