Understanding the concept of cost of quality How to use Cost of Quality concept to develop a business case

1. USING COST OF QUALITY FOR YOUR BUSINESS CASE
1Continuous Improvement | Lean Improvement | Dominic N | July 2020

2. USING COQ FOR YOUR BUSINESS CASE
Continuous Improvement | Lean Improvement | Dominic N | July 20202
What you need to understand to do this
• Understanding cost of quality and what are the elements
• What is a business case and what structure should it include
• Where required you need to include a cost benefit ratio
Other factors include:
• Be ready to work with your finance team on this and have a good relation ship with them
• Have a flare for data
• Make your data visual you will be share with top management

3. COST OF QUALITY
Continuous Improvement | Lean Improvement | Dominic N | July 20203
Cost of Quality :
This involves quantifying the “quality” costs to
the organization
Cost of Quality (COQ) = Cost of Poor Quality
(COPQ) + Cost of Good Quality (COGQ)
What COQ contains:
• COPQ – Internal Costs (defects occurring and managed
within the organization)
▪ Scrap, Rework, Re-inspection
• COPQ – External Costs (defects that reach the consumer)
▪ Adverse Event Reporting, Warranty, Corrections and
Removals, Product Liability, loss of brand reputation
• COGQ – Appraisal Costs (controls put in place by the
organization)
▪ Inspection (purchased, manufactured), Testing
(acceptance, field), Quality Audits, Calibration
• COGQ – Prevention Costs (activities to eliminate defects from
ever occurring)
• SPC (statistical process control), Quality
Planning, Quality Training, investment in quality-related
information systems

4. BUSINESS CASE
Continuous Improvement | Lean Improvement | Dominic N | July 20204
• A business case is a written document or verbal
presentation which contains the reasons for
initiating a task or project. Whoever presents the
case needs to structure it well. It should contain
details on costs, risks, as well as pros and cons.
• Additionally, it should include what actions to take
as well as their timescales. Above all, a good
business case must have a compelling conclusion.
• A business case should also warn of what might
happen if nobody takes the necessary actions.
Ref: Project Risk Leader

5. BENEFIT COST RATIO
Continuous Improvement | Lean Improvement | Dominic N | July 20205
A cost-benefit analysis is a study to determine the
relationship between the benefits and the costs of changes
to processes, policies, and/or procedures. The costs should
be stated in financial units (e.g., Dollars, Pesos, Euros,
etc.). Cost-benefit analyses are typically performed when
there is a change that is pending to ensure the benefits from
the changes outweigh the costs.
How to Use
• Step 1. Determine all costs associated with the processes affected by a proposed change.
• Step 2. Have these costs validated by accounting staff or by the appropriate financial
group.
• Step 3. Identify the changes to the processes and calculate the costs to execute the new
process going forward (also known as the operational state).
• Step 4. Determine the costs of implementing the changes to the process. In addition to
hard costs related to hardware and equipment, ensure that you capture costs related to
information technology and operations, training, documentation, running processes in
parallel during transition, office lease cancellation, and severance costs related to
dismissed employees. There may be other costs related to implementing the change.
• Step 5. Calculate the benefits projected from making these changes.
• Step 6. Determine the cost-benefit ratio: divide the total of the projected benefits by the
total costs. A higher the ratio of benefits to costs indicates a positive change.
• *Tip: It is wise to have accounting and/or finance staff confirm the assumptions
and analysis.
• Step 7. Communicate to management to obtain approval and implement the changes.
• Step 8. Periodically assess and calculate whether the benefits and costs forecasted were
realized and recalculate the cost-benefit analysis. Use this information for future cost-
benefit analyses of future projects.
Ref: ASQ publication

6. 1. What do you do when your company insists on buy raw materials of lower
quality for production in the name of saving cost
Continuous Improvement | Lean Improvement | Dominic N | Jun 20206
CASE STUDY

7. • Develop a business case using Cost of Quality (COQ) Approach
• State the purpose, why do you want this change or reverse of raw material
• What value will the business get out of this reversal to previous specification.
• Gather data on all parameters that make up COQ I.e both the COPQ and COGQ
• Calculate the COQ = COPQ + COGQ (see next slide for example)
• Use graphical analysis where possible to show variations and distribution since implementation of new material
• Share what the benefits will be if this process was reversed. (Use the Cost of Benefit Approach)
Continuous Improvement | Lean Improvement | Dominic N | July 20207
WHAT YOU COULD DO

8. COST OF QUALITY
Continuous Improvement | Lean Improvement | Dominic N | July 20208
Business Case Appendix
Cost of Quality
Parameters Before (N) After (N) % Change Comments
1. COPQ – Internal Costs (defects occurring and managed within the
organization)
Scrap 3.00 12.00 60%
More scraps during production as aresults
of materials with poor quality
Re-inspection 2.00 6.00 50%
Rework 1.00 6.00 71%
2. COPQ – External Costs (defects that reach the consumer)
Adverse Event 0.00 0.00 #DIV/0!
Consumer complaints 2.00 12.00 71%
Trade Returns 0.00 1.00 100%
3. COGQ – Appraisal Costs (controls put in place by the organization)
Inspection (purchased, manufactured) 10.00 10.00 0%
Testing (acceptance, field), Quality Audits 10.00 15.00 20% Beacause of retesting
Calibration 10.00 10.00 0%
4. COGQ – Prevention Costs (activities to eliminate defects from
ever occurring)
Quality Planing 10.00 12.00 9% More time spent in creating control plans
and assurance processes also in training
and retraining of teams to spot defective
materials hence all this brings more cost
from manhours
Quality Assurance 10.00 12.00 9%
SPC (statistical process control) 10.00 10.00 0%
Training
10.00 15.00 20%
COPQ 8.00 37.00 64%
COGQ. 70.00 84.00 9%
COQ = COPQ + COGQ. 78.00 121.00 22%

9. MAKE YOR DATA VISUAL- CREATE A DASHBOARD
Continuous Improvement | Lean Improvement | Dominic N | July 20209
2
14
0.25 0.7
0
2
4
6
8
10
12
14
16
Q1 Q2 Q3 Q4
Consumer complaint Review
Total Complaints CPM
1
3
6
8
12
18
0
5
10
15
20
Jan Feb Mar April May June
Supplier Non-Conformance
Jan Feb Mar April May June
0
Consumer
Recalls
2
Trade Recalls
0
Near Miss
3 4
16
18
22
30
0
5
10
15
20
25
30
35
Jan Feb Mar April May June
Defects during productions
Jan Feb Mar April May June

10. THANK YOU!
Continuous Improvement | Lean Improvement | Dominic N |
Jun 2020
10