Cost of Poor Quality Cost of Poor Quality

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. Cost of Poor Quality 2 .PPT

Cost of Attaining Quality Cost of Poor Quality Cost of Poor Quality Prevention Cost of Attaining Quality Appraisal: Prediction Audit Appraisal: Detection Cost of Poor Quality Failure: Internal External Cost of Poor Quality 3 .PPT

$ Components Quality Costs Non-Conformance $ Conformance $ Cost of Poor Quality Components Non-Conformance $ Conformance $ $ Cost of Poor Quality 4 .PPT

$ Cost of Quality (COQ) Total Quality Cost Cost of Poor Quality I want my money back! Prevention Appraisal Internal Failure External Failure Review $ The costs of poor quality are those that would disappear if every task were continuously performed without deficiency every time. Actual Cost – Minimum Cost = COPQ. Caution: Minimum cost is not necessarily equal to standard cost. Standard costs often include allowances for defects, spoilage, or loss. The American Society for Quality uses four categories to stratify COQ: Prevention Appraisal Internal Failure External Failure Cost of Quality (COQ) Cost of Poor Quality 5 .PPT

Definitions COPQ Overview Cost of Poor Quality 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

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 Rework Customer Returns Inspection Costs Rejects Recalls Cost of Poor Quality 7 .PPT

Cost of Poor Quality Cost of Poor Quality As an organization gains a broader definition of poor quality, the hidden portion of the iceberg becomes apparent. Late Paperwork High Costs Pricing or Billing Errors Excessive Field Services Expenses Incorrectly Completed Sales Order Lack of Follow-up on Current Programs Excessive Employee Turnover Planning Delays Excess Inventory System Costs Overdue Receivables Complaint Handling Unused Capacity Time with Dissatisfied Customer Excessive Overtime Waste Testing Costs Rework Customer Returns Inspection Costs Rejects Recalls Development Cost of Failed Product Hidden COPQ: The costs incurred to deal with these chronic problems Premium Freight Costs Customer Allowances COPQ ranges from 15-25% of Sales Cost of Poor Quality 8 .PPT

Quantifying the Potential Benefit Cost of Poor Quality Sigma 6 sigma 5 sigma 4 sigma 3 sigma 2 sigma Cost <10% of sales 10-15% of sales 15-20% of sales 20-30% of sales 30-40% of sales Cost of Poor Quality 9 .PPT

What Does Reality Look Like? Cost of Poor Quality 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 Appraisal 10 to 50 Prevention .05 to 5 What's Wrong With This Picture? Cost of Poor Quality 10 .PPT

Examples of Prevention Expense Cost of Poor Quality 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 Cost of Poor Quality 11 .PPT

Examples of Appraisal Expense Cost of Poor Quality 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 Cost of Poor Quality 12 .PPT

Examples of Internal Failure Costs Cost of Poor Quality 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) Cost of Poor Quality 13 .PPT

Examples of External Failure Costs Cost of Poor Quality 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

Definition Examples Non-value Added Work Cost of Poor Quality 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 Cost of Poor Quality “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.” Product Step 1 2 Floor Space Value Added Non-Value Added Philip R. Thomas, Competitiveness Through Total Cycle Time. McGraw-Hill (1990) The Hidden Factory Analyze Fix Test Cost of Poor Quality 16 .PPT

Why Cost of Poor Quality? Reporting Tool Comparisons Trends Analytical Tool Priorities Tradeoffs Investment Tool ROI Cost of Poor Quality 17 .PPT

Identify and Quantify Quality Costs Expose the “Hidden Factory” Focus of COPQ Efforts Cost of Poor Quality Identify and Quantify Quality Costs Expose the “Hidden Factory” Ongoing Measurement System Breakthrough Improvement Cost of Poor Quality 18 .PPT

Advantages of Using Quality Costs for Management Cost of Poor Quality 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