Business Unit

Cost of Poor Quality

Strictly Private
and Confidential
Draft

16 June 2015
Agenda
Page

1 Agenda 1
2 Cost of Quality Basics 4
3 Cost of Quality Measurement 16
Section 1
Agenda

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Section 1 – Agenda Draft

Agenda

1 - Understand the impact of measuring the cost of quality

2 - Be able to identify the quality costs in an organization

3 - Understand the process for measuring the cost of quality

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Any other expectations?

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Section 2
Cost of Quality Basics

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Section 2 – Cost of Quality Basics Draft

Basic Thought

“What gets measured gets done”

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Section 2 – Cost of Quality Basics Draft

Exercise – 5 mins

How do we define “Quality” in our process / Unit

• List down all the details of – Good Quality Output
• List down all the details of – “Bad Quality” instances / issues at your Unit

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When the Organizations Define the Cost of Quality

When quality costs are initially determined, the categories included are the
visible ones as depicted in the iceberg below

Waste Customer Returns

Rejection
Testing Costs Inspection Costs

Re-Processing Recalls

4 to 5% of the Total Sales

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Section 2 – Cost of Quality Basics Draft

When the Organizations Define the Cost of Quality

As an organization gains a broader definition of poor quality,
the hidden portion of the iceberg becomes apparent
Waste Customer Returns
Rejects
Testing Costs Inspection Costs
Rework 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
Unused Capacity
Complaint
Handling
Premium Freight Costs Time with
Dissatisfied Customer
Excessive
Overdue Receivables System Costs

Development Cost of Failed Product

Hidden COPQ: The
COPQ ranges
costs incurred to
from 15-25%
deal with these
of Sales
chronic problems
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Section 2 – Cost of Quality Basics Draft

The Cost of Quality

Quality related costs can mean two things:

1. Cost of Attaining Quality
1. Prevention Cost –
2. Appraisal Cost –

2. Cost of Poor Quality

1. Internal Failures –
2. External Failures -

Proactive Cost Vs Reactive Cost

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Section 2 – Cost of Quality Basics Draft

Cost of Prevention

The costs of all activities specifically designed to prevent poor quality in

products or services

Examples include:
Quality planning
New product reviews
Quality education These are all planned &
Process capability evaluations Pro-active activities

Supplier capability surveys

Quality improvement projects

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Section 2 – Cost of Quality Basics Draft

Cost of Appraisal

The costs associated with evaluating or auditing products or services to assure

conformance to quality standards and performance requirements

Examples:
Incoming inspection/test
These are all planned
Calibration of inspection/test equipment activities
Final inspection/test

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Section 2 – Cost of Quality Basics Draft

Exercise -

List down the components of

- Prevention
- Appraisal

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Internal Failure Costs

• Scrap
• Rework
• Re-process
• Excess Processing
• Failure analysis
• Re-inspection and retest
• Expediting

The goal is to identify all internal failures and resultant costs, and then
systematically identify and eliminate root causes until internal failure costs
are eliminated

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Section 2 – Cost of Quality Basics Draft

External Failure Costs

The costs incurred when the customer finds the failure

– Processing customer complaints
– Field repairs
– Recall costs
– Returned goods
– Processing returned materials
– Warranty costs
– Loss of reputation
– Penalties
– Customer incurred costs

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Section 2 – Cost of Quality Basics Draft

Exercise -

List down the components of

- External Failures
- Internal Failures

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Section 3
Cost of Quality Measurement

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Section 3 – Cost of Quality Measurement Draft

The Costs related with quality

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Baselining the Cost of Quality

Ad-hoc informal system

• Purpose is to quickly get a good
estimate of how large TCOQ and
COPQ are
• Output is TCOQ report for a point
in time
Formal Cost of Quality System
• Permanent feature of
management reporting and
decision making system
• Provides detailed ongoing reports

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Section 3 – Cost of Quality Measurement Draft

Steps:

Step 1: Identify the major internal and external categories that need to be
captured (use guidelines above)
Step 2: Establish a method to collect data for each category to be measured
(solicit team participation and Accounting help)
Step 4: Establish reporting format that can easily calculate COPQ, preferably an
automated reporting system that is very accessible

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Thanks

© 2015 PricewaterhouseCoopers Private Limited. All rights reserved. In this Proposal, “PwC” refers to PricewaterhouseCoopers Private Limited
(a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a
separate legal entity.
PricewaterhouseCoopers Private Limited, Registered office address: Plot Y-14, Block EP, Sector V, Salt Lake, Kolkata 700 091, CIN:
U74140WB1983PTC036093, http://www.pwc.in