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Exposing Your Hidden Costs of Performance


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An ongoing challenge today for most organizations is to do more with less. Many companies are spending more time with their customers, while customers are demanding competitive pricing on products and services. As the planned profit margin erodes, the question management is posing to their staff is, "How do we maintain our margins and still meet the customers’ demands?" Basically, how do we leave less dollars on the table? The answer is Cost of Poor Quality (COPQ) analysis, which can be used to identify and reduce operational wastes while maintaining margins.

Dr. Joseph DeFeo, Chairman and CEO of Juran Global, shares:

* Typical misconceptions about quality.
* How COPQ affects the bottom line.
* How to identify the "tip of the iceberg."
* The costs hidden in the bottom of the iceberg.
* How to estimate costs using total resources and unit costs.

Published in: Business
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Exposing Your Hidden Costs of Performance

  1. 1. Dr. Joseph A. DeFeo All Rights Reserved, Juran Institute, Inc. 2016 EXPOSING YOUR HIDDEN COSTS OF PERFORMANCE APRIL 20, 2016
  2. 2. All Rights Reserved, Juran Institute, Inc. 2016  To manage for excellence, it is vital to begin by establishing a vision for the organization, along with policies, goals, and plans that attain to the vision.  Managing for excellence makes extensive use of three fundamental managerial processes: 1. Designing or planning for quality 2. Compliance, controlling, or assuring quality 3. Improving or creating breakthroughs in quality Today’s discussion will focus around Principle #2 - compliance, controlling, or assuring quality, through the identification and analysis of Cost of Poor Quality. MANAGING FOR EXCELLENCE
  3. 3. All Rights Reserved, Juran Institute, Inc. 2016  Cost of Poor Quality (COPQ): These are the costs that would disappear in the organization if all products and processes performed right the first time. They are usually measured as a percentage of sales or costs. COPQ DEFINED An effective performance excellence program should prioritize removing COPQ as the expenses have already been incurred. By attacking COPQ, the organization is able to maintain sales performance but become more profitable!
  4. 4. All Rights Reserved, Juran Institute, Inc. 2016  By ignoring the magnitude of hidden costs in our organizations today, you are basically underestimating your profit.  This phenomenon is rooted in the limited understanding of costs related to poorly performing processes. *Regardless of industry WHY COST OF POOR QUALITY? Our research indicates that 15-25% of all work performed* consisted of redoing prior work because products and processes were not perfect.
  5. 5. All Rights Reserved, Juran Institute, Inc. 2016  Costs of poor quality affects every business in every industry, this is not an industry-specific problem  Companies do not always associate a bad process with poor quality  Many managers have been instructed to “reduce costs”  Can be difficult initially to distinguish differences between costs and costs of poor quality or non-value-added activities  Rush decisions lead to “across the board” cuts  Cost should be the minimum amount of money that we have to spend to meet the customer and business needs  Cost is a good thing if its a minimum cost that meets a customer requirement  Cost is a bad thing if its a cost of poor quality  In healthcare, misuse, underuse, and overuse = waste OUR LESSONS LEARNED
  6. 6. All Rights Reserved, Juran Institute, Inc. 2016 The effect of failure on income:  The customer who encounters a deficiency may take action that creates additional cost for the producer (file a complaint, return a product, file a lawsuit, etc.). The customer may also elect to stop buying from the guilty producer as well, and may publicly share their poor quality interaction. Such actions can cause serious damage to a producer’s revenue and reputation. The effect of failure on cost:  Deficient quality results in excessive costs associated with poor quality. The Cost of Poor Quality (COPQ) is a term that encompasses all the costs that would disappear if there were no failures – no errors, no rework, no field failures, etc. EFFECTS OF POOR QUALITY
  7. 7. All Rights Reserved, Juran Institute, Inc. 2016 EXAMPLE Example: A call center requires accurate and quick calls are to meet customer expectations. Problem: Management needs to reduce costs, and opts to reduce staff. Result: May have reduced operating cost, but wait times, resolution times, and customer satisfaction are all affected. Now we are paying for the cost of poor quality in addition to having a reduction in profit. The reduction in operating costs is quickly outweighed.
  8. 8. All Rights Reserved, Juran Institute, Inc. 2016 VISUALIZING THE DIFFERENCE Profit Total Operating Costs Profit True Operating Costs COPQ Profit Sales Erosion COPQ True Operating Costs Profit COPQ True Operating Costs
  9. 9. All Rights Reserved, Juran Institute, Inc. 2016 Traditionally, there are seven specific categories that organizations begin looking for poor quality:  We refer to these as “the tip of the iceberg”  Generally only represent about 5% of actual COPQ WHERE ARE THE COSTS HIDING?
  10. 10. All Rights Reserved, Juran Institute, Inc. 2016  As an organization gains a broader understanding of poor quality, the hidden portions of the iceberg become apparent.  COPQ can range between 10-25% of total operating costs. WHERE THE REAL MONEY IS
  11. 11. All Rights Reserved, Juran Institute, Inc. 2016 WHERE IS COPQ FOUND? Review Review Redo Redo Variation Non-Value-Added (NVA) Steps Check Check Product or Service Step 1 Step 2
  12. 12. All Rights Reserved, Juran Institute, Inc. 2016 1. Costs to Prevent Failure  Design reviews, educational on the job training, work instructions; most costs in organizations that help employees to do the right thing at the right time 2. Compliance, Appraisal, Quality Assurance, Quality Control  Regulatory agencies, risk management/analysis, audits (SEC), ISO  Excess appraisal costs are possible (too many audits, too many checks) 3. Internal Failure Costs (that customer never sees)  Inspection line failures 4. External Failure Costs (customer does see)  Cost to fix the problem after the customer gets/uses/sees it  Can be more expensive; fix + extra TOTAL COST OF QUALITY = Internal & External failure costs can account for 60-80% of Costs of Poor Quality
  13. 13. All Rights Reserved, Juran Institute, Inc. 2016 EFFECTS OF POOR QUALITY Ratio of the individual category costs to total costs vary widely. Many companies exhibit ratios which look like the following:
  14. 14. All Rights Reserved, Juran Institute, Inc. 2016 Identify product or process Create process map to understand value Classify non- value-added activities as COPQ Estimate COPQ based on fiscal year Prepare Quality Cost Report (Pareto charts) Define projects for improvement ASSESSMENT PROCESS
  15. 15. All Rights Reserved, Juran Institute, Inc. 2016 Determine the use of COPQ against business strategy Develop assessment team Define scope and tactics •Scope discussion, size of business unit, etc. Larger scope = more $ = more attention Develop list of COPQ elements, processes, and documentation Develop implementation plan Conduct pilot assessment Adjust process and drive projects HOW TO BEGIN ASSESSING
  16. 16. All Rights Reserved, Juran Institute, Inc. 2016  Concept of vital few vs useful many  All improvement happens project-by- project  Identify and allocate resources properly  Plan for success  Lead by example LAST THOUGHTS
  17. 17. All Rights Reserved, Juran Institute, Inc. 2016 CONNECT WITH US @Juran_Institute /user/JuranInstitut e JuranInstitute ompany/juran- institute
  18. 18. All Rights Reserved, Juran Institute, Inc. 2016 MORE RESOURCES  business innovation  business process improvement  continuous improvement  dmaic  juran quality handbook  lean manufacturing  lean six sigma  lean transformation  operational excellence  process innovation  quality assurance  quality control  quality improvement  management consulting firm  iso 9000 2015  six sigma certification  what is lean  what is six sigma Click any link for more information
  19. 19. All Rights Reserved, Juran Institute, Inc. 2016 THANK YOU! Copyright ©2015, Juran Institute, Inc. For more information, please visit We hope to see you at future webinars or at your site. If you would like for me to conduct this for your organization, contact me at