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 2 .PPT All Rights Reserved, Juran Institute, Inc.
Prevention
Cost of Attaining Quality

Appraisal: Prediction
Audit
Appraisal: Detection

Failure: Internal
External
Quality Costs
Components
$
Conformance Non-Conformance
$ $
Total Quality Cost
I want my
money
back!
Internal External
Prevention Appraisal
Failure 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 Customer Returns

Rejects
Testing Costs Inspection Costs
Rework Recalls
As an organization gains a broader definition of poor quality,
the hidden portion ofWaste
the iceberg becomes apparent.
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
Quantifying the Potential Benefit
Sigma Cost
6 sigma <10% of sales
5 sigma 10-15% 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 Purchase Cost Targets

Training and Education Process Capability
Process Definition Studies
Customer Surveys Preventive Maintenance
Preproduction Reviews Supplier Qualification
Technical Manuals Job Descriptions
Detailed Product Housekeeping
Engineering Zero-Defect Program
Early Approval of Product
Specifications
Examples of Appraisal Expense
Test Supplier Certification

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

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

Handling Complaints Reports
Customer Service Sales and service
Caused by Errors Returns and allowances
Products Returned Failure
Analysis of Returns
Evaluation of Field Stock
Late Payments and
Bad Debts
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 Test Step Test Product

1 2
Floor Space
Analyze Analyze
The Hidden Factory
Fix Fix
Value Added
Floor Space Floor Space
Non-Value Added
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.

Cost of Poor Quality

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Cost of Poor Quality

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Cost of Poor Quality

Managers and workers speak

COPQ allows us to translate

Cost of Attaining Quality

Cost of Poor Quality

All activities and processes that do not meet agreed

Costs that would disappear if every task were always

Actual Cost - Minimum Cost = COPQ

When quality costs are initially determined, the categories

Waste Customer Returns

Development Cost of Failed Product

The ratio of the individual category costs to total costs

Quality Cost Category Percent of Total

What's Wrong With This Picture?

Quality Planning Purchase Cost Targets

Test Supplier Certification

Substandard Product Supplier Problems

Product Recall Lawsuits

Lost Sales Because of Customer Dissatisfaction!

Step Test Step Test Product

The Hidden Factory

Philip R. Thomas, Competitiveness

Theoretical Cycle Time: The back-to-back process time

Identify and Quantify Quality Costs

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