Costof quality


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  • When Saab's R&D organization looked at its Quality Costs, it was amazed to find that 78 percent of its R&D budget was classified as Quality Cost. Likewise, in a marketing and sales organization, the Quality Cost is often more than 100% of the marketing and sales budget when lost-opportunity costs are considered
  • Costof quality

    1. 1. Cost of Quality Current Perspectives © Omnex All rights reserved
    2. 2. Speaker Biography <ul><li>Chad Kymal is a widely sought international trainer and consultant whose broad experience includes TQM, setup reduction, technology assessment and inventory analysis, statistical process control, and quality function deployment. He has co-authored or championed most of Omnex's quality training courses. He is on the Malcolm Baldrige Board of Examiners and is an RAB certified Lead Auditor. </li></ul><ul><li>He has a Bachelor’s degree Mechanical Engineering from General Motors Institute, a Master's degree in Industrial and Operations Engineering from the University of Michigan, and an MBA from the University of Michigan. </li></ul><ul><li>Kymal founded Omnex, Inc., a business/quality management solution provider that offers training to semi-conductor, automotive, manufacturing, and service industries. Omnex has worked with Ford Motor Company, Lucent Technologies, Philips Semiconductor, Magna, and most of the Fortune 500 companies worldwide. Omnex provides over 50 training courses in subject areas ranging from APQP to Six Sigma and has 15 offices worldwide. </li></ul><ul><li>Chad is also the founder of AQSR, one of the top five rated Quality System registrars in the US as rated by Quality Digest. Chad and AQSR specialize in providing auditing services in ISO 9000, QS-9000, TE Supplement, TS 16949, VDA 6*, AS-9000 and the ISO 14001 series of international standards. </li></ul><ul><li>He also founded Omnex Systems, which provides Omnex's industry-leading Advance Product Quality Planning Software, AQuA®, which is being used by several leading companies in the industry. Currently, Omnex Systems is offering the Enterprise-wide Quality Management System (EwQMS™) Suite, which features AQuA, Audit Pro, Boss, Document Pro, MSA Pro, HR Pro, Process Analyzer, Process Pro, and TPM Pro. </li></ul><ul><li>Chad has recently published a book on ISO 9001:2000 auditing for Paton Press, and is working on a book for ISO/TS 16949:2002 auditing. Chad led the Omnex team that helped Ford Motor Company rewrite the QOS methodology. He helped write the QS-9000 requirements and did the first worldwide witness audit for the same. </li></ul><ul><li>Chad Kymal worked closely with the Automotive Electronic Council (AEC) to develop the Semiconductor Supplement. He has also helped Visteon and Delphi in developing their customer specific requirement. </li></ul><ul><li>Chad was named Executive Director of SAC. He is currently leading SAC to develop a second party/third party auditing process for the semiconductor supply chain. He is also helping SAC remove waste and redundancy in quality system requirements auditing in the semiconductor supply chain. </li></ul>
    3. 3. History of Cost of Quality 12 3 6 9 1951 Cost of Quality Concept – Dr. J.M. Juran 1950’s COQ in GE – AV Feigenbaum 1964 – Q100 Report IBM 1979 – Quality is Free – Philip Crosby 1980’s – Cost of Quality is Popularized Late 80’s to 90’s – COQ loses favor 1998 – COPQ Reappears in QS-9000 2002 – COPQ present in ISO/TS 16949:2002 1990’s – COQ reappears with Six Sigma
    4. 4. Cost of Quality Classic Typology <ul><li>Cost of Quality is Categorized into </li></ul><ul><ul><li>Prevention and Appraisal Costs </li></ul></ul><ul><ul><ul><li>Prevention Costs </li></ul></ul></ul><ul><ul><ul><li>Appraisal Costs </li></ul></ul></ul><ul><ul><li>Failure Costs </li></ul></ul><ul><ul><ul><li>Internal Failure Costs </li></ul></ul></ul><ul><ul><ul><li>External Failure Costs </li></ul></ul></ul>Maturity of Quality Management System and reduction in COQ
    5. 5. Problems with Traditional COQ Models <ul><li>1. COQ undervalued based on traditional calculations </li></ul><ul><li>2. COQ cumbersome and difficult to calculate </li></ul><ul><li>3. Senior Management use other methods to drive improvement </li></ul><ul><li>4. Focus is on measuring cost, not using cost to improve performance while reducing cost. </li></ul>
    6. 6. Problems with Traditional COQ Models <ul><li>1. COQ is used as a status indicator rather than as a driver </li></ul><ul><li>2. Focus is on the details of gathering and reporting </li></ul><ul><li>3. Inadequate resources allocated to effect real prevention and change </li></ul><ul><li>4. False reporting to protect the guilty </li></ul><ul><li>5. Viewed as too much administration to follow through </li></ul><ul><li>6. Viewed as an unrealistic goal short on methods </li></ul>COQ systems fail due to “poor management planning, implementation, and follow-up.”
    7. 7. COPQ is “The Hidden Factory” Quality audits • Warranty claims • Maintenance and service • Warranty claims • Maintenance and service As is Could be • Scrap/rejects • Rework • Longer cycle times and excess inventory • Scrap/rejects • Rework • Longer cycle times and excess inventory 5 % 2 0 - 2 5 % 6 5 - 7 0 % ? As is Could be Cost of failure in the field Cost of failure in the field Internal failure costs Internal failure costs Cost appraisal and inspection Cost appraisal and inspection Cost to improve and prevent poor quality Cost to improve and prevent poor quality Opportunity lost • Avoided capital cost • Opportunity cost of additional volume if Sales > capacity • Lost customer loyalty • Time spent expediting • Cost to the customer • • Opportunity cost of additional volume if Sales > capacity • Lost customer loyalty • Time spent expediting • Cost to the customer • Improvement program costs • Process control • Quality engineering and admin • Improvement program costs • Process control • Quality engineering and admin • Inspection/test (materials, equipment, labor) • Vendor control • Quality audits • Inspection/test (materials, equipment, labor) • Vendor control •
    8. 8. Cost of Poor Quality (COPQ) the Tip of the Iceberg 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
    9. 9. Cost of Poor Design Quality 1 10 100 1000+ X Millions A change while still in design In manufacturing At customer location Recall Litigation Internal to Fab In shipping Customer incoming Customer mfg Field Cost of Poor Manufacturing Quality-Semiconductor Example 5 50 500 5-50K 10K - X Millions
    10. 10. COQ Methods Traditional Costing Approach Six Sigma Approach Measurables Approach
    11. 11. Traditional Cost Method % Method <ul><li>Identify the total resources consumed in a category or item. </li></ul><ul><li>Determine the percentage of those resources used for activities associated with quality problems. </li></ul><ul><li>Apply the percentage to the total cost of resources to obtain a cost by category/ item </li></ul><ul><li>Add these costs by category/ item to find the total cost of poor quality. </li></ul><ul><li>Using Sales Revenue, calculate cost of poor quality as a percentage of sales revenue. </li></ul>
    12. 12. Traditional Cost Method % Method
    13. 13. Traditional Cost Method Unit Cost Method <ul><li>Identify the frequency of activities in a category/ item </li></ul><ul><li>Determine an average cost per occurrence </li></ul><ul><li>Multiply the frequency by cost per occurrence to obtain a cost by category/ item </li></ul><ul><li>Add these costs by category/item to find the total cost of poor quality </li></ul><ul><li>Using Sales Revenue, calculate cost of poor quality as a percentage of sales revenue. </li></ul>1 2 3 4 5 6 7
    14. 14. Traditional Cost Method Unit Cost Method
    15. 15. Traditional Cost Method <ul><li>Aligned with traditional Accounting methods </li></ul><ul><ul><li>Focus on responsibility accounting </li></ul></ul><ul><ul><li>Revolves around the “command and control” structure </li></ul></ul><ul><ul><li>Allocation of costs to products and services on some “fair and equitable” basis </li></ul></ul><ul><ul><ul><li>Cost measures are (mis)aligned with operating measures. </li></ul></ul></ul>$
    16. 16. Activity-Based Costing <ul><li>Focus on process rather than responsibility </li></ul><ul><ul><li>Clear assignment of all costs to the process that uses the resource </li></ul></ul><ul><li>Identifies process steps wasting resources </li></ul><ul><li>Costs not absorbed in overhead </li></ul>
    17. 17. Activity-Based Costing <ul><li>Steps </li></ul><ul><ul><li>1. Identify activities </li></ul></ul><ul><ul><li>2. Determine cost for each activity </li></ul></ul><ul><ul><li>3. Determine cost drivers that cause COQ </li></ul></ul><ul><ul><li>4. Collect activity data </li></ul></ul><ul><ul><li>5. Calculate product cost and COQ </li></ul></ul>
    18. 18. Six Sigma Approach
    19. 19. Cost of Poor Quality & Industry Average PPM’s COPQ Sigma PPM 30-40% of Sales 2.0 308,537 Non Competitive 20-30% of Sales 3.0 66,807 15-20% of Sales 4.0 6,210 Industry Average 10-15% of Sales 5.0 233 <10% of Sales 6.0 3.4 World Class
    20. 20. COPQ & Sigma/Yield Relationship Industry Averages COPQ Sigma Yield 30-40% of Sales 2.0 5% Non Competitive 20-30% of Sales 3.0 93% 15-20% of Sales 4.0 99.4% Industry Average 10-15% of Sales 5.0 99.976% <10% of Sales 6.0 99.999655% World Class
    21. 21. Using the Six Sigma Approach <ul><li>A supplier to semiconductor industry has approximately 50,000 DPMO (internal and external). </li></ul><ul><li>This translates to a 2.0 sigma system </li></ul><ul><li>Such systems average a COPQ of 20-30% of sales. </li></ul><ul><li>This is a non-competitive situation since this cost directly affects the bottom line. </li></ul>
    22. 22. Measurables Approach
    23. 23. Measurables Approach - COPQ <ul><li>Focus is on COPQ </li></ul><ul><li>Identify product and process measurables which impact quality (and consequently the COPQ) </li></ul><ul><li>Collect and track data on these measurables as a proxy for the costs </li></ul>
    24. 24. Measurables Approach - COPQ <ul><li>Internal Yield loss (Failure) Costs </li></ul><ul><ul><li>Incoming material rejection (LAR) </li></ul></ul><ul><ul><li>Photo/Lithography Rework </li></ul></ul><ul><ul><li>Fab line yield loss </li></ul></ul><ul><ul><li>Wafer Acceptance / PCM test yield loss </li></ul></ul><ul><ul><li>Wafer / die test yield loss </li></ul></ul><ul><ul><li>Assembly yield loss </li></ul></ul><ul><ul><li>Final test yield loss </li></ul></ul><ul><li>External Failure Costs </li></ul><ul><ul><li>Customer returned product cost </li></ul></ul><ul><ul><li>Returned product failure analysis costs </li></ul></ul><ul><ul><li>Customer complaint response costs </li></ul></ul><ul><ul><li>Replacement product cost </li></ul></ul>
    25. 25. Cost Of Quality New Directions
    26. 26. Cost of Quality Expanded Typology <ul><li>I. “Hard” quality cost </li></ul><ul><ul><ul><li>A . Controllable quality cost      (1) Prevention cost      (2) Appraisal cost      (3) Lost opportunity cost (“valueless” activities) </li></ul></ul></ul><ul><ul><ul><li>B . Resultant (poor)quality cost    (1) Internal error cost     (2) External error cost </li></ul></ul></ul><ul><ul><ul><li>C . Equipment/process poor-quality cost </li></ul></ul></ul><ul><li>II. “Soft” quality cost </li></ul><ul><ul><ul><li>Customer incurred cost </li></ul></ul></ul><ul><ul><ul><li>Customer dissatisfaction cost </li></ul></ul></ul><ul><ul><ul><li>Transaction costs </li></ul></ul></ul><ul><ul><ul><li>Lost opportunity cost </li></ul></ul></ul><ul><ul><ul><li>Loss of reputation cost </li></ul></ul></ul>
    27. 27. COPQ is “The Hidden Factory” “ Soft” Quality Lost
    28. 28. COQ – Doing it Right the First Time <ul><li>In the past COPQ has only been associated with product quality. </li></ul><ul><li>COPQ can be applied to any process within the company, if the “product or service” is identified </li></ul><ul><li>What is the product or service of the maintenance department? </li></ul><ul><ul><li>Of the design department? </li></ul></ul><ul><ul><li>Of marketing? </li></ul></ul><ul><li>What is the COPQ of each of these business processes? </li></ul><ul><li>this can be tied to process measurement and used for continual improvement </li></ul>This is the greatest opportunity for COQ….
    29. 29. COQ – Upstream and Doing it Right the First Time <ul><li>Design – </li></ul><ul><ul><li>Failure costs in design include any designs that do not make it first pass. </li></ul></ul><ul><ul><li>Engineering Changes = Rework </li></ul></ul><ul><ul><li>This is the biggest opportunity of COPQ. </li></ul></ul><ul><li>Technology Development – </li></ul><ul><ul><li>Failure costs should include any process that is not qualified on first pass. </li></ul></ul>
    30. 30. COQ – Process Approach <ul><li>COQ is a fundamental characteristic of every process </li></ul><ul><li>Every process has hard and soft quality costs associated with it </li></ul>
    31. 31. Opportunities for COQ Semiconductor Design and Manufacturing
    32. 32. Criteria for First Pass Success in Design <ul><li>Within budget </li></ul><ul><li>On schedule </li></ul><ul><li>Meets die size and yield targets </li></ul><ul><li>Meets electrical performance targets </li></ul><ul><li>First mask set goes into production </li></ul><ul><li>Meets sales target </li></ul><ul><li>Meets Break Even Time </li></ul><ul><ul><li>recover design and development cost targets </li></ul></ul>
    33. 33. First Pass Success in Design <ul><li>Average number of passes per design – 2.5 Passes. </li></ul><ul><li>Cost of second and third design pass as a ratio of the initial cost </li></ul><ul><ul><li>1 to .5 to .3 </li></ul></ul><ul><li>Development Budget for typical Business Line – $10 Million </li></ul><ul><li>Costs for a Business Line – $50 Million </li></ul>Cost of Quality – $6.5 Million using the development budget. Some will argue that it should be calculated based on the entire Business line (i.e. COQ = $32.5 Million)
    34. 34. Internal Failure Costs Yield, Rework, and Failure <ul><li>Yield Loss by Process Step </li></ul><ul><li>FAB line loss: 1 – 2 % </li></ul><ul><li>Lithography rework rate: ½% to 1% </li></ul><ul><li>PCM test – wafer acceptance test: 1% to 1½ % </li></ul><ul><li>Wafer/Die electrical – varies by technology: 80% to 97% (newer technology and larger die) </li></ul><ul><li>Assembly – line loss: in defects per million </li></ul><ul><li>Final Test: 97 to 99% </li></ul>Chute yield – 74% to 93% depending on complexity and maturity
    35. 35. Opportunities in Wafer Fab <ul><li>If Wafer/Die electrical test yields are high, it may be more reasonable to use other continual improvement strategies </li></ul><ul><li>Is there fine tuning of decision algorithms on whether to “scrap” or send “wafer” to assembly? </li></ul>
    36. 36. Transaction Costs for Quality Problems <ul><li>Sales person (enter into system) calls customer service quality (sales office) or sends an email – 4 hours </li></ul><ul><li>Open a complaint in the system </li></ul><ul><li>Team is consulted and made aware of issue – 4 hours </li></ul><ul><li>Product is received and then sent to plant – 1 hour </li></ul><ul><li>Their the quality person will take the product to F/A and and F/A input into the system – 1 hour </li></ul><ul><li>Then F/A analysis is done and a F/A report is completed – 3 days </li></ul><ul><li>Then 8-D team also meets and 8-D is completed and sent to customer – 4 persons – 2 to 8 days </li></ul><ul><li>Goes to product quality engineer who reviews the problem – 4 hours </li></ul><ul><li>Goes to sales who sends to customer – 1 hour </li></ul>Total of 13 to 27 person days at $1000 per day – minimum of $11,000 for analysis only. And now we have to stop the bleeding and fix the problem
    37. 37. Implementing COQ
    38. 38. Implementing COQ – Current Perspectives – <ul><li>Use COQ costing only if this method is going to be one of the key drivers for setting priorities for continual improvement </li></ul><ul><ul><li>Calculate COQ once a year to identify top cost savings priorities for processes identified </li></ul></ul><ul><ul><li>Identify projects for improving key processes </li></ul></ul><ul><li>Prioritize processes/areas for focus based on budget allocation – Design, R&D, Operations </li></ul><ul><li>Identify key COQ drivers/measurables for each area </li></ul><ul><ul><li>This is also an ISO 9000:2000 requirement </li></ul></ul><ul><li>Do not monitor COQ each month, however measure the key driver </li></ul>
    39. 39. Implementing COQ Integration into the Strategic Model Customer Expectations Competitive Benchmarks Mission, Vision & Values Results Measurement Key Processes Process Measurement Improvement Projects COQ provides direction on selecting Improvement Actions and track effectiveness Six Sigma/ Varification Lean/Value Stream Mapping COQ Measurements Value Engineering Project Prioritization Method Strategic Objectives
    40. 40. Implementing COQ – If COQ Is Not a Driver – <ul><li>COQ is calculated because it is a mandated requirement </li></ul><ul><ul><li>Calculate using the easiest method, ie. six sigma method covered earlier </li></ul></ul><ul><ul><li>Continue setting priorities for continual improvement using other drivers like – six sigma, lean, activity based costing etc. </li></ul></ul>
    41. 41. Summary: What is COQ? <ul><li>The value of COQ using traditional methods decreases as organizations’ poor cost of quality hit approx. 20 ppm </li></ul><ul><li>In addition to the soft quality costs, the Process/upstream COQ approach and soft quality costs are important concepts to consider when using COQ </li></ul><ul><li>Representing quality improvements using “management’s language” (i.e. $$ will surely get management buy-in) </li></ul>