Cost of Poor Quality

Cost of Poor Quality

Managers and workers speak the language of things but Senior leaders speak the language of money... COPQ allows us to translate the things into money.

Cost of Poor Quality Prevention Appraisal: Prediction Audit Cost of Attaining Quality Appraisal: Detection Failure: Internal External Cost of Poor Quality

Quality Costs Components $ Conformance $ Non-Conformance $

Total Quality Cost I want my money back! Prevention Appraisal Internal Failure External Failure $ Cost of Quality (COQ)

COPQ Overview Definitions All activities and processes that do not meet agreed performance and/or expected outcomes Costs that would disappear if every task were always performed without deficiency Actual Cost - Minimum Cost = COPQ

Traditional Cost of Poor Quality (4-5% of Sales) When quality costs are initially determined, the categories included are the visible ones as depicted in the iceberg below. Waste Rejects Testing Costs Rework Customer Returns Inspection Costs Recalls

Cost of Poor Quality As an organization gains a broader definition of poor quality, the hidden portion of the iceberg becomes apparent. Rejects Testing Costs Rework Waste Customer Returns Inspection Costs Recalls Excessive Overtime Pricing or Late Paperwork High Costs Billing Errors Excessive Field Incorrectly Completed Services Expenses Lack of Follow-up Sales Order on Current Programs Excessive Employee Turnover Planning Delays Excess Inventory Customer Allowances Complaint Handling Overdue Receivables Premium Freight Costs Excessive System Costs Unused Capacity Time with Dissatisfied Customer COPQ ranges from 15-25% of Sales Development Cost of Failed Product Hidden COPQ: The costs incurred to deal with these chronic problems

Quantifying the Potential Benefit Sigma 6 sigma 5 sigma 4 sigma 3 sigma 2 sigma Cost <10% of sales 10-15% of sales 15-20% of sales 20-30% of sales 30-40% of sales

What Does Reality Look Like? The ratio of the individual category costs to total costs varies widely. Many companies exhibit ratios which look like the following: Quality Cost Category Percent of Total Internal Failure 25 to 40 External Failure 25 to 40 Appraisal 10 to 50 Prevention.05 to 5 What's Wrong With This Picture?

Examples of Prevention Expense Quality Planning Training and Education Process Definition Customer Surveys Preproduction Reviews Technical Manuals Detailed Product Engineering Early Approval of Product Specifications Purchase Cost Targets Process Capability Studies Preventive Maintenance Supplier Qualification Job Descriptions Housekeeping Zero-Defect Program

Examples of Appraisal Expense Test Inspection Process Controls Train QA Personnel Product Audits Quality Systems Audits Customer Satisfaction Surveys and Audits Prototype Inspection Accumulating Cost Data Supplier Certification Employee Surveys Security Checks Safety Checks Reviews: Operating Expenditures Product Costs Financial Reports Capital Expenditures

Examples of Internal Failure Costs Substandard Product Scrap or Rework Re-inspection Redesign/Engineering Change Process Modifications Payroll Errors All Expediting Costs Off-Spec/Waiver Abandoned Programs Supplier Problems Scrap and rework Late deliveries Excess inventory Equipment Downtime Accidents, Injuries Absenteeism Unused Reports Missed Schedule Cost Lost Sales (any cause)

Examples of External Failure Costs Product Recall Handling Complaints Customer Service Caused by Errors Products Returned Analysis of Returns Evaluation of Field Stock Late Payments and Bad Debts Lawsuits Reports Sales and service Returns and allowances Failure Lost Sales Because of Customer Dissatisfaction!

Non-value Added Work Definition Common activities that provide no benefit to customers. Some result from internal or external failure Some are unnecessary inspection Examples Rarely used information systems Memos never read Financial reports not used Irrelevant procedures Meetings with no objectives or outcomes

The Hidden Organization Step 1 Test Step 2 Test Product Floor Space Analyze Analyze The Hidden Factory Fix Fix Value Added Non-Value Added Floor Space Floor Space Philip R. Thomas, Competitiveness Through Total Cycle Time. McGraw-Hill (1990) Theoretical Cycle Time: The back-to-back process time required for a single unit to complete all stages of a task without waiting, stopping, or setups.

Why Cost of Poor Quality? Reporting Tool Comparisons Trends Analytical Tool Priorities Tradeoffs Investment Tool ROI

Focus of COPQ Efforts Identify and Quantify Quality Costs Expose the Hidden Factory Ongoing Measurement System Breakthrough Improvement

Advantages of Using Quality Costs for Management Advantages Reducing the cost of poor quality is one of the best ways to increase a company's profit. Provides manageable entity and a single overview of quality. Aligns quality and goals. Prioritizes problems and provides a means to measure change/improvement. Provides a means to correctly distribute controllable quality cost for maximum profits. Promotes the effective use of resources. Provides incentives for doing the job right every time.