Question

Costen, Inc., produces cellphone equipment. Jessica Tomly, Costen’s president, decided to devote more resources to the improvement of product quality after learning that her company had been ranked fourth in product quality in a 2009 survey of cellphone users. Costen’s quality-improvement program has now been in operation for two years, and the cost report shown here has recently been issued.

Semi-Annual Cost of Quality Report
Costen, Inc.

30 / 06 / 2010
31 / 12/ 2010
30 / 06 / 2011
31 / 12 / 2011

Prevention costs
   Maintenance
   Supplier training
   Design reviews
       Total

440 000
20 000
50 000
510 000

440 000
100 000
214 000
754 000

390 000
50 000
210 000
650 000

330 000
40 000
200 000
570 000

Appraisal costs
   Incoming inspections
   Final testing
       Total

108 000
332 000
440 000

123 000
332 000
455 000

90 000
293 000
383 000

63 000
203 000
266 000

Internal failure costs
   Rework
   Scrap
       Total

231 000
124 000
355 000

202 000
116 000
318 000

165 000
71 000
236 000

112 000
67 000
179 000

External failure costs
   Warranty repairs
   Customer returns
       Total

165 000
570 000
735 000

85 000
547 000
632 000

72 000
264 000
336 000

68 000
188 000
256 000

Total quality costs
2 040 000
2 159 000
1 605 000
1 271 000

Total revenues
8 240 000
9 080 000
9 300 000
9 020 000

Required:

4.1 For each period, calculate the ratio of each cost of quality category to revenues and to total quality costs.

4.2 Based on the results in 4.1, would you conclude that Costen’s quality program has been successful? Prepare a short report to present your case.

Answer 1

Percentage of each quality category on Total Quality Costs

Particulars	30/6/2010	31/12/2010	30/06/2011	31/12/2011
Prevention Cost	10.78%	10.19%	12.15%	12.98%
Maintenance	0.49%	2.32%	1.56%	1.57%
Supplier Training	1.23%	4.96%	6.54%	7.87%
Design Reviews	12.50%	17.46%	20.25%	22.42%
Appraisal Cost	2.65%	2.85%	2.80%	2.48%
Incoming Inspections	8.14%	7.69%	9.13%	7.99%
Final Testing	10.78%	10.54%	11.93%	10.46%
Internal Failure Costs	5.66%	4.68%	5.14%	4.41%
Rework	3.04%	2.69%	2.21%	2.64%
Scrap	8.70%	7.36%	7.35%	7.04%
External Failure Costs	4.04%	1.97%	2.24%	2.68%
Warranty Repairs	13.97%	12.67%	8.22%	7.40%
Customer Returns	18.01%	14.64%	10.47%	10.07%
Total Quality Costs	100.00%	100.00%	100.00%	100.00%

Observations :

1. With an increase in % of total quality costs on design reviews (almost doubling) over two year period, it shows that Customer Return % has gone down from 18% to 10% and the warrante repair cost aslo fallen down by half from 14% to 7.47%

Percentage of each quality category cost on Total Revenue

Particulars	30/6/2010	31/12/2010	30/06/2011	31/12/2011
Prevention Cost	5.34%	4.85%	4.19%	3.66%
Maintenance	0.24%	1.10%	0.54%	0.44%
Supplier Training	0.61%	2.36%	2.26%	2.22%
Design Reviews	6.19%	8.30%	6.99%	6.32%
Appraisal Cost	1.31%	1.35%	0.97%	0.70%
Incoming Inspections	4.03%	3.66%	3.15%	2.25%
Final Testing	5.34%	5.01%	4.12%	2.95%
Internal Failure Costs	2.80%	2.22%	1.77%	1.24%
Rework	1.50%	1.28%	0.76%	0.74%
Scrap	4.31%	3.50%	2.54%	1.98%
External Failure Costs	2.00%	0.94%	0.77%	0.75%
Warranty Repairs	6.92%	6.02%	2.84%	2.08%
Customer Returns	8.92%	6.96%	3.61%	2.84%
Total Quality Costs	49.51%	47.56%	34.52%	28.18%

Observations:

1. Percentage of Total Quality Costs over Revenue has gone down from close ~50% to ~28% which is almost half
2. With the percentage decrease in total cost in quality, I observe that the cutomer return has fallen down as well by two-third i..e from ~9% to ~3%
3. Warrrant Repairs costs have also gone significantly down over this two year period.

Based on these observations, I believe that the project quality has improved over the period.