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 2 .PPT
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Cost of Poor Quality
 Prevention
Cost of Attaining Quality
 Appraisal: Prediction
Audit
 Appraisal: Detection
 Failure: Internal
External
Cost of Poor Quality 3 .PPT
Cost of Poor Quality
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Quality Costs
Components
$
Conformance
Non-Conformance
$
$
Cost of Poor Quality 4 .PPT
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Total Quality Cost
I want my
money
back!
Prevention
Internal
Failure
Appraisal
External
Failure
$
Cost of Quality (COQ)
Cost of Poor Quality 5 .PPT
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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
Cost of Poor Quality 6 .PPT
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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
Rejects
Rework
Cost of Poor Quality 7 .PPT
Customer Returns
Inspection Costs
Recalls
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Cost of Poor Quality
As an organization gains a broader definition of poor quality,
the hidden portion ofWaste
the iceberg becomes apparent.
Customer Returns
Rejects
Testing Costs
Inspection Costs
Rework
Recalls
Excessive Overtime
Late Paperwork
Pricing or
Billing Errors
Excessive Field
Services Expenses
Excessive
Employee Turnover
Planning Delays
Incorrectly Completed
Lack of Follow-up
Sales Order
on Current Programs
Customer Allowances
Premium Freight Costs
Overdue Receivables
Excessive
System Costs
Time with
Dissatisfied Customer
Development Cost of Failed Product
Cost of Poor Quality 8 .PPT
Excess Inventory
Unused Capacity
Complaint
Handling
COPQ ranges
from 15-25%
of Sales
High Costs
Hidden COPQ: The
costs incurred to
deal with these
chronic problems
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Quantifying the Potential Benefit
Sigma
Cost of Poor Quality 9 .PPT
Cost
6 sigma
<10% of sales
5 sigma
10-15% of sales
4 sigma
15-20% of sales
3 sigma
20-30% of sales
2 sigma
30-40% of sales
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What Does Reality Look Like?
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?
Cost of Poor Quality 10 .PPT
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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
Cost of Poor Quality 11 .PPT
 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Job Descriptions
 Housekeeping
 Zero-Defect Program
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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
Cost of Poor Quality 12 .PPT
 Supplier Certification
 Employee Surveys
 Security Checks
 Safety Checks
 Reviews:
– Operating Expenditures
– Product Costs
– Financial Reports
– Capital Expenditures
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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
Cost of Poor Quality 13 .PPT
 Supplier Problems
– Scrap and rework
– Late deliveries
– Excess inventory
 Equipment Downtime
 Accidents, Injuries
 Absenteeism
 Unused Reports
 Missed Schedule Cost
 Lost Sales (any cause)
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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!
Cost of Poor Quality 14 .PPT
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Non-value Added Work
Definition
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
Cost of Poor Quality 15 .PPT
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The Hidden Organization
Step
1
Test
Step
2
Test
Product
Floor Space
Analyze
Analyze
Fix
Fix
Floor Space
Floor Space
The Hidden Factory
Value Added
Non-Value Added
Philip R. Thomas, Competitiveness
Through Total Cycle Time. McGraw-Hill
(1990)
“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.”
Cost of Poor Quality 16 .PPT
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Why Cost of Poor Quality?
Reporting Tool
 Comparisons
 Trends
Analytical Tool
 Priorities
 Tradeoffs
Investment Tool
 ROI
Cost of Poor Quality 17 .PPT
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Focus of COPQ Efforts
 Identify and Quantify Quality Costs
 Expose the “Hidden Factory”
 Ongoing Measurement System
 Breakthrough Improvement
Cost of Poor Quality 18 .PPT
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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.
Cost of Poor Quality 19 .PPT
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