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