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Demystifying Cost of Quality.pdf

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Demystifying Cost of Quality.pdf

ASQ TR 2:2018, a useful Cost of Quality (COQ) standard provides detailed guidelines on COQ development, implementation and monitoring to improve quality and performance. Making use of this standard—in tandem with ISO 10014:2021—can help organizations realize financial and economic benefits from their quality management system (or other management systems). In this presentation we will explore why building quality at the source and COQ measurement is beneficial to an organization. We will also address guidance for effective implementation of COQ. Participants will also understand major failure modes, and lessons learned from past implementations.

ASQ TR 2:2018, a useful Cost of Quality (COQ) standard provides detailed guidelines on COQ development, implementation and monitoring to improve quality and performance. Making use of this standard—in tandem with ISO 10014:2021—can help organizations realize financial and economic benefits from their quality management system (or other management systems). In this presentation we will explore why building quality at the source and COQ measurement is beneficial to an organization. We will also address guidance for effective implementation of COQ. Participants will also understand major failure modes, and lessons learned from past implementations.

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Demystifying Cost of Quality.pdf

  1. 1. Demystifying Cost of Quality Govind Ramu Quality Progress publication Sep 2021
  2. 2. Presenter bio Govind Ramu is a licensed professional engineer from Ontario, Canada. He has completed LEAD certificate program from Stanford Graduate School of Business. He was the convener for ISO technical committee 176/subcommittee 3 working group 23 for ISO 10014. Ramu is an ASQ Fellow, recipient of ASQ Crosby Medal, ASQ LA Simon Collier Quality Award, ISO Excellence Award and holds six ASQ certifications: manager of quality/organizational excellence, engineer, Six Sigma Black Belt, auditor, software quality engineer and reliability engineer. He is an author of The Certified Six Sigma Yellow Belt Handbook (ASQ Quality Press, 2016) and coauthor of The Certified Six Sigma Green Belt Handbook (ASQ Quality Press, 2015), The Lean handbook (ASQ Quality Press, 2012) and the American standard ASQ TR 2:2018: Cost of Quality: Guidelines for Development, Implementation and Monitoring to Improve Quality and Performance (ASQ, 2018). Contact
  3. 3. Cost of Quality - Agenda ● Foundation ● “Quality at the Source” ○ The 10X thumb rule. ○ investing in Advanced product Quality planning. ● Implementation strategies ● Common failure modes ● Lessons Learned ● Key takeaway ● Useful references ● Q & A
  4. 4. Foundation ● Cost of Poor Quality (COPQ) ○ Cost incurred from failure to meet needs and expectations of stakeholders. ○ Internal and external ● Cost of Good Quality (COGQ) ○ Cost incurred in control, assurance and prevention of failure (in meeting needs and expectations of stakeholders). ○ Appraisal and prevention. ● Cost of Quality (COQ) is the sum of COPQ and COGQ. ● COQ is often expressed as a % of a cost base. (e.g. Cost of Revenue, Cost of goods sold) ● More specifically COGQ spent at the source has higher returns by preventing COPQ downstream. ● COQ relative cost improvement is more meaningful than absolute value. ● Provides a framework for various strategic improvement programs.
  5. 5. Quality at the Source - Factor of 10 in Quality Management Cost of detecting and correcting defects at Lifecycle stages Source: Unknown
  6. 6. Quality at the Source - investing in Advanced Product Quality Planning ● Japanese organizations use robust quality tools and methodologies to have fewer design changes than their US counterparts. ● “Quality at the Source” accomplished by effective understanding of product requirements through product planning. ● Effective use of DFx (“x” - Assembly, manufacturability, testing, reliability, supply chain, cost, sustainability, etc.) ● Results in COPQ reduction during downstream Operations. Ref: The House Of Quality - Harvard Business Review
  7. 7. COQ breakdown
  8. 8. Cost of Quality categories Prevention Costs ● Costs incurred in error/waste prevention and control, create new systems, process, tool, training, build competencies. [Before Operation] Appraisal Costs ● Costs incurred in measuring, inspecting related to assuring conformance to quality expectations. [During operation] Internal failure Costs ● Costs incurred from discovery of errors/wastes before shipping products and offering services to customers or external stakeholders. [Before Customer delivery] External failure Costs ● Costs incurred from errors/wastes after shipping products and offering services to customers or external stakeholders. [After Customer delivery] Note: If these differences are well understood, you may be able to apply COQ categories to any industry sector with a little bit of creativity.
  9. 9. COQ measurement - difficulty Vs impact Easy to measure Hard to measure High impact First Priority Prevention cost ● Customer perception survey, product/service qualification, Training, equipment calibration, etc. Internal failure cost ● Scrap, rework, retest, repair, SW bug fix, etc. External Failure cost ● Customer returned material, repair, rework, restest, etc. Second Priority (Possibly COQ 2.0) Prevention cost ● Design review, code review, Risk management, FMEA development, supplier development, Quality planning, proactive engineering changes, etc. Internal failure cost ● Resources spent on failure investigation, lost productivity, regrading of products, additional processing to restore product and service. External Failure cost ● Market share, lost revenue from customer dissatisfaction (loss of goodwill), recall, liability,reactive engineering changes from field failures,etc. Low impact First Priority Appraisal cost ● Inspection, testing, auditing, measuring test equipment, Headcount expenses in quality control and assurance. Third Priority Internal failure cost ● People management - Dealing with absenteeism, people performance issues, disciplinary proceedings.
  10. 10. Total Cost of Quality - optimum level ● It is important to invest in Cost of Good Quality at the source to reduce Cost of Poor Quality downstream. ● Monitoring the COGQ increase over time and reduction of COPQ is important to understand the trend and avoid overspend. ● At some point, the total cost curve will reverse as a signal that we have exploited all the opportunities we could. ● Shifting the focus to breakthrough approaches, elimination of inspection and other strategies to be explored. Ref: Juran’s model of optimum quality costs
  11. 11. COQ - Common failure modes ● Heavy footprint program approach - ○ Creating a large Project Management Organization. ○ Hiring dedicated cost analysts for every department/function to collect and analyze data. ○ Trying to capture waste in every process, activities across the organization. ○ Trying to create number of cost categories to capture every conceivable cost of quality ○ Spending time and effort on comprehensive Cost of Good Quality Categories too early in the program. ○ Trying to get suppliers and other external parties too early in the program. ● Heavy focus on reports - ○ Developing a software tool to acquire, analyze and report COQ. ○ Reporting segmented cost analysis early in the program without broader consensus from internal stakeholders (misconstrued as a “name & shame”). ○ Reporting COPQ, COQ without agreement and validation on appropriate cost base (e.g. COGS, Revenue, etc.)
  12. 12. Lessons Learned ● Start Small, make bigger impact ○ Identify fewer high impact cost categories through initial brainstorming with key stakeholders. ○ Build consensus in developing operational definition for cost categories, related formula, assumption, counting rules before implementation. (If stakeholders do not like the outcome, it will result in analysis being discredited). ○ Work with your finance function to validate your calculations, assumptions. ○ Keep the focus on process and not people. ● Focus on early wins ○ If results are not produced soon, initiatives have limited shelf life. ○ Identify opportunities that will make tangible financial, economical impact. ○ Identify cost categories that can be measured, monitored with shorter time lag. ● Build the program ○ Add cost categories using prioritization e.g. 4 Quadrants - Hi/Lo Impact Vs Hi/Lo Effort to acquire, measure and monitor. ○ COGQ - prevention cost is often difficult to capture, measure and monitor. Try not to get bogged down on an academic exercise. Specific cost categories that are easier to measure and have direct relationship to improvement are good starting points.
  13. 13. Key Takeaway ● Keep it Simple ○ COQ implementation should not be complex, bureaucratic or onerous. ○ It is better to have a reasonably accurate analysis that is timely and can help prioritize improvements rather than very precise analysis with significant time lag. (Identified improvements may not be relevant at the time of publication). ● Make it happen ○ Start small and make improvements. ○ There is no use in having a successful surgery and a dead patient. Results matter. ○ Link your COQ performance to operational expenses, Customer satisfaction ● Improvements, not just reports ○ Outcome of the COQ program is stakeholder value improvement. It is not a COQ report. ○ Avoid academic exercise, getting bogged down on absolute COQ measure. ○ Pay attention to relative improvement made in product/service offering, value stream, over time period. ○ Continually improve the program using your own lessons learned.
  14. 14. Bibliography and useful references ● ASQ TR 2:2018: Cost of Quality: Guidelines for Development, Implementation and Monitoring to Improve Quality and Performance (ASQ, 2018). ● ISO 10014:2021: Quality management systems — Managing an organization for quality results — Guidance for realizing financial and economic benefits. ● Paddle Like The Dickens - Quality Progress, Standard Issues Column May 2018 ● To the point - Quality Progress, Standard Issues Column April 2021 ● Principles Of Quality Costs, Fourth Edition, ISBN: 978-0-87389-849-2, Quality Press, ASQ Published 2013 Acknowledgement: The late Mr.Navin S. Dedhia - ASQ Fellow, ASQ Inspection Division Chair (2000-2002) for useful feedback.
  15. 15. Q & A Thank you for your engagement and opportunity to share ideas. Contact LinkedIn

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