The document discusses the cost of poor quality (COPQ) and quality costs. It defines COPQ as all costs that would disappear if every task was performed without deficiency. It notes that COPQ is made up of prevention costs, appraisal costs, internal failure costs, and external failure costs. The document provides examples of costs that fall under each of these categories and notes that accurately measuring COPQ can help prioritize problems and measure improvements in quality.

2. Cost of Poor Quality 2 .PPT
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.

3. Non-value Added Work
• 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 3 .PPT
Definition

4. The Hidden Organization
Cost of Poor Quality 4 .PPT
“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.”
Product
Step
1
Step
2
Floor Space Floor Space
Floor Space
Value Added
Non-Value Added
Philip R. Thomas, Competitiveness
Through Total Cycle Time. McGraw-Hill
(1990)
The Hidden Factory
Analyze
Fix
Test
Analyze
Fix
Test

5. Why Cost of Poor Quality?
•Reporting Tool
• Comparisons
• Trends
•Analytical Tool
• Priorities
• Tradeoffs
•Investment Tool
• ROI
Cost of Poor Quality 5 .PPT

6. Cost of Poor Quality
 Prevention
Cost of Attaining Quality
 Appraisal: Prediction
Audit
 Appraisal: Detection
Cost of Poor Quality
 Failure: Internal
External
Cost of Poor Quality 6 .PPT

7. Quality Costs
Cost of Poor Quality 7 .PPT
Components
Non-Conformance
$
Conformance
$
$

8. Cost of Poor Quality 8 .PPT

9. Total Quality Cost
Cost of Poor Quality 9 .PPT
I want my
money
back!
Cost of Quality (COQ)
Prevention Appraisal
Internal
Failure
External
Failure
$

10. COPQ Overview
 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 10 .PPT
Definitions

11. Traditional Cost of Poor Quality
When quality costs are initially determined, the categories included are the
visible ones as depicted in the iceberg below.
Cost of Poor Quality 11 .PPT
(4-5% of Sales)
Waste
Testing Costs
Rework
Customer Returns
Inspection Costs
Rejects
Recalls

12. Cost of Poor Quality
Cost of Poor Quality 12 .PPT
As an organization gains a broader definition of poor quality,
the hidden portion of the iceberg becomes apparent.
Late Paperwork High Costs
Pricing or
Billing Errors
Excessive Field
Services Expenses
Incorrectly Completed
Sales Order
Lack of Follow-up
on Current Programs
Excessive
Employee Turnover Planning Delays Excess Inventory
Excessive
System Costs
Overdue Receivables
Complaint
Handling
Unused Capacity
Time with
Dissatisfied Customer
Excessive Overtime
Waste
Testing Costs
Rework
Customer Returns
Inspection Costs
Rejects
Recalls
Development Cost of Failed Product
Hidden COPQ: The
costs incurred to
deal with these
chronic problems
Premium Freight Costs
Customer Allowances
COPQ ranges
from 15-25%
of Sales

13. Traditional Model
Cost of appraisal
plus prevention
Failure costs
Total quality costs
Quality of conformance
0% 100%
Cost
per
good
unit
of
product

14. Cost of Poor Quality 14 .PPT

15. Emerging COQ Model
Cost of appraisal
plus prevention
Failure costs
Total quality costs
Quality of conformance
0% 100%
Cost
per
good
unit
of
product
Greater emphasis placed on prevention and appraisal.
It assumes appraisal and prevention costs to be relatively fixed over time
.
Model does not encourage tradeoffs.
Total cost is NOT minimized at less than 100% conformance.

16. COQ as motivator
• Companies under TQM do not focus on quality cost minimization.
• Quality improvement projects tend to focus on zero defects or defect reduction to the six-
sigma level.

17. The 1-10-100 Rule
• The earlier you detect and prevent a defect the more you can save.
• If you catch a defective 2 cent resistor before is used, you loose two cents.
• If you find after is solder into a computer component, it may cost $10 to repair the
part.
$
$
$
$
$
1
10
100
Prevention
Correction
Failure
If you don’t catch it until it reaches the customer’s hands, the repair will cost hundreds of dollars.
Indeed, for a $5000 computer, a field repair may exceed the manufacturing cost.

18. COQ Theme
•Costs are not incurred or allocated, but
rather caused.
•Cost information does not solve quality
problems, nor does it suggest specific
solutions.
•Problems are solved by tracing the
cause of a quality deficiency.

19. Quantifying the Potential Benefit
Cost of Poor Quality 19 .PPT
Sigma
6 sigma
5 sigma
4 sigma
3 sigma
2 sigma
Cost
<10% of sales
10-15% of sales
15-20% of sales
20-30% of sales
30-40% of sales

20. What Does Reality Look Like?
Cost of Poor Quality 20 .PPT
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?

21. 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
 Purchase Cost Targets
 Process Capability
 Studies
 Preventive Maintenance
 Supplier Qualification
 Job Descriptions
 Housekeeping
 Zero-Defect Program
Cost of Poor Quality 21 .PPT

22. 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
 Supplier Certification
 Employee Surveys
 Security Checks
 Safety Checks
 Reviews:
– Operating Expenditures
– Product Costs
– Financial Reports
– Capital Expenditures
Cost of Poor Quality 22 .PPT

23. 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
 Supplier Problems
– Scrap and rework
– Late deliveries
– Excess inventory
 Equipment Downtime
 Accidents, Injuries
 Absenteeism
 Unused Reports
 Missed Schedule Cost
 Lost Sales (any cause)
Cost of Poor Quality 23 .PPT

24. 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
Cost of Poor Quality 24 .PPT
Lost Sales Because of Customer Dissatisfaction!

25. Focus of COPQ Efforts
Cost of Poor Quality 25 .PPT
 Identify and Quantify Quality Costs
 Expose the “Hidden Factory”
 Ongoing Measurement System
 Breakthrough Improvement

26. 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 26 .PPT

27. Pritpal Singh BOS
Cost of Poor Quality 27 .PPT