Cost of Quality - COQ

MGMT-5060

Operations Management

COQ – The Issue

• "The cost of quality” is a widely used term

• …….and widely misunderstood.

• Knowing what it is means knowing how to improve it

COQ – The Definition

• The "cost of quality" isn't the price of creating a quality product or service.

• It's the cost of NOT creating a quality product or service the first time

• Every time work is redone, the cost of quality increases

COQ – Examples

• The reworking of a manufactured item. • The retesting of an assembly. • The rebuilding of a tool. • The correction of a bank statement. • The reworking of a service, such as the

reprocessing of a loan operation or the replacement of a food order in a restaurant.

COQ – The Goal

• In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality.

• The goal is to “get it right” the first time, every time

COQ – It is not Free

• Total Quality Costs are the total of the cost incurred by: • Investing in the prevention of

nonconformance to requirements. • Appraising a product or service for

conformance to requirements. • Failing to meet requirements.• Failure to meet customer satisfaction

COQ – The 4 Components

• Prevention Costs

• Appraisal Costs

• External Failure Costs

• Internal Failure Costs

COQ – Prevention Costs

• The costs of all activities specifically designed to prevent poor quality in products or services.

COQ – Prevention Costs

• New product design • Quality planning • Supplier capability surveys • Process capability evaluations • Quality improvement team meetings • Quality improvement projects • Quality education and training

COQ – Appraisal Costs

• The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements.

COQ – Appraisal Costs

• Incoming and source inspection/test of purchased material

• In-process and final inspection/test • Product, process or service audits • Calibration of measuring and test

equipment • Associated supplies and materials meet

specification

COQ – External Failure Costs

• Failure costs occurring after delivery or shipment of the product - and during or after furnishing of a service - to the customer.

• Commonly called “escapes” from the process

COQ – External Failure Costs

• Processing customer complaints • Customer returns • Warranty claims • Product recalls

COQ – Internal Failure Costs

• Failure costs occurring prior to delivery or shipment to the customer, or before providing a service

COQ – Internal Failure Costs

• Scrap • Rework • Re-inspection • Re-testing • Material review • Downgrading

COQ – The Sum Total

• The sum of the above costs. This represents the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products/services or defects in their manufacture/delivery.

Six Sigma and COQ – The Picture

CustomerLoyalty and Market Share

Right Features

Lower Deficiencies

RightPrice

Efficient Processes

Market Share Higher Revenue

AndLTV

Low I/EFailure Costs

Quality is NOT Free

• First Step – How to Access Resources to meet overall organizational goals

• The is an investment up front to get the quality levels and cost savings realized

• Every organization will need to have an internal ROI to justify the expenditures

Appraisal Process

• Identify your Quality Cost Reduction Goals• Estimate the average return for each

quality improvement• Then calculate how many projects are

required• This drives the resource and expense

requirements

Appraisal Process – cont.

• The use of Pareto charts will show where the problems/opportunities are

• The size of the improvement is directly correlated to the staffing and expenses required

• The targets are: prevention, appraisal, internal, and external failure areas

Appraisal Process – cont.

• Example – Assume a $25 million goal in the next 12 months

• If you assume a $250,000 return per project, then you need 100 projects(!)

• If you assign one Black Belt, and 4 project team members, with a project duration of 6 months…..

• It is WAY too costly…so what to do?

Appraisal Process – cont.

• The answer is to develop a parallel list of projects

• The first list is comprised of the top 3-5 initiatives that impact the business at the enterprise level – PMO level

• The second list is comprised of local optimization driven by front line employees – Department level

Accounting for COQ

• Tracking the spend levels allows for a calibration of investment in/results out

• Traditional accounting is used for scrap, warranty, inventory, operating costs

• Time reporting is used to track specific activities that are directly related to COQ

• Special data collection can be developed to augment this

Accounting for COQ – cont.

• Data is critical to inform and drive decisions:• Quality assurance data• Warranty data• Field service reporting• Customer complaints• Engineering studies• Internal quality audits• Special evaluations

Accounting for COQ – cont.

• Data collection and process is key:• How the data is collected• Know how the data is analyzed• Who will collect it• Design and implement a standard process• Provide a data communications plan• Train all users and recipients• Institutionalize and maintain• Align will rewards

Six Sigma Metrics

• A 3 sigma process has 66,807 DPMO. At $1,000 per defect, that is $66.8 million

• A 4 sigma process has 6,210 DPMO. At $1,000 per defect, that is $6.2 million.

• A six sigma process virtually eliminates all defects, and has a cost of $3,400

COQ Bottom Line

• Quality in the eyes of the customer is everything

• Competing on quality is a requirement to survive and thrive

• Companies that utilize this methodology will be ahead of companies that don’t

• However, quality is only one facet of success……don’t rely on this alone!

COQ Bottom Line – cont.

• Proactive planning for quality has the most leverage in the design phase

• Preventing “escapes” in crucial to customer satisfaction

• Quality perception is gained by reputation and trust building