© Operational Excellence Consulting. All rights reserved.
Reducing the
Cost of Quality
© Operational Excellence Consulting. All rights reserved. 2
Objectives
Upon completion of this program, you will be
able t...
© Operational Excellence Consulting. All rights reserved. 3
Contents 1
• Introduction & Basic Concepts
of COQ
 Business c...
© Operational Excellence Consulting. All rights reserved. 4
Contents 2
• Phase 2: Collecting COQ Data
 Matching accounts ...
© Operational Excellence Consulting. All rights reserved. 5
Vicious Cycle of Poor Quality
Extensive
Reworking
Fire-Fightin...
© Operational Excellence Consulting. All rights reserved. 6
Link Between Quality Costing & Profits
Track quality costs to
...
© Operational Excellence Consulting. All rights reserved. 7
What is COQ?
• Cost of Quality (COQ) is the total cost of
ensu...
© Operational Excellence Consulting. All rights reserved. 8
Cost of Non-Conformance (CONC)
• The costs incurred as a resul...
© Operational Excellence Consulting. All rights reserved. 9
Cost of Conformance (COC)
• The costs incurred in ensuring tha...
© Operational Excellence Consulting. All rights reserved. 10
We See Only the Tip of the Iceberg
Poor quality costs a typic...
© Operational Excellence Consulting. All rights reserved. 11
COQ and Lean (Waste Elimination)
Waiting
Over-processing
Defe...
© Operational Excellence Consulting. All rights reserved. 12
Goal of COQ System
Elimination of Failure Costs
Reduction in ...
© Operational Excellence Consulting. All rights reserved. 13
Four Phases of a COQ System
COQ
System
Identify
COQ
Items
Col...
© Operational Excellence Consulting. All rights reserved. 14
PAF Model
Cost of Quality (COQ)
Cost of Conformance
( COC )
C...
© Operational Excellence Consulting. All rights reserved. 15
External Failure Costs
• The costs occurring after delivery o...
© Operational Excellence Consulting. All rights reserved. 16
Internal Failure Costs
• The costs occurring prior to deliver...
© Operational Excellence Consulting. All rights reserved. 17
CONC Checklist 1
Process CONC Items
Production Scrap
Rework
R...
© Operational Excellence Consulting. All rights reserved. 18
Matching Accounts with CONC Items 1
Items in Accounts
Obsoles...
© Operational Excellence Consulting. All rights reserved. 19
Quality Costing
1. Whole account
2. Unit pricing
3. Labor/res...
© Operational Excellence Consulting. All rights reserved. 20
Example 1: Calculating a Failure Cost Item
Cost of Re-invoici...
© Operational Excellence Consulting. All rights reserved. 21
COQ Scorecard
External Failure Costs
Internal Failure Costs
A...
© Operational Excellence Consulting. All rights reserved. 22
COQ Indices
Sales Revenue:
TCOQ * 100%
Sales Revenue
Manufact...
© Operational Excellence Consulting. All rights reserved. 23
Practical Guidelines 1
Do’s Don’ts
• Have a clear purpose and...
24© Operational Excellence Consulting. All rights reserved.
COQ Trends Analysis
0
100000
200000
300000
400000
500000
60000...
© Operational Excellence Consulting. All rights reserved. 25
Sustaining COQ 1
• Constantly understand and meet the needs o...
© Operational Excellence Consulting. All rights reserved. 26
Copyrights of all the pictures used in this presentation are ...
© Operational Excellence Consulting. All rights reserved. 27
Other Presentations You May Like…
Check out our presentations...
© Operational Excellence Consulting. All rights reserved.
About
Operational
Excellence Consulting
© Operational Excellence Consulting. All rights reserved. 29
About Operational Excellence
Consulting
• Operational Excelle...
© Operational Excellence Consulting. All rights reserved.
www.oeconsulting.com.sg
www.oeconsulting.com.sg
END OF PREVIEW
T...
Upcoming SlideShare
Loading in …5
×

Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting

8,574 views
8,058 views

Published on

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

Published in: Business, Technology

Cost of Quality Approach to Cost Reduction by Operational Excellence Consulting

  1. 1. © Operational Excellence Consulting. All rights reserved. Reducing the Cost of Quality
  2. 2. © Operational Excellence Consulting. All rights reserved. 2 Objectives 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 NOTE: As this is a PREVIEW, only selected slides are shown. To download the complete presentation, please visit: http://www.oeconsulting.com.sg
  3. 3. © Operational Excellence Consulting. All rights reserved. 3 Contents 1 • Introduction & Basic Concepts of COQ  Business case for quality  Impact of quality improvement program  Link between quality costing and profits  Why are quality costs important?  Why measure COQ?  What is COQ?  COQ iceberg  COQ versus Lean & Six Sigma  Goal of COQ system  Preparation  Four phases of a COQ system • Phase 1: Identifying COQ Items  PAF model  Internal failure costs  External failure costs  Appraisal costs  Prevention costs  COQ Strategies  Financial structure P&L  Seven types of waste  CONC checklists  Guidelines for identifying COQ items
  4. 4. © Operational Excellence Consulting. All rights reserved. 4 Contents 2 • Phase 2: Collecting COQ Data  Matching accounts with CONC items  Quality costing  COQ Data source  Example calculations of Failure cost, Appraisal cost and Prevention cost  COQ scorecard and indices  Process flow for COQ reporting  Collecting and reporting COQ data  Role of Finance  Role of line managers/supervisors  Practical guidelines • Phase 3: Analyzing COQ Data  Selecting quality cost bases  Trends analysis  Pareto analysis  Variance analysis  SMART criteria  Set targets for improvement  Case study • 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
  5. 5. © Operational Excellence Consulting. All rights reserved. 5 Vicious Cycle of Poor Quality Extensive Reworking Fire-Fighting High Defects No Time To Look For Real Solutions Poor Quality Unhappy Customer 14 3 2
  6. 6. © Operational Excellence Consulting. All rights reserved. 6 Link Between Quality Costing & Profits Track quality costs to gain top management’s attention Look at high quality cost area Identify problem Analyze root cause Take corrective action & Institutionalize change Profit & Loss Statement Total Cost of Quality Cost of Non- Conformance Cost of Conformance Prevention-based activities Ultimate impact of COQ is here!
  7. 7. © Operational Excellence Consulting. All rights reserved. 7 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 Non- Conformance (CONC) and the Cost of Conformance (COC) CONC COC COQ
  8. 8. © Operational Excellence Consulting. All rights reserved. 8 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
  9. 9. © Operational Excellence Consulting. All rights reserved. 9 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
  10. 10. © Operational Excellence Consulting. All rights reserved. 10 We See Only the Tip of the Iceberg Poor quality costs a typical company 15-20% of sales annually Quality engineering and administration Inspection/test (materials, equipment, labor) Expediting Scrap Rework Rejects Warranty claims Maintenance and service Cost to customer Excess inventory Additional labor hours Longer cycle times Quality audits Vendor control Lost customer loyalty Improvement program costs Process control Opportunity cost if sales greater than plant capacity Less Visible Visible
  11. 11. © Operational Excellence Consulting. All rights reserved. 11 COQ and Lean (Waste Elimination) Waiting Over-processing Defects Transportation Motion Overproduction Excess Inventory Intellect Waste Waste Reduce COQ by eliminating waste! Input (Man, Machines, Materials) Transformation Process (Method) Output (Products, Services)
  12. 12. © Operational Excellence Consulting. All rights reserved. 12 Goal of COQ System Elimination of Failure Costs Reduction in Appraisal Costs Investment in Prevention activities/programs COQ Strategies To facilitate quality efforts that will lead to cost reduction opportunities
  13. 13. © Operational Excellence Consulting. All rights reserved. 13 Four Phases of a COQ System COQ System Identify COQ Items Collect & Report COQ Data Analyze COQ Data Reduce COQ
  14. 14. © Operational Excellence Consulting. All rights reserved. 14 PAF Model Cost of Quality (COQ) Cost of Conformance ( COC ) Cost of Non-Conformance ( CONC ) Prevention Cost Appraisal Cost Internal Failures Cost External Failures Cost
  15. 15. © Operational Excellence Consulting. All rights reserved. 15 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
  16. 16. © Operational Excellence Consulting. All rights reserved. 16 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
  17. 17. © Operational Excellence Consulting. All rights reserved. 17 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
  18. 18. © Operational Excellence Consulting. All rights reserved. 18 Matching Accounts with CONC Items 1 Items in Accounts Obsolescence written off Rent Raw material Finished goods Work-in-progress Discounts allowed Water & electricity Production overheads Warranty claims CONC Items • Obsolescence • Storage space • Defects • Spoilage • Warranty claims Process involved Production/Logistics Logistics Production Marketing
  19. 19. © Operational Excellence Consulting. All rights reserved. 19 Quality Costing 1. Whole account 2. Unit pricing 3. Labor/resource claiming 4. Whole person
  20. 20. © Operational Excellence Consulting. All rights reserved. 20 Example 1: Calculating a Failure Cost Item Cost of Re-invoicing Whole process of re-invoicing 45 mins Staff cost $10/hr No. of re-invoices per annum 156 cases Man-hours expended in re-invoicing 156 x 45 mins = 7,020 mins or 117 hrs Total staff cost in re-invoicing 117 hrs x $10 = $1,170 per annum Paper/invoice cost $0.28 per invoice Postage cost $0.20 per invoice Overheads $0.48 x 156 cases = $75 Total cost of re-invoicing $1,170 + $75 = $1,245 Relatively small; OK to ignore
  21. 21. © Operational Excellence Consulting. All rights reserved. 21 COQ Scorecard External Failure Costs Internal Failure Costs Appraisal Costs Prevention Costs TOTAL QUALITY COSTS $ % $ % $ %
  22. 22. © Operational Excellence Consulting. All rights reserved. 22 COQ Indices Sales Revenue: TCOQ * 100% Sales Revenue Manufacturing Costs: TCOQ * 100% Mfg. Costs Value Added: TCOQ * 100% Value Added Direct Labour Costs: TCOQ * 100% Direct Labour Costs Sales Revenue: CONC * 100% Sales Revenue Sales Revenue: COC * 100% Sales Revenue
  23. 23. © 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 cost of failure 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
  24. 24. 24© Operational Excellence Consulting. All rights reserved. COQ Trends Analysis 0 100000 200000 300000 400000 500000 600000 700000 800000 900000 1000000 1999 2000 2001 2002 Prevention Appraisal Internal Failure External Failure Total COQ Case Study
  25. 25. © Operational Excellence Consulting. All rights reserved. 25 Sustaining COQ 1 • Constantly understand and meet the needs of customers • COQ is primarily a cost reduction program and must be managed as such • Senior management support across multiple functions is critical to the success of COQ • Take a holistic approach for optimum results, e.g. position COQ as part of a TQM program
  26. 26. © Operational Excellence Consulting. All rights reserved. 26 Copyrights of all the pictures used in this presentation are held by their respective owners.
  27. 27. © Operational Excellence Consulting. All rights reserved. 27 Other Presentations You May Like… Check out our presentations catalog at http://www.oeconsulting.com.sg/#!training-presentations/c1les
  28. 28. © Operational Excellence Consulting. All rights reserved. About Operational Excellence Consulting
  29. 29. © Operational Excellence Consulting. All rights reserved. 29 About Operational Excellence Consulting • Operational Excellence Consulting is a management training and consulting firm that assists organizations in improving business performance and effectiveness. • One of our unique strengths is going beyond a tools-focused approach to seamlessly integrate people, processes, technology and continuous improvement initiatives to suit the specific needs and situations of our clients. • We provide corporate learning programs and management advisory services to assist our clients to achieve breakthrough in business performance and effectiveness. Our aim is to support our clients in designing, managing and executing lasting beneficial change.
  30. 30. © Operational Excellence Consulting. All rights reserved. www.oeconsulting.com.sg www.oeconsulting.com.sg END OF PREVIEW To download this presentation, please visit:

×