An Introduction to Cost of Poor Quality COPQ Introduction This course is designed to give you an introduction to the Cost of Poor Quality, and explain how this metric can redefine the importance of quality in any organization or business. This class is best taught using your company’s specific examples, allowing for interaction among the students Feel free to modify and change this course any way you like. Simply click View  Master  Master Slide to edit the master slide so that all slides show your company logo and name. You may also teach it exactly as it is. We recommend about 4 hours to teach the course. This course is intended to teach an individual or group with basic math skills and little to no prior knowledge of Cost of Poor Quality. We recommend that someone with prior experience and training with this topic teach the course. If not being used as a course, valuable information can still be obtained by following through the presentation and reading the notes section. If you have any questions, please visit or contact us at http://www.biz-pi.com

Speaks the language of management! Why is COPQ so powerful? Speaks the language of management! Money gets mgmt attention, not yield rates and defect quantities Justifies need for upfront planning and design and development spending Helps identify opportunities for improvement helps prioritize resources in the right areas Helps with ROI calculations and cost-benefit analysis Keeps people priority-focused on biggest issues, not chasing minor problems Why is COPQ so powerful, and how can it re-vitalize our quality improvement effort? Speaks the language of management! Money gets mgmt attention, not yield rates and defect quantities. If you don’t have COPQ, everyone has their own opinion as to what the biggest problem is, and so very little will get accomplished. Justifies need for upfront planning and design and development spending. Without COPQ, estimates of the impact of design and development decisions of new products or process are not understood, and more likely to occur. Helps identify opportunities for improvement. There will also be too much work to get done, so COPQ helps prioritize resources in the area that is having the most problems, and allows you to move resources away from an area that is doing well. Helps with ROI calculations and cost-benefit analysis. Often times, we want to make the right decisions and purchase equipment, redesign processes, or spend more time upfront reviewing changes, but the cost avoidance is not understood, and management will typically reject these ideas, since they can’t clearly justify the expenses. COPQ will allow you to provide that impact, if the improvement is not implemented, or the preventative activity is not completed. Keeps people priority-focused on biggest issues, not chasing minor problems. Even if you have the right resources in an area, you may still be misaligned on what specific problems to address. COPQ helps everyone on the team see what the biggest issues are, and using the Pareto principle, allows you to focus on those issues as a team. Many people focused on a small number of problems is more powerful than those same people all working on separate problems.

$15 20 $10 $20 $85 $205 $290 MP3 Player Example Action Time to Complete (Min) COPQ Manufacturer ships player back to customer overnight $15 Customer receives package, opens it, retests the player, and confirms that it is working 20 $10 Manufacturer calls customer to confirm that new player is working fine, then closes out entry in database $20 <<Read the actions, time and cost to the class>> <<Read the incurred costs at the bottom as well>> Customer COPQ Manufacturer COPQ Total COPQ $85 $205 $290

Customer actually paid $405 for this product MP3 Player Example Customer COPQ Manufacturer COPQ Total COPQ $85 $205 $290 Here’s the bottom line. Instead of paying $320 for the MP3 player, the customer ended up paying an additional $85 worth of their time to get what they thought they were getting at no extra cost. The customer could have found a better quality MP3 player with more features and paid $400 and not paid as much overall. That extra amount is called Cost of Poor Quality. Now on the manufacturer’s side, they sold the player for $300, and it costs them only $200 to make, market and sell the product, so they were planning on a $100 profit on this sale. After the COPQ was factored in, they actually ended up losing $105 on this sale, due to all the extra costs they incurred because of the defect. Sale of Player = $300 Cost to Build Player = $200 COPQ = $205 Customer was going to make $200 profit on the sale, but instead lost $105 Player Cost = $320 COPQ = $85 Customer actually paid $405 for this product

Engineering Support for Design Change MP3 Player Example That's not all the COPQ! Product Recall Lost Competitive Advantage Word of Mouth Reputation Engineering Support for Design Change But wait, that’s not all of the COPQ. That is only the measurable and easy to obtain information about that specific transaction and defect. Multiply that amount by the number of defects returned, and you’ll get a very large number that eats away at the company’s bottom line. In addition, what we haven’t discussed yet is the other intangible costs to the manufacturer for this defect, the things that fall underneath the water surface of the iceberg diagram. Things such as the word of mouth reputation that these defects will have on the internet review sites the complaints the customers will make to their friends about the product problem, which then gets back to the salespeople who work in the MP3 industry and push certain products based on their quality and reliability. It has been stated that when a customer is satisfied, they will tell 3-6 people. When they are dissatisfied, they will tell 10-20 people. When a company loses its reputation, it is difficult to measure the true impact on that problem on the lost sales, but its definitely a large number, and typically is so large that it destroys companies. The company will also need to set aside money that will be needed for re-designing the manufacturing processes or re-designing the product to prevent the problem from happening anymore. That can be some large capital expenses to a company. The problem may be so bad that a recall may be needed, and all customers will need to return the player for an upgrade at the company’s expense. If the defect resulted in a burned up part where smoke or heat would radiate from the player, then there could even be legal and litigation costs incurred by the manufacturer. In some industries, the customer is reimbursed for their extra expenses, but that doesn’t exist in the commercial market of MP3 players. That is a potential cost that could someday become COPQ. Customer Reimbursement Potential Litigation and Lawsuits

Help identify waste in your area What can you do? Help identify waste in your area Estimate the costs spent dealing with the problem Collect data over time if necessary Determine root cause of problem Brainstorm and cost-justify solution Quantify actual savings after implementation Look for new opportunities Here’s a short and simple process that you can do today, based on our discussion of COPQ. 1. Help identify waste in your area 2. Estimate the costs spent dealing with the problem 3. Collect data over time if necessary 4. Determine root cause of problem 5. Brainstorm and cost-justify solution 6. Quantify actual savings after implementation 7. Look for new opportunities