An ongoing challenge today for most organizations is to do more with less. Many companies are spending more time with their customers, while customers are demanding competitive pricing on products and services. As the planned profit margin erodes, the question management is posing to their staff is, "How do we maintain our margins and still meet the customers’ demands?" Basically, how do we leave less dollars on the table? The answer is Cost of Poor Quality (COPQ) analysis, which can be used to identify and reduce operational wastes while maintaining margins. Dr. Joseph DeFeo, Chairman and CEO of Juran Global, shares: * Typical misconceptions about quality. * How COPQ affects the bottom line. * How to identify the "tip of the iceberg." * The costs hidden in the bottom of the iceberg. * How to estimate costs using total resources and unit costs.

1. Dr. Joseph A. DeFeo
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EXPOSING YOUR HIDDEN
COSTS OF PERFORMANCE
APRIL 20, 2016

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 To manage for excellence, it is vital to begin by establishing a
vision for the organization, along with policies, goals, and plans
that attain to the vision.
 Managing for excellence makes extensive use of three
fundamental managerial processes:
1. Designing or planning for quality
2. Compliance, controlling, or assuring quality
3. Improving or creating breakthroughs in quality
Today’s discussion will focus around Principle #2 -
compliance, controlling, or assuring quality, through the
identification and analysis of Cost of Poor Quality.
MANAGING FOR EXCELLENCE

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 Cost of Poor Quality (COPQ): These are the costs that would
disappear in the organization if all products and processes
performed right the first time. They are usually measured as a
percentage of sales or costs.
COPQ DEFINED
An effective performance excellence program
should prioritize removing COPQ as the
expenses have already been incurred. By
attacking COPQ, the organization is able to
maintain sales performance but become
more profitable!

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 By ignoring the magnitude of hidden costs in our
organizations today, you are basically underestimating
your profit.
 This phenomenon is rooted in the limited
understanding of costs related to poorly performing
processes.
*Regardless of industry
WHY COST OF POOR QUALITY?
Our research indicates that 15-25% of all work
performed* consisted of redoing prior work
because products and processes were not perfect.

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 Costs of poor quality affects every business in every industry, this is
not an industry-specific problem
 Companies do not always associate a bad process with poor quality
 Many managers have been instructed to “reduce costs”
 Can be difficult initially to distinguish differences between costs and
costs of poor quality or non-value-added activities
 Rush decisions lead to “across the board” cuts
 Cost should be the minimum amount of money that we have to spend
to meet the customer and business needs
 Cost is a good thing if its a minimum cost that meets a customer
requirement
 Cost is a bad thing if its a cost of poor quality
 In healthcare, misuse, underuse, and overuse = waste
OUR LESSONS LEARNED

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The effect of failure on income:
 The customer who encounters a deficiency may take action that
creates additional cost for the producer (file a complaint, return a
product, file a lawsuit, etc.). The customer may also elect to stop
buying from the guilty producer as well, and may publicly share their
poor quality interaction. Such actions can cause serious damage to a
producer’s revenue and reputation.
The effect of failure on cost:
 Deficient quality results in excessive costs associated with poor quality.
The Cost of Poor Quality (COPQ) is a term that encompasses all the
costs that would disappear if there were no failures – no errors, no
rework, no field failures, etc.
EFFECTS OF POOR QUALITY

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EXAMPLE
Example: A call center requires accurate and quick calls are to meet
customer expectations.
Problem: Management needs to reduce costs, and opts to reduce
staff.
Result: May have reduced operating cost, but wait times, resolution
times, and customer satisfaction are all affected. Now we are paying
for the cost of poor quality in addition to having a reduction in
profit. The reduction in operating costs is quickly outweighed.

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VISUALIZING THE DIFFERENCE
Profit
Total
Operating
Costs
Profit
True
Operating
Costs
COPQ
Profit
Sales Erosion
COPQ
True
Operating
Costs
Profit
COPQ
True
Operating
Costs

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Traditionally, there are seven specific categories that organizations
begin looking for poor quality:
 We refer to these as “the tip of the iceberg”
 Generally only represent about 5% of actual COPQ
WHERE ARE THE COSTS HIDING?

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 As an organization
gains a broader
understanding of poor
quality, the hidden
portions of the
iceberg become
apparent.
 COPQ can range
between 10-25% of
total operating costs.
WHERE THE REAL MONEY IS

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WHERE IS COPQ FOUND?
Review Review
Redo Redo
Variation
Non-Value-Added
(NVA) Steps
Check Check Product or
Service
Step 1 Step 2

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1. Costs to Prevent Failure
 Design reviews, educational on the job training, work instructions; most costs
in organizations that help employees to do the right thing at the right time
2. Compliance, Appraisal, Quality Assurance, Quality Control
 Regulatory agencies, risk management/analysis, audits (SEC), ISO
 Excess appraisal costs are possible (too many audits, too many checks)
3. Internal Failure Costs (that customer never sees)
 Inspection line failures
4. External Failure Costs (customer does see)
 Cost to fix the problem after the customer gets/uses/sees it
 Can be more expensive; fix + extra
TOTAL COST OF QUALITY =
Internal & External failure costs can account for 60-80%
of Costs of Poor Quality

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EFFECTS OF POOR QUALITY
Ratio of the individual category costs to total costs vary widely.
Many companies exhibit ratios which look like the following:

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Identify product
or process
Create process
map to
understand value
Classify non-
value-added
activities as COPQ
Estimate COPQ
based on fiscal
year
Prepare Quality
Cost Report
(Pareto charts)
Define projects
for improvement
ASSESSMENT PROCESS

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Determine the use of
COPQ against business
strategy
Develop assessment
team
Define scope and tactics
•Scope discussion, size of
business unit, etc. Larger scope
= more $ = more attention
Develop list of COPQ
elements, processes,
and documentation
Develop
implementation plan
Conduct pilot
assessment
Adjust process and
drive projects
HOW TO BEGIN ASSESSING

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 Concept of vital few vs useful many
 All improvement happens project-by-
project
 Identify and allocate resources
properly
 Plan for success
 Lead by example
LAST THOUGHTS

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MORE RESOURCES
 business innovation
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 continuous improvement
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 juran quality handbook
 lean manufacturing
 lean six sigma
 lean transformation
 operational excellence
 process innovation
 quality assurance
 quality control
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 management consulting firm
 iso 9000 2015
 six sigma certification
 what is lean
 what is six sigma
Click any link for more information

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THANK YOU!
Copyright ©2015, Juran Institute, Inc.
For more information, please visit www.juran.com
We hope to see you at future webinars or at your site.
If you would like for me to conduct this for your organization,
contact me at jdefeo@juran.com