Cost of Poor Quality

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Explaning Cost of Poor Quality

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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.

All Rights Reserved, Juran Institute, Inc.

Cost of Poor Quality

 Prevention
Cost of Attaining Quality
 Appraisal: Prediction
Audit

 Appraisal: Detection
 Failure: Internal
External

Cost of Poor Quality

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Quality Costs

Components

$
Conformance

Non-Conformance

$

$

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Total Quality Cost
I want my
money
back!

Prevention

Internal
Failure

Appraisal

External
Failure

$
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

 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Job Descriptions
 Housekeeping
 Zero-Defect Program

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Examples of Appraisal Expense

 Test
 Inspection
 Process Controls
 Train QA Personnel
 Product Audits
 Quality Systems Audits
 Customer Satisfaction
 Surveys and Audits
 Prototype Inspection
 Accumulating Cost Data

 Supplier Certification
 Employee Surveys
 Security Checks
 Safety Checks
 Reviews:
– Operating Expenditures
– Product Costs
– Financial Reports
– Capital Expenditures

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Examples of Internal Failure Costs











Substandard Product
Scrap or Rework
Re-inspection
Redesign/Engineering
Change
Process Modifications
Payroll Errors
All Expediting Costs
Off-Spec/Waiver
Abandoned Programs

 Supplier Problems
– Scrap and rework
– Late deliveries
– Excess inventory
 Equipment Downtime
 Accidents, Injuries
 Absenteeism
 Unused Reports
 Missed Schedule Cost
 Lost Sales (any cause)

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Examples of External Failure Costs

 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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