coq - assessing quality costs

8/4/2019 Coq - Assessing Quality Costs

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Assessing Quality Costs


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The Quality Cost Committee wasestablished by the then ASQC in 1961

Philip Crosby, a former CEO,

popularizedthe concept of COQ with his book Quality

is Free in 1979

The current revisions of ISO 9000, QS-9000 and AS9100 reference the use ofCOQ in quality improvement


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Crosbys categories

Price of Conformance (POC/COC)

Prevention costs

Appraisal costs

Price of Nonconformance(PONC/CONC)

Internal defect costs

External defect costs


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The cost of poor quality (COPQ = PONC): COPQ is the sum of all costs that would

disappear if there were no quality problems.

-Juran

You can easily spend 15 - 30% of your sales

dollars on PONC.- Crosby

In most companies the costs of poor quality

runs at 20 -30% of sales.- Juran


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Net profits for many companies is lessthan 5% of sales

COPQ on the average is 17% of sales

Total COQ on the average is 25% of sales COPQ is some companies is as high as40% of sales

COPQ is typically 3 to 6 TIMES as largeas profits


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To consider the alternative models ofcosting (cost of quality approach)


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Quality Costing Approach

Quality Loss Approach

Process Cost Approach


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Conventional approach

Categorize quality costs as:

Prevention costs

Appraisal costs

Internal Failure costs

External Failure costs

Often known as PAF model


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The costs of all activities specificallydesigned to prevent poor quality inproducts or services. Examples include:

Quality planning New product reviews

Quality education

Process capability evaluations Supplier capability surveys

Quality improvement projects

These are all planned, proactive activities


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In the ideal situation, prevention costs

will bethe largest portion of the TotalCost of Quality.

Typically, prevention is less than 10%

of Total Cost Of Quality.

It should be over 70%!


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The costs associated with evaluating orauditing products or services to assure

conformance to quality standards and

performance requirements. Examples:

Incoming inspection/test

Calibration of inspection/test equipment Final inspection/test

These are all planned activities


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Appraisal costs should be the secondlargest category, but should not exceedprevention costs.


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All costs resulting from products or servicesnot conforming to requirements or

customer/user needs which occurbefore

delivery/shipment of product, or thefurnishing of a service. Examples include:

Scrap/rework

Reinspection/retesting Material Review Board

These are non-value added and reactive


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The goal is to identify all

internal failures andresultant costs, and thensystematically identifyand eliminate root causesuntil internal failure costsare eliminated.

**Remember, allfirefighting is a the resultof a failure!


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All costs resulting from products or services

not conforming to requirements or

customer/user needs which occur after

delivery/shipment of product, or the

furnishing of a service.


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The costs incurred when the customer finds the failure Processing customer complaints

Field repairs

Recall costs

Returned goods

Processing returned materials

Warranty costs

Loss of reputation Penalties

Customer incurred costs

These are non-value added


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A survey by the Illinois ManufacturersAssociation revealed a 400% margin of error

in cost of poor quality assessments.

Companies initially reported an average of6% cost of poor quality (6% of sales).

A later, in-depth assessment showed the

average to be closer to 25% (25% of sales). The Survey Conclusion: 75% of the cost of

poor quality is hidden, and not obvious!


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Results of an ASQ survey of CEOs:

Over 70% thought their organizations COPQ was

less than 10 percent of sales

Twenty-seven percent admitted they had no idea

what their companies COPQ was

One of the conclusions of those conducting the

survey: too many people still do not understandthe relationship between cost and quality


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Capture both tangible and intangiblecosts or losses due to poor quality

Tangible losses

E.g. scrap, rework and warranty costs Intangible losses

E.g. lost sales due to customerdissatisfaction

Use Taguchi Quality Loss Function toapproximate the intangible quality losses


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We cannot reduce cost without affectingquality

We can improve quality without

increasing cost We can reduce cost by improving quality

We can reduce cost by reducing variation


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Allproductsare equally

bad

Allproductsare equally

bad

NominalLSL USL

BadBad

GoodGood

All products areequally good

All products within the specifications are equally good


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Taguchi focus on hidden costs or long termlosses related to engineering/managementtime, inventory, customer dissatisfaction,and lost market share in the long run.

Loss occurs not only when products isoutside the specifications, but also when aproduct falls within the specification

Taguchi has found that the simple quadraticfunction approximates the behaviour of lossin many instances.


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Look at costs for a process rather than for a productor a profit center Process cost model classify Cost of Quality as:

Cost of conformance (COC) + Cost of nonconformance(CONC)

Cost of conformance : cost incurred to fulfill all thestated and implied needs of customers in theabsence of failure

Cost of Nonconformance: cost incurred due to failureof the existing process

Most common methodology adopted for drivingprocess and productivity improvement

Tend to be made up of three cost elements: Labor + Materials + Overheads


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Any activity that transforms inputs intooutputs utilizing resources and beingsubject to particular controls.


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Everyone in the company operates withina process

Every process should have a process

owner Process owner person who has the

authority and responsibility for the

effectiveness operation of that process


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1. Identify a key process to be measurede.g. order taking

2. Define scope of process

3. Identify process owner

4. Determine the followings:

Output and customers

Inputs and suppliers

Controls and resources


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5. Identify the costs of conformity (COC)and costs of nonconformity (CONC)associated with each key activity.

6. List all the activities and their respectiveCOC and CONC elements

7. COC or CONC elements can be actual or

synthetic. A synthetic is built up ofestimated cost element


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8. Construct a regular process cost report.9. Circulate process cost report for

comments

10. Identify opportunities for improvement

11. Establish improvement plans

12. Conduct cost/benefit analysis to justify

actions.


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Process CONC ItemsProduction Scrap, Rework, Repair & return

Engineering Equipment damage/repair/downtime/modification, ECO

Design Product redesign, Design change, CAD downtime

Marketing Order cancellations, Customer complaints, Warranty,

Product recall

Human Resource Employee turnover, MC, Excessive/ Lack of labor, Losttime accident

Finance Bad debts, Re-invoicing costs, payroll errors, Overdue A/R

InformationTechnology

Order entry error, Software error, computer breakdown

Logistics Late delivery, Wrong delivery, Replacement, Handlingstorage

Purchasing Late supplies, Obsolescence, Excessive Inventory, ChangePO

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