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

 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

Cost of Poor Quality 3 .PPT

 The Hidden Organization
Step Step
Test Test Product
1 2
Floor Space
Analyze Analyze

The Hidden Factory

Fix Fix

Value Added
Floor
Floor Space
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.”

Cost of Poor Quality 4 .PPT

 Why Cost of Poor Quality?
• Reporting Tool
• Comparisons
• Trends

• Analytical Tool
• Priorities
• Tradeoffs

• Investment Tool
• ROI

Cost of Poor Quality 5 .PPT

Cost of Poor Quality

 Prevention

Cost of Attaining Quality

 Appraisal: Prediction
Audit

 Appraisal: Detection

Cost of Poor Quality

 Failure: Internal
External

Cost of Poor Quality 6 .PPT

 Quality Costs
Components

$
Conformance Non-Conformance
$ $

Cost of Poor Quality 7 .PPT

Cost of Poor Quality 8 .PPT
 Total Quality Cost I want my
money
back!

Internal External
Prevention Appraisal
Failure Failure

$
Cost of Quality (COQ)
Cost of Poor Quality 9 .PPT
 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

Cost of Poor Quality 10 .PPT

 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

Cost of Poor Quality 11 .PPT

 As an organization gains a broader definition of poor quality,
the hidden portion of the iceberg becomes apparent.
Cost of Poor Quality
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
Cost of Poor Quality 12 .PPT
Traditional Model

Total quality costs

Failure costs
unit of product
Cost per good

Cost of appraisal
plus prevention

0% Quality of conformance 100%

Cost of Poor Quality 14 .PPT
Greater emphasis placed on prevention and appraisal.
It assumes appraisal and prevention costs to be relatively fixed over time

.
Emerging COQ Model
Model does not encourage tradeoffs.
Total cost is NOT minimized at less than 100% conformance.
Total quality costs

Failure costs
unit of product
Cost per good

Cost of appraisal
plus prevention

0% Quality of conformance 100%

 COQ as motivator

• Companies under TQM do not focus on quality cost minimization.

• Quality improvement projects tend to focus on zero defects or defect reduction to the six-sigma
level.
• The earlier you detect and prevent a defect the more you can save.
• If you catch a defective 2 cent resistor before is used, you loose two cents.
The 1-10-100 Rule
• If you find after is solder into a computer component, it may cost $10 to repair the
part.

Prevention
$ 1
Correction
$ 10

Failure
$

$ 100

If you don’t catch it until it reaches the customer’s hands, the repair will cost hundreds of dollars.
Indeed, for a $5000 computer, a field repair may exceed the manufacturing cost.
COQ Theme

•Costs are not incurred or allocated, but

rather caused.
•Cost information does not solve quality
problems, nor does it suggest specific
solutions.
•Problems are solved by tracing the
cause of a quality deficiency.
Quantifying the Potential Benefit
Sigma Cost
6 sigma <10% of sales
5 sigma 10-15% of sales
4 sigma 15-20% of sales
3 sigma 20-30% of sales
2 sigma 30-40% of sales

Cost of Poor Quality 19 .PPT

 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?

Cost of Poor Quality 20 .PPT
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
Cost of Poor Quality 21 .PPT
 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Job Descriptions
 Housekeeping
 Zero-Defect Program
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
– Product Costs
 Customer Satisfaction – Financial Reports
 Surveys and Audits – Capital Expenditures
 Prototype Inspection
 Accumulating Cost Data

Cost of Poor Quality 22 .PPT

Examples of Internal Failure Costs

 Substandard Product  Supplier Problems

 Scrap or Rework – Scrap and rework
– Late deliveries
 Re-inspection – Excess inventory
 Redesign/Engineering 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)

Cost of Poor Quality 23 .PPT

Examples of External Failure Costs

 Product Recall  Lawsuits

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

Lost Sales Because of Customer Dissatisfaction!

Cost of Poor Quality 24 .PPT

Focus of COPQ Efforts

 Identify and Quantify Quality Costs

 Expose the “Hidden Factory”
 Ongoing Measurement System
 Breakthrough Improvement

Cost of Poor Quality 25 .PPT

 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 26 .PPT

Pritpal Singh BOS

Cost of Poor Quality 27 .PPT