Quality Costs in Process Industry

Abstract
Although the principles of quality cost analysis are valid for all kinds of businesses, applying them in a practical way to a specific situation requires a flexible approach to match the economics and practices of an individual business. Taken as a group, the process industries are characterized by a distinctive set of quality costs, different in detail from those of other industries.

Quality Costs
Compiling quality costs to measure the current economic state of quality in a business is not very new. In India, the earliest quality cost alarms were triggered in the 1980s by Tata Steel, Bombay Dyeing, Punjab Tractors and a few others. Some equate quality costs with the costs of attaining quality; others equate the term with the extra costs incurred due to poor quality.

Many companies summarize these cost into four broad categories: Internal Failure Costs, External Failure Costs, Appraisal Costs, and Prevention Costs. Within these categories, however, the specific elements of quality costs appropriate for inclusion are not universally applicable across all businesses. In this article, I would like to present some of the elements of quality costs which have been found useful in process industries.

Process Industries
To begin with, we should describe a process industry to distinguish it from a mechanical, electronic, service, or other kind of industry. The products of process industries are usually in some bulk form rather than in discrete units. These may be liquids (like many chemical or petrochemical products) or solids in the form of powders (like some other chemicals, or cement), pellet (like some plastics), or rolls (like paper or some other plastics). Some businesses are hybrids with many of the characteristics of a process industry in the upstream operations, but with a final product in discrete units. For example, flashlight batteries, glass bottles, certain prepared foods, and tyres are in this class.

The primary characteristics of a process industry, however, is that it is materials intensive. That is, materials represent a large fraction of the total cost of the product, typically 50 to 80% or more. A major determinant of success in process industries is how effectively those materials are managed through the process. Therefore an important criterion of plant performance is yield, measured as the ratio of kilos out/kilos in or square meters out/kilos in, etc.

Internal Failure Costs
This point of view has a profound impact on the perception of Internal Failure Cost in process industries. It is common for manufacturing, technical, and accounting people to treat all forms of yield loss with equal concern, without distinguishing between defective product and process wastes. Although it has been stated that including “unavoidable” costs, such as process waste, in the quality costs will expose them to challenge, my experience has been that process industry people relate better to an enumeration of Internal Failure Costs which includes process waste. The reason is that both process waste and true defectives are perceived simply as different forms of yield loss.

When the various reasons for yield loss are analyzed by arranging them in order of their magnitudes in what is commonly called a Pareto distribution, the process waste items are appropriately ranked among the defective product items. In process industries, where it is not unusual to find the quality engineering function combined with process engineering, product development, or other technical functions, work on process waste or product defects frequently involves the same people and the same investigative approaches. As long as the item is among the vital few, work to understand its causes and correct them has the same effect on yield improvement, whichever kind of item it is.

The foregoing argument implies that process wastes are not necessarily unavoidably and process industry experience has shown this to be so. An example is found in a plant making vinyl fabrics. The vinyl costing was formed in a calender and laminated to a textile substrate; in the same pass through the machine, a texture was embossed into the vinyl surface. It was well known that the adhesion between the vinyl and the textile was inadequate in the first roll of any order because the process required the frictional heat generated in steady state operation to reach a temperature high enough to ensure good adhesion. The first roll of each order was customarily rejected as startup waste and sent for reembossing to an off-line machine which was kept hot enough to secure adequate adhesion. When it turned up in the Pareto distribution as a significant item of internal Failure Cost, a study of the problem was made. Adhesion was measured on samples taken at frequent intervals along the length of a number of first rolls. The investigation disclosed that the adhesion reached a satisfactory level after about 100 to 150 meters were coated. By changing the manufacturing procedures to begin each run with a 200 meters roll (which was automatically rejected and sent for reembossing) followed by full 1000 meters rolls of acceptable product, an 80% reduction in startup reembossing was achieved.

In many process industries, batches of intermediate or finished product which do not meet specifications, and which represent a relatively large Internal Failure Cost, can be recovered by blending with other good lots in some appropriate proportion. This produces a series of lots which are all inside the specification limits, leaving only a very small net loss. A better insight into the pattern of quality costs can be had if the Quality Cost Report shows the gross Failure Cost of the rejected batches. If it happens with any frequency, monitoring the bad batches may allow a product performance problem to be anticipated, suggest a potential problem with raw materials or process conditions, or signal an excess of batches requiring blending. When a nonconforming batch is recovered by blending, the recovered value should be shown on a separate line of the Quality Loss Report as an offsetting credit to the gross Failure Cost. The difference between the two should also be reported as the net Failure Cost.

Another kind of yield loss, which is not an obvious process waste and which is found in some process industries, is the variance form standard material usage not accounted for by reported scrap. Some examples of the sources of this loss are the variation from the standards in the solids content of liquid chemicals (either as the seller’s product or the buyer’s raw material), or in the moisture content of paper. If the raw materials for a product are bought by weight, but the product is sold by area or volume, such things as variation from standard in the thickness of a plastic film or in the weight of a glass bottle fall into the same class. Also included are spillage and sweepings, and evaporation, both literal and figurative.

External Failure Costs
Because of the nature of their products, process industries do not usually have warranty costs as an item of External Failure Costs. Adjustments, however, are made for defective product found by customers and quantities of unsatisfactory products that are returned. External Failure Costs should include these amounts in total as a partial measure of customer dissatisfaction. Sometimes returns can be salvaged by resale to a customer with a less stringent requirement, by blending with good lots, or by recycling through the process. When this happens, the Quality Costs Report should show the offsetting credit for the value of the recovered material, and the net External Failure Cost.

Appraisal Costs
Appraisal Costs in process industries have, in general, the same elements as in other industries, but the proportion of Appraisal Cost allocated to chemical, physical, or metallurgical testing tends to be much higher. In recent years, increasing trends towards on-line instrumentation to measure both product and process characteristics and towards computers to process the data and report it (or to adjust the process automatically) has modified the nature of Appraisal Costs. Process instrumentation should be included as an element of Appraisal Cost.

Prevention Costs
Prevention Costs are costs incurred in keeping Failure and Appraisal Costs to a minimum. The elements of Prevention Costs include quantity planning, new-product review, process control, quality audits, supplier quality evaluation, training, etc. These elements apply equally well in the process industries, and no special items appear to be needed.

Optimum Quality Costs
Companies estimate quality costs for several reasons:

• Quantifying the size of the quality problem in the language of money improves communication between middle managers and upper managers.
• Major opportunities for cost reduction can be identified. Costs of poor quality do not exist in a homogenous mass.
• Opportunities for reducing customer dissatisfaction and associated threats to product salability can be identified.

Attaining zero Failure Costs can be costly. The key is to optimize quality costs (refer figure). In other words, the cure should not cost more than the disease.

Conclusion
The major difference between standard practice and the recommended quality cost elements for process industries are in the Internal Failure Costs, where the following elements are included:

• Process Wastes
• Excess Maternal Usage