1. Cost of Quality: A Tool for Tough Times
Section 1113 Raleigh, NC
January 19, 2010
Ron Atkinson, Past-President
American Society for Quality

2. Ron Atkinson ASQ Past-President

3. ASQ 60-year-old not for profit professional organization
ASQ’s mission has broadened from factories to all segments of society
Learn from the vast body of quality-related knowledge

4. ASQ Future Study 2008 Forces of Change
Globalization
Social Responsibility
New Dimensions for Quality
Aging Population
Healthcare
Environmental Concern
NOTE: Financial downturn not anticipated

5. Can quality help in tough times?
You are sold on quality
What about the rest of the organization?
What do I tell them?
How can we afford a new program?
Where will we get the resources?

6. Quality Products & Services
Bottom line
Lower costs
Top line
Demand a higher price
New business
Stimulate company growth

7. Quality Pays! Quality = Profit Customer satisfaction
Customer retention
Lower overhead
Higher productivity

8. Costs of Poor Quality
Costs associated with NOT creating a quality product or service
Waste and inefficiencies
Rework/Redo
Downtime
Warranty/Good Faith
Legal Issues

9. Quality Impacts
Impacts associated with NOT creating a quality product or service
Top and Bottom Line
Customers lose confidence
Few new customers
Loss of current customers

10. Quality in Tough Times
How can we afford a new program (like Cost of Quality) at a time like this?
Not a new program
Identification of current expenses
People already making financial analyses
Give them focus and tools to reduce costs and improve revenue

11. Quality in Tough Times
How can we afford a new program (like Cost of Quality) at a time like this?
Not a new program
Identification of current expenses
People already making financial analyses
Give them focus and tools to reduce costs and improve revenue

12. Quality Cost Analyses Value Stream Mapping Six Sigma Deep Dive
Zero Base Budgeting
Traditional Cost of Quality

13. Quality Maintenance NOT maintaining
Negative market reaction to low quality product/service
Consider
Expected loss : maintenance costs
Maintain
Quality reputation
Retain and gain new customers

14. Social responsibility

15. Quality Evaluation Tools
Where to start

16. Quality Evaluation Tools
Everything cannot be done at once. Use quality tools to evaluate and prioritize
Failure Mode and Effect Analysis
Cost of Quality
Many others

17. Quality Financial Metrics
Cost of Quality (COQ)
Quality Financial Metrics

18. Cost of Quality
Prevention
Appraisal
Internal Failure
External Failure

19. Prevention Costs
Activities specifically designed to prevent poor quality in products or services
SPC
Quality planning
New supplier reviews
Quality improvement meetings

20. Appraisal Costs
Costs associated with measuring, evaluating or auditing products or services to ensure quality conformance
Incoming, In-process, and Final Inspection and Testing
Quality Audits

21. Internal Failure Quality Failures detected inside a facility Rework
Detected prior to shipment or delivery
Rework
Overtime
Excess Inventory – carrying costs
Allowances – Price concessions

22. External Failure Quality Failures detected outside your facility
Material is shipped or delivered
Complaint Adjustment
Allowances
Warranties

23. Cost to make Impact Low Cost High Cost Prevention Appraisal
Internal Failure
External Failure
High Cost

24. Implementing COQ

25. COQ Involvement Executive Level Operational Level Functional Level
Strategic
Approvals and Support
Operational Level
Administer and Remove Roadblocks
Propose Improvements
Functional Level
Implement COQ
Collect and Compile Data
Propose Improvements and Implement Changes

26. COQ Methodology Plan – Support, Determine Metrics
Do – Train, Implement, Collect Data
Study – Evaluate data and COQ process
Act – Product/process and COQ process improvements

27. COQ Steps
In monetary terms, introduce management to whatever data are available.
Propose a cross-functional committee be formed.
Develop a list of quality costs to fit your organization.
Have upper-level management approve the list and assign resources and timeline.
Collect, summarize and analyze the data. Propose improvement projects to determine and remove root causes.
Carefully select one improvement project and pursue it using modern problem-solving tools.
Review the study and select additional projects.
Source: Campanella, Jack, Principles of Quality Costs, 1999, p.85

28. COQ Steps These steps are a good starting point for a single location.
Multiple locations, product diversity and geographic diversity add complexity.
So let’s try to get a look in general terms as to what this means to you.

29. Core Team understand COQ
1. In monetary terms, introduce management to whatever data are available.
Core Team understand COQ
What is COQ? What are limitations? Why implement COQ?
Develop corporate proposal
Quality and financial use existing data to quantify magnitude of COQ
Explain COQ in management terms
Present proposal to top management
Obtain approval and allocation of resources to proceed

30. 2. Propose a cross-functional committee be formed.
Committee to gage the COQ
Chair from Management
Major line functions represented
Committee is not responsible for the COQ
Quality costs are generated by the organization
The purpose of the committee is to develop a system to gage those costs

31. 3. Develop a list of quality costs to fit your organization.
Committee understands COQ
What is COQ? What are limitations? Why implement COQ?
Training for Committee
Develop list of costs
Understand classifications
Determines what is included in COQ
i.e. Is a customer required check appraisal or a cost of doing business?
Don’t get hung up on classification !!!

32. Approval of what to measure at an overall level is key to success
4. Have upper-level management approve the list and assign resources and timeline.
Approval of what to measure at an overall level is key to success
Have upper-level management assign duties including a Management Champion
Have management determine a pilot location as lead
Determine reporting frequency and format (What to report)
Minimum monthly

33. 5a. Collect, summarize and analyze the data.
Collection of data
Changes to accounting classifications?
Involvement of employees?
Appropriate training
Summarize data in management terms
Financially based
Aligned with Business Goals, COQ Classifications and Operation Segments
Cross-functional analysis to determine total system picture

34. 5b. Propose improvement projects to determine and remove root causes.
Analysis is key to project selection
Some projects are as simple as stopping doing something
Some are much more complex, hence, need for cross-functional analysis and project list proposal
Remember: COQ identifies and gages

35. Cross-functional analysis and buy-in is key to pilot project selection
6. Carefully select one improvement project and pursue it using modern problem-solving tools.
Cross-functional analysis and buy-in is key to pilot project selection
Obtain agreement on pilot project
Obtain agreement on pilot location
Willingness to change
Convenience
Magnitude of Gain
Use existing Improvement Process
Remember: Buy-in is essential.

36. 7. Review the study and select additional projects.
This is a constant process.
Analysis will reveal shifts in patterns that need to be addressed
Metrics will change over time
Make COQ status part of the standard monthly management metric reviews

37. COQ Additional Considerations
Schedule for implementation (especially for multiple locations)
Ensure training is appropriate
Different types of training for different functions and levels of involvement
Translation of training
Consistency of Metrics
Corporate mandatory if applicable
Local additions as appropriate
Consistent definitions of metrics

38. OK now that I have this information, what do I do next?
THE HARD
WORK !!

39. Quality Improvement Tools
Making the gains

40. Quality Improvement Tools
Six Sigma
Lean
Statistical Process Control
Design of Experiments
Measurement System Analysis
Cost of Quality (Track Improvements)
etc

41. Six Sigma What it does Defect prevention vs defect detection
Customer satisfaction and bottom-line results
Apply anywhere that variation and waste exist
Apply DFSS for Innovation and improved customer satisfaction

42. Summary Quality is not free. It has a good Return on Investment (ROI).
Quality can contribute to the top and bottom lines of a corporation
COQ is a way to measure the financial impact of quality on an organization
Any quality initiative done correctly will benefit your customers and your organization.

43. ASQ Resources

44. Thank you!
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