Cost of Poor Quality

Cost of Poor Quality
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 2 .PPT
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.
Prevention
Cost of Attaining Quality
Appraisal: Prediction
Audit
Appraisal: Detection
Failure: Internal
External

Components
Non-Conformance
$
Conformance
$
$
Quality Costs
I want my
money
back!
Cost of Quality (COQ)
Prevention Appraisal
Internal
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 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
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.

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