FEATURE
INGENIEUR
Reducing Costs of Poor
Quality & Building Quality
Products
By Ir. Dr Oh Seong Por, Director of Manufacturing, Samsung SDIEM
Costs of Poor Quality or COPD refers to Quality cost and Hidden Cost. Deficiencies in product quality
such as defects, rework, scrap, customer returns or other not fit for use losses fall under Quality Cost.
Non visible losses such as opportunity losses because of poor sales, longer lead times, complaint
handling costs, holding and delay costs are hidden costs. The author looks at many approaches and
tools to reduce these two costs so that companies can create quality products.
T
he basic purpose of a business organisation
is to create wealth through profit generated by
selling product to customer. This was cited by
Eli Goldright, a computer scientist who developed
the algorithm of Optimized Production Technology,
a scheduling system developed around bottlenecks
of a production system. Without profit, an
organisation regardless of size or business nature
will undeniably perish. To ensure profit, the selling
price must always be greater than the cost involved
as shown by the following simple equation, Profit
= Selling Price – Cost. In the highly competitive
and borderless market, the selling price tends to
depreciate over time once the product becomes
commoditised. Therefore, to sustain an acceptable
profit margin, the cost reduction initiative should
become a key focus of the organisation. Getting
6
66
VOL 61 JANUARY – MARCH 2015
VOL 55 JUNE 2013
the right and effective cost reduction measures
requires clear understanding and analysis of the
cost components.
COST COMPONENTS
Product cost generally consists of two major
components. They are :
1.Required cost or target cost (TC)
This is ideal cost without any losses or wastage
that must be invested to make the product. In lean
thinking (Womack & Jones, 1996), target cost is
the sum of value added costs of material, parts,
equipment, labour and any other resources which
are needed to develop the product that a customer
is willing to pay for.