LEAN SIX SIGMA - COST OF POOR QUALITY (COPQ) AND HOW TO AVOD THEM:

The biggest cost of poor quality is when your customer buys it from someone else because they didn't like yours. - W. Edwards Deming

Every Lean Six Sigma project has an operational and financial impact. The elimination of poor performance and reduction of waste can be monetized by quantifying COPQ, or the cost of poor quality.

What is the cost of poor quality?

The cost of poor quality, or COPQ, are the costs associated with poor performance. And if things were done right the first time, all those costs need not be incurred. COPQ has three categories,

1. Appraisal costs:

Appraisal costs are unnecessary costs because if things were done right, there is no need for the checks, rechecks, inspections, or reviews. Examples include rechecking and reviews, inspection to assure quality, activities and costs associated with appraisals that are needed because the process is not good enough to produce defect-free outputs.

2. Internal failure costs:

Internal failure costs are costs associated with failures that occur within your organization, before the service output or product is sent to your customer. For example, re-doing it because it failed the first time due to poor first-time yields, defects in processing the transaction or product, defective outputs on non-conforming product, rework, scrap, second-grade product, activities and costs associated with addressing internal failures.

3. External failure costs:

External failure costs are costs associated with failures that occur after the service output or product has left your organization. External failure costs could be returns from customers, customer credits, warranty claims, products recalls, activities and costs associated with addressing external failures.

To quantify the expected project benefits, make a list of the relevant COPQ items, such as the ones I just listed. Then quantify the cost of each item on an annualized basis. For example, let's say 10% of the product is scrap. The annual cost of the scrap can be calculated.

Another example, say every week five meetings take place to resolve problems in the value stream. These two-hour meetings are attended by 10 people, such as managers, engineers, and supervisors. These meetings are considered COPQ. Why? Because if things were done right the first time, these meetings need not take place.

So take the average hourly labor cost of each of those personnel, then multiply by 10 people, multiple by two hours and the five meetings per week, and then multiple by 48 weeks per year, and you have the annual COPQ for those firefighting meetings.

And if your project improvements eliminate four of those five meetings each week, then expected project benefits is 80% of the annual COPQ. To summarize, COPQ enables the project team to monetize the cost of poor performance and waste targeted by the project.

PREVENTION COSTS:

Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and incurred before actual operation, and they could include:

• Product or service requirements: Establishment of specifications for incoming materials, processes, finished products, and services
• Quality planning: Creation of plans for quality, reliability, operations, production, and inspection
• Quality assurance: Creation and maintenance of the quality system
• Training: Development, preparation, and maintenance of programs

COST OF QUALITY AND ORGANIZATIONAL OBJECTIVES

• The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one.
• These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities.
• Cost of quality is also an important communication tool. Philip Crosby demonstrated what a powerful tool it could be to raise awareness of the importance of quality. He referred to the measure as the "price of nonconformance" and argued that organizations choose to pay for poor quality.
• Many organizations will have true quality-related costs as high as 15-20% of sales revenue, some going as high as 40% of total operations. A general rule of thumb is that costs of poor quality in a thriving company will be about 10-15% of operations. Effective quality improvement programs can reduce this substantially, thus making a direct contribution to profits.
• The quality cost system, once established, should become dynamic and have a positive impact on the achievement of the organization’s mission, goals, and objectives.

?