COST OF QUALITY

About the Trainer:

Name: S.GIRITHARAN
Company: BEST RESOURCES
Mobile: 9840284489
Age: 55
Based at: Chennai
Consultant: Since 2004
ISO - 9001, 14001, 20000_1, 21001,
27001, 45001, 50001, 55001
& Lean Manufacturing

Completed more than 150 projects

in India and Abroad.

Also a Soft Skill Trainer since 1992

Charter Member & Treasurer of CCC

 “Cost of quality is …
the expense of
nonconformance –
the cost of doing things wrong.”
Crosby, P. 1979, Quality is Free, McGraw-Hill, Toronto
Opportunity to Reduce Real Costs

• Understand quality costs enables you to

– Understand hidden costs
– Reduce and eliminate unnecessary cost
• Prevent problems from happening
• Management responsibility to enable this
• Increase the competence of the
organisation on profitability & competitive
Understand Quality Costs
• Quality costs are estimated at:
– 25% of costs in manufacturing
– 35% of costs in service industry
• Quality costs can be categorised to
enable better understanding
 - Inspection
- Warranty
- Scrap
- Rework Traditional Quality Costs:
- Rejects - Tangible
- Easy to Measure

- More Setups
- Expediting Costs
Hidden Costs:
- Lost Sales - Intangible
- Late Delivery - Difficult to Measure
- Lost Customer Loyalty - Lost Opportunities
- Excess Inventory
- Long Cycle Times - The Hidden Factory
- Costly Engineering Changes

Average COPQ approximately 15% of Sales

COPQ v/s Sigma Level
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2 3 4 5 6
Categories of Quality Costs
• Failure Costs & Repair Costs
(internal & external failure)
• Appraisal Costs
• Prevention Costs
 Elements of COQ

Costs of Quality
COQ

Costs of Control Costs of Failure

Prevention Appraisal Internal External

Costs Costs Failure Failure

Repair
Cost
Cost of Lost Opportunity:

Now-a-days, COPQ includes

the cost of lost opportunity
due to the loss of resources
used in rectifying the
defect.
 Failure Costs
• Those costs incurred because
poor quality products do exist

• Can be further divided into sub-

categories of:
– Internal failure costs
– External failure costs
• Internal failure costs, are associated
with defects that do not reach the
customer.

• They include scrap, rework, failure

analysis
 Internal Failure Costs Example

 Design changes/ corrective action

 Scrap due to design changes
 Excess inventory
 Rectification / reject disposition of purchased
material
 Rework/rejection in manufacturing
 Downgrading of end product
 Downtime of plant & machinery
 Trouble-shooting & investigation of defects
External failure costs includes
- warranty costs,
- complaint adjustment,
- returned material costs,
- allowances made to customers to
maintain their goodwill.
 External Failure Costs Example

 investigation of customer complaint

 Repair/replacement of sold goods
 Warranty claims
 Product liability & litigation costs
 Interest charges on delayed payment due to
quality problems
 Loss of customer goodwill & sales.
 Repair Costs
• Those costs incurred if poor quality
products receive further
processing (Hidden Factory)
• If this occurs then the previous
processing is wasted cost
 Appraisal Costs
• Those costs incurred because
poor quality products might exist
• If these costs are necessary then
the process is flawed and
management is guilty
 Appraisal Costs

 Prototype testing
 Vendor surveillance
 Incoming material inspection
 Process inspection/control
 Final inspection
 Laboratory testing / measurement
 Quality audits.
 Prevention Costs

• Those costs incurred because

poor quality products can exist
and
• Those costs incurred because
management is committed to
prevent poor quality products
from happening
 Prevention Costs
 Market research
 Quality training programs.
 Contract review
 Design review
 Field trials
 Supplier evaluation
 Process plan review
 Process capability review
 Design and manufacture of jigs and
fixtures
 Preventive maintenance
Visible and hidden costs Visible costs

•Scrap
•Rework
•Warranty costs

Hidden Costs
• Conversion efficiency of materials
• Inadequate resource utilization
• Excessive use of material

• Cost of redesign and re-inspection

• Cost of resolving customer problems
• Lost customers / Goodwill
• High inventory
Function wise quality costs
 Quality Assurance

Prevention costs Appraisal Costs Failure costs

• Quality planning • Process appraisal •Internal failure

• Training personnel • Final product appraisal •External failure
 Research, design and development
Prevention costs Appraisal Costs Failure costs

• Setting specifications • Inspection equipment •Rework & rectification

(incl. services, - Maintenance •Downgrading of products
materials, processes -Design & specifications & services
and products) •Product or service
• Pre-production/ complaints & warranty
operation and claims
prototype trials
 Production/operations

Prevention costs Appraisal Costs Failure costs

• Training - including • Line or process

supervisor training inspection (by •Full cost of scrap or
• Pre-production/ production/operations wasted effort
operation and personnel)
prototype trials • Finished product •Rework & rectification
• Special handling & inspection or service •Replacement of rejected
storage during checking (by product or repeating
production or production/operations service
operations personnel)
• Supervision of quality •Downgrading of
at all stages products, materials and
services
 Marketing and sales

Prevention costs Appraisal Costs Failure costs

• Market research • Analysis of degree of •Downgrading of products

• Correct forecasts acceptance of goods and services
• Setting of correct and services •Customer complaints,
product or service liaison & compensation
specifications as per •Warranty claims &
the requirement of replacements or refunds
customers
 Purchasing

Prevention costs Appraisal Costs Failure costs

• Supplier evaluation • Vendor rating •Downtime because of

• Supplier training • Receiving inspection part shortages.
 Service department

Prevention costs Appraisal Costs Failure costs

• Product or service • Finished product or •Customer complaints

specification service performance •Product or customer
evaluation evaluation
service
• Pre-production/ •Returned material
operations and investigations and repairs
prototype trials
• Planning of in-process
control procedures
 Personnel

Prevention costs Appraisal Costs Failure costs

• Recruitment of • Operation of staff •Dealing with results of

appropriate personnel appraisal systems poor recruitment process
• Good compensation •Disciplinary procedures
• Competencies analysis •Strikes/Union problems
• Training •High employee turnover
 Stores, transport and distribution

Prevention costs Appraisal Costs Failure costs

• Receiving and checking

• Special handling and materials bought-out •Sorting of reject finished
storage items or services goods in stock
• Checking and •Receiving and checking
despatching finished returned reject goods
product and/ or • Checking and
services
despatching replacement
goods
 Material control
Prevention costs Appraisal Costs Failure costs

• Ordering correct • Checking stock levels •Excess inventory

materials •Scrap material control
• Inventory systems
•Ordering of material or
services for replacement.
 Maintenance

Prevention costs Appraisal Costs Failure costs

• Prototype processes • Equipment reliability •Downtime of plant &

and equipment monitoring machinery
• Planning and •Trouble shooting and
maintenance of plant investigation of defects
equipment and
inspection equipment
 Finance

Prevention costs Appraisal Costs Failure costs

• Establishment of good • Auditing accounts •Investigations following

financial systems with • Determination of failure in the system
proper controls in quality related costs
•Chasing recoveries from
place. the customers
• Proper assessment of •Bad debts
customers on credit •Losses
facility.
• Feasibility studies
Preventing Poor Quality Pays
Prevention Costs Perianal
Benefit
Appraisal Costs

Repair Costs Prevention Costs

Failure Costs Appraisal Costs

• Internal Repair Costs
• External Failure Costs

Before Quality After Quality Cost

Cost Alignment Alignment
Preventing Poor Quality Pays
• Would it not make sense to
prevent poor quality products
from happening?
• How can this be done?
• Whose responsibility is this?
How to Prevent Poor Quality
• Prepare to measure costs of quality
– Determine categories of quality
costs
– Create measurement system that
captures categories of quality costs
• Assign responsibility to collect data
• Analyse collected data
Determine Quality Cost Categories

• Understand your product

• Understand your process
• Understand where problems occur
• Determine precisely what goes
wrong
• Determine what costs represents
each problem
 Creating Data Collection
System
• Create measurement system
– Attempt to harness existing financial
accounting system
– Manipulate existing financial data
– Collect costs as they occur
• Whatever you do ensure costs are
accurate
 Assign Responsibility
• Make individuals at all levels responsible for
collecting quality cost data:
– If quality cost data is required then make
it the responsibility of the person who
creates the cost to collect the data
• If no one is responsible no one will bother
 Analyse Collected Data
• Data on its own is useless
• You must have it analysed to be able
to extract meaning
• Determine what knowledge you
require
• Develop an analysis system that
provides the knowledge you require
Useful Quality Cost Knowledge
• What you need to know is useful
• What you do not need to know is
useless
• Only ask for knowledge you need to
know
• Demand that knowledge is presented
so that it can be understood easily
Management is Responsible
• Management decides what to
produce in terms of Products (goods
and / or services)
• Management assigns responsibilities to
produce products
• Management is accountable for
effectively using resources to produce
products
Quality, Cost & Profit relationship
Many people think that quality costs money and adversely
effects profits. But these costs are the costs of doing it wrong
first time .
Quality in the long run results in increased profitability.
 Quality , Cost and Profit relationship.
Cost

For example if we design the product right first time , build it

right first time - we save all the costs of redesign , rework,
scrap, resetting, repair, warranty work etc.
Quality and Profit :
Traditional thinking
Cost Profit
Quality and Profit :
Paradigm shift
Profit

Cost
 Higher productivity

1.Higher production due to

improved cycle time and
reduced errors and defects
Increased profitability
due to :
2.Increased use of machine
and resources. •Larger sales
QUALITY

3.Improved material use

from reduced scrap and
rejects
•Lower production costs
4.Increased use of personnel
resources

5.Lower level of asset •Faster turnover

investments required to
support operations.

6.Lower service and support

costs for eliminated waste,
rework and non value added
activities.
 Quality and Profit
 If the organization does not offer high
quality product or service , it will soon go High
out of business .
Quality
 But just having high quality will not be
enough , because your competitors will
also have the high quality.
Lower
 To win , companies will need to offer high
quality for a lower price than their price
competitors.This requires organizations to
identify and reduce their quality costs