External Failure Costs Research Articles

Classical model based analysis of cost of poor quality in a manufacturing organization

In today’s world of manufacturing competitiveness, quality is a prerequisite and it is no longer a differentiator. Although people in developing countries have started understanding the importance of quality in any sector but this fact is still not very much clear to decision makers that a substantial amount is lost in terms of cost of poor quality (COPQ). This is a case study focusing on COPQ in a heavy manufacturing organization of Pakistan keeping in view the literatures of economical designing of quality and quality costing. Approach of studied organization was checked out against COPQ keeping in view all kind of quality costs including prevention cost, appraisal cost, internal failure cost and external failure cost. SWOT and PAF costing analysis were performed. It was observed that statistical process control (SPC) and statistical quality control (SQC) techniques are completely being neglected and even the ISO certified departments are not implementing ISO recommendations and total quality management (TQM) guidelines in this organization. This public sector organization is still governed by the myth that quality is just a buzz word and it should just be limited to paper work far away from actual implementation. Quality is being compromised on basis of material, scrap, trainings, human resource management, product robust design, products tolerances, and Cp and product performance all leading to COPQ. This study suggests a quality cost model based upon some charting techniques devised to measure the actual and the planned activities. Furthermore a sound methodology of measuring internal and external failure cost is also provided. Key words: Cost of poor quality, statistical process control, statistical quality control, total quality management, quality control.

Safety hazard and time to recall: The role of recall strategy, product defect type, and supply chain player in the U.S. toy industry

This research identifies and tests key factors that can be associated with time to recall a product. Product recalls due to safety hazards entail societal costs, such as property damage, injury, and sometimes death. For firms, the related external failure costs are many, including the costs of recalling the product, providing a remedy, meeting the legal liability, and repairing damage to the firm's reputation. The recent spate of product recalls has shifted attention from why products are recalled to why it takes so long to recall a defective product that poses a safety hazard. To address this, our research subjects to empirical scrutiny the time to recall and its relationship with recall strategies, source of the defect and supply chain position of the recalling firm. We develop and verify our conceptual arguments in the U.S. toy industry by analyzing over 500 product recalls during a 15-year period (1993–2008). The empirical results indicate that the time to recall, as measured by difference between product recall announcement date and product first sold date, is associated with (1) the recall strategy (preventive vs. reactive) adopted by the firm, (2) the type of product defect (manufacturing defect vs. design flaw), and (3) the supply chain entity that issues the recall (toy company vs. distributor vs. retailer). Our results provide cues that could trigger a firm's recognition of factors that increase the time to recall.

품질코스트를 이용한 데이터 QC 활동의 자원할당 모형 연구

This research proposes a resource allocation model of Data QC (Quality Control) activities using COQ (Cost of Quality). The model has been developed based on a series of research efforts such as COQ classifications, weight determination of Data QC activities, and an aggregation approach between COQ and Data QC activities. In the first stage of this research, COQ was divided into the four typical classifications (prevention costs, appraisal costs, internal failure costs and external failure costs) through the opinions from five professionals in Data QC. In the second stage, the weights of Data QC activities were elicited from the field professionals. An aggregation model between COQ and Data QC activities has been then proposed to help the practitioners make a resource allocation strategy. DEA (Data Envelopment Analysis) was utilized for locating efficient decision points. The proposed resource allocation model has been validated using the case of Korea national defense information system. This research is unique in that it applies the concept of COQ to the data management for the first time and that it demonstrates a possible contribution to a real world case for budget allocation of national defense information.Keywords: resource allocation, data quality control, cost of quality1. 서 론

Quality Control and Signaling Strategy in Supply Chain

Based on the principal-agent theory, this paper constructs quality signaling game model in supply chain under the condition of asymmetric information. The supplier makes the production process investment decision and determines the type of production process level (high level type or low level type), who will also make quality prevention strategy and determine its products quality prevention level. The manufacturer makes the quality appraisal strategy and processing strategy when it accepts the intermediary components, who will also determine its products quality inspection level and processing level. In this paper, we analyze the supplier may signal the type of production process investment level to the manufacturer in order to obtain the optimal incentive contracts. We take use of the optimal theory to establish supplier’s production process quality prevention model and manufacturer’s products quality inspection model and investigate the manufacturer's information rents to motivate supplier to improve products quality level. This paper will prove that: the supplier may have the incentives to signal the type of production process investment level to the manufacturer, and improve its products quality prevention level in its production process. When the manufacturer observes supplier’s signals of products quality level, it will reduce quality inspection level and improve processing level. With the improvement of supplier’s quality prevention level, its warranty payments and price rebate will decrease, the manufacturer will increase its upfront payments and reduce apportionment ratio of external failure cost. Meanwhile the integrated supply chain’s joint expected profits will also increase, and then the manufacturer will reduce the supplier’s information rents obviously. Above all, we analyze the causes of ratchet effects and provide corresponding quantitative descriptions and proofs for our conclusions respectively.

Moral hazard strategy and quality contract design in a two-echelon supply chain

Based on game theory and principal-agent theory, this paper focuses on how to control product quality and design quality contract in supply chain when moral hazard exists. We set up the supplier and buyer’s expected profits function model, in which the supplier makes production process investment-level decision and decides on the product quality prevention level, whereas the buyer makes quality evaluation decision and decides on the product quality inspection level. The supplier with a moral hazard of reducing investment level may lack investment in the production process; thus, the buyer will pay the information rent to incentivize the supplier to improve the investment level. The buyer creates the moral hazard of exaggerating the product quality defective rate, who may overinvest in the inspection process. We use the optimal condition to solve supplier’s first-best investment level, product quality prevention level, and buyer’s first-best quality inspection level, internal penalty, and apportionment ratio of external failure cost. We also conduct a simulation test that shows the following: When the supplier improves its investment level, its product quality prevention level will increase, and the buyer’s quality inspection level will decrease. With the improvement in the buyer’s product quality inspection level, its internal penalty will increase, and the supplier’s external failure cost will also increase while its expected profits will decrease. Hence, the buyer will design an incentive contract, the expected profits of which will increase, and the whole supply chain’s joint expected profits function may become an inverse U shape. Finally, we develop a simulation example and propose suggestions for quality control strategy and contract design in the supply chain under the conditions of asymmetric information.

Effect of the Quality Costing System on Implementation and Execution of Optimum Total Quality Management

Today, quality has become the best considered issue for manufacturers and suppliers. Hence, understanding thisconcept and its execution – related costs in the organizational level is a substantial and vital principle forachieving this goal. To ensure the success of the total quality management process, creating an official structurerelevant to this system and using suitable tools and techniques is necessary. Due to fierce national andinternational competition on one hand and fast change in technology on the other, analyzing, having a betterrecognition and applying proper discussions including total quality management (TQM) could prove useful andeffective. With the importance of establishing a quality costing system for the efficiency of a total qualitymanagement system taken into account, the present research deals with studying the effect of the quality costingsystem helps an organization with regards to identify designing and prevention costs, appraisal costs, internalfailure costs and external failure costs. This research is of applied type and was done as a case study at PARSKHAZAR INDUSTRIAL CO. In order to analyze the results, variance analysis (ANOVA) and Duncan tailedtest were used. Research result showed that the higher the specifying level of the quality costing system in anorganization, the more its effect on the optimum implementation of TQM.

PENGARUH BIAYA KUALITAS TERHADAP PENJUALAN PADA PT. GUARDIAN PHARMATAMA

This is an empirical research to determine the influence of the independent variable quality cost to the dependent variable sales. A T-test on prevention cost, valuation cost, internal failure cost, and external failure cost showed significant influence on sales. An F-test on prevention cost, valuation cost, internal failure cost and external failure cost also showed significant influence on sales. Regression analysis was done using the multiple linear regression equation Y = -240710057,3 + 496,753 X1 + 411,237 X2 + 38,384 X3 + 21,283 X4. Regression analysis showed positive that prevention cost, valuation cost, internal failure cost, and external failure cost had a positive influence on sales, which indicates that increasing costs of quality leads to increase in sales. A coefficient determination test (Kd) showed that 95% of quality cost contributes to sales; the remaining 5% is influenced by factors other than cost of quality.

Failure Risk and Quality Cost Management in the Choice of Single versus Multiple Sourcing

The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the paper is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer-initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs.

Development of empirical quality cost model for a manufacturing industry

In today's world of globalisation, it is considered that a business without quality products or services will not survive. Quality-related costs arise from a number of activities and involve every department in an industry, which are ultimately affecting the quality of the product or service. In order to satisfy the customer's need at lower cost, one should know the interactions between quality-related activities associated with prevention, appraisal, internal failure and external failure costs. Several authors point to the need and value of understanding the relationship between total quality cost and other cost categories. In this paper, an attempt is made to establish the mathematical relationship using regression analysis between quality cost and its cost component. The effect of each cost component on total quality cost is studied with the help of data collected in a manufacturing industry. The empirical quality cost model is developed for a manufacturing industry.

Research on the trade-off relationship within quality costs: A case study

In today's global competition, the significant cost saving potential on the quality costs is attracting more and more firms. The quality costs can be classified into control costs (prevention and appraisal costs) and failure costs (internal and external failure costs). As a universally accepted principle, the increase of the control costs will result in the decrease of the failure costs and vice versa. This relationship is called the trade-off relationship within quality costs. Thereof, the proportions of quality costs are vital for balancing the quality cost and there is a balanced point (a set of proportions) that can make a firm obtain the lowest level of the sum of quality costs. Based on a real case study, this paper concentrates on the statistic analysis of the trade-off relationship between quality costs and the quantitative calculation of the balanced point. The statistic analysis reveals that the trade-off relationships within quality costs will not show up except when time delays are taken into account. With these time delays, the related total quality cost (RTQC) can be derived and utilised to compute the balanced point of the quality costs. The case study demonstrates that the findings and approach can provide a useful assistance in the quality cost saving and management improvement.

System dynamics approach to analysing the cost factors effects on cost of quality

PurposeThe purpose of this paper is to propose a model for analysing the influence of costs of quality.Design/methodology/approachA model is designed by using a causal loop diagram and is analysed through a system dynamics approach. The model simulation is prepared by Vensim software.FindingsPrevention and appraisal costs are the two effective cost factors. The model represented in this paper reveals that prevention costs have the most effect on total cost of quality and especially external failure costs. Hence, in order to achieve the customer expected quality level, prevention and appraisal costs should be considered.Research limitations/implicationsCalculating and measuring non‐conformance costs is very difficult in organizations and some errors and mistakes may happen.Practical implicationsA system dynamics approach can analyse and measure the amount of prevention cost effects on cost of quality in different organizations.Originality/valueThe proposed methodology demonstrates the use of an innovative approach in developing a cost of quality concept and constructing a practical framework for system dynamics in a real case.

IMPLEMENTATION PROPOSAL FOR THE ASSESSMENT OF OCCUPATIONAL ACCIDENT COSTS IN TERMS OF QUALITY COSTS

Occupational accidents, whether they are work-related or not, are defined as unplanned and unforeseen incidents which cause one or more than one workers to get ill, injured or lose their lifes. The increase in occupational accidents in recent years, together with the decrease in productivity and production efficiency, has mooted direct and indirect costs for companies. Quality costs are the type of costs which arise due to the activities implemented in order to preclude possible flaws, to the planned quality tests,and to flaws that appear during the production or customer delivery processes. Quality costs are classified in British Standards 6143 as follows: (a) Prevention Costs (b) Appraisal Costs (c) Internal Failure Costs (d) External Failure Costs As regards quality costs, occupational accidents that may produce highly excessive costs can be prevented by executing a good number of prevention activities. With the analysis of workflow processes in the established or subsequently established engine park, quality costs of those processes can be measured and evaluated in terms of occupational accidents. Despite prevention costs and appraisal costs, occupational accidents may still continue to appear in companies owing to various reasons. Those accidents may cause cessation in the production flow, or effect defective products. All these costs combined may constitute a considerable amount of internal failure costs. A company, along with internal failure, may have to endure a good number of appraisal costs and indemnities owing to workers’ complaints. In this study the internal and external failure costs caused by a significant industrial accident which occurred during implementation will be appraised. Furthermore, costs of operating activities aimed at preventing this type of occupational accidents will be discussed and a number of proposals will be presented in respect to probable prevention costs.

A research on the measurement of quality costs in the Turkish food manufacturing industry

The measurement of quality costs is a good indicator of the quality and the overall performance of a firm. There have been many attempts to measure quality costs in both theoretical and empirical research. However, there is a lack of research about the measurement of quality costs as far as the food industry is concerned. Therefore, the purpose of this study is to measure quality costs with specific reference to the Turkish food manufacturing industry. In contrast to many previous studies made with cross-section or time series regression, panel regression method has been used to analyse the relation between conformance costs and non-conformance costs in seven leading Turkish food manufacturing firms, for the period 2000–2005. It has been found that when the conformance costs are increased by 1%, the non-conformance costs decline by 0.83%. This also means that the basic premise of the traditional quality cost model has been confirmed. That is to say, there is a trade-off between conformance and non-conformance costs and the non-conformance costs can be reduced by increasing conformance expenditures. In conclusion, the negative relation found between conformance and non-conformance costs can rather be attributed to external failure costs than internal failure costs.

Tracing Quality Cost in a Luggage Manufacturing Industry

Quality costs are the costs associated with preventing, finding, and correcting defective work. Since the main language of corporate management is money, quality-related costs act as means of communication between the staff of quality engineering departments and the company managers. The objective of quality engineering is to minimize the total quality cost across the life of product. Quality costs provide a benchmark against which improvement can be measured over time. It provides a rupee-based report on quality improvement efforts. It is an effective tool to identify, prioritize and select quality improvement projects. After reviewing through the literature it was noticed that a simplified methodology for data collection of quality cost in a manufacturing industry was required. The quantified standard methodology is proposed for collecting data of various elements of quality cost categories for manufacturing industry. Also in the light of research carried out so far, it is felt necessary to standardise cost elements in each of the prevention, appraisal, internal failure and external failure costs. . Here an attempt is made to standardise the various cost elements applicable to manufacturing industry and data is collected by using the proposed quantified methodology. This paper discusses the case study carried in luggage manufacturing industry. Keywords—Quality Costs, PAF model, quantified methodology, Case study.

Comparative Analysis of Quality Costs and Organization Sizes in the Manufacturing Environment

Companies can lose money because they fail to take advantage of opportunities to improve their costs of quality. Most cost accounting data are not revealed to the public and are rarely exchanged among businesses. Also, there is no known study testing the effect of an organization's size on costs of quality. This study attempts to analyze and compare quality cost categories between small and medium enterprises (SMEs) and large organizations, and proposes an empirically based model for quality costs in the manufacturing environment.The quality cost model—or prevention, appraisal, and failure (PAF) costs model—was used as the theoretical foundation for the research design. ASQ and Quality Progress magazine helped in the announcement of the online questionnaire to manufacturing and quality professionals, resulting in 63 respondents. Excel spreadsheets were used in data analysis and analysis of variance was used in hypotheses testing.The results indicate no significant differences in prevention, appraisal, and internal failure costs between SMEs and large organizations, but there were external failure cost differences. The findings also suggest that total quality costs were on an average 8 to 10 percent of manufacturing expenses, or 2.6 to 4 percent of sales revenues. The failure costs were the major expenses and ranged from 70 percent to 80 percent of total quality costs. In addition, the primary problems in quality cost program implementation were culturally related in favor of correction over prevention, human mistakes, insufficient processes, and lack of proper information.

Integrating inspection-policy design in assembly-line balancing

This paper addresses the problem of assembly-line balancing and selection of the best inspection policy. Different inspection policies yield different manufacturing, reworking, inspection, and external failure costs. While, in the literature, assembly-line balancing and inspection-policy design have usually been addressed as different problems, they are strongly interrelated. Inspection tests require time to be carried out, and thus their assignation directly influences the results of the assembly-line balancing procedure, that is the number of stations that are necessary and hence the line installation cost. Thus, the advantages of integrating inspection policy design in assembly-line balancing are clear, but to our knowledge no such model is available yet. In this paper, a new model that simultaneously defines inspection policy and assembly-line balancing is presented.

Quality Implications of Warranties in a Supply Chain

We examine a supply chain in which the final product consists of components made by a buyer and a supplier. In the single moral-hazard case, the buyer’s quality is observable, whereas in the double moral-hazard case, the buyer’s quality is not observable. The supplier’s quality is not observable in both the single and double moral-hazard cases. In each case, we examine a warranty/penalty contract between the buyer and the supplier based on information from incoming inspection and external failures. When the warranty contract is based on information from external failures in the single moral-hazard case, the first-best quality is achieved, whereas in the double moral-hazard case, the first-best quality is achieved if the supplier is not held responsible for the buyer’s defects. When the warranty contract is based on information from incoming inspection, the first-best is achieved in both the single and double moral-hazard cases, even when the incoming inspection does not identify all of the supplier’s defectives. An analysis of whether the penalty on the supplier in each case meets a fairness criterion—that is, the penalty does not exceed the manufacturer’s external failure cost—indicates that the fairness criterion is met by the warranty contract based on information from incoming inspection when the first-best incoming inspection is sufficiently high. However, if the first-best incoming inspection is low and the precision of pinpointing the supplier’s responsibility for external failure is sufficiently high, the warranty contract based on external failures could satisfy the fairness criterion.

Economic production quantity and process quality: a multivariate approach

PurposeThe purpose of this paper is to study the interaction of economics of production with process quality, when multiple key quality characteristics are present. Specifically, the paper aims to analyse the possibility of investing in a production process to reduce its variances and the impact on a multivariate quality loss function.Design/methodology/approachA bivariate inventory‐planning model is developed, in which the optimal investment for reducing process variances and the optimal lot size are jointly determined. A case study with industrial data is presented to illustrate the possible solution procedures and the potential advantages of the proposed model.FindingsIt is found that by using the previous approaches to analyse the interaction between the economics of production and process quality, a company will underestimate the cost of quality, especially the expected external failure cost (quality loss), and ultimately invest less into the prevention activities to improve the process.Originality/valueThe proposed model can help managers to compare different production processes and also guide the managers towards better choices for process improvement. To the best of our knowledge, this paper is the first to integrate the economic production quantity (EPQ) problem with the process quality consideration for products with multiple quality characteristics.

BIAYA KUALITAS DAN KOMPQNENNYA PADA BAD AN USAHA PERAIH ISO 9000 DI KAWASAN INDUSTRI SIER DAN PIER

Quality has become an important competitive dimension for all organization. Recently, -the emphasis on quality has shifted from a source of strategic advantage to a compepetive necessity As the companies implement quality-improvement programs,one of those is. ISO 9000, a need arises to monitor and report on the progress of these programs. Managers r need to know about the quality costs and the component of quality costs. The component of quality costs include prevention, appraisal, internal failure and external failure costs. This article describes how the companies that were awarded ISO 9000 define the quality costs, what items to be included in the each component of quality costs and how the composition of each component of quality activity cost driver is.

Assessing quality costs of external failures (warranty claims)

Measuring quality costs is an essential step for achieving competitiveness because these costs are strongly related to the company's annual revenue. One of the most important categories of quality costs is that of external failure costs. The consequences of these failures are not only related to the costs incurred to the failure in the field, but also to customer appeasement Within this quality cost category there are the claims against warrant. The warranty, which is a contract between a manufacturer and the consumer, specifies that the manufacturer agrees to repair or replace the failed product within the predetermined warranty period. This paper deals with the assessment of external failures by presenting a case study on warranty costs. The findings demonstrated that warranty costs can be significant and their reduction very important. In the studied case, the assessment of warranty costs has proved to be feasible and effective.