cost of quality - nely bachsin blog · mcgraw-hill/irwin copyright © 2008, the mcgraw-hill...

Copyright © 2006, The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin

Cost of Quality

Appendix 2B


Learning Objective 9

(Appendix 2B)(Appendix 2B)

Identify the four types of Identify the four types of

quality costs and explain quality costs and explain

how they interact.how they interact.


Quality of Conformance

When the overwhelming majority of

products produced conform to design

specifications and are free from

defects.


Components

Non-Conformance

$ Conformance

$

$

Quality Costs


I want my

back!

I want my

money

back!

Cost of Quality (COQ) Cost of Quality (COQ)

Prevention Prevention Appraisal Appraisal Internal

Failure

Internal

Failure External

Failure

External

Failure

$ $

Total Quality Cost


Prevention and Appraisal Costs

Prevention

Costs

Support activities

whose purpose is to

reduce the number of

defects

Appraisal Costs

Incurred to identify

defective products

before the products are

shipped


Internal and External Failure Costs

Internal Failure

Costs

Incurred as a result of

identifying defects

before they are shipped

External Failure

Costs

Incurred as a result of

defective products

being delivered to

customers


Examples of Quality Costs

Prevention Costs • Quality training

• Quality circles

• Statistical process

control activities

Appraisal Costs • Testing & inspecting

incoming materials

• Final product testing

• Depreciation of testing

equipment

Internal Failure Costs • Scrap

• Spoilage

• Rework

External Failure Costs • Cost of field servicing &

handling complaints

• Warranty repairs

• Lost sales


Distribution of Quality Costs

When quality of conformance is low, total

quality cost is high and consists mostly of

internal and external failure.

Total quality costs drop rapidly as the quality

of conformance increases.

Companies reduce their total quality costs by

focusing their efforts on prevention and

appraisal because the cost savings from

reduced defects usually overwhelm the

costs of additional prevention and

appraisal.

Total quality costs are minimized when the

quality of conformance is slightly less

than 100%.


Learning Objective 10

(Appendix 2B)(Appendix 2B)

Prepare and interpret a Prepare and interpret a

quality cost report.quality cost report.


Quality cost

reports provide

an estimate of

the financial

consequences

of the

company’s

current defect

rate.

Amount Percent* Amount Percent*

Prevention costs:

Systems development 400,000$ 0.80% 270,000$ 0.54%

Quality training 210,000 0.42% 130,000 0.26%

Supervision of prevention activities 70,000 0.14% 40,000 0.08%

Quality improvement 320,000 0.64% 210,000 0.42%

Total prevention cost 1,000,000 2.00% 650,000 1.30%

Appraisal costs:

Inspection 600,000 1.20% 560,000 1.12%

Reliability testing 580,000 1.16% 420,000 0.84%

Supervision of testing and inspection 120,000 0.24% 80,000 0.16%

Depreciation of test equipment 200,000 0.40% 140,000 0.28%

Total appraisal cost 1,500,000 3.00% 1,200,000 2.40%

Internal failure costs:

Net cost of scrap 900,000 1.80% 750,000 1.50%

Rework labor and overhead 1,430,000 2.86% 810,000 1.62%

Downtime due to defects in quality 170,000 0.34% 100,000 0.20%

Disposal of defective products 500,000 1.00% 340,000 0.68%

Total internal failure cost 3,000,000 6.00% 2,000,000 4.00%

External failure costs:

Warranty repairs 400,000 0.80% 900,000 1.80%

Warranty replacements 870,000 1.74% 2,300,000 4.60%

Allowances 130,000 0.26% 630,000 1.26%

Cost of field servicing 600,000 1.20% 1,320,000 2.64%

Total external failure cost 2,000,000 4.00% 5,150,000 10.30%

Total quality cost 7,500,000$ 15.00% 9,000,000$ 18.00%

* As a percentage of total sales. In each year sales totaled $50,000,000.

Year 2 Year 1

Quality Cost Report

For Years 1 and 2


Quality Cost Reports in Graphic Form

$10

9

8

7

6

5

4

3

2

1Appraisal

0Prevention Prevention

1 2

Year

Qu

ali

ty C

ost

(in

mil

lio

ns)

Appraisal

Internal

Failure

External

Failure

Internal

Failure

External

Failure

20

18

16

14

12

10

8

6

4

2Appraisal

0Prevention Prevention

1 2

Year

Qu

ali

ty C

ost

as a

Perc

en

tag

e o

f S

ale

s

Appraisal

Internal

Failure

External

Failure

Internal

Failure

External

Failure

Quality

reports

can also

be

prepared

in

graphic

form.


Uses of Quality Cost Information

Help managers see the

financial significance of

defects.

Help managers identify

the relative importance

of the quality problems.

Help managers see

whether their quality

costs are poorly

distributed.


Limitations of Quality Cost Information

Simply measuring quality

cost problems does not

solve quality problems.

Results usually lag

behind quality

improvement programs.

The most important

quality cost, lost sales, is

often omitted from

quality cost reports.


ISO 9000 Standards

ISO 9000 standards have become

international measures of quality.

To become ISO 9000 certified, a

company must demonstrate:

1. A quality control system is in use, and the

system clearly defines an expected level of

quality.

2. The system is fully operational and is

backed up with detailed documentation of

quality control procedures.

3. The intended level of quality is being

achieved on a sustained basis.


Cost of Poor Quality


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

Cost of Poor Quality Failure: Internal

External


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


Cost of Poor Quality As an organization gains a broader definition of poor quality,

the hidden portion of the iceberg becomes apparent.

Late Paperwork High Costs Pricing or Billing Errors

Excessive Field Services Expenses

Incorrectly Completed Sales Order Lack of Follow-up

on Current Programs Excessive

Employee Turnover Planning Delays Excess Inventory

Excessive System Costs Overdue 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 Space Floor Space Floor Space Floor Space

Floor Space Floor 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.

cost of quality - nely bachsin blog · mcgraw-hill/irwin copyright © 2008, the mcgraw-hill...

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