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Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting
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Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting

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As a key factor of competitiveness, you must manage cost all the time, not only in times of economic downturn. Reducing the Cost Of Quality (COQ) program helps achieve this. ...

As a key factor of competitiveness, you must manage cost all the time, not only in times of economic downturn. Reducing the Cost Of Quality (COQ) program helps achieve this.

This training fits well into any improvement initiative, including TQM and Lean management. The COQ methodology instills a practical approach to quantifying the financial impact of the Cost Of Non-Conformance (CONC) and the Cost Of Conformance (COC).

By teaching this presentation, you can improve the company culture and improve the bottom line. This presentation changes employees problem solving focus from quick fix solutions to preventing issues before they occur. This course teaches the skills to prioritize quality improvement opportunities based on the expected financial return.

LEARNING OBJECTIVES

Understand the principles and basic concepts of the Cost of Quality (COQ)
Understand how quality improvement reduces costs
Calculate COQ and conduct COQ assessments
Identify COQ cost drivers within your organization
Develop a COQ strategy
Use COQ to drive prevention in your organization
Apply COQ to manage improvement projects in your organization

CONTENTS

Introduction & Basic Concepts of COQ
Business case for quality
Phase 1: Identifying COQ Items
Phase 2: Collecting COQ Data
Phase 3: Analyzing COQ Data
Phase 4: Reducing COQ & Improving Quality

To download this complete presentation, please go to: http://www.oeconsulting.com.sg

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Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting Presentation Transcript

  • Reducing the Cost of Quality © Operational Excellence Consulting. All rights reserved.
  • Objectives NOTE: As this is a PREVIEW, only selected slides are shown. To download the complete presentation, please visit: http://www.oeconsulting.com.sg Upon completion of this program, you will be able to: • Understand the principles and basic concepts of the Cost of Quality (COQ) • Understand how quality improvement reduces costs • Calculate COQ and conduct COQ assessments • Identify COQ cost drivers within your organization • Develop a COQ strategy • Use COQ to drive prevention in your organization • Apply COQ to manage improvement projects in your organization © Operational Excellence Consulting. All rights reserved. 2
  • Contents 1 • Introduction & Basic Concepts of COQ • Phase 1: Identifying COQ Items  PAF model  Business case for quality  Internal failure costs  Impact of quality improvement program  External failure costs  Link between quality costing and profits  Appraisal costs  Why are quality costs important?  Prevention costs  Why measure COQ?  COQ Strategies  What is COQ?  Financial structure P&L  COQ iceberg  Seven types of waste  COQ versus Lean & Six Sigma  CONC checklists  Goal of COQ system  Guidelines for identifying COQ items  Preparation  Four phases of a COQ system © Operational Excellence Consulting. All rights reserved. 3
  • Contents 2 • Phase 2: Collecting COQ Data • Phase 3: Analyzing COQ Data  Matching accounts with CONC items  Selecting quality cost bases  Quality costing  Trends analysis  COQ Data source  Pareto analysis  Example calculations of Failure cost, Appraisal cost and Prevention cost  Variance analysis   SMART criteria COQ scorecard and indices   Set targets for improvement Process flow for COQ reporting   Case study Collecting and reporting COQ data  Role of Finance  Role of line managers/supervisors  Practical guidelines • Phase 4: Reducing COQ & Improving Quality  Reduce COQ through quality improvement programs  Tools and techniques  System for quality is prevention  Some results from industries  Sustaining COQ © Operational Excellence Consulting. All rights reserved. 4
  • Vicious Cycle of Poor Quality No Time To Look For Real Solutions High Defects 4 Fire-Fighting 1 3 Poor Quality 2 Extensive Reworking © Operational Excellence Consulting. All rights reserved. Unhappy Customer 5
  • Link Between Quality Costing & Profits Total Cost of Quality Look at high quality cost area Identify problem Cost of NonConformance Analyze root cause Cost of Conformance Profit & Loss Statement Take corrective action & Institutionalize change Track quality costs to gain top management’s attention Prevention-based activities © Operational Excellence Consulting. All rights reserved. Ultimate impact of COQ is here! 6
  • What is COQ? • Cost of Quality (COQ) is the total cost of ensuring product and service quality • Total COQ is the sum total of the Cost of NonConformance (CONC) and the Cost of Conformance (COC) CONC COC © Operational Excellence Consulting. All rights reserved. COQ 7
  • Cost of Non-Conformance (CONC) • The costs incurred as a result of not doing things right the first time • Examples        Mistakes Scrap Rework Equipment Downtime Handling customer complaints Warranty claims Customer return analysis © Operational Excellence Consulting. All rights reserved. 8
  • Cost of Conformance (COC) • The costs incurred in ensuring that things are done right the first time • Examples:        Quality training Quality auditing Inspections and tests Process capability studies Vendor assurance Continuous improvement programs Customer satisfaction surveys © Operational Excellence Consulting. All rights reserved. 9
  • Poor quality costs a typical company 15-20% of sales annually We See Only the Tip of the Iceberg Maintenance and service Rejects Visible Rework Scrap Warranty claims Additional labor hours Opportunity cost if sales greater than plant capacity Cost to customer Expediting Improvement program costs Lost customer loyalty Process control Less Visible Vendor control Inspection/test (materials, equipment, labor) Excess inventory Quality engineering and administration Quality audits Longer cycle times © Operational Excellence Consulting. All rights reserved. 10
  • COQ and Lean (Waste Elimination) Input (Man, Machines, Materials) Waste Transformation Process (Method) Waiting Over-processing Defects Transportation Motion Overproduction Excess Inventory © Operational Excellence Consulting. All rights reserved. Output (Products, Services) Waste Reduce COQ by eliminating waste! 11
  • Goal of COQ System Strategies Elimination of Failure Costs To facilitate quality efforts that will lead to cost reduction opportunities Reduction in Appraisal Costs Investment in Prevention activities/programs © Operational Excellence Consulting. All rights reserved. 12
  • Four Phases of a COQ System Identify COQ Items Reduce COQ COQ System Collect & Report COQ Data Analyze COQ Data © Operational Excellence Consulting. All rights reserved. 13
  • PAF Model Cost of Quality (COQ) Cost of Conformance ( COC ) Prevention Cost Appraisal Cost Cost of Non-Conformance ( CONC ) Internal Failures Cost © Operational Excellence Consulting. All rights reserved. External Failures Cost 14
  • External Failure Costs • The costs occurring after delivery or shipment of the product — and during or after furnishing of a service — to the customer • Examples:  Warranty claims  Replacements  Customer returns  Product recalls  Customer return analysis  Handling customer complaints  Loss of customer goodwill © Operational Excellence Consulting. All rights reserved. 15
  • Internal Failure Costs • The costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. • Examples:  Scrap  Rework  Retest  Re-inspection  Redesign  Downtime  Corrective action  Downgrading © Operational Excellence Consulting. All rights reserved. 16
  • CONC Checklist 1 Process CONC Items Production Scrap Rework Repair and return costs Engineering Equipment/facility damage Equipment/facility repair Equipment downtime Equipment redesign/modification Engineering change orders Subcontractor faults Design Product redesign Computer downtime Design change Note: List is not exhaustive © Operational Excellence Consulting. All rights reserved. 17
  • Matching Accounts with CONC Items 1 Items in Accounts CONC Items Process involved Obsolescence written off • Obsolescence Production/Logistics Rent • Storage space Logistics Raw material Finished goods Work-in-progress Discounts allowed Water & electricity Production overheads • Defects • Spoilage Production Warranty claims • Warranty claims Marketing © Operational Excellence Consulting. All rights reserved. 18
  • Quality Costing 1. Whole account 2. Unit pricing 3. Labor/resource claiming 4. Whole person © Operational Excellence Consulting. All rights reserved. 19
  • Example 1: Calculating a Failure Cost Item Cost of Re-invoicing Whole process of re-invoicing Staff cost No. of re-invoices per annum Man-hours expended in re-invoicing Total staff cost in re-invoicing Paper/invoice cost Postage cost Overheads Total cost of re-invoicing 45 mins $10/hr 156 cases 156 x 45 mins = 7,020 mins or 117 hrs 117 hrs x $10 = $1,170 per annum $0.28 per invoice Relatively $0.20 per invoice small; OK $0.48 x 156 cases = $75 to ignore $1,170 + $75 = $1,245 © Operational Excellence Consulting. All rights reserved. 20
  • COQ Scorecard External Failure Costs Internal Failure Costs $ % $ % $ % Appraisal Costs Prevention Costs TOTAL QUALITY COSTS © Operational Excellence Consulting. All rights reserved. 21
  • COQ Indices Sales Revenue: Sales Revenue: Sales Revenue: TCOQ * 100% Sales Revenue CONC * 100% Sales Revenue COC * 100% Sales Revenue Manufacturing Costs: Value Added: Direct Labour Costs: TCOQ * 100% Mfg. Costs TCOQ * 100% Value Added TCOQ * 100% Direct Labour Costs © Operational Excellence Consulting. All rights reserved. 22
  • Case Study COQ Trends Analysis 1000000 900000 800000 700000 Prevention Appraisal Internal Failure External Failure Total COQ 600000 500000 400000 300000 200000 100000 0 1999 2000 2001 2002 © Operational Excellence Consulting. All rights reserved. 23
  • Practical Guidelines 1 Do’s Don’ts •Have a clear purpose and strategy •Go it alone - involve other departments •Report only costs endorsed by the Finance department •Expect that the existing accounting system will provide the information needed •Get data and costs from standard data whenever possible •Be too ambitious – start with a pilot study •Start with CONC items •Expect too much during the initial phase of implementation •Collect those quality costs that are most accessible •Agonize over insignificant quality costs •Concentrate on costs that do or can change with improvement •Concentrate only on what is already known © Operational Excellence Consulting. All rights reserved. 24
  • END OF PREVIEW To download this presentation, please visit us at: www.oeconsulting.com.sg © Operational Excellence Consulting. All rights reserved.