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 Customer Loyalty and Market Share Right Features Lower Deficiencies Right Price Efficient Processes Market Share Higher Revenue And LTV Low I/E Failure 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