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
All Rights Reserved, Juran Institute, Inc.
Prevention
Cost of Attaining Quality
Appraisal: Prediction
Audit
Appraisal: Detection
Failure: Internal
External
Quality Costs
Components
$
Conformance
Non-Conformance
Total Quality Cost

II want
want my
my
money
money
back!
back!
Prevention
Appraisal
Internal
Failure
External
Failure
$
Cost of Quality (COQ)
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
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
Customer Returns
Inspection Costs
Recalls

As an organization gains a broader definition of poor quality,
the hidden portion of the Waste
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
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
Quantifying the Potential Benefit
Sigma
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
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?

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
Purchase Cost Targets

Process Capability
Studies
Preventive Maintenance
Supplier Qualification
Job Descriptions
Housekeeping
Zero-Defect Program
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
Supplier Certification
Employee Surveys
Security Checks
Safety Checks
Reviews:
Operating Expenditures
Product Costs
Financial Reports
Capital Expenditures
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
Supplier Problems
Scrap and rework
Late deliveries
Excess inventory
Equipment Downtime
Accidents, Injuries
Absenteeism
Unused Reports
Missed Schedule Cost
Lost Sales (any cause)
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!

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
The Hidden Organization
Step
1
Test
Step
2
Test
Product
Floor
Floor Space
Space
Analyze
Analyze
Fix
Fix
Floor
Floor Space
Space
Floor
Floor Space
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.
Why Cost of Poor Quality?
Reporting Tool
Comparisons
Trends
Analytical Tool
Priorities
Tradeoffs
Investment Tool
ROI
Focus of COPQ Efforts
Identify and Quantify Quality Costs

Expose the Hidden Factory
Ongoing Measurement System
Breakthrough Improvement
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

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Cost of Poor Quality

Managers and workers speak