Cost of Poor Quality

Cost of Poor Quality
The Tip of the Iceberg

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.
“Goal setting has traditionally been based on past performance. This

practice has tended to perpetuate the sins of the past”
“Without a standard there is no logical basis for making a decision

or taking action”
“All improvement happens project by project and in no other way”
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
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?

Six Sigma
Six Sigma es una Metodología que hace uso de datos y herramientas

estadísticas para sistemáticamente mejorar y sustentar la mejora de
Procesos . SIX SIGMA hace uso del Modelo DMAIC
 Sigma (σ) representa una unidad de medida que define la distribución o

dispersión de datos alrededor de la media de un proceso, es decir representa
la variabilidad del proceso.
 Entre mayor es el valor de σ menor es la variación y menores los defectos
del proceso.
 El Estándar 6σ representa 3.4 defectos por cada millón de oportunidades
(DPMO)
 6σ representa un 99.9999966% de eficiencia de un proceso
Normal Distribution
Six Sigma
Esta metodología esta enfocada en el desarrollo de Proyectos SIX

SIGMA y consiste en 5 Fases que constituyen el Modelo DMAIC el
cual esta formado por una serie de herramientas que son usadas para
optimizar procesos de Negocios y Procesos Industriales:
DEFINE Problem Statement
Process Mapping
CONTROL MEASURE
VOC – CTQ
Project Scope
IMPROVE ANALIZE Project Charter
Six Sigma = Culture + Quality

Goal: Improve Performance on Customer (CTQ's)
Method DMAIC Process
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.
The Tip of the Iceberg

Cost of Poor Quality

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Cost of Poor Quality

The Tip of the Iceberg

“Goal setting has traditionally been based on past performance. This

“Without a standard there is no logical basis for making a decision

“All improvement happens project by project and in no other way”

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?

Six Sigma es una Metodología que hace uso de datos y herramientas

 Sigma (σ) representa una unidad de medida que define la distribución o

Esta metodología esta enfocada en el desarrollo de Proyectos SIX

DEFINE Problem Statement

Six Sigma = Culture + Quality

 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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