Cost of-poor-quality

All Rights Reserved, Juran Institute, Inc.
Managers and workers speak
the language of things but
Senior leaders speak the
language of money...
…COPQ allows us to translate
the things into money.

Cost of Poor Quality
 Prevention
Cost of Attaining Quality
 Appraisal: Prediction
Audit
 Appraisal: Detection
 Failure: Internal
External

Components
Non-Conformance
$
Conformance
$
$
Quality Costs

I want my
money
back!
I want my
money
back!
Cost of Quality (COQ)Cost of Quality (COQ)
PreventionPrevention AppraisalAppraisal
Internal
Failure
Internal
Failure
External
Failure
External
Failure
$$
Total Quality Cost

COPQ Overview
Definitions
 All activities and processes that do not meet agreed
performance and/or expected outcomes
 Costs that would disappear if every task were always
performed without deficiency
 Actual Cost - Minimum Cost = COPQ

Traditional Cost of Poor Quality
(4-5% of Sales)
When quality costs are initially determined, the categories
included are the visible ones as depicted in the iceberg below.
Waste
Testing Costs
Rework
Customer Returns
Inspection Costs
Rejects
Recalls

As an organization gains a broader definition of poor quality,
the hidden portion of the iceberg becomes apparent.
Late Paperwork High CostsPricing or
Billing Errors
Excessive Field
Services Expenses
Incorrectly Completed
Sales OrderLack of Follow-up
on Current Programs
Excessive
Employee Turnover Planning Delays Excess Inventory
Excessive
System CostsOverdue Receivables
Complaint
Handling
Unused Capacity
Time with
Dissatisfied Customer
Excessive Overtime
Waste
Testing Costs
Rework
Customer Returns
Inspection Costs
Rejects
Recalls
Development Cost of Failed Product
Hidden COPQ: The
costs incurred to
deal with these
chronic problems
Premium Freight Costs
Customer Allowances
COPQ ranges
from 15-25%
of Sales

Sigma
6 sigma
5 sigma
4 sigma
3 sigma
2 sigma
Cost
<10% of sales
10-15% of sales
15-20% of sales
20-30% of sales
30-40% of sales
Quantifying the Potential Benefit

The ratio of the individual category costs to total costs
varies widely. Many companies exhibit ratios which look
like the following:
Quality Cost Category Percent of Total
Internal Failure 25 to 40
External Failure 25 to 40
Appraisal 10 to 50
Prevention .05 to 5
What's Wrong With This Picture?
What Does Reality Look Like?

Examples of Prevention Expense
 Quality Planning
 Training and Education
 Process Definition
 Customer Surveys
 Preproduction Reviews
 Technical Manuals
 Detailed Product
Engineering
 Early Approval of Product
 Specifications
 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Job Descriptions
 Housekeeping
 Zero-Defect Program

 Supplier Certification
 Employee Surveys
 Security Checks
 Safety Checks
 Reviews:
– Operating Expenditures
– Product Costs
– Financial Reports
– Capital Expenditures
Examples of Appraisal Expense
 Test
 Inspection
 Process Controls
 Train QA Personnel
 Product Audits
 Quality Systems Audits
 Customer Satisfaction
 Surveys and Audits
 Prototype Inspection
 Accumulating Cost Data

 Supplier Problems
– Scrap and rework
– Late deliveries
– Excess inventory
 Equipment Downtime
 Accidents, Injuries
 Absenteeism
 Unused Reports
 Missed Schedule Cost
 Lost Sales (any cause)
Examples of Internal Failure Costs
 Substandard Product
 Scrap or Rework
 Re-inspection
 Redesign/Engineering
Change
 Process Modifications
 Payroll Errors
 All Expediting Costs
 Off-Spec/Waiver
 Abandoned Programs

Examples of External Failure Costs
 Product Recall
 Handling Complaints
 Customer Service
Caused by Errors
 Products Returned
 Analysis of Returns
 Evaluation of Field Stock
 Late Payments and
Bad Debts
 Lawsuits
 Reports
– Sales and service
– Returns and allowances
– Failure
Lost Sales Because of Customer Dissatisfaction!

Non-value Added Work
Common activities that provide no benefit to customers.
 Some result from internal or external failure
 Some are unnecessary inspection
Examples
 Rarely used information systems
 Memos never read
 Financial reports not used
 Irrelevant procedures
 Meetings with no objectives or outcomes
Definition

The Hidden Organization
“Theoretical Cycle Time: The back-to-back process time
required for a single unit to complete all stages of a task
without waiting, stopping, or setups.”
Product
Step
1
Step
2
Floor SpaceFloor Space Floor SpaceFloor Space
Floor SpaceFloor Space
Value Added
Non-Value Added
Philip R. Thomas, Competitiveness
Through Total Cycle Time. McGraw-
Hill (1990)
The Hidden Factory
Analyze
Fix
Test
Analyze
Fix
Test

Why Cost of Poor Quality?
Reporting Tool
 Comparisons
 Trends
Analytical Tool
 Priorities
 Tradeoffs
Investment Tool
 ROI

Focus of COPQ Efforts
 Identify and Quantify Quality Costs
 Expose the “Hidden Factory”
 Ongoing Measurement System
 Breakthrough Improvement

Advantages of Using Quality Costs for Management
Advantages
 Reducing the cost of poor quality is one of the best ways to
increase a company's profit.
 Provides manageable entity and a single overview of quality.
 Aligns quality and goals.
 Prioritizes problems and provides a means to measure
change/improvement.
 Provides a means to correctly distribute controllable quality
cost for maximum profits.
 Promotes the effective use of resources.
 Provides incentives for doing the job right every time.

Cost of-poor-quality

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Editor's Notes