Assessing Quality Costs

The Quality Cost Committee was established by the then ASQC in 1961 Philip Crosby, a former CEO, popularized the concept of COQ with his book Quality is Free in 1979 The current revisions of ISO 9000, QS9000 and AS9100 reference the use of COQ in quality improvement

Crosbys categories Price of Conformance (POC/COC) Prevention costs Appraisal costs Price of Nonconformance( PONC/CONC) Internal defect costs External defect costs

The cost of poor quality (COPQ = PONC): COPQ is the sum of all costs that would disappear if there were no quality problems. - Juran You can easily spend 15 - 30% of your sales dollars on PONC. - Crosby In most companies the costs of poor quality runs at 20 - 30% of sales. - Juran

 Net profits for many companies is less than 5% of sales COPQ on the average is 17% of sales Total COQ on the average is 25% of sales COPQ is some companies is as high as 40% of sales COPQ is typically 3 to 6 TIMES as large as profits

To consider the alternative models of costing (cost of quality approach)

Quality Costing Approach Quality Loss Approach Process Cost Approach

Conventional approach Categorize quality costs as:

Prevention costs Appraisal costs Internal Failure costs External Failure costs

Often known as PAF model

The costs of all activities specifically designed to prevent poor quality in products or services. Examples include:
Quality planning New product reviews Quality education Process capability evaluations Supplier capability surveys Quality improvement projects
These are all planned, proactive activities

In the ideal situation, prevention costs will be the largest portion of the Total Cost of Quality. Typically, prevention is less than 10% of Total Cost Of Quality. It should be over 70%!

The costs associated with evaluating or auditing products or services to assure conformance to quality standards and performance requirements. Examples:
Incoming inspection/test Calibration of inspection/test equipment Final inspection/test
These are all planned activities

Appraisal costs should be the second largest category, but should not exceed prevention costs.

All costs resulting from products or services not conforming to requirements or customer/user needs which occur before delivery/shipment of product, or the furnishing of a service. Examples include: Scrap/rework Reinspection/retesting Material Review Board
These are non-value added and reactive

The goal is to identify all internal failures and resultant costs, and then systematically identify and eliminate root causes until internal failure costs are eliminated.

**Remember, all firefighting is a the result of a failure!

All costs resulting from products or services not conforming to requirements or customer/user needs which occur after delivery/shipment of product, or the furnishing of a service.

The costs incurred when the customer finds the failure Processing customer complaints Field repairs Recall costs Returned goods Processing returned materials Warranty costs Loss of reputation Penalties Customer incurred costs

These are non-value added

 A survey by the Illinois Manufacturers Association revealed a 400% margin of error in cost of poor quality assessments. Companies initially reported an average of 6% cost of poor quality (6% of sales). A later, in-depth assessment showed the average to be closer to 25% (25% of sales). The Survey Conclusion: 75% of the cost of poor quality is hidden, and not obvious!

Results of an ASQ survey of CEOs: Over 70% thought their organizations COPQ was less than 10 percent of sales Twenty-seven percent admitted they had no idea what their companies COPQ was One of the conclusions of those conducting the survey: too many people still do not understand the relationship between cost and quality

Capture both tangible and intangible costs or losses due to poor quality Tangible losses

E.g. scrap, rework and warranty costs

Intangible losses
E.g. lost sales due to customer dissatisfaction

Use Taguchi Quality Loss Function to approximate the intangible quality losses

We cannot reduce cost without affecting quality We can improve quality without increasing cost We can reduce cost by improving quality We can reduce cost by reducing variation

All products are equally bad Bad Good LSL

All products are equally good

All products are equally bad Good Bad USL

Nominal

All products within the specifications are equally good

Taguchi focus on hidden costs or long term losses related to engineering/management time, inventory, customer dissatisfaction, and lost market share in the long run. Loss occurs not only when products is outside the specifications, but also when a product falls within the specification Taguchi has found that the simple quadratic function approximates the behaviour of loss in many instances.

Look at costs for a process rather than for a product or a profit center Process cost model classify Cost of Quality as:
Cost of conformance (COC) + Cost of nonconformance (CONC)

Cost of conformance : cost incurred to fulfill all the stated and implied needs of customers in the absence of failure Cost of Nonconformance: cost incurred due to failure of the existing process Most common methodology adopted for driving process and productivity improvement Tend to be made up of three cost elements:
Labor + Materials + Overheads

Any activity that transforms inputs into outputs utilizing resources and being subject to particular controls.

Everyone in the company operates within a process Every process should have a process owner Process owner person who has the authority and responsibility for the effectiveness operation of that process

1.

2. 3. 4.

Identify a key process to be measured e.g. order taking Define scope of process Identify process owner Determine the followings:
Output and customers Inputs and suppliers Controls and resources

5. Identify the costs of conformity (COC) and costs of nonconformity (CONC) associated with each key activity. 6. List all the activities and their respective COC and CONC elements 7. COC or CONC elements can be actual or synthetic. A synthetic is built up of estimated cost element

8. Construct a regular process cost report. 9. Circulate process cost report for comments 10. Identify opportunities for improvement 11. Establish improvement plans 12. Conduct cost/benefit analysis to justify actions.

Process Production Engineering Design Marketing

CONC Items Scrap, Rework, Repair & return Equipment damage/repair/downtime/modification, ECO Product redesign, Design change, CAD downtime Order cancellations, Customer complaints, Warranty, Product recall

Human Resource Employee turnover, MC, Excessive/ Lack of labor, Lost time accident Finance Information Technology Logistics Bad debts, Re-invoicing costs, payroll errors, Overdue A/R Order entry error, Software error, computer breakdown Late delivery, Wrong delivery, Replacement, Handling storage

Purchasing

Late supplies, Obsolescence, Excessive Inventory, Change PO