Introduction to COQ

Quick Guide

Introduction to COQ
Computer-Based Training Program

from
Resource Engineering, Inc.

www.QualityTrainingPortal.com
The Introduction to COQ Quick Guide is offered as a complementary component of the Introduction to COQ
computer-based training program developed by Resource Engineering delivered through its
QualityTrainingPortal.com operating division. For more information contact:

Resource Engineering, Inc.

Phone: 800-810-8326 (North America only) or 802-496-5888
e-mail: support@qualitytrainingportal.com

First Edition 2016

Copyright 2016 Resource Engineering, Inc.

All rights reserved. No part of this Guide covered by the copyright hereon may be reproduced or used in any form
or by any meansgraphic, electronic, or mechanical, including photocopying, recording, taping, or information
storage and retrieval systemswithout prior written permission of the publisher.

All other brand and product names are trademarks or registered trademarks of their respective companies.

Printed in the United States of America

19 18 17 16 | 6 5 4 3 2 1

Resource Engineering, Inc.

www.QualityTrainingPortal.com

ISBN 978-1-882307-66-1
 Contents
Introduction to COQ ...................................................................................................................................................... 1
Quick Guide................................................................................................................................................................... 1
Contents ......................................................................................................................................................................... 3
About the Introduction to COQ Training Course ....................................................................................................... 1
Lesson Objectives .......................................................................................................................................................... 2
Lesson 1: Why Measure COQ? ..................................................................................................................................... 3
Lesson 2: Calculating COQ ........................................................................................................................................... 5
List of Appendices ......................................................................................................................................................... 8
Appendix 1: The Seven Wastes ..................................................................................................................................... 9
Appendix 2: Accumulate COQ Costs by Category ..................................................................................................... 10
Appendix 3: Calculate COQ as a % of Sales ............................................................................................................... 11
Appendix 4: Use a Trend Chart to Track Progress ...................................................................................................... 12
Appendix 5: Glossary of Terms (for COQ) ................................................................................................................. 13
QualityTrainingPortal .................................................................................................................................................. 15
 Introduction to COQ Quick Guide 1

About the Introduction to COQ

Training Course
This Introduction to COQ Quick Guide is a companion to the Introduction to COQ Training
Course. The Introduction to COQ course introduces the learner to Cost of Quality concepts in 2
lessons: Lesson 1: Why Measure COQ? and Lesson 2: Calculating COQ. A self-assessment
test called a Challenge allows the learner to test their understanding of the body of knowledge.

Is a COQ Program essential? No, but it is important. Why? Lets look at two well-known quotes:
1. If you can't measure it, you can't improve it. Peter Drucker
2. "In God we trust, all others must bring data." W. Edwards Deming.
Drucker means that we cannot know if we are successful unless we have defined what success
looks like and then measure and monitor our performance against our definition. Deming adds
an important dimension: We need data, not hunches or opinions to properly understand how we
are doing. Unless we can develop a reliable means to collect and quantify performance, we dont
really know how we are doing. Without data, we are just guessing.

So what can a COQ Program do for us? A COQ Program can:

Let us know (approximately) how much it costs (as a % of sales) to prevent quality
defects, detect them if they occur and recover from substandard quality issues when they
do take place.
Help us identify the processes, products or services that have the greatest impact on
COQ
Effectively track and monitor COQ % over time so we can see if our efforts to reduce
COQ are working.

The Introduction to COQ course will help learners:

Understand why an effort to measure and quantify COQ is important.
Be aware of the structure needed to implement a successful COQ Program.
2 Introduction to COQ Quick Guide

Introduction to COQ
Lesson Objectives
Lesson 1 | Why Measure COQ?
Understand the value of measuring and tracking Cost of Quality.
Acknowledge and recognize hidden Costs of Quality.
Understand the PAF Model for measuring COQ.
Lesson 2 | Calculating COQ
Recognize the importance of gaining commitment for a COQ effort from Process Owners
and the value of involving the Financial Department right at the start.
Be aware of potential sources of data for COQ measures.
Be familiar with how COQ data is grouped into appropriate PAF categories.
Understand why Approximation Values are used to quantify COQ inputs.
Recognize how to a COQ Reporting and Tracking System works.
Introduction to COQ Quick Guide 3

Cost of Quality, Lesson 1:

Why Measure COQ?
Cost of Quality, or COQ for short, is a useful measure of the costs to maintain and
improve products and services coupled with the impact of quality-related failures.
COQ is not just about tracking the costs of quality-related procedures and systems.
COQ represents the combined costs of the overall quality effort plus all of the costs
associated with failing to produce and deliver a quality product or service.
Visible Costs vs. Hidden Costs
Most organizations do have reports in place to measure and track quality costs. However ,
existing reports usually track visible (traditional) quality factors such as:
Rejected material
Scrapped product or work-in-process (WIP)
Rework costs
Yield loss
Warranty costs
But there is more to the full Cost of Quality than visible costs. When a substandard quality
event does occur, a complex series of costly events is triggered the hidden costs.
Since the impact of hidden costs is not (usually) tracked, their impact may not even be
understood.
Hidden cost inputs include:
Extra operations
Investigation into causes of defects
Disruptions to schedules
Emergency procurement of supplies
Expedited shipping
Disposal costs
(Even these factors do not include intangible hidden costs such as potential lost sales, lost
customers and potential damage to the brands reputation.)
The full Cost of Quality is the sum of traditional quality costs that are already captured
added to the hidden costs.
Interestingly, the costs associated with hidden factors are often greater than the visible
(traditional) costs that existing reports track.
A formal COQ program includes a structured approach that:
Collects COQ data, both visible and hidden.
Groups the data into like categories so that it can be analyzed.
Prioritizes the areas that need attention.
Acts as the catalyst to initiate improvement efforts.
Tracks the progress of COQ improvement efforts over time.
4 Introduction to COQ Quick Guide

The most common model used to measure and track Cost of Quality is the PAF Model.
P: Prevention Costs
A: Appraisal Costs
F: Failure Costs; track Internal Failures and External Failures separately.
Introduction to COQ Quick Guide 5

Cost of Quality, Lesson 2:

Calculating COQ
The process for calculating COQ can be accomplished using the following 5 Steps.
1. Establish roles and responsibilities.
2. Identify sources of data.
3. Group the data into PAF Categories.
4. Create Approximation Values for COQ-related actions and events.
5. Institute a Reporting and Tracking System.
Step 1: Establish roles and responsibilities.
As with any activity, someone has to own the task for it to gain traction in the
organization.
A COQ effort can succeed only if the Owners of each Process support and (preferably)
commit to the COQ program.
It is usually easier to gain the backing of management if the Financial Department is the
group that captures and reports the results.
Step 2: Identify sources of data.
Whenever possible, use existing sources of data. (Creating new reports can be a non-
value-adding activity.)
Assemble samples of existing quality-related reports, dashboards and KPIs (Key
Performance Indicators) from Finance, Production, Customer Service, Quality and
Maintenance.
The Seven Wastes can also be a source of data for identifying and calculating COQ.
Step 3: Group the data into PAF Categories.
PAF = Prevention, Appraisal and Failure
Note: There are two categories of failure: Internal and External.
Prevention Costs: Efforts to keep defects from occurring.
Appraisal Costs: Actions and activities that detect defects through inspection, tests and
audits.
Internal Failures: Defects caught internally usually require rework, repair or scrapping parts
or goods.
External Failures: Defects found (and reported) by customers and the impact of those
failures.
Prevention
COQ inputs in the Prevention category often deal with focused improvement opportunities.
Many Prevention activities involve projects that target a specific recurring problem,
yielding a solution that modifies how a process will be operated in the future.
Prevention COQ inputs can be loosely grouped into four categories:
Training and education
Preventive maintenance (PM)
6 Introduction to COQ Quick Guide

Work on improvement projects

Process engineering enhancements
Appraisal
COQ inputs in the Appraisal category capture activities such as inspections, tests and audits
conducted to ensure consistent quality and conformance to established procedures.
Appraisal COQ inputs can be summarized into four broad categories:
Testing and Inspection
Calibration activities
Quality Audits
Reliability (and life-cycle) analyses
Internal Failures
COQ inputs for Internal Failures can be summarized under the following 4 categories:
Rework, scrap or yield loss
Extra operations
Defect investigation
Yield loss
External Failures:
When an External Failure occurs, a chain reaction is often triggered that involves many
unanticipated tasks and related cost.
COQ inputs for External Failures can be summarized under the following 4 categories
Technical support
Returns and/or replacements
Defect investigation
Warranty and liability claims, recalls
Step 4: Create Approximation Values
Approximation Values represent a standardized way (or formula) to approximate the cost of
a quality-related event or incident.
Some Approximation Values are based on a prorated amount of the fixed operating budget
for that activity or task. For other activities, values are calculated on an incident-basis.
Base the value on real numbers; use data.
Select a nominal value for that cost driver (the specific activity, event or incident).
Use that Approximation Value calculation format each time the cost driver is triggered.
Step 5: Institute a Reporting and Tracking System
Set a reporting frequency.
o
Report on a routine basis; monthly is a typical reporting period.
Total up the COQ inputs.
o Accumulate all COQ inputs for the reporting period.
o Be sure to include all PAF categories.
o See Appendix 2 for a Worksheet to Accumulate COQ Costs by Category.
Introduction to COQ Quick Guide 7

Calculate the COQ %.

o Divide the aggregate COQ cost by the Total Sales to calculate the COQ %.
o See Appendix 3 for a Worksheet to Calculate COQ as a % of Sales
Track the trend.
o Use a trend chart to track COQ %.
o The trend, not the absolute number, is what is important; if the trend is down, progress
is being made.
o Conversely, if the results tracked trend up (or even hold steady), either improvement
efforts implemented have not taken effect or new, significant troublesome issues have
occurred.
8 Introduction to COQ Quick Guide

List of Appendices
The following Appendices will be useful to individuals and teams initiating a COQ effort.

1. The Seven Wastes

2. Accumulate COQ Costs by Category
3. Calculate COQ as a % of Sales
4. Use a Trend Chart to Track Progress
5. Glossary of Terms
Introduction to COQ Quick Guide 9

APPENDIX 1
The Seven Wastes
In a broad sense, waste can be considered as any activity or resource in an organization
that does not add value to an external customer.
Wastes can help identify sources of data for COQ calculations.
The table below presents reflective questions that help clarify the Seven Wastes.
10 Introduction to COQ Quick Guide

APPENDIX 2
Accumulate COQ Costs by Category
Use a COQ Input Accumulation Worksheet to capture costs by category before
converting them to % of Sales.
Introduction to COQ Quick Guide 11

APPENDIX 3
Calculate COQ as a % of Sales
Calculate the COQ as a % of the Total Sales.
The total from the COQ Input Accumulation Worksheet
will be the numerator.
Use the Sales Total from Accounting reports as the
denominator.
The COQ % = [(Total COQ $)/(Sales $)] x 100%
Calculate the COQ % by category as well.
It is useful to track the trend by category as well as by the
total.
The data by category can prove to be useful to help focus
efforts if the overall COQ is not declining.
12 Introduction to COQ Quick Guide

APPENDIX 4
Use a Trend Chart to Track Progress
Trend Charts display the performance of a specific characteristic over time.
COQ % is typically calculated (and tracked) monthly.

Here, the COQ % is trending in the

proper direction: Down.
 Introduction to COQ Quick Guide 13

APPENDIX 5
Glossary of Terms (for COQ)
Term The Meaning
Appraisal tasks (COQ) Appraisal tasks include inspections, tests and audits conducted to ensure consistent quality and conformance to
established procedures.
Approximation Values (COQ) Approximation Values are credible, consistent approach used to estimate of the total quality cost of similar activities
or events. The use of Approximation Values is an acceptable way to simplify COQ calculations.
B2B Business to Business transactions.
B2C Business to Consumer transactions.
COG Acronym for Cost of Goods.
COQ Acronym for Cost of Quality.
Corrective Action Action to address the root cause of nonconformity.
Corrective Action Plan A plan for corrective action covering who will do what by when.
Cost of Quality Cost of Quality is a measure of the combined cost of quality systems plus costs associated with poor quality. The
COQ is usually stated as a % of the cost of sales.
DFA The acronym for Design for Assembly. The purpose of DFA techniques is to design a product in a way that makes
assembly easier for manufacturing. One example of a DFA technique would be redesigning a part that requires 10
screws in the assembly process so it could snap together instead thereby eliminating the need for any screws.
DFM The acronym for Design for Manufacturability. The purpose of DFM techniques is to design a product in a way that
makes it easier to manufacture. One example of a DFM technique is designing all products to use the same type of
fastener rather than specifying a different type of fastener for each product.
Effect (Mistake-Proofing) Mistake-proofing solutions result in one of 4 effects: Forced Control, Shutdown, Warning and Sensory Alert.
External failures (COQ) External Failures are those defects found (and reported) by customers.
Fixed-basis (COQ) Fixed cost approximated for spending for a specific period of time (e.g. monthly) based on the operating budget.
Forced Control A mistake-proofing effect that uses elimination, combination, physical guides or process control to force the
prevention or detection of a mistake.
GR&R The acronym for Gage Repeatability and Reproducibility studies. A GR&R is a study of the variation in the
measurement system due to the repeatability of the test equipment and the reproducibility between appraisers.
Hidden costs (COQ) They represent factors that are usually not part of conventional accounting reporting systems representing complex
series of costly and disruptive events in response to substandard quality.
Hidden Factory The (theoretical) proportion of plant capacity used to make scrap or rework defective goods plus the supporting
functions that accompany that effort.
Hidden Office Similar to the Hidden Factory but it applies to a transactional or service business
Incident-basis (COQ) All costs associated with a specific incident or event.
Internal failures (COQ) Internal Failures represent defects caught internally; they usually require rework, repair or scrapping parts or goods.
KPIs Key Performance Indicators used to evaluate factors that are crucial to the success of an organization.
Mistake-Proofing A family of techniques that helps eliminate the cause of a defect (or at the least, detects that it will occur or has
already occurred.) The premise of mistake-proofing is that (most) mistakes can be prevented before they happen.
NVA The acronym for Non-Value-Adding.
Outcome (Mistake-Proofing) Mistake-proofing solutions result in one of 2 outcomes: Prevention or Detection.
PAF Model (COQ) The PAF model is the most common approach used to measure and track Cost of Quality. It separates costs into
Prevention, Appraisal and Failure (Internal and External) categories.
Pareto Principle The Pareto Principle states that, for many events, roughly 80% of the effects come from 20% of the causes. Quality
guru Dr. Joseph Juran suggested the principle and named it after 19th century Italian economist Vilfredo Pareto.
PDCA Cycle The acronym for the Plan-Do-Check-Act Cycle used to plan, implement and confirm enhancements. Most problem-
solving models (e.g. 8D, DMAIC) are based on the PDCA Cycle.
PdM The acronym for Predictive Maintenance, a condition-based plan where equipment/components are
repaired/replaced when measured equipment conditions predict failures are imminent.
Prevention Finding potential problems and correcting the problems before they cause defects or mistakes.
Prevention activities (COQ) Prevention activities often deal with focused improvement opportunities. Many Prevention activities involve projects
that target a specific recurring problem, yielding a solution that modifies how a process will be operated in the future.
Preventive Maintenance, PM Preplanned routine maintenance to prevent equipment failures.
Process Owner The lead of the process under study.
RCA See Root Cause Analysis.
Root Cause The underlying reason a problem, error or mistake occurred.
14 Introduction to COQ Quick Guide

Root Cause Analysis A structured approach to find the true source (the root cause) of a problem, error or mistake.
Sensory Alert A mistake-proofing effect using color-coding, missing-in-action or another aid to help the operator do the job correctly.
Shutdown A mistake-proofing effect where the process is stopped if a mistake is detected or to prevent a mistake.
Solution (Mistake-Proofing) A mistake-proofing solution is a combination of the effect coupled with the outcome.
SPC Statistical process control.
Trend Chart Shows the output of a process or performance characteristic over time.
Useful many (Pareto) From the Pareto Principle, the vital few are those ~80% (of causes, events, detects) that account for ~20% of the
topic under study.
Variation The difference between similar items or things.
Visible costs (COQ) Traditional and obvious) costs of poor quality usually captured by conventional accounting records.
Vital few (Pareto) From the Pareto Principle, the vital few are those ~20% (of causes, events, detects) that account for ~80% of the
topic under study.
Warning A mistake-proofing effect using lights or audible alarms to signal that a mistake is about to occur (prevention) or that a
mistake just occurred (detection).
Waste Any non-value-adding activity.
WIP WIP is the acronym for work in progress; it refers to (to costs of) materials and partly finished products at various
stages of a process.
WIP The acronym for work-in-process; inventory between two process steps. Operating a process in a simulated
continuous flow manner eliminates, or at minimum significantly reduces, WIP.
Yield loss The difference (loss) between the theoretical and actual process output
 Introduction to COQ Quick Guide 15

QualityTrainingPortal
------------------------------------------------------
We do the training, so you dont have to.

QualityTrainingPortal.com offers a comprehensive training suite to help you improve quality and
productivity.
Master Courses: Comprehensive/In-Depth
Complete training on a broad topic.
Courses usually take 5 to 7 hours; some courses are longer.
Overview Courses: Introductory/High Level
An overview of the topic and relevant terminology.
Courses take 1 to 2 hours to complete.
Targeted Training Courses: Focused/Practical
Detailed training on a specific topic.
Courses take 1 to 3 hours to complete.
All courses have:
Media-rich presentation including full audio and graphics.
Exercises throughout to help reinforce learning.
Complete control to navigate through the program in a way that best meets the needs of the
learner.
Tracking of training including learner bookmarks.
Documentation of training and, for organizations using a Subscription, a database of
learners progress and assessment test results.
Certificates awarded upon successful completion of courses granting Continuing Education
Units (CEUs) that can be used for professional accreditations/certifications.

Check out:
www.QualityTrainingPortal.com