MGAC [Quality & Throughput Analysis]

**QUALITY & THROUGHPUT ANALYSIS** **SEP 2, 2023** **Quality Cost:** * Cost that exists because poor quality may or does exist. **2 major quality cost:** 1. **Control cost:** - Cost of performing activities - Performed to detect & make sure product will not fail. TO PREVENT & DETECT poor quality - Prevention costs incurred to prevent poor quality in the products or services being produced. These are costs to make sure products will not fail. * If these increase, cost of failure will decrease. * Ex: Quality Engineering, quality training programs, quality planning, quality reporting, supplier evaluation & selection, quality audits, quality circles, field trials, and design reviews. - Appraisal Costs: to determine whether products & services are conforming to their requirements or customer needs * Ex: inspecting & testing materials, packaging inspection, supervising appraisal activities, product acceptance, measurement (inspection & test equipment), and outside endorsements * Product acceptance: Not inspecting everything. Sampling from batches * Process acceptance: Testing the process 2. **Failure cost:** performed in response to poor quality. - **Internal Failure costs:** detected by appraisal activities. It occurs before the product is shipped or delivered to outside parties. * Ex: scrap, rework, downtime (due to defects), reinspection, re-testing & design changes. The use of the prefix "RE-" - **External Failure Costs:** occurs after being delivered to outside parties. * Ex: Costs of recalls, lost sales, returns & allowances, warranties, repairs, product liability, customer dissatisfaction, lost market share, complaint adjustments. * These disappear if no defects exist. (same with internal) **Observable quality costs:** measurable & proven from receipts, available from an organization's accounting record. **Hidden quality costs:** Opportunity costs resulting from poor quality. **FORMULAS** * **Cost of Quality** = Control Cost + Failure Cost * **Control Costs** = Prevention Cost + Appraisal Cost * **Failure Costs (FC)** = Internal FC + External FC * **Total External FC** = Measured Quality Cost + Hidden Quality Cost x Multiplier (Multiplying effect) **P1** During Y1 & Y2, Norton Company reported sales of $18,000,000 per year. Norton listed the following quality costs for the past two years. Assume that all changes in the quality costs are due to a quality improvement system. (1) Prepare a quality cost report for each year. (2) How much were the additional resources invested in prevention & appraisal activities from one year to the next? What return did this investment generate? (What reduction in failure costs was achieved?) **Norton Company** **Cost of Quality Report** **For the periods of Y1 & Y2** | Category | Y1 | % of Sales | Y2 | % of Sales | |---|---|---|---|---| | **Prevention Costs** | | | | | | Field Trials | 450,000 | | 300,000 | | | Quality Training | 120,000 | | 200,000 | | | **Appraisal Costs** | | | | | | Packaging Inspection | 180,000 | | 120,000 | | | Process Acceptance | 150,000 | | 150,000 | | | Product Inspection | 150,000 | | 90,000 | | | **Internal FC** | | | | | | Reinspection | 300,000 | | 150,000 | | | Retesting | 435,000 | | 105,000 | | | **External FC** | | | | | | Recalls | 600,000 | | 300,000 | | | Lost Sales | 600,000 | | 600,000 | | | Complaint Adjustment | 465,000 | | 245,000 | | | **Total** | 3,600,000 | 20% | 3,000,000 | 16.67% | **Profit Improvement through Total Quality Management** | Category | Y1 | Y2 | Variance | |---|---|---|---| | Control Cost | 900,000 | 1,560,000 | 660,000 (additional investment) | | Failure Cost | 2,100,000 | 1,440,000 | (660,000) Return lower quality cost | | **Net Effect on Quality Cost** | | | **(600,000)** | **3. The management of Norton believes that it is impossible to reduce quality costs to 2.5% of sales. Assuming sales continue at the $18,000,000 level, calculate the additional profit potential facing Norton. Is the expectation of improving quality and reducing quality cost to 2.5% of sales realistic? Explain** * Current Quality Cost: 3,000,000 (from Y2) * Projected Quality Cost (2.5% x 18,000,000): 450,000 * Additional Profit Potential: 2,550,000 **Mathematically, NO. Norton needed to spend 8.67% (6.67%+2%) of Sales to control failure costs at 8% (1.42%+6.58%). Lowering down the control costs will increase failure costs.** **BUT! Industry-standard wise, YES. The experiences of real-world companies show that it is an achievable goal. Most Japanese companies have measured quality costs to be less than 5% compared to US experiences of 20% to 30%.** **Estimating Hidden Quality Cost Methods:** **1. The multiplier method:** Assumes that the total failure cost is simply some multiple of measured failure cost: Total external failure cost = k (Measured external failure cost) where k = multiplier effect. The more you're able to measure or account for external failure costs, the more observation that you have for external failure cost, the more hidden quality cost that we have. Hidden Quality Cost = (Measured Quality Cost x Multiplier) - Measured Quality Cost **The market research method:** used to assess the effect poor quality has on sales & market share. The results can be used to project future profit losses attributable to poor quality. Examples include customer surveys & interviews. **The Taguchi Quality Loss Function:** assumes that any variation from the target value of a quality characteristic causes hidden quality costs. The hidden quality cost increase quadratically as the actual value deviates from the target value. The equation is: L(y) = k(y-T)^2 where: * k = A proportionality constant dependent upon the org's external FC * y = Actual value of quality characteristic * T = Target value of quality characteristic * L = Quality Loss **Shaw Company manufactures a product that has a target value of 32 ounces. Specification limits are 32 ounces plus or minus 0.75 ounce. The value of k is $120. A sample of 5 units produced the if measures:** | Unit | Measured Weight | |---|---| | 1 | 32.30 | | 2 | 32.75 | | 3 | 32.45 | | 4 | 31.75 | | 5 | 31.90 | During May, a total of 50,000 units was produced. (1) Calculate the loss for each unit. (2) Calculate the average loss for the sample of 5. (3) Using the average loss, calculate the hidden quality loss for April. | Unit | Actual (y) | (y-T)=y-32 | (y-T)^2 | k(y-T)^2 = k*120 | |---|---|---|---|---| | 1 | 32.30 | 0.30 | 0.090 | 10.80 | | 2 | 32.75 | 0.75 | 0.563 | 67.56 | | 3 | 32.45 | 0.45 | 0.203 | 24.36 | | 4 | 31.75 | -0.25 | 0.063 | 7.56 | | 5 | 31.90 | -0.10 | 0.010 | 1.20 | average quality loss = $22.30