Cost of Quality As a Driver for Continuous - Systems Quality ...

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Cost of Quality As a Driver for Continuous - Systems Quality ...

Cost of Quality

as a Driver for

Continuous Improvement

Presented by

Roger E Olson

Partner

SYSTEMS Quality Consulting 1


Agenda

1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in

COQ Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

SYSTEMS Quality Consulting 2


1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in

COQ Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

SYSTEMS Quality Consulting 3


History/Background of COQ

• Joseph Juran first discussed cost of quality

analysis in 1951 in the first edition of

Quality Control Handbook

• Armand Feigenbaum identified the four cost

categories in 1956 in “Total Quality

Control” in the Harvard Business Review,

Vol. 34, No 6

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History/Background of COQ

Armand Feigenbaum’s original categories

Cost of Control

– Prevention costs

– Appraisal (i.e., inspection) costs

Costs of Failure of Control

– Internal defect costs

– External defect costs

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History/Background of COQ

• The Quality Cost Committee was

established by the then ASQC in 1961

• Philip Crosby, a former CEO, popularized

the concept of COQ with his book Quality

is Free in 1979

• The current revisions of ISO 9000, QS-9000

and AS9100 reference the use of COQ in

quality improvement

SYSTEMS Quality Consulting 6


History/Background of COQ

Crosby’s categories

• Price of Conformance (POC/COC)

– Prevention costs

– Appraisal costs

• Price of Nonconformance (PONC/CONC)

– Internal defect costs

– External defect costs

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Deming, Juran, Crosby on COQ

(Philosophy)

• Deming – the cost of nonconformance, and the

resulting loss of good will, is so high that

measuring it is not necessary

• Juran – as defect prevention increases, the cost of

scrap/rework decreases faster. Need to know

where to look

• Crosby – money is the language of management,

you need to show them the numbers

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Juran and Crosby on COPQ

The cost of poor quality (COPQ = PONC):

• “COPQ is the sum of all costs that would

disappear if there were no quality problems.”

- Juran

• “You can easily spend 15 - 30% of your sales

dollars on PONC.” - Crosby

• “In most companies the costs of poor quality

runs at 20 - 30% of sales.” - Juran

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Something to Think About…

• Net profits for many companies is less than

5% of sales

• COPQ on the average is 17% of sales

• Total COQ on the average is 25% of sales

• COPQ is some companies is as high as 40%

of sales

• COPQ is typically 3 to 6 TIMES as large

as profits

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Example 1

Paper Mill – April 2004 Report to New CEO

• Sales: $220,000,000 (460 employees)

• POC: $7,600,000

• PONC: $35,300,000

• COQ: $42,900,000

• EBITDA: $12,678,000

• Net Profit: $3,150,000

SYSTEMS Quality Consulting 11


Example 1

Paper Mill – April 2004 Report to New CEO

• Sales: $220,000,000

• POC: $7,600,000 (>90% appraisal)

• PONC: $35,300,000

• COQ: $42,900,000 3X 11X

• EBITDA: $12,678,000

• Net Profit: $3,150,000

• Net Profit/Sales = 1.43%

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Example 1

Paper Mill – April 2004 Report to New CEO

• Sales: $220,000,000

• POC: $7,600,000 ~ 5X

• PONC: $35,300,000

• COQ: $42,900,000

• EBITDA: $12,678,000

• Net Profit: $3,150,000

• Net Profit/Sales = 1.43%

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Example 2a

Transportation Industry Supplier (1998)

• Sales: $130,000,000

• COC: $4,400,000 (92% appraisal)

• COPQ: $18,500,000

• COQ: $22,900,000

• EBITDA: $6,531,000

• Net Profit: $2,050,000

• Net Profit/Sales = 1.57%

3X 9X

SYSTEMS Quality Consulting 14


Example 2b

Transportation Industry Supplier (2003)

• Sales: $185,000,000

• COC: $8,600,000 (45% appraisal)

• COPQ: $8,100,000

• COQ: $16,700,000

• EBITDA: $19,900,000

• Net Profit: $6,650,000

• Net Profit/Sales = 3.6%

0.5X 1.2X

SYSTEMS Quality Consulting 15


Don’t Let Poor Quality Costs Eat Your Profits!

Profits

COPQ

SYSTEMS Quality Consulting 16


1. Linking Quality Improvement to Profits

• Background of Quality Costs

• Evolution of Quality

• Traditional vs Value Driven Quality Strategy

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What is Quality?

Quality is “fitness for use”

(Joseph Juran)

Quality is “conformance to requirements”

(Philip B. Crosby)

Quality of a product or service is its ability to satisfy

the needs and expectations of the customer

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“Inspection Inspection with the aim of finding the bad ones

and throwing them out is too late, ineffective and

costly. Quality comes not from inspection but

improvement of the process.” process.

Dr. W. Edwards Deming

Founder of the Quality Evolution

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All quality improvement of a lasting nature occurs as

the result of a project. Joseph Juran

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Traditional “Strategy”

• Historically, organizations tend to treat

strategic planning and quality improvement

planning as two separate and unrelated

activities

• Strategic planning tends to be regular and

scheduled, but with no follow up

Continuous improvement is not a process, it

happens randomly, with no connection to

the “big picture”

SYSTEMS Quality Consulting 21


Value Driven Quality Strategy

• Starts with a focus on the customer

• Organizations treat strategic planning and

quality improvement planning as an

integrated activity

• Strategic planning is a function of need, not

the calendar

Continuous improvement is a process, it

happens regularly, with a connection to the

“big picture”

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1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in

COQ Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

SYSTEMS Quality Consulting 23


Cost of Quality Definitions and Types

Total Quality Costs represent the difference

between the actual (current) cost of a

product or service and what the reduced

cost would be if there were no possibility of

substandard service, failure to meet

specifications, failure of products, or

defects in their manufacture.

Campanella, Principles of Quality Costs

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Prevention

The costs of all activities specifically

designed to prevent poor quality in products

or services. Examples include:

Quality planning

• New product reviews

Quality education

• Process capability evaluations

• Supplier capability surveys

Quality improvement projects

These are all planned,

proactive activities

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Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Hidden Quality Costs

Prevention Costs

$20,000

Quality Planning $4,000

• Engineering design $10,000

Quality Training $2,000

• Preventive maint. $4,000

$20,000

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Prevention

In the ideal situation, prevention costs will be

the largest portion of the Total Cost of

Quality.

Typically, prevention is less than 10% of

TCOQ

It should be over 70%!

SYSTEMS Quality Consulting 27


Appraisal

The costs associated with evaluating or

auditing products or services to assure

conformance to quality standards and

performance requirements. Examples:

• Incoming inspection/test

• Calibration of inspection/test equipment

• Final inspection/test

These are all planned activities

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Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Hidden Quality Costs

Appraisal Costs

$250,000

• Inspector wages $40,000

• In-process inspect $75,000

Quality audits $20,000

• Calibration services $40,000

• Supplies $15,000

• QC floorspace $50,000

• Regulatory approval $10,000

$250,000

SYSTEMS Quality Consulting 29


Appraisal

Appraisal costs should be the second largest

category, but should not exceed prevention

costs.

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Internal Failures

All costs resulting from products or services

not conforming to requirements or

customer/user needs which occur before

delivery/shipment of product, or the

furnishing of a service. Examples include:

• Scrap/rework

• Reinspection/retesting

• Material Review Board

These are non-value added and reactive

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Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Hidden Quality Costs

Internal Failure Costs

$400,000

• Labor (rework) $110,000

• Materials (rework) $95,000

• Eng. redesign $30,000

• Failure analysis $20,000

• Software fix $40,000

• Fire loss – equip. $70,000

• Rework space $35,000

$400,000

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• The goal is to identify all

internal failures and

resultant costs, and then

systematically identify

and eliminate root causes

until internal failure costs

are eliminated.

• Remember, all firefighting

is a the result of a failure!

Internal Failures

SYSTEMS Quality Consulting 33


External Failures

All costs resulting from products or services

not conforming to requirements or

customer/user needs which occur after

delivery/shipment of product, or the

furnishing of a service.

SYSTEMS Quality Consulting 34


External Failures - Examples

The costs incurred when the customer finds the failure

– Processing customer complaints

– Field repairs

– Recall costs

– Returned goods

– Processing returned materials

– Warranty costs

– Loss of reputation

– Penalties

– Customer incurred costs These are non-value added

SYSTEMS Quality Consulting 35


Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Hidden Quality Costs

External Failure Costs

$330,000

• Returns $105,000

• Labor $60,000

• Materials $40,000

• Consulting Services $37,000

• Legal $25,000

• Travel $15,400

• Meals & Entertain $3,000

• Repairs $44,600

$330,000

SYSTEMS Quality Consulting 36


Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Prevention: $20,000

Appraisal: $250,000

COC $270,000

Int. Failure: $400,000

Ext. Failure: $330,000

COPQ $730,000

COPQ/Sales = 18.3%

SYSTEMS Quality Consulting 37


Income Statement

Income

Sales $4,100,000

Returns ($105,000)

Income $3,995,000

Cost of Goods Sold

Labor $960,600

Materials $1,118,000

COGS $2,078,600

Expenses

Salaries $483,800

Services $98,400

Depreciation $194,340

Training $3,300

Supplies $36,900

Interest $61,500

Rent $287,000

Accounting $24,600

Legal $28,200

Office Supplies $16,400

Travel $28,700

Licenses/Certification $12,300

Meals and Ent. $15,300

Advertising $82,000

Sales Shows $41,000

Repairs $44,600

Telephone $20,500

Utilities $36,900

Expenses $1,515,740

Profit $400,660

Prevention: $20,000

Appraisal: $250,000

COC $270,000

Int. Failure: $400,000

Ext. Failure: $330,000

COPQ $730,000

TCOQ $1,000,000

(TCOQ/Sales = 24.4%)

SYSTEMS Quality Consulting 38


Sales: $4,100,000

Profit: $400,660

COC/Sales = 6.5%

COPC/Sales = 17.8%

TCOQ/Sales = 24.4%

COPQ/Profit = 1.8

TCOQ/Profit = 2.5

TCOQ Summary

Prevention: $20,000 (2%)

Appraisal: $250,000 (25%)

COC $270,000 (27%)

Int. Failure: $400,000 (40%)

Ext. Failure: $330,000 (33%)

COPQ $730,000 (73%)

TCOQ: $1,000,000 (100%)

SYSTEMS Quality Consulting 39


POC

PONC

Price of Conformance and Price of Nonconformance

Over Time

Total Cost of Quality

POC is increased initially,

then slowly decreased

over time

But, POC never goes

away completely

Year 1 Year 2 Year 3 Year 4 Year 5

Over time, PONC is reduced to 1/10 - 1/20 of its original level

SYSTEMS Quality Consulting 40


POC

PONC

THE Barrier to Reducing COPQ

Total Cost of Quality

Year 1

You must INCREASE

the POC, mostly

Prevention costs,

BEFORE COPQ will

start to drop.

SYSTEMS Quality Consulting 41


Costs

Failure

Appraisal

Spending more on

prevention will reduce

appraisal and failure

costs over time

Time

Prevention

SYSTEMS Quality Consulting 42


In the Beginning COQ Category Maturity

~65% Failure


Something to Think About…

• A survey by the Illinois Manufacturers’

Association revealed a 400% margin of error

in cost of poor quality assessments.

• Companies initially reported an average of 6%

cost of poor quality (6% of sales).

• A later, in-depth assessment showed the

average to be closer to 25% (25% of sales).

• The Survey Conclusion: 75% of the cost of

poor quality is hidden, and not obvious!

SYSTEMS Quality Consulting 44


Something to Think About…

Results of an ASQ survey of CEOs:

• Over 70% thought their organizations COPQ was

less than 10 percent of sales

• Twenty-seven percent admitted they had no idea

what their companies COPQ was

• One of the conclusions of those conducting the

survey: “too many people still do not understand

the relationship between cost and quality”

SYSTEMS Quality Consulting 45


Failure Costs

$10,000

$1000

$100

$10

$1

Litigation loss

Field Failure/Repair

Receiving Inspection

Artificial Hip

Prevention

Process Time

Subsystem/Assembly

Component

Final Inspection

Failure cost

as a function

of detection

point in

process

SYSTEMS Quality Consulting 46

External

Internal


1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in

COQ Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

SYSTEMS Quality Consulting 47


Why Study Cause and Effect and COQ?

A key finding in a four-year study* for the

Institute of Management Accountants, of

more than thirty industry leaders, is the

importance of understanding the cause and

effect relationship among strategy, quality,

productivity, profitability and

competitiveness.

* Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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Understanding Cause and

Effect in COQ Measurements

The study found that without exception the

successful companies in the study based

quality related decisions on a clear

understanding of the cause-and-effect

relationship between the goals they wanted

to accomplish and the step required to

achieve those goals.

Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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The High Level Cause and Effect View

It all

Starts

Here!

Effective Quality Improvement

Which Leads to

Higher Quality

Which Leads to

Increased Productivity

Which Leads to

Increased Profitability

Which Leads to

Increased Competitiveness

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Any Similarity?

Effective Quality Improvement

Which Leads to

Higher Quality

Which Leads to

Increased Productivity

Which Leads to

Increased Profitability

Which Leads to

Increased Competitiveness

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The Problem Is…..

When Senior Management

Doesn’t Understand

High Quality

Leads to

Increased Productivity

Which Leads to

Increased Profitability

Which Leads to

Increased Competitiveness

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The Cause and Effect Framework

Step 1. The quality process embraces the

strategic vision and goals of top

management, aligning the objectives and

priorities of the quality process and the

business.

Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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The Cause and Effect Framework

Step 2. Improvement projects are chosen on

the basis of improving profitability and

customer satisfaction by eliminating the

high payback root cause of poor quality and

the related nonvalue-added activities and

waste. (We will look at how to do this in a

later chapter – Cost Driver Analysis)

Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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The Cause and Effect Framework

Step 3. Productivity gains from higher quality are

trapped and held by making the organizational

alterations necessary to eliminate nonvalue-added

activities and waste. This means we have to

institutionalize process improvements. We need

to monitor and measure those processes to insure

the gains don’t go away.

Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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The Cause and Effect Framework

Step 4. Profitability gains from higher

productivity are trapped and held by

redeploying resources from nonvalue-added

activities into value-added activities. Note:

Most companies are not good at this step!

Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994

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Short-Term Cost of Quality and Total

Quality Management (Quick Fix)

5. Poor quality

Pacific Bell Cost of Quality Handbook, 1992

1. Cut budget

4. Total

costs

increase

2. Fewer people to

do same workfalse

improvements!

3. More errors

And rework

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Long-Term Cost of Quality and

Total Quality Management

5. Improved quality

And profitability

Pacific Bell Cost of Quality Handbook, 1992

1. Invest in

quality

improvement

4. Decrease

In

Total

costs

2. Teams improve processes

and productivity

3. Fewer defects and rework

SYSTEMS Quality Consulting 58


1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in

COQ Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

SYSTEMS Quality Consulting 59


Establishing COQ Baseline

• Two Approaches

• Advantages and Disadvantages of each

approach

• Getting started

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• Ad-hoc informal system

Two Approaches

– Purpose is to quickly get a good estimate of

how large TCOQ and COPQ are

– Output is TCOQ report for a point in time

• Formal Cost of Quality System

– Permanent feature of management reporting

and decision making system

– Provides detailed ongoing reports

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Ad-hoc informal system

• Cross functional team

• Meets for two weeks to two months and

then disbands

• Reviews existing quality, defect, rework

reports

• Conducts interviews to assess extent of

failure costs

• Reports on TCOQ and COPQ as of a

given date

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Advantages and Disadvantages of an

• Advantages

Ad-hoc informal system

– Can have report in two to four weeks

– Less cost than formal system

• Disadvantages

– Typically underestimates COPQ and does not

get managements attention

SYSTEMS Quality Consulting 63


Formal COQ System

• Cross functional team

• Involves finance department

• Requires training of all employees on cost

of quality concepts

• Requires ongoing data collection efforts

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Advantages and Disadvantages of a

• Advantages

Formal COQ System

– Data is very accurate

– Root cause analysis and problem solving is

easier

• Disadvantages

– Slower to get first report

– Adds infrastructure (costs) although these will

be more than offset IF COQ projects are

successful

SYSTEMS Quality Consulting 65


Starting a COQ Program

• Senior management support is critical for

either approach

• Senior management must be open to the

possibility that COPQ is large (Why?)

• COQ programs cannot be started from the

bottom up (Why?)

SYSTEMS Quality Consulting 66


Starting a COQ Program

1. Determine level of detail to be included

1. Level 1 Assessment deals with internal and

external failures only

2. Level 2 Assessment adds appraisal costs

3. Level 3 Assessment adds prevention costs

SYSTEMS Quality Consulting 67


COQ Assessment Problems

• When ongoing periodic assessments are

made, the cost of poor quality may continue

to increase over the first 2-3 years, due to

assessment team members getting better at

identifying poor quality costs

• The first assessment may identify far more

improvement than the organization can

handle

SYSTEMS Quality Consulting 68


Potential COQ Assessment Problems

• Avoid the expectation that a cost of quality

assessment solves any problems – it is a

data gathering exercise

• Level 1 assessments are most useful when

used to identify significant opportunities for

savings, to avoid drowning in minutia

SYSTEMS Quality Consulting 69


The COQ Challenge

• Many COQ costs appear to be appraisal, but

when you dig deeper, they are only there

because some process is not working right.

• Some COQ costs are currently seen as not

related to COQ.

• Remember: “ COPQ is the sum of all costs

that would disappear if there were no

quality problems.” -Juran

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For every cost, and cost category, be willing

to ask this question: “If all of our processes

(admin and manufacturing) produced the

correct results the first time, would this cost

still be here?”

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1. Linking Quality Improvement to Profits

2. Cost of Quality Definitions and Types

3. Understanding Cause and Effect in COQ

Measurements

4. Establishing COQ Baseline

5. Cost Driver Analysis

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Cost Driver Analysis

• Definition

• Methodology

• Root Cause Analysis

• Percent Allocation and Cost

• Add Common Root Cause Costs

SYSTEMS Quality Consulting 73


Cost Driver Analysis

The underlying beliefs:

1. For each failure there is a root cause

2. Causes are preventable

3. Prevention is always cheaper

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What is it?

Cost Driver Analysis

A powerful technique that integrates the

problem solving tools of the quality

process with the poor-quality cost

assessment.

SYSTEMS Quality Consulting 75


Cost Driver Analysis-How To

1. Determine the root cause of the poor-

quality costs

2. Identify the activity percentages and

calculate the cost of poor quality

related to each root cause

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Cost Driver Analysis-How To

3. Combine the financial impacts of common

root causes to determine the total

financial impact of the root cause

4. Perform a cost-benefit analysis for the

high financial impact root cause to

determine the financial payback

SYSTEMS Quality Consulting 77


Internal Failure costs

Scrap $66,500 14.9

Repair $1,900 0.4

Rework $2,500 0.6

Failure analysis $4,000 0.9

Total Internal Failure costs $74,900 16.8

External Failure costs

Failures - manufacturing $14,500 3.2

Failures - Engineering $7,350 1.6

Penalties $198,714 44.4

Failures - Sales $4,430 1.0

Warranty charges $31,750 7.1

Failure analysis $7,600 1.7

Total External Failure costs $264,344 59.1

Total Quality Costs $447,144 100

SYSTEMS Quality Consulting 78


Poor-Quality-

Cost Element

Late shipments

Penalties Incorrect shipments

Partial shipments

Cost

Drivers

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$198,714

X 80%

$158,971

$198,714

Penalties

80%

Identify the Percentages

Partial

Shipments

15%

5%

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$198,714

X 80%

$158,971

X90%

$143,074

$198,714

Penalties

80%

Identify the Percentages

Partial

Shipments

15%

5%

90%

Excessive

Downtime

10%

SYSTEMS Quality Consulting 81


$198,714

X 80%

$158,971

X90%

$143,074

X75%

$107,306

$198,714

Penalties

80%

Identify the Percentages

Partial

Shipments

15%

5%

90%

Excessive

Downtime

10%

75%

Tool

Breakage

15%

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$198,714

X 80%

$158,971

X90%

$143,074

X75%

$107,306

X95%

$101,940

$198,714

Penalties

80%

Identify the Percentages

Partial

Shipments

15%

5%

90%

Excessive

Downtime

10%

75%

Tool

Breakage

15%

95%

Hard Spots in

Raw Material

$101,940

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5%


Poor-Quality-

Cost Element

Penalties

Identify the Root Cause

Partial

Shipments

Root Cause of

Poor Quality

Excessive

Downtime

Tool

Breakage

Hard Spots in

Raw Material

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Last Thoughts

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Failure To Include White Collar Costs

Prominent quality experts maintain that the

inability of COQ systems to accurately

capture white-collar costs and indirect

quality costs is a fatal shortcoming and

probably the single most frequently found

reason for failure.

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Failure To Include White Collar Costs

Examples:

• Disruption of operations due to out of

conformance purchases and production

• Excessive inventory levels maintained to

accommodate poor quality

• Poor quality related schedule changes

• Opportunity costs of lost consumer goodwill

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Need to have a “CoQ Process”

• “Doing” Cost of Quality needs to be more

that just data collection and analysis

• Need to create a process that takes Cost of

Quality data and turns it into actions that

results in lower Cost of Poor Quality

(PONC/CONC)

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The COQ Process

1. Commitment

2. COQ Team

3. Gather data (COQ assessment)

4. Pareto analysis

5. Determine cost drivers

6. Process Improvement Teams

7. Monitor and measure

8. Go back to step 3

Typically

Missing

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“Wished I had understood that Cost of Quality stuff better”

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Key Points

• COPQ is big, usually 15-20% of sales!

• COPQ is usually 3-5X profits, can be 10X.

• Understanding poor cost of quality drivers is the

key to understanding the right project to work on.

• Must capture white collar/indirect COPQ costs.

• Prevention/Appraisal costs have to go up, before

overall COQ can go down. There are no

exceptions to this!

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Questions

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SYSTEMS Quality Consulting

Training and Consulting

ISO 9001 ISO 14001

Lean Manufacturing Six Sigma

www.systemsquality.com

909-484-7545

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