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
SYSTEMS Quality Consulting 4

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
SYSTEMS Quality Consulting 5

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
SYSTEMS Quality Consulting 7

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
SYSTEMS Quality Consulting 8

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
SYSTEMS Quality Consulting 9

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
SYSTEMS Quality Consulting 10

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%
SYSTEMS Quality Consulting 12

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%
SYSTEMS Quality Consulting 13

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
SYSTEMS Quality Consulting 17

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”
SYSTEMS Quality Consulting 22

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
SYSTEMS Quality Consulting 24

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
SYSTEMS Quality Consulting 25

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%!
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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
SYSTEMS Quality Consulting 28

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.
SYSTEMS Quality Consulting 30

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
SYSTEMS Quality Consulting 31

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
SYSTEMS Quality Consulting 32

• 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
SYSTEMS Quality Consulting 48

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
SYSTEMS Quality Consulting 50

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
SYSTEMS Quality Consulting 51

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
SYSTEMS Quality Consulting 53

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
SYSTEMS Quality Consulting 54

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
SYSTEMS Quality Consulting 55

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
SYSTEMS Quality Consulting 56

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
SYSTEMS Quality Consulting 57

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
SYSTEMS Quality Consulting 60

• 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
SYSTEMS Quality Consulting 61

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
SYSTEMS Quality Consulting 62

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
SYSTEMS Quality Consulting 64

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
SYSTEMS Quality Consulting 70

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
SYSTEMS Quality Consulting 72

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.
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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%
SYSTEMS Quality Consulting 82

$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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