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.
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Cost of Poor Quality
Prevention
Cost of Attaining Quality
Appraisal: Prediction
Audit
$
Cost of Quality (COQ)
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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
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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
Testing Costs
Rejects
Rework
Customer Returns
Inspection Costs
Recalls
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Cost of Poor Quality
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
Late Paperwork
Pricing or
Billing Errors
Excessive Field
Services Expenses
Excessive
Employee Turnover
Planning Delays
Complaint
Handling
Incorrectly Completed
Lack of Follow-up
Sales Order
on Current Programs
Customer Allowances
Excess Inventory
Unused Capacity
Premium Freight Costs
Overdue Receivables
COPQ ranges
from 15-25%
of Sales
High Costs
Excessive
System Costs
Time with
Dissatisfied Customer
Development Cost of Failed Product
Hidden COPQ: The
costs incurred to
deal with these
chronic problems
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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
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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?
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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
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!
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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
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The Hidden Organization
Step
1
Test
Step
2
Test
Product
Floor
Floor Space
Space
Analyze
Analyze
Fix
Fix
Floor
Floor Space
Space
Floor Space
The Hidden Factory
Value Added
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.”
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Why Cost of Poor Quality?
Reporting Tool
Comparisons
Trends
Analytical Tool
Priorities
Tradeoffs
Investment Tool
ROI
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Focus of COPQ Efforts
Identify and Quantify Quality Costs
Expose the “Hidden Factory”
Ongoing Measurement System
Breakthrough Improvement
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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.
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