HO CHI MINH CITY OPEN UNIVERSITY UNIVERSITÉ LIBRE DE BRUXELLES SOLVAY BRUSSELS SCHOOL OF ECONOMICS & MANAGEMENT MBQPM5 DONG VAN TIEP ESTABLISHMENT OF QUALITY COST SYSTEM IN SCANCOM MASTER FINAL PROJECT MASTER IN BUSINESS QUALITY AND PERFORMANCE MANAGEMENT Ho Chi Minh City (2016) STATEMENT OF AUTHENTICATION This final report has not been submitted for a degree or diploma in any other universities To my best knowledge and belief, the report contains no materials previously published or written by another person except where due reference is made in the report itself Signature of Student Dong Van Tiep Date: 23 April 2016 ACKNOWLEDMENT This is the final report for Master in Business Quality and Performance Management – Solvay Brussels School of Economics and Management The aim of this final report is to establish the quality cost system in ScanCom Vietnam The report is the combination of practical experiences of furniture industry and quality subject studies I would like to take this opportunity to thank our Managing Director – Mr Edwin Van De Sloot who has supported me in providing me the important data in cost management and as well as strong support from him to the team to make the program moved forward CONTENT INTRODUCTION 1.1 Background 1.2 The case of ScanCom 10 1.2.1 Introduction to ScanCom 10 1.2.2 ScanCom’s General Quality Management Process 10 1.2.3 How quality performance is reviewed and measured in ScanCom? 11 COST OF QUALITY 15 2.1 Quality 15 2.2 History and Definition of Cost of Quality (COQ) 16 IMPLEMENTATION OF QUALITY COST PROGRAM IN SCANCOM: 22 3.1 Delimitations 22 3.2 Challenges/difficulties anticipated during the implementation of Cost of Quality System in ScanCom: 23 3.3 ScanCom Goals for the implementation of Quality Cost Program 23 3.4 Implementation steps for the Cost of Quality Program in ScanCom 24 3.4.1 Gain top management commitment 24 3.4.2 Constitute the Quality Cost Team: 26 3.4.3 Quality Cost Categories 26 3.4.4 Data collection 27 3.4.5 Collecting Quality Cost Data 28 3.4.6 Quality Cost Data Analysis 31 3.4.7 Build up an improvement proposal plan 32 3.4.9 Kick-off Meeting for the Implementation of Quality Cost System 32 3.4.10 Quality Cost Training 33 3.4.11 Periodic review of quality costs 33 REFERENCES APPENDICES TABLE OF FIGURE , APPENDIX No Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure 10 Figure 11 Figure 12 Figure 13 Figure 14 Figure 15 Appendix CONTENT PAGE ScanCom’s top 10 customer claims review In-line quality inspection reported by the factories Final quality inspection reported by the Final Control Inspector 10 11 In-line quality inspection reported by the factories 12 15 The classification of CoPQ according to Feigenbaum (1991) The iceberg of visible and invisible costs (Krishnan, 2006) Juran’s Quality Cost Curve Six Sigma value chart Quality Cost Categories Applied in ScanCom ScanCom example of standard rework cost the maturity level of Quality Cost the monthly quality cost report to be presented in QA Monthly Update 16 16 23 25 27 29 32 an example of future quality report for the quality cost categories in ScanCom Multiple-Period Trend Graph of individual quality cost categories 32 IKEA Product Quality Definition 34 38 flow chart of ScanCom Quality Assurance System Appendix T ThThe survey on understanding of Quality Cost for furniture manufacturers Appendix 11 The rework plan form used in factories of ScanCom 32 39 40 No Figure Appendix Appendix Appendix Appendix Appendix Appendix CONTENT PAGE Loss analysis form used in factories of ScanCom internal failure cost flowchart for in-line control internal failure cost flowchart for final control performance quality measurement in ScanCom Invisible CoPQ Classification of COPQ 41 42 43 44 44 45 Introduction This introduction gives the background of the chosen topic and investigates the case of ScanCom 1.1 Background “If we can define it – we can measure it; If we can measure it – we can analyze it; If we can analyze it – we can control it; If we can control it – we can improve it” (Dahlgaard et al., 1998, in Krishnan, 2006, p 99) In the outdoor furniture market today with more and more competition, most furniture manufacturers are challenged to offer the high quality product to their customers at the low cost Previously many companies had believed that high quality means high costs, while actually it is the poor quality that costs Therefore, the term of Quality Cost becomes more and more important Since ScanCom was established in 1995, the quality cost has not been measured, collected and reported in a correct way Also ScanCom has a very limited knowledge on Quality Cost; therefore the understanding of context is unknown It is difficult for us to benchmark the goals of our Quality Cost Program as when looking into other companies in the same industry in Vietnam; we realize that most of companies have not implemented the quality cost management system According to the quick survey done in March 2016 by ScanCom Quality Assurance Department for outdoor furniture companies in Vietnam, 100% says the knows about Quality Cost, 62.5% says they are applying a Quality Cost System and 37.5% says they are not, 50% thinks their quality cost is less than 10% of total production cost and 50% believes their quality cost is from 15%-20% of total production cost 100% says they are going to apply the Quality Cost System in the future; however, none of them has a full understanding of what the quality cost is 1.2 The case of ScanCom 1.2.1 Introduction to ScanCom Founded on the 1st April 1995, ScanCom has grown to become one of the leading manufacturers of outdoor furniture in the world With legal headquarters in Denmark and top management located in Ho Chi Minh City Vietnam, ScanCom directly employs over 5000 people and over 15,000 people indirectly through contract manufacture ScanCom owned sales offices can be seen in Denmark, United Kingdom, Germany, U.S.A and Vietnam with manufacturing sites in Brazil, Indonesia and Vietnam We credit our achievements to attractive designs, high standards of quality and social responsibility combined with precise delivery planning and competitive prices Always an active and responsible partner, ScanCom is guided by a firm set of principles that guides us in everything we Source: http://scancom.net/AboutScanCom/ 1.2.2 ScanCom’s General Quality Management Process There are five main processes in ScanCom Quality Assurance Management Process 1: Incoming Control - Evaluating and selecting suppliers - Incoming material inspection - Auditing suppliers - Equipment Calibration Process 2: In-line Control       Participating in making production processes Reviewing and auditing production processes Inspecting products before packing Conducting training to QC inspectors and production staff Making proposals for improving product quality and productivity Following up on Corrective and Preventive Actions (CAPAs) 10 Process 3: Final Control      Reviewing and updating quality handbook Designing Final Control Plan Conducting training to FC inspectors and relevant departments Conducting pre-shipment inspection Following up on CAPA Process 4: System Audit     Conducting training on quality management system (QMS) Being in charge of internal/external audits Reviewing and updating key QMS procedures Following up on CAPAs Process 5: Quality Improvement     Conducting random audits for critical processes in mass-production Suggesting product quality improvement during prototype meeting Following up on FMEA implementation Raise CAPAs for customer complaints 1.2.3 How quality ScanCom? performance is reviewed and measured in In ScanCom we are maintaining two important Quality Reviews; one is QA Monthly Update and another one is Group Quality Review QA Monthly Update: Group QA Senior chairs this meeting with the participation of all Factory QA Managers and other QA Managers in different areas such as final control, incoming control, and system audit and quality improvement The purpose of this meeting is to follow up the quality performance of all factories, the major quality problems happening in the month and what corrective action and preventive action which have been done to correct the problem as well as to prevent the problem from happening again in the future The quality problems include quality issues happening in the factories and quality claims received from customers 11 APPENDIX APPENDIX 1: flow chart of ScanCom Quality Assurance System Process Process Process Process Process ScanCom Quality Assurance Senior Management Responsible Incoming Control _ - Evaluating and selecting suppliers - Incoming material inspection - Auditing suppliers - Equipment Calibration Incoming QA Manager In-line Control - Participating in making production processes - Reviewing and auditing production processes - Inspecting products before packing - Conducting training to QC inspectors and production staff - Making proposals for improving product quality and productivity Following up on Corrective And Preventive Actions (CAPAs) Factory QA Manager Final Control - Reviewing and updating quality handbook - Designing Final Control Plan - Conducting training to FC inspectors and relevant departments - Conducting pre-shipment inspection - Following up on CAPAs Final Control QA Manager System Audit - Conducting training on quality management system (QMS) - Being in charge of internal/external audits - Reviewing and updating key QMS procedures - Following up on CAPAs System Audit Manager Quality Improvement Process - Conducting random audits for critical processes in mass-production - Suggesting product quality improvement during prototype meeting - Following up on FMEA implementation - Raise CAPAs for customer complaints 42 Quality Improvement Manager APPENDIX 2: The survey on understanding of Quality Cost for furniture manufacturers 43 APPENDIX 3: The rework plan form used in factories of ScanCom 44 APPENDIX 4: Loss analysis form used in factories of ScanCom 45 APPENDIX 5: internal failure cost flowchart for in-line control 46 APPENDIX 6: internal failure cost flowchart for final control 47 APPENDIX 7: performance quality measurement in ScanCom In term of Customer Perspectives And in term of Process Perspectives 48 Appendix ‐ Invisible CoPQ Invisible CoPQ according to Sörqvist (2001) Traditional CoPQ Arise from temporary problems affecting the business while those problems being continuously hidden Hidden CoPQ Remaining costs, which are difficult to measure but are directly, affect the business To a large extent, the production costs are hidden as well due to lack of reporting Lost income Costs created due to not satisfying the needs of the external customers with the company’s products and services, which the competitors can These costs are hard to measure, and therefore require to be estimated Customer’s costs Losses that affect external customers by reasons of poor quality in the supply chain The customer’s cost can be connected to costs of lost revenue and will create bad will for the company Socio ‐economic costs Losses in which affects the society because of the company’s products and processes 49 Appendix – Classification of COPQ COPQ according to Feigenbaum (1991) Prevention costs  Quality planning  Process control  Design and development of quality information equipment  Quality training and work force development  Product ‐design verification  Systems development and management  Other prevention costs Appraisal costs  Tests and inspections of purchased materials  Laboratory ‐acceptance testing  Laboratory or other measurement services  Inspection  Testing  Checking labor  Setup for test or inspection  Test and inspection equipment and material and minor quality equipment  Quality audits  Outside endorsements  Maintenance and calibration of quality information test and inspection equipment  Product ‐engineering review and shipping release  Field testing Internal failure costs     Scrap Re ‐work Material ‐procurement costs Factor contact engineering 50 External failure costs      Indirect and vendor CoPQ Complaints in warranty Complaints out of warranty Product service Product liability Product recall  Extra unnecessary manufacturing operations  Unnecessary design features  Less labor  Less material  Less equipment  Rejected materials awaiting disposition  Overstocking of purchased material  Reduction in down time  Savings to customer through elimination of their incoming inspection afforded by the producer certifying product quality 51  Supplier’s quality costs  Intangible and liability CoPQ Tarnishing of the company quality image  Liability exposure  Time of personnel involved with investigating the problem and preparing a case  Time of personnel to testify, attorney fees, expert witness fees, and other court costs Equipment CoPQ    Life cycle CoPQ    Investment in quality information equipment Equipment amortization Installation Occupied Service floor space Repairs Replacement parts CoPQ according to Harrington (1987) Non ‐value adding costs  Equipment costs  Costs of effort that are not directly related to the product that the external customer wants Costs to invest in equipment used for measuring, accepting or controlling a product (computers, typewriters, voltmeters, micrometers, coordinate measuring machines, automated test equipment  The space the equipment occupies  Equipment used to print and report quality data 52 Customer incurred costs  Customer dissatisfaction costs  Loss of reputation  Loss of productivity while equipment is down Travel costs and time spent to return defective merchandise  Overtime to make up production because equipment is down  Repair costs after the warranty period is over  Backup equipment needed when regular equipment fails  Customer ‐dissatisfaction in terms of lost revenue versus product quality level Reflect the customer’s attitude towards an organization rather than towards an individual product line The costs cannot be imposed upon an individual product, but must be considered as having an effect of all product lines Lost opportunity costs  The money a company forfeits when, because of poor judgment or poor output, the company fails to take advantage of an opportunity 53 CoPQ according to Gryna (1999) Failure to meet customer requirements and costs               Cost of inefficient processes  Failure to meet customer requirements and needs  Variability of product characteristics  Unplanned downtime of equipment  Inventory shrinkage  Variation of process characteristics from “best practice”  Non ‐value ‐added activities       Lost opportunities for sales revenue Scrap Re ‐work Loss of missing information Failure analysis Scrap and re ‐work – supplier One hundred percent sorting inspection Re ‐inspection, retest Changing processes Re ‐design of hardware Re ‐design of software Scrapping of obsolete product Scrap in support operations Re ‐work in internal support operations Downgrading Warranty charges Complaint adjustment Returned material Allowances Penalties due to poor quality Re ‐work on support operations Revenue losses in support operations  Customer defections  New customers lost because of quality  New customers lost because of lack of capability to meet customer needs 54 CoPQ according to Dale and Plunkett (1987) Supplier/Subcontractor Company/In-‐house Prevention Vendor assessment Training rating, and Statistical development process control Certification and Quality accreditation improvement Audits and site teams inspection Joint quality Quality Appraisal Incoming inspection Inspection and planning engineering Sorting test Product Organizing returns and Quality testing planning replacements Calibration Inspections at Checking supplier’s site procedures Internal failure External failure Work costs to point of scrapping Re ‐work costs Machining defective materials Lost production Costs attributable to but not recoverable from supplier Complaint handling Receipt and disposal of defective goods 55 Customer Joint quality planning Field trials Market research Customer audits and inspections Product sign ‐ off/certification Liaise with customer inspection activity Isolation of Discount on causes of failure goods accepted on concession Re ‐inspection Downgraded Scarp and associated costs goods sold cheaply Re ‐work and associated costs Complaint Analysis and correlation of handling feedback data Customer returns Free ‐of ‐charge replacements Field repairs CoPQ according to Giakatis et al (2001) Manufacturing loss The decrease of the production equipment efficiency in order to decrease failures Design loss The money spent to achieve more than required product quality 56 [...]... of kicking off the quality cost program in ScanCom and has nominated Group QA Senior Manager to take the lead in coordinating with relevant departments to make it happen TMG was really interested in the monetary terms rather than quality data such reject rate during in- line control or final control “Companies not already engaged in quality cost programs are unaware of the magnitude of the quality cost. .. of activities that relate to quality Difficulties in analyzing the data collected Identification of quality cost items ScanCom Goals for the implementation of Quality Cost Program ScanCom determines that reducing the cost of quality is one of effective way to improve the company’s profit By establishing a measurable and manageable quality cost system, we can provide a mean to correctly report the quality. .. Challenges/difficulties anticipated during the implementation of Cost of Quality System in ScanCom:          3.3 Lack of cooperation with other departments Difficulties in accessing to financial data Difficulties in standardizing a corporate quality cost system Lack of benchmarking opportunities and consultancy services Lack of top management support Difficulties in indentifying new quality improvement opportunities... during mass production and quality failures detected and claimed by customers Therefore, one of the most important tasks before getting the Quality Cost program implementation is to train the relevant on the awareness of quality cost and their categories 2 Cost of Quality 2.1 Quality How quality is defined in ScanCom today? We follow the philosophy of H.L Gilmore (defined in Product Conformance Cost Quality. .. for each quality problem complained by customers Figure1: ScanCom s top 10 customer claims review Source: ScanCom Quality Assurance Department 12 More importantly, the meeting is to discuss about the quality strategy in the future by looking into the current quality trend in ScanCom The quality performance is mostly measured basing on the inspection results of inline inspection and final inspection... economics, effectiveness and efficiency of quality activities in their organization Quality c o s t i n g integrates all the separate quality activities into a total q u a l i t y system It forces the entire organization to examine the performance of each quality activity in terms of costs Moreover, quality costing c a n be used as a starting point i n setting up a quality system except where an organization... by ensuring that the overall benefits of an improvement project do not result in unintended consequences somewhere else in the business Souce:http://www.cqeacademy.com/cqe-body -of- knowledge/qualitysystem /cost -of- quality/ 21 Difficulties during the implementation of COQ Lack of data or difficulties in collecting data, lack of cooperation from top management and lack of understanding of COQ principles... with the team listed down all the quality cost elements which will be inputted for producing the total quality cost in ScanCom Figure 9: Quality Cost Categories Applied in ScanCom By reviewing the data in accounting system, we realize that the external failure cost is available and well-managed by Axapta System The prevention cost is placed in different functions in ScanCom such as R&D Department, Commercial... Prevention cost Appraisal cost Internal failure cost External failure cost Guidelines for Quality Cost Data Collection in ScanCom: It will already have been discovered that many of the needed quality cost data are not readily available from the cost accounting system Like in ScanCom, many prevention and internal failure costs are considered as a normal part of operations Therefore, these costs are not... of COQ project and must be in place before it the implementation begins  Use existing systems instead of trying to invent new methods for COQ data collection  Link COQ to other measures which give more relevance and impact  Continually improve the COQ reporting system 3 IMPLEMENTATION OF QUALITY COST PROGRAM IN SCANCOM: 3.1 Delimitations This final report delimits to only focus on factories of ScanCom