iSixSigma

Appraisal Cost

Definition of Appraisal Cost:

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Quality control is one of the most important aspects of nearly any business. Typically, the amount of money that a company spends as part of its quality control exponentially outweighs what would be lost by offering faulty products or services. However, there are some instances where this is not the case, so these kinds of costs need to be carefully looked at.

Overview: What are appraisal costs?

These are the fees that are paid by a company in order to spot defects in its products or services before they reach its customer base.

3 drawbacks of appraisal costs

There are some major drawbacks to appraisal costs:

1. They can hinder continual improvement

Focusing on appraisal as opposed to process improvement and better measurement merely treats the symptom and not the cause.

2. The cost can get out of hand

When spending a lot of resources on appraisals instead of addressing the problems that are causing the faults, the cost can become exorbitant.

3. Lack of variable-type information about process behavior

In appraisals, faulty items can be verified and reverified without proper exploration of the root cause analysis. This is due to what is often a simple pass or fail scenario.

Why is appraisal cost important to understand?

There are a few reasons why having a good understanding of appraisal cost and its need for reduction is important:

1. Time management

Being able to improve so that there is a reduction in appraisals cuts down on the amount of time that it takes to get your product or service to your customers.

2. Motivation for better measurement systems

By understanding how much can go into the cost of appraisals, you may be motivated to work towards implementing better measurement systems in order to influence appraisal cost reduction.

3. Improvement of processes

With the understanding of appraisal costs and how they can actually harm your bottom line, you can put resources towards continuous process improvement and the reduction of appraisals.

An industry example of appraisal cost

A manufacturer ships parts for a Tier 1 automotive supplier at 2 PPM defective. The largest retailer that the supplier deals with decides that they want to be able to advertise that their suppliers ensure 0 PPM defective. In order to accommodate this, the supplier reaches out to the manufacturer and asks if they are capable of manufacturing at that level. When exploring the appraisal costs inherent in such an operation, the manufacturer realizes that the appraisal efforts would cost more than what they receive from the supplier.

3 best practices when thinking about appraisal cost

Here are some practices to keep in mind about the cost of appraisals and how they can impact your business:

1. Reversing the culture of process control

There should be clear targets in the design and manufacturing engineering processes that produce optimal performance. Controls should be put in place that keep processes on target and limited inspection/testing can monitor how far distribution is from the target. This approach shrinks the variance and creates the need for less inspection. This can reduce your company’s appraisal costs.

2. Excessive appraisals

Excessive appraisals can lead to a false sense of confidence in the capability of your manufacturing operations.

3. Make sure the process changes are worth it

Some customers may want lots with zero defects, and the cost of appraisals may outweigh the profits that are to be made on the order. Be sure that the process changes that are made are going to help your company and that the appraisals stay within reason and do not eclipse what your company will be getting from the deal.

Frequently Asked Questions (FAQ) about appraisal cost

1. What are some other categories of quality costs?

The other categories would be prevention costs, internal failure costs, external failure costs, and prevention costs.

2. What are some examples of appraisal costs?

There is the cost of setting up an inspection, training related to the inspection, inspection of the final product, and field testing.

3. How can appraisal costs be lowered?

Lower appraisal costs are the result of investing intelligently in activities that are oriented towards prevention.

Limiting the need for appraisals

Appraising simply separates the bad products from the good. There is no real effort towards improvement in and of itself. The only specific goal related to this cost is to keep the faulty items out of the hands of the customer. This does not change how many faulty products are produced. In order to minimize the need for high appraisal costs, improvements should be made over time to the actual processes and design.

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