this is welcoming each one of you in this amazing session on Modern business environment the chapter that we are now going to start wow very nice chapter and what a great person to start with somebody who has actually changed the course of modern environment Shri Shri Shri Mr Elon mask oh boy right Tesla SpaceX uh PayPal founder all of these companies right the owner of them and indeed he has changed the landscape of the whole world planning to go to Mars very soon uh he he feels that Mars is a place where people can live forever anyways we'll see what time shows us but for now we are going to start with this chapter and the name of the chapter is modern business environment and indeed the modern environment of business is Ever Changing who knew 20 years back probably that the likes of social media will capture the whole industry in a way which you know unbelievable to think of who knows in the next 10 years how artificial intelligence will transform the whole world so obviously uh just you know how things are changing is what is is going to be discussed in this chapter now I am going to discuss everything in detail so what is going to be my target for today I'll tell you that first up so let me tell you that this chapter basically has three major Concepts so to say three major Concepts so to say so I'll just write down the chapter modern business environment okay and this chapter is divided indeed into three parts what are those three parts one is called as quality the other is called as tqm and then we have something called as SCM SCM Supply Chain management now when I say of uh when I speak of quality here what they mean to say is the cost of quality right we all know how big how high an emphasis is in today's businesses the impact of quality is so cost of quality then what is SCM it is called as Supply Chain management and the last is total quality management am I right everybody okay okay now what is going to be a part of today's session pay attention so today's session is going to be focused on this see so basically this chapter is divided into three parts quality tqm and SCM quality meaning cost of quality tqm total quality management and SCM Supply Chain management of which today to's focus of which today's focus our lecture's Focus will be on the three aspects one theory of uh cost of quality the other the Practical aspect of cost of quality and then the McQ related questions of cost of quality so that is how the whole system will be worked up for us and that's how uh we will approach this subject now if you all remember my last session just the introduction session I told you all that I have a particular way of teaching any subject and my way revolves around examples examples examples so that's what I usually start with then from those examples I connect to the concepts from the concepts I will take you to the Practical questions so today we are going to solve two practical questions as well yeah so today we are going to solve two questions uh approximately 25 mcqs in today's session and Theory relating to cost of quality now where does this whole concept of cost of quality originate from let me tell you whenever you hear this word quality it is synonymous to one of the world's most developed countries and that is Japan and yes that is where the majority of the Quality Concepts were introduced were uh bought in and yeah here we are quality and Japan are almost equivalently used yes I'll give you a example just listen to my example and you'll realize that why and how Japan has conquered the whole quality system throughout the whole world do you remember Japan's bombing of World War II who bombed Japan Hiroshima and Nagasaki was bombed right by whom by America United States of America if you remember bombed them after the World War II almost on the completion of World War II they were bombed by Hiroshima and Nagasaki they were bombed by America who bombed Hiroshima and Nagasaki and and Japan was reduced to shambles there was hardly anything left in Japan and that is when they stood up and stood up very very nicely so 1944 or so Japan was bombed now I had a perception that it is the United States of America who did wrong to Japan by bombing them and that to a nuclear bomb that was very very brutal and unexpected but then I got into the history and realized it was Japanese who instigated the Americans in World War I Japanese had bombed Pearl Harbor which is in America and that's where the Revenge was taken by America in the 1944 World War II yes so that's when they thought that okay how D the Japanese people bombers immediately did not react because they did not have the resources but they waited for the day when they will have all the resources and World War II end was the time they thought of doing it but after a few years Japan was back to its normal and it it ensured that none of it ensured that none of uh the bombings could destroy their economy yes it was destroyed for a few two months or so but they came back and they came back very strong and do you know which country is responsible for the Revival of America Revival of Japan you'll be shocked to know it is America yes after this bombing of Hiroshima Nagasaki America said see you bombed us once we bombed you again hisab 0 0 balance settle down now let's be friends now let's help each other so a lot of American economists and a lot of American Quality Specialists went to Japan to ensure that they are able to teach them quality because when these Americans reached Japan they saw that Japanese products were hopeless they were shy you know not good quality they were of shy quality so that's where Japanese people thought that we want to become the manufacturing Hub we want to give the best products to the whole world so American Economist and quality specialist said that my God your products are very bad how is it possible that you'll be able to give quality products and that's where they said that for this Japan it will take 10 years and and and it will take 10 years and a lot of hard work for you to give the best quality products Japanese people said we are ready for hard work we are ready to give 10 years and we are ready for hard work you'll not believe they worked so hard that in a span of five years they became the best provider of manufactured quality materials throughout the whole world so much so that in the year 1960 they were able to come out with their own bullet train world's fastest bullet train at that point in time even after 60 years plus even at India level we are not able to do that but they did it and how so that's that's what Japan and Japanese people are they are just too working and ensuring that their country grows about anything else and during that phase they learned a lot of things they ensured that this focus is always on quality giving the best to the manufacturers and that is where once they started giving the quality products they became the manufacturing hubs they became the manufacturing hubs with the help of three concepts that we are going to study today one they Incorporated the concept of quality cost in their manufacturing process in their manufacturing process then they also ensured that total quality management is Incorporated in the product development and the customer should get the end product with full clarity called as Supply Chain management so one thing led to the other so obviously Focus was giving quality products in manufacturing giving rise to Total Quality Management products giving rise to ensuring that customers are also happy so this chapter is going to teach us from manufacturing to customer support everything from manufacturing to customer support everything and and and that's what Japanese people are famous for that's what Japanese people are famous for for giving the best quality in manufacturing through use of three concepts which we are going to study in today's chapter quality cost Total Quality Management Supply Chain management are we clear with the first basic with the idea of what we are going to study today guys get up what's up now cost of quality is what we will first understand but before I make you understand the concept I will start with an example which you will never forget in your life and hence you'll never forget the concept as well my my example starts with my dream a dream that I used to think when I was doing my articleship so during my articleship days you know so just when I was almost of your age in CA final uh know planning to appear in some time and obviously everybody has dreams you should have so I had this dream that before I turned 30 I wanted three things I wanted three things one is uh to have an iPhone for some reasons I I I'm a die hard fan of Steve Jobs and so I wanted an iPhone so I I knew that it is only going to be possible if I clear my chared accountancy examination no other option do I have so I thought once I dream and become a chartered accountant I will purchase a iPhone second I am a big travel buff so I want to travel 30 countries under 308e so 30 under 30 is what I call it and the third is so I I took an iPhone as soon as my uh CA got completed got placed in JP Morgan first salary I bought a lot of gifts for my family and friends and then second salary immediately from the second salary I purchased an iPhone iPhone 4 that to I purchased from USA so since I was working in JP moan we had a lot of connects from there so I ordered it from there got it here because I was so crazy for it then travel 30 under 30 means I traveled 30 countries under 30 and I had this dream till age of 25 I had not even traveled one single country but then later on for the five years I thought so now is the time let's travel so completed this also and then I also had one more dream and that was to own a car and that's what my example for today is related to you should also have dreams then from 21 to uh from 31 to 40 I have a dream currently I am in that phase 31 to 40 so in that phase then 41 to 50 I have some more dreams so that's how it should be 10 year planning so car I purchased I20 Hundai was my first car and that's what I purchased again from my initial salary so after 6 months I had a good decent Surplus amount in my bank account use that to give the down payment and then purchased my own car yes I was very very happy with it I had a very very big passion for car and and purchased it now new car purchased the main use of car was traveling from office to home uh and home to office nothing more so my home was my home and office distance was approximately 15 kilomet and from office again back I would get back to home and then again weekends would be with the friends and family weekends would be with friends and family so that's how my whole system worked up new car I was taking it very nicely taking care of the new car ensuring that everything is in place now just you know traveling from home office weekends enjoying with family and friends and everything things are going good until until after year one I got a call from the Hundai team maintenance team and they told me that sir your one is over now we need to maintain your car please send your car to us I said okay fair enough I'll send but are there any charges like yes sir so when I purchased the car they had given me an option three year warranty and they were charging a few thousand rupees or something but I didn't take I said no if anything is there I'll see later on so I had not taken any threeyear warranty or uh maintenance or something so I knew that I'll have to do the maintenance externally and I was ready for it so now I got a call from Hyundai service center and they said that sir send your car for mainten I said no I'll send it to you but you first tell me what are the charges they told that sir 15,000 will be rupees will be your charges for maintenance so please send your car and 15,000 after the maintenance is done you can give now I am a mar person at heart now you know how Mar people are for them everything is about up sa money money everything is about money so same even I started thinking now my car was running very very smoothly I had no issues with my car whatsoever huh so car was going all well still these buggers called me and told me no no sir still you should maintain I called what few of my friends and family two of my family people I called and I told them should I do the maintenance it is going in the right you know it's going all good there are no issues at all it's going very smooth he said still you should get the maintenance done it's a compulsion you can feel that way like but everything is going good still yes they said still you have to do it like okay CH let's see I'll think then I called to of a few of my friends they also said that yes Uncle you have to do the maintenance part there's no doubt about that but 15,000 rupees so I thought I thought that whether I should do or not and finally I thought CH I'll take a call I'll not do it my maradi brain overpowered logic and said that no let's not do this because things are going good no why unnecessarily spend huh to I just skipped it again second year I you know use the car very nicely again for these purposes after year two I again got a call from the Hundai maintenance team from their service department again they told that sir now at least do the maintenance now I said no sorry I don't want to maintain how much are the charges he said sir 25,000 this time I said right so much last time you said 15,000 sir obviously now two years so more oil will be required brake filter and bonut checking and engine oil and all of that they started saying that technical things again I thought yeah see this year I'm not doing next year I will Paka do third year I will Paka do because so far car is doing good things are going well I should I honestly spend so I thought CH we will see what is to be done then came your three again in your three I had to do the maintenance again I had to do the maintenance and and and now I got a call and they said that sir this time it will be 35,000 huh I'm like okay but uh sir last time you said that definitely this year you will do sir now what what is happening sir but the car is doing good why should I do the maintenance again my mar brain overpowered logic and I said no no I will not maintain next year Paka sure your swear your swear I I'll do it I'll do it for sure you would be thinking no sir is such a big stingy person sh come on yeah I'm earning with so much effort so every penny counts for me yeah so now this is how things work after 3 years and 3 months after 3 years and three months there was some sound coming from my engine I realize something is a problem then after a few months more some there was some more issues and everything and finally year four was near I knew that the maintenance call will come and it did come and this time I wanted to give purposely because there was some sound coming there were some wiring issues at times the car had stuck in between so there were issues and I was like CH this time I will give I to ask them how much they said sir 50,000 this time like oh so much yes sir I do you want to get it done I'm like yes please I'll send the 50,000 Rupees complete the maintenance and get back you're like yes sir we'll also check the car in case anything else we'll let you know I'm like okay no problem now I got a call from them after some time that sir the maintenance charges is not going to be 50,000 sir it is going to be 150,000 a OMG are you kidding me 150,000 for what sir this year the maintenance charges are there other than that there are a lot of internal issues within your car so what do it well no sir can't do it without this cost no but why didn't you tell me this before sir you didn't come for maintenance and that word stuck me stuck my head that OMG what did I do y why didn't I come earlier if I I asked him if I had come earlier he told that if you had come earlier we would have rectified this mistake earlier only before it became so grave and so big then I told them but I thought that what to do maintenance sir it's not like that no it's a car it's a machine and it has its own wear and tear go if I would have earlier given at least 15 15 15 I would have paid 16 to 60 to 75,000 now unnecessarily because of my mistake I have to give more money so that my car come backs to the same quality basically what I mean to say is quality now I'm going to get but with a cost as they say quality comes but with a cost and who than me would know this who better than me would know this boy I was very very upset with myself but that's how it was that's when I realized that boss quality is the the most important thing you should not compromise on got it got it got it okay I compromised on the Quality Maintenance and eventually my repair cost was so high that it would have been better if I would have spent on quality costs and this is what hello this is what quality does to you and that's the explanation that was given by the Japanese people by the US uh Economist who went to Japan for work so finally I realized my thing now this example just remember because now we are going to use this example to connect to our first concept and that is cost of quality before that I'll give you some more examples some two three more examples see my whole teaching methodology is based on example because I know as examples you'll be able to remember everything and then it will become easy for you to apply second example is related to Samsung Note 7 second example is relating to Samsung Note 7 this phone had such a bad battery that its battery exploded yes and it was a very very big blot on the name of Samsung there were so many recalls the Goodwill of Samsung was up for a toss they had reputational issues then everything they had to replace the whole uh you know mobile phone it was a disaster nothing less than a disaster for them but that's how it is it is what it is it is so again Samsung also realized that quality comes with a a horrible cost a cost of recall Goodwill reputation replacement not a good sign for any company there was another company which did the same mistake that company very famous car automobile company Volkswagen thus Auto yes even Volkswagen say made some cars and say so Volkswagen when it has to sell cars in USA in USA there have they have a certain Norm there is a pollution control equipment which they should put and that pollution control equipment is a compulsion by the US authorities but it obviously comes with a cost so they did not put the pollution control equipment in the car and eventually and eventually eventually the control the authorities of USA came to know about it and they rejected the Volkswagen cars they rejected the Volkswagen cars they said that you you have to recall all the cars you will have to first replace the pollution control equipment and then resend it to it the customers again again loss of money because now you have to put this pollution control equipment loss of reputation that oh my God the uh Volkswagen cars have to be recalled not a good sign for any business not a good sign for any company and yes they all also paid a big cost for the quality giving us making us to our first concept and that concept by now you would have remembered is called as cost of quality ladies and gentlemen everybody with me yes cost of quality so if you are making any product focus on quality first your quality should be the best so that there is no defective at all in your product Mr SAR did not focus on quality and eventually he had to pay a big price for the defects so was the case with Samsung Note 7 so was the case with Volkswagen and there are so many examples that I can quote you but now we realize that yes quality comes with a cost but let's focus let's be ready to pay the cost so that we get the best quality and zero Z defect so that we get the best quality and zero defect are you understanding everybody so so so in a nutshell what is quality cost if you focus on quality there will be less defectives if you focused on if if Mr SEL focused on maintenance you would have paid less amount in repair if Samsung focused on B batter testing battery quality battery overall uh working they would have not paid a amount for recalls Goodwill replacement so is the case with folks wagen and that's what guys cost of quality is all about that's what cost of quality is all about it is divided into two parts one focus on making good quality products so obviously there will be a cost of good quality as a result your cost of bad quality will go down as a result your cost of bad quality will go down if we focus on good quality cost of bad quality will go down down if you do not focus on good quality your bad quality will go up I am now going to make a big sarcasm on each one of you if you do not study good for your examination it is like that study good and you will not have to see failure but if you don't study [Laughter] you know what I am trying to say right right right okay so this is about your cost of quality so what it is so we will say cost of quality is two things before production or pre pre-production or you can say during production you have to focus on its quality called as cost of good quality called as cost of confirmance it is also called as cost of confirmance confirming to quality products is called as cost of confirmance if this is good then it will result in good post prodouction or lower post production defects which is your cost of bad quality right and this basically is technically is called as cost of noncon done got it so that's how it works now uh Mr jurang the person who came from America to Japan to develop he said that this cost of quality is divided into four parts this cost of quality is divided into four parts which now we are going to study in the course of our whole topic so I hope we are clear with what exactly is your cost of quality now we'll get more into the details as we move on and this is the four division that he did and all of that now let's open our textbook let's open our textbook and start with the whole chapter the first concept obviously being cost of quality but before we move on to cost of quality there is a backdrop related to it let's understand that backdrop and and and let's get started so please open your textbooks your theory book so that we can start on a positive note so let's start so modern business environment we started with an example and I am going to connect to that example very very soon stay tuned wow so here we are during the past two decades the business environment in many sectors has been characterized by rapid changes now it is very important for us to read every theoretical line because everything can be asked anything can be asked in McQ so yes so very true the first paragraph is mainly an introduction just telling us that you know uh the business environment is undergoing a lot of changes and there are a lot of plans and policies that a company will have to take to ensure that things are in place and everything is going rightly so let's take it forward the envir ment is ever changing and dynamic in nature again can be asked for yes McQ the modern business environment drastically changed shape entirely in a different manner it has now become a challenge for business managers to understand their business environment and formulate business plans and policies accordingly business technology has advanced business functions and operations to new levels and hence the role of accounting is very very important so so this is just an introduction is trying to say that yes business environment is very important characterized by rapid changes and how managers will adopt to it how will they make their plans policies accordingly now the most important thing that has happened with business environment that it has converted itself from traditional to new environment what was there in traditional environment it was a Cost Plus approach as in if I am a businessman I will calculate the cost of my product say if I'm making a calculator I will calculate the cost of the product add the margin to it profit margin to it I will get the price of this product but now things are changing now things now the pricing is competitive so there is a case of competitive pricing so the price is decided based on the market Sy scario what it then then is response time determined by suppliers but now it is based on jit see now what used to happen is I'll tell you the system used to be sellers Market previously the in the traditional system the market used to be sellers Market but now it has become buyers Market that's right now it has become buyers market so from sellers Market two buyers Market how things have changed so this is what this whole uh distinguish is all about Cost Plus approach competitive pricing in terms of pricing see when it was sellers Market there were hardly two to three Sellers and there were so many buyers but now now there are many sellers so buyers have a negotiation value right so previous when there were less sellers the sellers used to determine the price now there are many sellers so pricing is based on competitive pricing pricing is based on competitive pricing response time it was determined by suppliers but now it is just in time previously I used to say oh it will take 10 days 15 days ask your parents just to get a phone call connection phone connection at your home telephone they used to wait for 8 months 9 months 12 months now you get a call from them sir please take phone connection from my company how things have changed response time it was determined by suppliers now it is just in time you order and you will get whatever you want on immediate basis called as just in time quality determined by service or product provider better than customers expectations previously it was whatever quality you whatever product you used to get you will take it keep it with you but now you will expect and in fact you will get greater better than your expectations and performance it was dictated to the customer now it is efficient and effective if it is effective and efficient all right guys so that's how the whole system is based divided into traditional environment and new environment traditional environment Cost Plus approach determined by suppliers quality based determined by service of product uh product provider now better than expectations of everybody previously performance was dictated to the customer now everything is efficient and effective also as a result of this the characteristics of modern business environment are a lot first because of sellers to buyers market now the number of sellers have increased why because of globalization of world economy see in till 1991 India was a restricted economy after 1991 we started LPG liberalization privatization globalization what is globalization asking the outside than India countries companies to come to India and develop the product so now you are competing not only with your product but also not only with with your local products but also with an international product see Fierce competition among organizations within and across countries now this is how the modern business environment is characterized by you have to use new managerial methods to be relevant survival of the fittest as said by Charles Dalin is now the concept used by every business Global excess capacities in production this is the case of ch China China for the last 20 years has built huge manufacturing capacities huge so as a result they have a lot of excess capacities I know a lot of my friends uh my uh colleagues who you know when I was working with JP [Music] Moran yes so Global excess capacity in Production Services and in some areas of development so China last 20 years has produced a huge amount of capacities uh as I told you my friends colleagues would go to China whatever costs rupees 20 year the Chinese manufactur it at rupees 2 and they have so much of bulk manufacturing that whatever excess capacities there they can send it to the whole world at a very very cheap cost and that's what China has been doing for so many years so Global Exel exess capacities availability and accessibility of data and knowledge has become so easy on account of Internet the customers know what is being sold at what price just go on to Amazon or Flipkart and you have the price of almost everything and anything that you want right timely availability of materials and services so now things are available on one time one day delivery from 5 day delivery to one day delivery to you know half a day delivery to 10 minute delivery that's what we are ease of Global Travel and transportation you can travel to any part of the world get the product that you want get the service that you want so that is how the modern business environment is characterized by and a lot of it has changed in terms of macroeconomic technological political and social changes and now as per today's businesses there is just one Challenge and that is to satisfy the customers through exceptional performance of your processes so your process has to be so good that the customer has to be satisfied should get the value for the money that he is paying and for that three concept are going to be very important just look down there first cost of quality quality second Total Quality Management third Supply Chain management cost of quality Total Quality Management Supply Chain management are you understanding are you clear done so now finally we are moving on to our first concept the base that I had set for you all through my uh example is now what we are coming to but so this was just an introduction where in we came to know the rapid changes the changing Dynamic nature resulting in the companies formulating better business plans and policies technology became Advanced and uh yeah that's how it worked how the traditional environment changed to new environment from Cost Plus approach to competitive pricing from focus on suppliers to just in time quality now has to be given above customers expectations and you know the the performance is also becoming effective and efficient how is the characterized of characterization of modern business environment globalization competitiveness man new methods Global access capacities accessibility of data knowledge thanks to internet timely availability of material and ease of travel and transportation now we want the customers to be happy and for that we need to ensure that we focus on cost of quality now the first question that will come to your mind is what is quality I'll tell you first giving the customer what it wants confirmance to specification of customer is what is quality simple you need a 100h hour batch from me I have to ensure that I give it to you somewhere around those number of hours confirmance to customer specifications you need a totally fresh batch done if if that is there satisfy customer expectation amount you are paying a value for money if you're able to clear it in the first go you'll feel that yes the worth the value for money is realized are you understanding so that's how the characterization of quality is confirmance to customer specification satisfy customer expectation and give them value vfm value for money this is what quality is and in order to give this quality in order to give this quality we need four things we need four things we need to incur a good prevention and Appraisal cost to ensure that my internal failure and external failure is r reduced to minimum is reduced to minimum so there is components of cost of quality which has two components one cost of confirmance relating to good quality and non-conformance relating to poor quality which I had told you taught you all in my examples if sculp had focused on this good quality cost of confirmance related to prevention and Appraisal or even Samsung Note 7 or even Vol Volkswagen cost of confirmance would have been lower so what are prevention cost what are appraisal cost so for you I have derived a simple meaning to make you understand you not find it anywhere so just focus here and you'll get the answer so first is prevention cost what is a prevention cost a cost incurred on designing the product before the product goes into the production so before cost incurred before the production costs incurred before the production is prevention cost simple second what are appraisal costs what are appraisal costs so during the production the costs that you have to incur whether the machine machine is of proper quality whether the raw material is being processed properly get few samples of the production whether the samples are of desired quality is appraisal cost so cost incurred during the production during the production third is internal failure cost now after the production after the after the production is done after the production is done if you find any defective quality product then you will have to rework it you have to redesign it right that is called as internal failure but ensure that the product is not out of your factory and gone to the customer because that will become external failure cost so after the production if you test oh there is some quality issue you will have to do a remake of that product called as a internal failure so after production after production but before the product leaves the factory for the product leaves the factory and finally we will have the external failure finally we will have the external failure which is customer level defect goods are out of the factory gone to the customer customer says oh this is not good return it back the warranties and the guarantees and all of that is external failure customer level defect customer level def are we clear everybody prevention appraisal internal failure external failure if focus is properly on prevention and Appraisal automatic internal failure external failure will go down let's come back to our book let's come back to the theory so cost of confirmance and cost of non-conformance what is cost of confirmance cost of good quality prevention appraisal cost incur to avoid poor quality of products to minimize number of defects as I told you planned and incurred before actual operation hello before actual operation associate ated with design implementation and maintenance of quality management system could be quality planning quality engineering quality design quality review quality training quality audit quality supplier evaluation everything related to Quality quality Quality quality is your internal is your prevention cost cost of good quality cost of confirm then we have the appraisal costs then we have the appraisal costs what are your appraisal costs here we are no ensuring that high quality standards and performance requirements are abur to are to so associated with suppliers and customers evaluation of purchase material processes products so see here when the raw material has come first when the raw material has come check raw material is proper or not so purchase material is proper then put it in the machine is the machine proper equipment is proper or not they are uhuh products and the equipment evaluation of purchase material processes basically your machine is proper or not then make some samples are the sample up to the specifications or not all of these things have to be checked in the appraisal cost field testing package testing equipment testing product or process Acceptance in terms of samples right then comes internal failure if there is any issue at this level if there is any issue at this level which means that there is a defective product that has been manufactured so after the production hello after the production if still there is a effect we will say it is a IFC internal failure cost we will say it is a IFC internal failure cost so incur to remedy so now there is a issue there is a problem with the material with the product that has been made now how do I rectify the mistake right so see how how it is worked is this that if there is any defect if there is any defect in the product you will have to take it I before it goes out of the factory so after production before it leaves out of the factory if there is any product issue it has to be resolved and that's what internal failure cost is all about incurred to remedy defect discovered before the product or service is delivered to the customer cost incur to correct deficiencies cost by error in products and inefficiencies in processes all right guys so FC occurs when product not as per quality design standards and that's the reason you know it would be broken or something of that sort say for example if you can see this calculator if there is one button which is not properly put up then you will have to do the rework if more than five to 10 buttons are not proper then there it will be a scrap there could be some chipping on the calculator you would have to redesign or probably retest so all of this is a part of your internal failure and if the uh the product has gone out of the factory and if it meets if if the customer gets that bad product then in that case sorry but this is called as a external failure cost incurred after leaving the factory detected by the customer incurred to correct defects discovered by the customers occurs when product or service f fail to reach the design quality standards not detected not detected until transfer to customer causing dissatisfaction and warranties complaints you will have to give customer support there will be lost market share suppose if a you do not give a good quality product then the customers will not refer it to some other customer and as a result you will lose the market share so that is a big big problem returns you will have to incur on return and allowances they will be a liability on you so all of that is a part of your external failure cost so in a nutshell just read this line and you'll understand a lot of things higher the prevention and Appraisal cost lower will be the defects and internal and external failure I hope we are absolutely clear as far as cost of quality is concerned as far as cost of quality is concerned all right guys so cost of quality comprising of two things cost of control cost of failure of control also called as confirmance non-conformance cost also called as good quality poor quality costs right right right right right the best approach will be to always remember cost of quality is calculated as a percentage of total cost which allows comparison of cost of quality across projects or companies I'll give you an example I'll give you an example see now when I'm making a product let's take an example okay now if I am making say a product a product X I will incur prevention cost appraisal cost on them say I incur 2 lakh rupees of prevention cost three lakh rupees of appraisal cost so can can I say in all 5 lakh rupees I incur right in turn it will result into internal failure and external failure to the tune of 6 lakh to the tune of 7 lakh rupees giving a total of 13 lakh a failure of 13 lakh right right now in terms of percentage see how much total cost Total Quality cost is prevention plus appraisal plus internal failure plus external failure Total Quality cost is 18 lakh rupees yes and that 18 lakh rupees now we have to find as a percentage that's the whole point so say 5 divide by 18 and 13 divide by 18 so we come to know that we are focusing how much on cost of good quality 5 divid 18 oh only 28% and here it is 72% so now what we will do we will try to reduce the internal external failure by increasing the prevention and Appraisal cost so let's try and do that let's try and do that so suppose now I focus more on prevention and Appraisal right so say prevention cost is 4 lakh appraisal cost is 5 lakh total works out to 9 lakh right this will result in internal failure and external failure this will result in internal failure and external failure so one lakh and 1.5 lakhs and 1.5 lakhs all right guys so overall now we know that how much is this this is 2.5 lakhs yeah 2.5 lakhs so now we know that see overall cost has reduced overall overall cost as cost has reduced 2 11.5 lakhs to 11.5 lakhs now if I see 9/ 11.5 it is approximately 78% and here it is approximately 22% of total cost now the difference when your quality of when your prevention appraisal cost was low your internal external failure cost was very high you realized that you improved on that and now see once you increased it to 78% look at the internal external failure gone down to a very very considerable extent right so this is what we say that as a percentage of total cost so here we see that the the cost as a percentage so preven ion cost as a percentage of total cost internal external failure as a percentage of total cost are you understanding guys yes done now the next concept is called as optimal cost of qualities so now see here we kept on increasing the inter prevention and Appraisal cost our internal external failure kept on getting down but there will be a point right where we will be like okay enough of prevention appraisal now even if there is internal external failure it's okay that level is called as optimal cost of quality see we will want to be zero defect company but may not always be possible so logically when prevention and Appraisal costs are high your internal and external failure will be low your internal and external failure will be low but but but but but but if your prevention and Appraisal costs are low your internal and external costs are high your internal and external costs are high this level boss this level is called as optimal cost of quality optimal cost of quality all right yes so hope all of us are clear with this I'll just read it from this also an increased expenditure in prevention and Appraisal is likely to result in a substantial reduction in Failure costs because of the trade-off there may be an Optimum operating level which combined costs are at minimum the combined costs are at minimum AA everybody so yes this is your optimal cost of quality optimal cost of quality right so we got to know about the percentage of cost of quality now we are also aware of optimal cost of quality just to give you an idea that sir after doing this book are we supposed to do the module well my answer will always be no because as you see everything will be of whatever is given in the module is covered here in fact I be giving more things only so at the end of the session I can I'll just show you that how we have covered everything that is there in the module now we move on to the next concept called as the views regarding the cost of quality so what are the views first view is higher the quality means higher cost which is true to a certain extent because if I have to give quality I will need more quality checks in order to have more quality checks I will have need more laborers so accordingly everything is connected more quality checks so more laborers so increasing cost more Packaging ing cost all of that second resultant savings are greater than cost of improving quality always always always so see here uh see this here from 18 lakh we have gone down to 11.5 lakh so how much we have saved effectively we have saved approximately 6.5 lakh rupees but to save this 6.5 lakh rupees we had to incur a little amount a lower amount so the resultant say savings are always higher the resultant savings are always higher quality cost are those incurred in excess of those that would have been incurred if product was built for exactly the right the first time if you are going to make the product the right the first time then the quality cost eventually will go down to a very very large extent is what it says so these are the views regarding the cost of quality all right done now we come to the path model what is this path can be asked in the uh mcqs PA basically stands for prevention appraisal and failure we have to optimally incur prevention and Appraisal to ensure that the failure is reduced to the minimum bare minimum level possible prevention appraisal failure is the most widely accepted method for measuring and classifying quality cost will be asked in the McQ PA used for measuring and yeah classifying quality cost this is the five step procedure that you have to follow first see it is like failing in the examination if suppose you have failed in the exam then how you will determine the next PATH so you will see you will gather information up to why you have failed so number of failures in the system you will see how many internal failures are there external failures are there right so number of failures number of failures in the system then once we know about that then we will quantify that uh how much failure is there based on that we will see the four listed elements that the failure is on account of prevention appraisal internal failure external failure so that is uh finding out charting out the four elements then allocate resources and finally evaluate the performance and finally evaluate the performance so that's how the whole system works in case of path model what is it find out the number of failures once you know of the number of failures see seek the data relating to that divide it into the four parts that we have just studied then then allocate the resources to ensure that your prevention and Appraisal cost increase or prevention and Appraisal focus is there and then finally keep on doing this so that your performance will keep on getting better we keep on getting better better better better better okay guys done so this is about your application of path model application of path prevention appraisal failure model done done remember remember it okay no need to mofy anything because it's an McQ so things will be manageable and finally this PA model model will lead to something called as the iceberg model the last concept for the day and after this we will do two sums and few mcqs and then we'll be done with the today's session so so Iceberg model see iceberg is like our CA Journey today you are burning yourself in solitude you are single studying working hard sacrificing parties sacrificing marriages focusing feeling sad at times depression anxiety don't know at times what to do feeling lonely all of this will be uh taken care of once you get the name chartered accountant once you get the degree chartered accountancy before your name and this is what Iceberg model is for the whole world you know on 14th of January I'll give you my example on 14th of January okay only I knew how much hard work I had put to get this degree on 15th of January the result comes and the world will say oh how lucky in just so less time he has become a chared accountant but only we know the five years the six years of energy the sacrifices that we have put in to ensure that you know we get our degree to the best manner possible so this is what iceberg is Iceberg at the top will be very less but beneath the water there are so many things which are involved you know it is like our mother who is working so hard for us but we will never uh be able to find out that how hard she is working so it's like she's like the iceberg we just see the tip but below that there is a lot of hard work which is involved and that's what the path model is all about that's what the whole path model is all about all right guys uh the iceberg model is all about the iceberg model is all about okay now let's connect it with this let's let's let's connect it with this example even for the quality what we see on the top is recalls customer returns waste rejects testing cost rework inspection cost only these above above things but there is a lot of other things involved the over time that we will have to ask our C the our employees to do if there is a rework the excessive employee uh work or fluctuation there will be delays in planning because you had planned for making 100 products every day but out of that 10 products are defective so you'll have to first recorrect them so there will be planning delays late paperwork there will be excessive inventory unnecessarily development cost of failed product complaint handling will be there dissatisfied customer putting time there incorrect completed sales order excessive it cost field service expenses there will be billing pricing errors so there will be a lot of issues other than what can be seen at the top of the iceberg a lot of other things like your ca degree when when you get the degree people will just see this oh wow you are a started accountant overnight success no it is not it is a effort of five years a lot of sacrifices Iceberg model got it okay so with this we complete today's Theory session only a minority of the cost of poor and good quality are obvious above appear above the surface of the water the reduction of cost underwater has a huge scope if we identify and improve these cost cost of doing business will significantly significantly reduce and this ladies and gentlemen is what Iceberg model says so we have to focus equally on these because if these go down automatically this will also come down got it so that's this is about your Iceberg model now next session we'll start with tqm but before that now whatever we have studied in terms of quality cost and all of that we have few practical sums that we have to solve so let's start with that let's start with that so modern business environment uh I'll just connect you to the module see here modern business environment and then buyers Market they have just given one side of the story I have also given you the other side they have just told that okay Cost Plus approach I've told you competitive pricing they've told you determined by the supply I've told you jit so I'll be one step ahead only from the module don't worry then from sellers Market to buyers Market the globalization Global excess capacities Pierce competition same language availability accessibility of data timely availability of raw materials all of that cost of quality Joseph Jan Philip crossby views regarding this high quality means high cost savings components of quality good bad prevention appraisal prevention cost it's it's examples appraisal cost internal failure external failure right then two questions that now we are going to solve optimal cost of quality its diagram everything is taken care of right everything is taken care of are you understanding guys done so now we are done with the theory part and we will be starting with the Practical aspects for the that you will have to open the Practical book yes the Practical book is what now you have to open because now that's what we are going to start with okay so uh have you opened it Guys open the chapter nice so Live Well limited is a manufacturing company that produces a wide range of consumer products for home consumption among the popular products are so it's the first question that we are solving uh among its popular products are its energy efficient and environment friendly LED lamps company has a quality control Department that monitors the quality of production as per the recent report recent cost of poor quality report the current rejection rate for LED lamps is 5% 5 ,000 units of input go through the process each day each unit that is rejected results into a loss of 200 to the company hold on hold on hold on listen see here the current rejection rate rate for LED lamps is 5% so there are in all 5,000 units 5% is the rejection which is 250 for every rejection 200 Rupees is the loss so into 200 so 250 into 200 is how much 250 into 200 is rupes 50,000 so that is the cost that you are incurring currently now the quality control department has proposed changes to the inspection process that would enable early detection of defects oh this would reduce the overall rejection rate from 5% to 3% of units of input yay so previously also 5% was there now also 3% will be remaining only but at least 2% reduction will happen hello at least 2% reduction will happen which is good so from 5,000 into 2% if I do 100 units at least now will not be defective so for these 100 units 200 per unit which works out to how much correct rupees 20,000 rupees 20,000 worth of money can be saved 20,000 worth of money can be saved but to save this the improved inspection process would cost the company 15,000 to save this 15,000 will have to be incurred 5,000 is your net savings we will say accept the project now this is what the questions will ask you they will ask you this typical question you have to solve it quickly like I did on the calculator give the McQ correct answer Bingo get full marks now if this would have been a typical scmp 100 Mark paper I would have opened this and solved it thoroughly each and every word but now thankfully we just have to find the final answer so we can directly come to the solution without caring very much for the uh present part as such right so so what is the current system guys I hope we are clear obviously I solved it with the flow while reading the question but uh found it pretty much manageable no so we will solve current system is divided into two parts that 5,000 units are there having 5% defect which is giving 250 units defect into 200 per unit so 50,000 Rupees is the loss 50,000 Rupees is the loss right now as for the new system as per the new system what is going to happen see here previously it was 3% uh now it is only 3% def so can I say from five it has reduced to three so effectively 2% is what you will save 2% is what you will save so 5,000 units into 2% 100 units is what you are going to save 100 units Yes you heard that right for every unit 200 per unit you are going to save which will result into Rupees 20,000 savings good which is good 20,000 I'm saving but but but now I will also incur costs relating to approximately 15,000 so in a nutshell net saved is how much Rupees 5,000 20K minus 15K 20K minus 15K is the net amount that you are saving guys are we clear guys any doubts you can ask me huh I hope you have my number obviously i' given it you all in the first session any doubts I will be going at a good pace so that we are on time in terms of portion completion at the same time you know understanding is also there depth is also there Basics are also covered but you overall 100% 360 degree things are there but if and also tell me you know how are you finding it in terms of understanding the the concept Concepts so many examples I'm giving whether it's valuable to you value for money to you or not do do drop me a WhatsApp once you watch down the sessions are you understanding the Practical questions or not all of this yeah okay so this was the first part guys first part we had already solved on our own only second part after the implementation analyze the maximum rejection rate Beyond which The Proposal seizes seizes means stops to be beneficial see now after which The Proposal will not be beneficial I'll tell see this proposal is beneficial this year it was beneficial because we saved more than the cost that we are incurring cost incurred was 15,000 saving was 20,000 5,000 extra we are able to save 5,000 extra we are able to save right but if if just think just just logically think at what level will you stop suppose if you are getting a benefit of 15 say 16,000 rupees will you still do it the answer is yes benefit 15 uh 16 cost 15 1,000 at least 1,000 at least we are making a profit if it is 15,000 one saving 15,000 cost till I okay one Rupees at least I'm saving but if this was saving was 14,000 and cost was $ 15,00 000 still will you do it the answer is absolutely no because 1,000 you are losing so until what time till what benefit will you continue the answer is 15,000 below that if the savings goes you will not consider it right so that's what the whole point is that our cost is very clear 15,000 how much is the benefit that you are looking at see you know here that savings per unit is rupes 200 per unit so how how many units minimum you need to ensure to go ahead with this whole process so you will say that savings how much is the savings at least it should be 15,000 so say your cost is 15,000 your saving should be at least 15,000 200 per unit is your saving into X number of units is equal to 15,000 so therefore X is equal to 70 5 units 75 units are you understanding guys yes this is this is it this is the minimum number of units that I require to ensure that things are on the right track if the number of units saved is 74 units I'll not accept it so how much is 75 effectively so we will say 75 units out of 5,000 units is is 1.5% 1.5% so in our first case it was 2% so we were happy in our first case it was 2% so we were happy we were like okay 2% is very good accepted but but but but but but if it goes below 1.5% we will not so how much is the savings so we will say if savings less than 1.5% then we will not accept then we will not accept I will not accept are we clear suppose suppose the savings is 1.4% suppose the savings is 1.4% of say 5,000 so can I say 70 units into 200 per unit 14,000 Rupees is the sorry is the saving how much is the cost hello how much is the cost sir 15,000 reject so at least we need that much and that's what the answer is you can read the detailed answer if you have time obviously I have to get it done in terms of understanding and in terms of ensuring that if an McQ come you should be able to answer so see here 75 units each day is what we will say 1.5% rejection rate Improvement in other words when the rejection rate is 3.5 5 minus 1.5 3.5 till then we will be accepting it below that we will not accept it at any cost understood done with this question now we move on to the next question question number two yeah CH so open the question question number two we will start JK limited produces and sells a single product presently the company is having its quality control system in a way that at an annual external failure and internal failure cost of 440 and 850 respectively very easy so question number two is what we are starting with okay so now what they have said external failure internal failure external failure 440 internal failure 850 so internal failure external failure how much is the internal failure 850 external failure 440 right yes so total how much is the total it is 1290 it is 12 lakh 90,000 then what they have said as the company is not able to ensure supply of good quality products up to the expectation of its customers and wants to manage competition what is it it is expected to implementation of new system which will lead to a prevention cost and Appraisal cost so far prevention and Appraisal cost was was not there but now it is there so so now we have a prevention cost now we have a appraisal cost how much is the prevention cost guys 5 lakh 60,000 how much is the appraisal cost guys 70,000 total how much sir 630,000 okaye and and and and now but but but what has happened obviously the internal failure and external failure will go go down how much external and internal failure cost will reduce by rupees 1 lakh huh by one lakh not 2 one lakh so from 850 this will go down to internal failure cost will go down to 750 and what about external failure cost it will go down to 4 lakh 10,000 will reduce by 4 lakh 10,000 so from 440 to 4 lakh 10,000 to 4 lakh 10,000 all right so so it has gone down by 410,000 oh wow it's awesome awesome so 4.1 lakh so 30,000 in all 780,000 got it so now your total cost is 13 14 lakh 10,000 okay so financially if you see our cost has increased from 1290 to 14 lakh 10,000 but Frankly Speaking logically if you will see even though the financial cost overall total Financial total quality quity cost has increased that's okay because now at least our cost of good quality is being incurred and cost of bad quality has gone down drastically so in the short term you will see the financial and you will feel oh oh my God this is too much the cost has increased but but in the long term the overall quality will ensure that the sales will increase and eventually the profitability will increase all right so I think we should go ahead with the whole process the new quality control and recommend the acceptance from Financial perspective the recommendation may be a no but from a non-financial perspective it will be a yes because quality non-financial perspective is a quality and quality is always to be honored what is your advice to the company if the company wants to achieve zero defect through a continuous program so that's the next concept that we will be doing tqm and suggest us suitable quality control level at minimum cost so see we will always want to be a zero uh defect company again it is a part of tqm itself so the second and third part once we do tqm tomorrow then you can go through on your own and you'll be able to answer that so as discussed two questions from the Practical book done Theory thoroughly done now we will come quickly to our McQ book and try to to solve the first 25 mcqs so and now we'll be able to solve the mcqs in a very very quick manner because uh yeah because we have done the theory concept so so thoroughly so please please please open your mcqs in that we will start with the SK mcqs because see IC mcqs are very uh you know separately spread out as in there is a there will be a question on strateg Supply Chain management then tqm then cost of quality and everything will be jumbled up but here in R SK mcqs everything is as per the concept so the first initial concept cost of quality is done and for that we have questions till question 207 yeah so first 27 questions are now what we are going to solve probably it will take around maximum 10 minutes and we'll be done we'll be done with today's session and we'll be done with three things the mcqs the practicals the theories and that's how every session we'll try to do all of that okay so now quickly let's start with McQ McQ should not take time if you had done the previous part properly let's start what characterizes today's business environment yes the rapid changes the dynamisms correct definitely definitely is what characterizes the yes the today's business environment so rapid changes and dynamism then what is the main challenge for business managers in modern environment what is the challenge let's see embracing stagnation traditional practices ignoring technological understanding and adapting to Rapid change according to me it is 2 C see there will be few questions out of 100 say two three questions will may not match with our answer behind see the answers are also given here behind so few questions may be here and there so few questions maybe here and see see this is the final solution at the end every solution is given so but again two three questions may be a bit here and there than that everything will match okay so what has been the main Revolution yeah main revolution in the business environment tell me question number three shift from buyers Market to sellers Market no transition from static to Dynamic no change Evolution from from manual to automated yes yes okay change from service oriented to product oriented no so I think C Evolution from manual to automated process what is the current Trend in business environment what is the current Trend in the business environment tell me sellers market dominance buyers market dominance yes one side what are the characteristic of today's buyers Market limited globalization no no excess globalization lack of competition no no excess capacities in production yes what does Coq stand for cost of quantity no no cost of quality yes yes who popularized the concept of cost of quality can I say Dr Joseph Jiran yes okay then what is the focus of concept of quality in the text confirmance to quality quantity no see what what they are asking is this part they are asking this part quality confirmance to customer specification satisfy customer expectation value for money this is what they are asking confirmance to customer specification definitely we want satisfy customer expectation and give value for money so what is the focus on concept of quality confirmance to a specification and customer expectations 8 B then which view suggest that resultant savings are greater than cost of improving quality savings are greater than whose view I think it was deming's view so this we'll come to know in the next session when we do the deming's tqm next what are the two broad categories of Coq cost uh price of confirmance and price of non-conformance almost all the answers we should know we should not look at the Alternatives what is the term used for price of confirmance cost of good quality 11b what is the main focus of prevention costs reming defects measuring monitoring avoiding quality problems yes 13 which cost categories associated with measuring and monitoring activities related to Quality measuring and monitoring activities related to Quality focus on quality is always on prevention cost what when do internal failure cost occur before the customer receives the product or service what is the focus of external failure cost uh cost incur what are external failure cost basically are cost incurred after customer detection of defects what do the term optimal cost of quality suggest uh increased expenditure on prevention and Appraisal leads to reduced failure cost yes 16b so according to me it is 16b I think behind the answer is 16 a so correct it to 16 B next uh why is an external person recommended to determine the cost of quality to avoid inter internal bias yes to increase project team no so we need an external personal so that bias is not there internal bias is not there we can take independent decisions what is the argument regarding striving for zero defects it is helpful yes it is economically helpful definitely it is so uh 18 a okay how is Coq calculated in its simplest form in terms of money effort no as a percentage of cost yes purpose of five-step process in path model see try to remember what they had said PF is the most widely accepted method for measuring and classifying quality costs yes measuring and classifying quality costs okay okay what is the iceberg model illustrate hidden nature of quality costs right yes according to Iceberg model where are the majority of costs hidden below the surface of water next what is the potential impact of identifying and improving hidden costs increase in business cost no impact no significant reduction in the cost of doing business yes then in the past two decades the business environment in many sectors has been characterized by yes rapid changes obviously main revolution has happened from seller to buyer buyer to seller seller to buyer now the buyer demands what is the challenge for business managers in today's environment the major challenge according to me is yes obviously the understanding the dynamic business environment yes and the last 27 concept of cost of quality includes price of confirmance and price of non-c confirmance with this we complete today's session all right guys so yes how was it do tell me do let me know because your feedback will ensure that we are on the right track hope you enjoyed the session time for me to say asista take care keep smiling and tomorrow again we will meet with new Theory with New Practical with new mcqs bye
