Measuring the Real Cost of Quality: Methods, Models & Tips

Beyond Compliance
Webinar & Podcast Series for Process Manufacturers
Measuring the Real Cost of Quality:
Methods, Models & Tips
Denis J. Devos, P.Eng.
Devos Associates, Inc.
Advisors to Industry

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Before We Get Started
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Helpful tips
Devos Associates, Inc. 2022 - All Rights Reserved

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Meet the Speaker - Denis Devos, P.Eng.
● Authority on Quality Management, Lean Methods, Audit,
COQ
● Contributor to books on Auditing, The ASQ Certified
Quality Auditor Handbook and ASQ Certified Quality
Manager Handbook
● Engineer – General Motors and automotive industry
● Training and Advisory services for QA and Operations for
manufacturing sectors
Denis Devos, P.Eng.
Advisor – Devos Associates Inc.
Fellow of the American Society for
Quality (ASQ)

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Session Objectives
● Cost of Quality - the Model
● Capturing True Costs of Poor Quality
● Opportunity Costs
● Why Failures Erode Production Capacity
● Tips for Reducing the Cost of Quality
Session Overview

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Cost of Quality – Definition
A method of determining the costs incurred to ensure quality.
ISO 24765:2017

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Cost of Quality – Model
Non-Conformance Costs
● External Failure – warranty, sorting etc.
● Internal Failure – scrap, rework etc.
Conformance Costs
● Routine Inspection and Testing, Auditing
● Prevention Costs – HACCP/PFMEA, worker training,
automation

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Hidden CoPQ
Visible
Less Visible

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Non-Conformance Costs
External Failure Costs
● Warranty
● Sorting
● Re-make an order
● Breaking into the schedule to re-
make
● Travel to the Customer / Field
● Customer Grief, loss of reputation
Internal Failure Costs
● Scrap
● Rework, Repair
● Re-make an order
● Breaking into the schedule to re-
make
● Downtime for Quality issue
● Taking a mark-down to earn
concession
● Expedite Raw Materials

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Conformance Costs
Prevention Costs
● Design Choices - DFM
● Failure Modes & Effects Analysis (FMEA)
● Error-Proofing
● Training at All Levels
● Quality Mgt. Systems
● Audits at All Levels
Appraisal Costs
● Product Inspections
● Product Testing
● Receiving Inspection
● Inspection and Testing Equipment
● Maintenance and Calibration
● All Labor and Materials

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Cost of Poor Quality – Bad News
One bad batch is too many
● Full Root Cause and Corrective Action
● Spend what it takes to fix the problem
Containment – “Controlled Shipping”
● 100% inspection for the defect until the process is under control (30 days).
Sometimes it lasts forever
● Third Party Containment – pay another company to 100% check your parts.
($30/hour, three people, 16 hours per day, 20 days per month) $29K/month!

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Cost of Quality Curve

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Cost Avoidance - Insurance
Understand the true costs of Internal and External failure,
and then invest appropriately in Prevention and Appraisal
methods to mitigate that risk.
Add up your HACCP - what does it cost? That’s your
Prevention/Detection cost… Your insurance.

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Cost of Poor Quality – Free Money!
CoPQ comes right off the bottom line. Some customers punish us
with crushing costs – so we spend whatever it takes. Savings in COPQ
can be invested in ‘quality’
● Replacement costs – re-making orders
● Expedites to replace orders
● Sorting at customers, in-house
● Travel to customers
● Containment costs
Add these up – Free Money

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Does PFMEA/HACCP Cost or Pay?
● Is the investment in PFMEA/HACCP an asset or liability?
● What is the cost of the Control Plan? (Appraisal) Is it worth it? Does it
cost less to avoid more?
● “Occurrence” values speak to internal failure
● “Detection” values speak to external failure
● Use control plan to drive COPQ down and meet targets

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Opportunity Cost
“The loss of potential gain from other alternatives when one
alternative is chosen.” Oxford English Dictionary
What else could you have been doing while you were doing rework?
How much profit could you have earned if you were building products to sell
instead of throwing away scrap?

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CoPQ – The Capacity Killer
● If you’re not busy, who cares? Lots of time for rework and re-runs
● Never late to customers
● True costs/impacts are masked by all the free capacity
● If you’re full, the true cost of every part you scrap is the selling
price, you can never get that time back again.
● Rework, reruns are done on overtime
● Customer orders backup and lead times get longer

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Opportunity Cost
“Scrap isn’t a problem, we just melt down the aluminum scrap or
regrind the plastic… material is reused, we lose almost nothing.”
“We pay employees their hourly wage anyway, so having them sort
parts actually costs us nothing.”

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● The cost of chasing a bigger reward, but with a higher chance of failure
● Bet $1 to get 3 gems, %100 success
● Bet $1 to get 4 gems, maybe 50% success
● Every time the 4 gem bet fails, I could have had 3. I have to win the 4 gem bet (against the
3) three more times just to break even.
Opportunity Cost - Example

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● Cheap Gas – 20 minutes out of the way
● Save $6 per tank
● I save $18 per hour of getting cheap gas
● Could I be billable? Am I worth $18 per hour?
● Only if I’m so busy I could sell that hour – full capacity

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What is the value of a half-built house?

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● IDENTIFY opportunities for cost reduction
● QUANTIFY the true costs of the problem(s)
● PRIORITIZE improvement actions
● ACTIONS to improve
● EVALUATE success as cost reduction
● SUSTAIN and continuously improve
Approach to Reducing CoPQ

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Brainstorming,
Pareto Chart etc.
Identification - Prioritization

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Example
● Plastic Extrusion – job shop – many customers, some automotive
● Some parts are painted in-house
● Customer rejections and internal re-runs of about 3-4 per month
● Rework of moulding defects and paint defects, about 2.5%
● Their current CoPQ calculation was $300 per month, $3600/yr
● Plant is at full capacity – customer backlog

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Example - One Customer Re-Run
● 720 pc order for re-run… Cycle time 3 parts per minute, 4 hours
● Machine Charge Time = $600 per hour, add one hour for set-up
● Labor – 1.5 Operators, weekend (time and a half) = $30/hr x 1.5
● Cost of additional inspection and packaging, $250
● Parts sell for $2.10. (selling price, opportunity cost)
● True Cost of Poor Quality for one run
- 5 hours x $600 = $3000
- Labor, inspection and packaging = $180 + $250
- Lost sales = 720 x $2.00 = $1440

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Example - One Customer Re-Run
● One run - $4870
- Not including Weekend supervision/support
- “Administrative” penalties imposed by customer
- Travel to customer/field, if required
- Staff time with Credits, RMA, investigation etc
- Cost of cutting into an already full schedule
- Cost of customer annoyance
● If $4870 is an average cost for re-run, 4 per month, 48 per year
● $233,000 per year

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Example – Rework
● 5000 orders per year, 2% rework, 100 rework per year
- Inspect and reject original lot = $30
- Prepare rework ticket = $45
- Rework product (2 people on a weekend) = $90 x 4 = $360
- Move material to/from rework area = $150
- Repackage the parts = $100
- Re-inspect the lot = $45
● $730…. 100 per year = $73,000 right off the bottom line

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How bad can it get?
● World's largest automotive air-bag
manufacturer
● US recall – 42M cars
● Fines, payouts, bankruptcy
● 400B Yen to 4B Yen
● Bhopal India Explosion
● $470 Million USD in damages
● CEO a fugitive from justice

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Conclusion
● True Cost of Poor Quality numbers can be
shocking
● The real cost is using productive assets to
make scrap, or make things twice
● Loss of reputation
● Identify high cost areas, select a project
with high pay-off
● CoQ is an important KPI for all
organizations

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Contact the Speaker
Devos Associates, Inc.
Advisors to Industry
www.devosassociates.com
(519) 476-8951
Denis@devosassociates.com

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