Cost of Poor Quality

The Tip of the Iceberg

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.
Goal setting has traditionally been based on past performance. This
practice has tended to perpetuate the sins of the past
Without a standard there is no logical basis for making a decision
or taking action
All improvement happens project by project and in no other way

Cost of Poor Quality 2 .PPT

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Cost of Poor Quality

Prevention
Appraisal: Prediction

Cost of Attaining
Quality

Audit

Appraisal: Detection
Failure: Internal

Cost of Poor Quality

External

Cost of Poor Quality 3 .PPT

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Quality Costs

Components

$
Conformance

Non-Conformance

Cost of Poor Quality 4 .PPT

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Total Quality Cost

Prevention

Internal
Failure

Appraisal

External
Failure

$
Cost of Quality (COQ)
Cost of Poor Quality 5 .PPT

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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

Cost of Poor Quality 6 .PPT

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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

Cost of Poor Quality 7 .PPT

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

Cost of Poor Quality 8 .PPT

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 of Poor Quality 9 .PPT

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?

Cost of Poor Quality 10 .PPT

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Six Sigma

Six Sigma es una Metodologa que hace uso de datos y herramientas

estadsticas para sistemticamente mejorar y sustentar la mejora de
Procesos . SIX SIGMA hace uso del Modelo DMAIC

Sigma () representa una unidad de medida que define la distribucin o

dispersin de datos alrededor de la media de un proceso, es decir representa
la variabilidad del proceso.
Entre mayor es el valor de menor es la variacin y menores los defectos
del proceso.
El Estndar 6 representa 3.4 defectos por cada milln de oportunidades
(DPMO)
6 representa un 99.9999966% de eficiencia de un proceso

Cost of Poor Quality 11 .PPT

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Normal Distribution

Cost of Poor Quality 12 .PPT

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Six Sigma

Esta metodologa esta enfocada en el desarrollo de Proyectos SIX

SIGMA y consiste en 5 Fases que constituyen el Modelo DMAIC el
cual esta formado por una serie de herramientas que son usadas para
optimizar procesos de Negocios y Procesos Industriales:

Six Sigma = Culture + Quality

Goal: Improve Performance on Customer (CTQ's)
Method DMAIC Process
Cost of Poor Quality 13 .PPT

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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

Cost of Poor Quality 14 .PPT

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

Cost of Poor Quality 15 .PPT

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

Cost of Poor Quality 16 .PPT

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!

Cost of Poor Quality 17 .PPT

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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
Cost of Poor Quality 18 .PPT

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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.

Cost of Poor Quality 19 .PPT

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Why Cost of Poor Quality?

Reporting Tool
Comparisons
Trends

Analytical Tool
Priorities
Tradeoffs

Investment Tool
ROI
Cost of Poor Quality 20 .PPT

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Focus of COPQ Efforts

Identify and Quantify Quality Costs
Expose the Hidden Factory
Ongoing Measurement System
Breakthrough Improvement

Cost of Poor Quality 21 .PPT

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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 22 .PPT

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Cost of Poor Quality

The Tip of the Iceberg

Cost of Poor Quality 23 .PPT

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Cost of Poor Quality 24 .PPT

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