Cost of poor quality by Raghvendra Gopal

Cost of Poor Quality

Managers and workers speak the language of things but Senior leaders speak the language of money... â&#x20AC;ŚCOPQ allows us to translate the things into money.

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Cost of Poor Quality

 Prevention Cost of Attaining Quality

 Appraisal: Prediction Audit

 Appraisal: Detection  Failure: Internal

Cost of Poor Quality

External

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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) Cost of Poor Quality 5 .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

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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

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Customer Returns Inspection Costs Recalls

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

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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

Quantifying the Potential Benefit

Sigma

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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

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 10 .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

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

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

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

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

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

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! Cost of Poor Quality 14 .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 15 .PPT

The Hidden Organization

Step 1

Test

Step 2

Test

Product

Floor Floor Space Space Analyze

Analyze

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 Cost of Poor Quality 17 .PPT

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. Cost of Poor Quality 19 .PPT