COST of Poor Quality in Proj Mgmt Dr Ali Sajid Director Inst of Bus & Mgmt UET Lahore alisajid61@yahoo.com 0300 856 1147

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The greatest Discovery of our generation is that a human being can alter his life by altering his attitudes. - William James

Our own moods, whether gloomy or bright, radiate to those around us. Nature present us with an infinite variety of Attitudes - from gloomy mist to glorious sunshine. Our own moods, whether gloomy or bright, radiate to those around us.

We may affirm absolutely that nothing great in the world has ever been accomplished without passion. - George Hegel

Skill (tip of iceberg) & Attitude (mass of the iceberg). Two Parts of Empathy: Skill (tip of iceberg) & Attitude (mass of the iceberg).

Eighty percent of success is related to ATTITUDE rather than competency.

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Selflessness "The world is divided into people who do things, and people who get the credit. Try, if you can, to belong to the first class. There's far less competition." (Dwight Morrow, 1935.)

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Passion We may affirm absolutely that nothing great in the world has been accomplished without passion. - Georg Wilhelm Friedrich Hegel

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Being broke is a temporary situation. Being poor is a state of mind. - Mike Todd Hastey kay fareeb main mut aa jouyio asad Alam Tumam halqa dam I Khal haain

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HR Development "Behind an able man there are always other able men.“ (Chinese Proverb.) "Understanding human needs is half the job of meeting them." (Adlai Stevenson, 1900-1965.)

Project H RM

Recruitment in Proj

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Development

Discipline

Rewards Systems

Productivity in Proj

Quality as an Organizational Goal Exceeding customer expectations Creating Customer Value Not just doing it well but learning to do it better Employee Empowerment

Quality Improvement Evolution Level III Quality System: Continuous improvement emphasis Level II Quality System: Measures implemented to track effectiveness Effectiveness of Quality System Level I Quality System: Procedures established NS: Dan Is there an evolution in quality improvement? DO: Talks slides NS Level 0 Quality System: Ad hoc processes Phases/ Time

Characteristics of Product Quality Objective Performance Features Reliability Conformance Durability Serviceability Variety Subjective Aesthetics Perceived quality Quality

What is Quality Management It is the management of the processes of the performing organization that determine quality policies, objectives, and responsibilities so that project will satisfy the needs for which it is undertaken.

“The purpose of quality management in projects is to ensure that the project outputs are delivered fit-for-purpose. If outputs are not fit-for-purpose, there is every likelihood that planned project outcomes will not be realized, or realized to a much lesser extent.

It can be achieved by developing quality criteria for the outputs themselves and by ensuring that all project management processes are conducted in a quality manner.”

Three Areas to Improve Quality Quality of design in Proj meet the customer’s needs design for manufacturability build quality in Quality of conformance inProj minimize and control process variation to satisfy the design specifications every time Quality of service in Proj The customer must come first

1. COPQ Introduction NS: The Cost of Poor Quality

Vs What is Cost of Quality?????? “Quality is measured by the cost of quality which is the expense of of non conformance– the cost of doing things wrong.” Vs

COST OF QUALITY DEFINED “Quality Costs - Costs incurred because poor quality MAY or DOES NOT exist.” “Cost of not meeting customer’s requirements- cost of doing things wrong” “All activities carried out that are not needed directly to support departmental (quality) objectives - cost of quality.”

or defects in their manufacture.” QUALITY COST CONCEPTS Represent difference b/w actual cost of product/ service & what reduced cost would be if there were no possibility of substandard service, failure of products, or defects in their manufacture.”

Why Cost of Poor Quality? Speaks in the language of management, Rupees Shows how profit is affected by quality Can prioritize quality improvement actions Serves as impetus for actions In US about a third of what we do consists of redoing work previously “done”. (Juran)

“Quality is Free” For average company, Cost of quality is about 20-25% of total sales Cost of prevention is a fraction of “Cost of Fixing Mistakes” after they made Investments in prevention can “Drastically reduce Total Cost of Quality

Proj Mgr Role in encouraging Investment in Preventive Actions can yield significant savings!

Evolution Of Harrington's Poor-Quality Cost Model In 1950s, Feigenbaum, VP (GE), developed & implemented "Cost of Quality" concept throughout GE. divided Cost Of Quality into following 2 categories & 4 sub categories: Costs of Control Prevention costs Appraisal costs   Costs of failure of control Internal defect costs External defect costs

Role of IBM In 1960s, IBM undertook an effort to study its own “Quality Costs” & tailored concept for its own use. While Feigenbaum's term “Quality costs" is technically accurate, it's easy for the uninitiated to jump to the conclusion that better quality products cost more to produce.

Feigenbaum's concept later adopted by large American firms. In 1960s, Dr. Harrington assigned to implement Dr. Feigenbaum's Cost Of Quality concept at IBM. Found concept lacking a) Did not focus on “Support functions' Co Q” or b) “External customers' Quality Costs”. As a result, IBM expanded concept to fulfill its own needs. IBM used name "Poor-Quality Cost."

Because IBM felt : “C O Q” an inappropriate title: “Good quality does not cost any addl money”. “Poor quality generates additional costs for org”. If we had perfect quality, we would not have a need for preventive cost or appraisal cost, & there would be no internal error cost or external error cost. Unfortunately, we do not live in a perfect world.

Poor Quality Cost 1964, IBM published its first report – included Poor-quality cost for internal component mfg, subassembly, final assembly, final machine test, system test, & first 12 months at customer location for 1620 system. called Q-100 Report During following months, report- expanded to cover many other IBM systems.

1980s, Philip Crosby implemented Feigenbaum's “Cost Of Quality” concept into his consulting practice. Crosby's approach closely followed Feigenbaum's teachings, although he changed names of some of Feigenbaum's terms 1987, ASQ -Harrington's book Poor-Quality Cost, - documented IBM's approach to reporting costs that result from poor quality.

Early 1980s, while “Business Process Improvement” methodology Dr Early 1980s, while “Business Process Improvement” methodology Dr. Harrington found that: “Costs that resulted from: “Poorly-Designed Business Processes” also “Poor-Quality Cost Elements”.

COPQ is refinement of concept of C of Q. Harrington adopted name: “Poor Quality Costs" to emphasize belief: “Investment in detection & prevention of product failures is more than offset by savings in reductions in product failures”.

COST OF QUALITY Control Costs Failure Costs prevention appraisal internal external

These Two Main Areas Can Be Split Further

Poor Customer Satisfaction in Pakistan Mother of all “C o PQ”. This cost is compounded by loss: Customer suffers due to: “Defective Product first & Servicing Second”.

Better management of Design, Engineering, Testing & Costs go down and productivity goes up as improvement of quality is accomplished by: Better management of Design, Engineering, Testing & by improvement of processes. -W. Edwards Deming

Types of Quality Costs Cost of Compliance Cost of Non-compliance Preventive costs - prevent product defects Appraisal costs - monitor & compensate when prevention fails Cost of Non-compliance Failure costs Internal losses - scrap, rework External losses - warranty work, customer complaint departments, litigation, product recalls

Four segments of quality costs: A. PREVENTION. covers avoiding defects Planning, preparation, training, preventative maintenance & evaluation. B. APPRAISAL. area covers finding defects by inspection, audit, calibration, test & measurement. C. INTERNAL FAILURE. covers costs borne by org itself such as scrap, rework, redesign, modifications, corrective action, down time, concessions & overtime. D. EXTERNAL FAILURE. covers costs borne by customer such as equipment failure, down time, warranty, administrative cost in dealing with failure & loss of goodwill.

Two levels: Cost effect due to Poor Q from Mfr defined at Two levels. Straight from “Defective Production of Materials” Other is due to “Handling & Delivery”. These are very much under control of manufacturer. Due to Poor Proj Processes & Practices

generally applicable consistent CoPQ: Wastage Or Under-Utilization: Referred to as spoilage in Six Sigma, arising out of raw material wasted due to: Inconsistent & Inefficient Processes.

“Cost of repairing & replacing some parts”. Cost Of Reworking: Cost includes “Cost of repairing & replacing some parts”. This also includes “Cost labor to repair”.

Cost of Additional Utilities: Overall cost of setting up “Extra infrastructure & utilities consumed To run recycling operation be considered in COPQ.

Lost Opportunities: Dissatisfaction triggered business loss Can not be just Loss of Margin. Your Org have to: “Invest capital to regaining lost revenue & offset” Cumulative Revenue Loss”.

Lost Revenue Due To Poor Quality This cost refers to: Potential loss of new business due to: Defective Quality.

COST OF POOR QUALITY (COPQ) Allows an org to determine extent to which orgal resources used for activities: That exist only as the result of deficiencies that occur in its processes. Such info allows an org to determine: “Potential savings to be gained by implementing process improvements”.

Cost of Quality Appraisal Prevention Test and inspection of incoming material lab-based acceptance sampling in-line inspection & testing setup for test and inspection test/inspection equipment and supplies Quality audits Quality endorsements (ISO, MBNQA) Field testing Test/inspection equipment maintenance Prevention Quality planning Process control Data acquisition & Analysis Training and personnel development Design verification Quality system development and management Quality reporting Improvement proj

Cost of Quality External Internal customer complaints scrap warranty costs service and repair expense product liability recall expense and management returned material processing credit allowance loss of goodwill Internal scrap rework retest downtown yield losses Disposition Engineering analysis tracking and reporting expediting

“those costs “associated with: COPQ includes “those costs “associated with: Definition, creation, & control of quality as well as “Evaluation & feedback of conformance with Quality, Reliability & Safety requirements, & those costs associated with consequences of failure to meet requirements both within factory & in the hands of customer.”

QUALITY COST CONCEPTS Represent difference b/w actual cost of product/ service & what reduced cost would be if there were no possibility of substandard Service, Failure of Products, or defects in their manufacture.”

Anatomy of copq CoPQ comprises costs which have generated as by products of defective and inconsistent manufacturing process. Directly assigns a Rupee value to cost of poor quality, meaning that the CoPQ is measurable. Cost of Poor Quality originates at all places where product or a part thereof is being made.

…continued a) Producing defective material. CoPQ originating from suppliers a) Producing defective material. b) Damaging material during delivery. CoPQ at the production points  CoPQ at warehouse CoPQ at transportation and distribution

We may includ“No-Real-Value-Added“ elements to his “Poor-Quality Cost Model” in 1990. In 1994- extensive work with “Sales & marketing functions”, “Concept of Lost-Opportunity”, cost also had a major impact on “Corporate Bottom-Line”. So “Lost-opportunity cost” added as a new element.

COPQ Calculation allows an org to: Determine extent to which orgal resources used for activities that exist only as a result of deficiencies that occur in its processes. Such info allows an Your org to: “Determine potential savings to be gained by implementing process improvements”.

COPQ Equation COPQ = Costs (external failures + internal failures + appraisal + preventive action) Many times white collar poor quality costs are not included in COPQ calculations (out of conformance purchases, excess inventory, ...) (Atkinson)

COPQ Represents difference between met customer needs and The actual cost of production or service What the cost would be if the process were effective in manufacturing products that met customer needs and were defect free.

Related Quality Initiatives Six Sigma uses defect costs to quantify savings Lean Manufacturing focuses on reducing appraisal costs Design Controls focuses on early review & test activities to find defects early

Cost of External Failures Costs for defects found by the customer: Reports of corrections and removals, Field service corrections, Field service bulletins, and Software patches.

Cost for Internal Failures Cost for defects found by R&D or Mfg Unclear requirements Improper design and implementation Incorrect test documentation Incoming inspection defects In-process testing defects Final acceptance testing defects Rework

Fields of “copq”: CoPQ generally cover the followings: 1) Cost of labor to fix the problem. 2) Cost of extra material used. 3) Cost of extra utilities . 4) Cost of lost opportunity a) Loss of sales/revenue (profit margin) b) Potential loss of market share c) Lower service level to customers/consumers

Defects are not free. Somebody makes them and gets paid for making them. -W. Edwards Deming

If the cost of quality is high, looking through the the cost of poor quality is still higher. Companies bear a huge cost of about 9-16 percent of their revenues on problem solving. This is the cost of poor quality, or CoPQ, as it is known. Motorola discovered this in the late 1970s at a huge price. General Electric has put cost difference between 3 or 4 Sigma and Six Sigma at an astonishing $8-12 billion a year.

MEASURING THE COST OF QUALITY

Measuring cost of quality Like all things there is a price to pay for quality. total cost can be split into two fundamental areas: a. Non Conformance. Area covers price paid by not having quality systems or a quality product. Examples (1) Rework. Doing job over again because it wasn't right first time. (2) Scrap. Throwing away results of your work because it is not up to required standard. (3) Waiting. Time wasted whilst waiting for other people. (4) Down Time. Not being able to do your job because a machine is broken.

Measuring cost of quality b. Conformance. Conformance is an aim of quality assurance. achieved at a price. Examples : (1) Documentation. Writing work instructions, technical instructions and producing paperwork. (2) Training. O the job training, quality training, etc. (3) Auditing. Internal, external & extrinsic. (4) Planning. Prevention, do right thing first time & poka yoke. (5) Inspection. Vehicles, equipment, buildings & people.

Measuring Cost of Quality Determine where to spend Rupees on quality prevention Pareto Analysis Track costs of quality change chart of accounts or coding system Develop a quality reporting system

Calculating Lost Profits Total Defective Units Number of Units Reworked Profit Lost by Selling Units as Defects = X Profit for Good Unit Profit for Defective Unit Z = (D - Y) (P1 - P2 )

Calculating Internal Costs of Failure Cost to Rework Defective Unit Number of Units Reworked Rework Cost = X R = (Y)(r)

Calculating External Costs of Failure Cost of Processing Customer Returns Number of Defective Units Returned Cost of a Return = X W = (Dr )(w)

Total Failure Cost Profit lost by selling units as defects Rework cost Cost of processing customer returns Cost of warranty work Cost of product recalls Cost of litigation related to products Opportunity cost of lost customers

Calculating the Total Quality Cost Prevention Cost Appraisal Cost Failure Cost = + + T = K + A + F

THE SYSTEM OF COST OF POOR QUALITY

ELEMENTS OF COPQ CoPQ fester into the following elements: DIRECT POOR-QUALITY COSTS INDIRECT POOR-QUALITY COSTS

Direct poor-quality cost- Controllable poor-quality cost (directly controllable costs to ensure that only acceptable products and services reach the customer) Prevention cost Appraisal cost Resultant poor-quality cost (costs incurred because unacceptable products and services were delivered to the customer, resulting from earlier decisions about how much to invest in controllable COPQ) Internal error cost (Cost for defects found by the customer) External error cost (Cost for defects found by R&D or Manufacturing) Equipment poor-quality cost (costs to invest in equipment to measure, accept, or control a product or service. It is treated separately from controllable costs to accommodate the effects of depreciation)

Prevention Cost: Cost for initiatives to improve processes: …continued Prevention Cost: Cost for initiatives to improve processes: Use techniques to better understand requirements Employ programs to reduce design defects Implement tools to reduce manufacturing defects Institute quality improvement programs Appraisal Cost: Costs for checking defects including: Review of system specifications (R&D), Review & inspection during manufacturing processes, Review of quality records, and Audits

Internal Error Cost: Cost for defects found by R&D or Manufacturing: …continued Internal Error Cost: Cost for defects found by R&D or Manufacturing: Unclear requirements Improper design and implementation Incorrect test documentation Incoming inspection defects In-process testing defects Final acceptance testing defects Rework External Error Cost: Costs for defects found by the customer: Reports of corrections and removals, Field service corrections, Field service bulletins, and Software patches.

Cost for Appraisal Costs for checking defects including: Review of system specifications (R&D), Review & inspection during manufacturing processes, Review of quality records, and Audits

Cost for Preventive Action Cost for initiatives to improve processes: Use techniques to better understand requirements Employ programs to reduce design defects Implement tools to reduce manufacturing defects Institute quality improvement programs

inDirect poor-quality cost- Indirect COPQ is difficult to measure because it is a delayed result of time, effort, and financial costs incurred by the customer. These customer costs add up to lost sales and therefore do not appear in the company's ledger. Customer-incurred cost Customer-dissatisfaction cost Loss-of-reputation cost

WHITE COLLAR C oPQ -Harrington noted that expanding cost analyses to management and clerical workers could also make a significant dent in waste. He defined the following costs by functional area:

Functional area Controllable COPQ Resultant COPQ Controller COPQ Timecard reviews Capital equipment reviews Invoicing reviews Billing errors Incorrect accounting entries Payroll errors Software COPQ Design reviews Code reviews Crashes Deadlocks Incorrect outputs Plant administration COPQ Security Facility inspection and testing Machine maintenance training Disclosure of trade secrets Facilities redesign Overstaffing/understaffing Equipment downtime/idle time Purchasing COPQ Vendor reviews Periodic vendor surveys Follow-up on delivery dates Strike built-in costs Line-down cost Excessive inventory due to suppliers Premium freight cost

White collar copq: Functional area Controllable COPQ Resultant COPQ Marketing COPQ Sales material review Marketing forecast Customer surveys Sales training Overstock Loss of market share Incorrect order entry Personnel COPQ Prescreening applications Appraisal reviews Exit interviews Attendance tracking Absenteeism Turnover Grievances Industrial engineering COPQ Packaging evaluations Layout reviews OSHA reports Inspection of contract work OSHA fines Shipping damage Redoing layout Paying contractors for poor work

CONCLUSION Calculating the cost of poor quality allows an organization to determine the extent to which organizational resources are used for activities that exist only as the result of deficiencies that occur in its processes. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements. Identify all activities that exist only because of poor quality. Identify where in the organization the cost of each activity is experienced. Determine the method you will use to calculate the cost of poor quality. Collect the data and estimate the costs.

CRITICAL QUALITY ISSUES IN PAKISTAN

Poor quality mangoes- Poor quality of mangoes exported- A CONSTRAINTS ANALYSIS OF PAKISTAN MANGO SUPPLY CHAINS, 16 May 2006, Dr Aman Ullah Malik University of Agriculture Faisalabad, Pakistan Poor quality of mangoes exported- The export market faces similar challenges. Pakistan mangoes have a reputation as being cheap and of poor quality, and exporters have a tendency to dump fruit in markets such as the UAE. The product subsystem: the poor quality of mangoes that reach the final consumer is a result of poor production systems coupled with inadequate handling, storage and transport systems. The Middle East, particularly Dubai, has become a dumping ground for Pakistan mangoes. The sheer volumes and poor quality, particularly from open container shipments, drives the whole market down to a point where it is very difficult for exporters with better quality product to achieve profitable margins.

Poor quality of citrus export- CITRUS EXPORT SYSTEM IN PAKISTAN M. Athar Mahmood (Scientific Officer), and A. D. Sheikh (Director, Technology Transfer Institute (PARC), Ayub Agricultural Research Institute, Faisalabad, Pakistan Lack of storage facilities: Very few factories have their own storage facility and their capacity is very limited. Generally, exporters and traders store their consignments in traditional cold stores available near fruit markets. When there is glut in the market, Kinnows are even thrown on the roads which indicate the fact of poor storage facilities. The other problems related to cold storage facilities are high rent and poor quality of storage. Non-availability of quality packing: Packing material available is of low quality with high prices. The cardboard boxes cannot sustain the pressure of weight in the containers, so the packing gets loose affecting the fruit quality. Poor quality packing fetches low price in international market.

Poor Carrot Production in Toba Tek Singh- Effects of Poor Quality of Ground Water on Carrot Production: A Comparative Study, KHUDA BAKHSH, MUHAMMAD ASHFAQ AND MUHAMMAD WAQAS ALAM Department of Environmental and Resource Economics, and Agricultural Economics, Faculty of Agricultural Economics and Rural Sociology, University of Agriculture, Faisalabad–38040, Pakistan Poor Carrot Production in Toba Tek Singh- Cross-sectional data were used to determine the effects of ground water on carrot production. Results of production function analysis indicated that poor quality of ground water in Toba Tek Singh was significantly decreasing the carrot production. The consistent use of poor quality water not only deteriorates chemical and physical properties of soil (World Bank, 1994) but also results in loss of agriculture production of the order of 14000 million rupees per annum (Pato, 1998) The result indicates that one percent increase in application of poor quality of the ground water could further decline carrot yield by 0.153%. Carrot crop is sensitive to poor quality of the ground water and application of this type of water results in substantial losses in carrot production.

Poor quality of education- Education in Pakistan: The Key Issues, Problems and The New Challenges Ghulam Rasool Memon, Department of Education, University of Karachi The Education Sector in Pakistan suffers from insufficient financial input, low levels of efficiency for implementation of programs, and poor quality of management, monitoring, supervision and teaching. As a result, Pakistan has one of the lowest rates of literacy in the world, and the lowest among countries of comparative resources and social/economic situations. With a per capita income of over $450 Pakistan has an adult literacy rate of 49%, while both Vietnam and India with less per capita income have literacy rates of 94% and 52%, respectively (Human Development Centre, 1998). An educational system of poor quality may be one of the most important reasons why poor countries do not grow.

How to use it: Identify all activities that exist only because of poor quality. Call together a team that includes people with first hand knowledge of process. Conduct a brainstorming session to capture all component tasks that exist exclusively to remedy quality problems caused by process deficiencies. Identify where in org cost of each activity is experienced. These costs may appear in one area or in multiple areas. Determine method you will use to calculate CoQP. To use the total resources method, you must identify Total resources consumed in a category Percentage of those resources used for activities associated with remediating effects of poor quality. To use the unit cost method, you must identify the number of times deficiencies occur and the average cost for correcting that deficiency. Collect the data and estimate the costs.

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