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CostofQuality:NotOnlyFailureCosts
CostofQuality:NotOnlyFailureCosts
ArneButhmann 14
WhencalculatingthebusinesscaseforaSixSigmaproject,thecostofpoorquality(COPQ),whichisthecostcausedthroughproducingdefects,isacommonly
usedconcept.Withinthetotalamountofqualitycost,however,COPQrepresentsonlyacertainproportion.Costsdonotresultfromonlyproducingandfixing
failuresahighamountofcostscomesfromensuringthatgoodproductsareproduced.Thisarticleexplainsthecostofqualityasamorecomprehensive
conceptcoveringthecostofpoorqualityandthecostofgoodquality.Inshort,anycostthatwouldnothavebeenexpendedifqualitywereperfectcontributesto
thecostofquality.
CostofQuality
AsdefinedbyPhilipB.CrosbyinhisbookQualityIsFree,thecostofqualityhastwomaincomponents:thecostofgoodquality(orthecostofconformance)and
thecostofpoorquality(orthecostofnonconformance).AsFigure1shows:
Thecostofpoorqualityaffects:
Internalandexternalcostsresultingfromfailingtomeetrequirements.
Thecostofgoodqualityaffects:
Costsforinvestinginthepreventionofnonconformancetorequirements.
Costsforappraisingaproductorserviceforconformancetorequirements.
Figure1:CostofQuality
CostofPoorQuality:InternalFailureCosts
Internalfailurecostsarecoststhatarecausedbyproductsorservicesnotconformingtorequirementsorcustomer/userneedsandarefoundbeforedeliveryof
productsandservicestoexternalcustomers.Theywouldhaveotherwiseledtothecustomernotbeingsatisfied.Deficienciesarecausedbothbyerrorsin
productsandinefficienciesinprocesses.Examplesincludethecostsfor:
Rework
Delays
Redesigning
Shortages
Failureanalysis
Retesting
Downgrading
Downtime
Lackofflexibilityandadaptability
CostofPoorQuality:ExternalFailureCosts
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CostofQuality:NotOnlyFailureCosts
Externalfailurecostsarecoststhatarecausedbydeficienciesfoundafterdeliveryofproductsandservicestoexternalcustomers,whichleadtocustomer
dissatisfaction.Examplesincludethecostsfor:
Complaints
Repairinggoodsandredoingservices
Warranties
Customersbadwill
Lossesduetosalesreductions
Environmentalcosts
CostofGoodQuality:PreventionCosts
Preventioncostsarecostsofallactivitiesthataredesignedtopreventpoorqualityfromarisinginproductsorservices.Examplesincludethecostsfor:
Qualityplanning
Supplierevaluation
Newproductreview
Errorproofing
Capabilityevaluations
Qualityimprovementteammeetings
Qualityimprovementprojects
Qualityeducationandtraining
CostofGoodQuality:AppraisalCosts
Appraisalcostsarecoststhatoccurbecauseoftheneedtocontrolproductsandservicestoensureahighqualitylevelinallstages,conformancetoquality
standardsandperformancerequirements.Examplesincludethecostsfor:
Checkingandtestingpurchasedgoodsandservices
Inprocessandfinalinspection/test
Fieldtesting
Product,processorserviceaudits
Calibrationofmeasuringandtestequipment
Thetotalqualitycostsarethenthesumofthesecosts.Theyrepresentthedifferencebetweentheactualcostofaproductorserviceandthepotential(reduced)
costgivennosubstandardserviceornodefectiveproducts.
Manyofthecostsofqualityarehiddenanddifficulttoidentifybyformalmeasurementsystems.Theicebergmodelisveryoftenusedtoillustratethismatter:Only
aminorityofthecostsofpoorandgoodqualityareobviousappearabovethesurfaceofthewater.Butthereisahugepotentialforreducingcostsunderthe
water.Identifyingandimprovingthesecostswillsignificantlyreducethecostsofdoingbusiness.
Figure2:TheIcebergModelofCostofQuality
TheSixSigmaPhilosophyofCostofQuality
Whatistherelationbetweenthecostofgoodqualityandthecostofpoorquality?Thetraditionalviewwouldbetoconcludethatifacompanywantstoreduce
defectsandbythisreducethecostofpoorquality,thecostofgoodqualitywouldhavetobeincreased,meaninghigherinvestmentsinanykindofchecking,
testing,evaluation,trainingofoperators,etc.FollowingtheSixSigmaphilosophy,however,ofbuildingqualityintoprocess,serviceandproductsanddoing
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CostofQuality:NotOnlyFailureCosts
thingsrightthefirsttime,theincreaseofthecostofgoodquality,whilestrivingforzerodefectperformance,canbesmoothedifprocessesgetbetter.
AsFigure3shows,businessprocesseswithbetterprocesssigmawillhavesignificantlylowerpreventionandappraisalcosts.Althoughyouwillneverfully
eliminateappraisalandpreventioncosts(asopposedtofailurecoststhatinanidealzerodefectworldwouldalsobezero),theirreductionduetobetterprocess
performancewillbesignificant.
Figure3:TraditionalManagementViewvs.SixSigmaPhilosophy
Table1showshowdramaticallythecostofqualityasapercentageofsalesdecreasesiftheprocesssigmaimproves.
Table1:SigmaLevelandtheCostofQuality
SigmaLevel
DPMO
CostofQualityasPercentageofSales
298,000
Morethan40%
67,000
2540%
6,000
1525%
233
515%
3.4
Lessthan1%
Assumingthattheaverageperformanceofacompanyis3sigma,25percentto40percentofitsannualrevenuegetschewedupbythecostofquality.Thus,if
thiscompanycanimproveitsqualityby1sigmalevel,itsnetincomewillincreasehugely.
FeaturedProductRootCauseAnalysisCourse
Withthiscourseyouwillbeabletotrainanyoneinyourcompanyonthepropertechniquesforachievingproperresolutionofanytypeof
problem,whetheritbeatransactionalprocess,manufacturingissue,medicalprocedure,orpersonnelissue.
Comments
MichelleBaker
IsyourDPMO(showninyourCostofQualitytable),equaltothesumofalltheinternalandexternalfailures?
Inotherwords,theDPMOisthesumofmultipleprocessfallout?
Thanks,
Reply
Akmal
yes.itsthetotalDefectsPerMillionOpportunities
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DPMO:(1,000,000*NumberofDefects)/(NumberofUnits*Numberofopportunities).
Reply
zizu
doescostofqualityincludemarketingcosts?
Reply
Daryl
MarketingCostscanbeincludedasaresponsetoexternalfailures.
Companiesmayincreasemarketingtorebuildreputationdamageandnegativebrandimagecausedbyexternalfailuressuchas
litigationorproductrecall.
Reply
philip
Idsayingeneralnotzizu,marketingisanormalactivityoffindingoutwhatcustomerswant,makingsureyourserviceorproductsarealignedto
thatandthenensuringthecustomersknowaboutthat,thiswillgoonevenifyourproductsandservicesaredefectfree,rightthefirsttime.
HoweverifyouhadtorebrandaproductorlaunchamarketingcampaignespeciallyduetopoorproductsorservicesthenIthinkitwouldbe.
Reply
Carlos
Areinternalfailurecostmoreorlessimportantthatnexternalfailurecostregardingthecostofquality?
Reply
RobertReid
Everythingisrelativetomagnitudehowever,costofafailuremakingittothecustomerisregardedastheultimatefailureandthosecost
cannotbeaccuratelyassessedduetothewiderangeofimplications(E.g.confidencelossimpactishardtogaugebecausebadnews
travelsfastwhensomeoneisdissatisfied).
Reply
PradeepChellakani
Thepreventioncostwillincreasefirstreducingtheappraisalcost(MeaningmovingfromInspectiontoautomationandpreventionthroughright
design).ThiswillincreasetheyieldfromRTYinsteadoftheFPYorclassicalyield.
Reply
R.Chakrapani
LossofsalesduetopoorProductimage/BrandImage/poormarketing/poorsupplierchainbottlenecks,inrelationtocompetitioninthesame
industryneedstobeaccountedinCOQ.
RC
Reply
Mohd.Haneef
whatistherelationb/wscrap&COQ.
Reply
Pam
Ifthereisaplannedevolution,suchastrimminganimpellerblade,thatoccursbecauseofdataobtainedfromthefirstpumptest,isthat
consideredacostofpoorquality?
MypositionisthatthisisNOTCOPQbecausethefirsttest,thetrim,andthesecondtestareplannedintothedecisionontrimmingandare
plannedintotheprocess.
Reply
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CostofQuality:NotOnlyFailureCosts
DanJ
Hi,greatsummary.QuestionaretheSigmaLevelsandCostofQualityequalforservicesvs.manufacturingcompanies?Ourservicecentersdo
alotITILincident,problem,change,andservicemanagementandIaminterestedinbeingabletomeasureCOPQforfailedchanges,incidents,
etc.
thanksinadvance,
Dan
Reply
Makary
Questioniswhatisbetter
keepingbadqualityserviceandpoorprices
orhighlevelofqualityandhighprices.
maybesometimesmixisthebestway???
Reply
Saji
IsthereanyexampleforThecostofpoorqualitythatincurredhighinternalorexternalcosts???
Reply
NEWJOB
DTEEnergy SupervisingEngineer&Ombudsman
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