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Cost of Poor Quality
All Rights Reserved, Juran Institute, Inc. 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.
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 3 .PPT
Cost of Poor Quality
Prevention
Cost of Attaining Quality
Appraisal: Prediction Audit
Appraisal: Detection
Cost of Poor Quality Failure: Internal
External
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 4 .PPT
Components
Non-Conformance
$Conformance
$
$
Quality Costs
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 5 .PPT
I want my money back!
I want my money back!
Cost of Quality (COQ)Cost of Quality (COQ)
PreventionPrevention AppraisalAppraisalInternal Failure
Internal Failure
ExternalFailure
ExternalFailure
$$
Total Quality Cost
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 6 .PPT
COPQ Overview
Definitions
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
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 7 .PPT
Traditional Cost of Poor Quality
(4-5% of Sales)
When quality costs are initially determined, the categories included are the visible ones as depicted in the iceberg below.
Waste
Testing Costs
Rework
Customer Returns
Inspection CostsRejects
Recalls
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 8 .PPT
Cost of Poor Quality
As an organization gains a broader definition of poor quality,the hidden portion of the iceberg becomes apparent.
Late Paperwork High CostsPricing orBilling Errors
Excessive FieldServices Expenses
Incorrectly CompletedSales OrderLack of Follow-up
on Current ProgramsExcessive
Employee Turnover Planning Delays Excess Inventory
ExcessiveSystem CostsOverdue Receivables
ComplaintHandling
Unused Capacity
Time withDissatisfied Customer
Excessive Overtime
Waste
Testing Costs
Rework
Customer Returns
Inspection CostsRejects
Recalls
Development Cost of Failed Product Hidden COPQ: The costs incurred to deal with these chronic problems
Premium Freight Costs
Customer Allowances
COPQ rangesfrom 15-25% of Sales
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 9 .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
Quantifying the Potential Benefit
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 10 .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?
What Does Reality Look Like?
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 11 .PPT
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
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 12 .PPT
Supplier Certification Employee Surveys Security Checks Safety Checks Reviews:– Operating Expenditures– Product Costs– Financial Reports– Capital Expenditures
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
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 13 .PPT
Supplier Problems– Scrap and rework– Late deliveries– Excess inventory
Equipment Downtime Accidents, Injuries Absenteeism Unused Reports Missed Schedule Cost Lost Sales (any cause)
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
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 14 .PPT
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
Lost Sales Because of Customer Dissatisfaction!
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 15 .PPT
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
Definition
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 16 .PPT
The Hidden Organization
“Theoretical Cycle Time: The back-to-back process timerequired for a single unit to complete all stages of a taskwithout waiting, stopping, or setups.”
ProductStep1
Step2
Floor SpaceFloor Space Floor SpaceFloor Space
Floor SpaceFloor Space
Value AddedNon-Value Added
Philip R. Thomas, Competitiveness Through Total Cycle Time. McGraw-Hill (1990)
The Hidden Factory
Analyze
Fix
Test
Analyze
Fix
Test
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 17 .PPT
Why Cost of Poor Quality?
Reporting Tool Comparisons
Trends
Analytical Tool Priorities
Tradeoffs
Investment Tool ROI
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 18 .PPT
Focus of COPQ Efforts
Identify and Quantify Quality Costs Expose the “Hidden Factory”
Ongoing Measurement System Breakthrough Improvement
All Rights Reserved, Juran Institute, Inc. Cost of Poor Quality 19 .PPT
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.