More Related Content More from Operational Excellence Consulting (20) Reducing the Cost of Quality (COQ) by Operational Excellence Consulting2. © Operational Excellence Consulting. All rights reserved. 2
Objectives
Upon completion of this program, you will be
able to:
• Understand the principles and basic concepts of the Cost of Quality
(COQ)
• Understand how quality improvement reduces costs
• Calculate COQ and conduct COQ assessments
• Identify COQ cost drivers within your organization
• Develop a COQ strategy
• Use COQ to drive prevention in your organization
• Apply COQ to manage improvement projects in your organization
NOTE: As this is a PREVIEW, only selected slides
are shown. To download the complete presentation,
please visit: http://www.oeconsulting.com.sg
3. © Operational Excellence Consulting. All rights reserved. 3
Contents 1
• Introduction & Basic Concepts
of COQ
Business case for quality
Impact of quality improvement program
Link between quality costing and profits
Why are quality costs important?
Why measure COQ?
What is COQ?
COQ iceberg
COQ versus Lean & Six Sigma
Goal of COQ system
Preparation
Four phases of a COQ system
• Phase 1: Identifying COQ Items
PAF model
Internal failure costs
External failure costs
Appraisal costs
Prevention costs
COQ Strategies
Financial structure P&L
Seven types of waste
CONC checklists
Guidelines for identifying COQ items
4. © Operational Excellence Consulting. All rights reserved. 4
Contents 2
• Phase 2: Collecting COQ Data
Matching accounts with CONC items
Quality costing
COQ Data source
Example calculations of Failure cost,
Appraisal cost and Prevention cost
COQ scorecard and indices
Process flow for COQ reporting
Collecting and reporting COQ data
Role of Finance
Role of line managers/supervisors
Practical guidelines
• Phase 3: Analyzing COQ Data
Selecting quality cost bases
Trends analysis
Pareto analysis
Variance analysis
SMART criteria
Set targets for improvement
Case study
• Phase 4: Reducing COQ &
Improving Quality
Reduce COQ through quality
improvement programs
Tools and techniques
System for quality is prevention
Some results from industries
Sustaining COQ
5. © Operational Excellence Consulting. All rights reserved. 5
Vicious Cycle of Poor Quality
Extensive
Reworking
Fire-Fighting
High
Defects
No Time To
Look For
Real Solutions
Poor
Quality
Unhappy
Customer
14
3 2
6. © Operational Excellence Consulting. All rights reserved. 6
Link Between Quality Costing & Profits
Track quality costs to
gain top management’s
attention
Look at high
quality cost area
Identify problem
Analyze root
cause
Take corrective
action &
Institutionalize
change
Profit & Loss
Statement
Total Cost of
Quality
Cost of Non-
Conformance
Cost of
Conformance
Prevention-based
activities
Ultimate impact
of COQ is here!
7. © Operational Excellence Consulting. All rights reserved. 7
What is COQ?
• Cost of Quality (COQ) is the total cost of
ensuring product and service quality
• Total COQ is the sum total of the Cost of Non-
Conformance (CONC) and the Cost of
Conformance (COC)
CONC COC COQ
8. © Operational Excellence Consulting. All rights reserved. 8
Cost of Non-Conformance (CONC)
• The costs incurred as a result of not doing
things right the first time
• Examples
Mistakes
Scrap
Rework
Equipment Downtime
Handling customer complaints
Warranty claims
Customer return analysis
9. © Operational Excellence Consulting. All rights reserved. 9
Cost of Conformance (COC)
• The costs incurred in ensuring that things
are done right the first time
• Examples:
Quality training
Quality auditing
Inspections and tests
Process capability studies
Vendor assurance
Continuous improvement programs
Customer satisfaction surveys
10. © Operational Excellence Consulting. All rights reserved. 10
We See Only the Tip of the Iceberg
Poor quality costs a typical company
15-20% of sales annually
Quality engineering
and administration
Inspection/test (materials,
equipment, labor)
Expediting
Scrap
Rework
Rejects
Warranty
claims
Maintenance
and service
Cost to customer
Excess inventory
Additional
labor hours
Longer cycle times
Quality audits
Vendor control
Lost customer loyalty
Improvement program costs
Process control
Opportunity cost if sales
greater than plant capacity
Less
Visible
Visible
11. © Operational Excellence Consulting. All rights reserved. 11
COQ and Lean (Waste Elimination)
Waiting
Over-processing
Defects
Transportation
Motion
Overproduction
Excess Inventory
Intellect
Waste Waste
Reduce COQ
by
eliminating
waste!
Input
(Man, Machines,
Materials)
Transformation
Process
(Method)
Output
(Products,
Services)
12. © Operational Excellence Consulting. All rights reserved.
“Eliminating what is
not wanted or
needed is profitable
in itself.”
Philip Crosby
13. © Operational Excellence Consulting. All rights reserved. 13
Goal of COQ System
Elimination of Failure Costs
Reduction in Appraisal Costs
Investment in Prevention
activities/programs
COQ Strategies
To facilitate
quality efforts
that will lead
to cost
reduction
opportunities
14. © Operational Excellence Consulting. All rights reserved. 14
Four Phases of a COQ System
COQ
System
Identify
COQ
Items
Collect &
Report
COQ
Data
Analyze
COQ
Data
Reduce
COQ
15. © Operational Excellence Consulting. All rights reserved. 15
PAF Model
Cost of Quality (COQ)
Cost of Conformance
( COC )
Cost of Non-Conformance
( CONC )
Prevention
Cost
Appraisal
Cost
Internal
Failures Cost
External
Failures Cost
16. © Operational Excellence Consulting. All rights reserved. 16
External Failure Costs
• The costs occurring after delivery or shipment of the
product — and during or after furnishing of a service
— to the customer
• Examples:
Warranty claims
Replacements
Customer returns
Product recalls
Customer return analysis
Handling customer complaints
Loss of customer goodwill
17. © Operational Excellence Consulting. All rights reserved. 17
Internal Failure Costs
• The costs occurring prior to delivery or shipment of
the product, or the furnishing of a service, to the
customer.
• Examples:
Scrap
Rework
Retest
Re-inspection
Redesign
Downtime
Corrective action
Downgrading
18. © Operational Excellence Consulting. All rights reserved. 18
CONC Checklist 1
Process CONC Items
Production Scrap
Rework
Repair and return costs
Engineering Equipment/facility damage
Equipment/facility repair
Equipment downtime
Equipment redesign/modification
Engineering change orders
Subcontractor faults
Design Product redesign
Computer downtime
Design change
Note: List is not exhaustive
20. © Operational Excellence Consulting. All rights reserved. 20
Matching Accounts with CONC Items 1
Items in Accounts
Obsolescence written
off
Rent
Raw material
Finished goods
Work-in-progress
Discounts allowed
Water & electricity
Production overheads
Warranty claims
CONC Items
• Obsolescence
• Storage space
• Defects
• Spoilage
• Warranty claims
Process involved
Production/Logistics
Logistics
Production
Marketing
21. © Operational Excellence Consulting. All rights reserved. 21
Quality Costing
1. Whole account
2. Unit pricing
3. Labor/resource
claiming
4. Whole person
22. © Operational Excellence Consulting. All rights reserved. 22
Example 1: Calculating a Failure Cost Item
Cost of Re-invoicing
Whole process of re-invoicing 45 mins
Staff cost $10/hr
No. of re-invoices per annum 156 cases
Man-hours expended in re-invoicing 156 x 45 mins = 7,020 mins or 117 hrs
Total staff cost in re-invoicing 117 hrs x $10 = $1,170 per annum
Paper/invoice cost $0.28 per invoice
Postage cost $0.20 per invoice
Overheads $0.48 x 156 cases = $75
Total cost of re-invoicing $1,170 + $75 = $1,245
Relatively
small; OK
to ignore
23. © Operational Excellence Consulting. All rights reserved. 23
COQ Scorecard
External Failure Costs
Internal Failure Costs
Appraisal Costs
Prevention Costs
TOTAL QUALITY COSTS
$ %
$ %
$ %
24. © Operational Excellence Consulting. All rights reserved. 24
COQ Indices
Sales Revenue:
TCOQ * 100%
Sales Revenue
Manufacturing
Costs:
TCOQ * 100%
Mfg. Costs
Value Added:
TCOQ * 100%
Value Added
Direct Labour
Costs:
TCOQ * 100%
Direct Labour Costs
Sales Revenue:
CONC * 100%
Sales Revenue
Sales Revenue:
COC * 100%
Sales Revenue
25. © Operational Excellence Consulting. All rights reserved. 25
Practical Guidelines 1
Do’s Don’ts
• Have a clear purpose and strategy • Go it alone - involve other departments
• Report only costs endorsed by the Finance
department
• Expect that the existing accounting system
will provide the information needed
• Get data and costs from standard data
whenever possible
• Be too ambitious – start with a pilot study
• Start with cost of failure items
• Expect too much during the initial phase of
implementation
• Collect those quality costs that are most
accessible
• Agonize over insignificant quality costs
• Concentrate on costs that do or can
change with improvement
• Concentrate only on what is already known
26. © Operational Excellence Consulting. All rights reserved. 26
COQ Trends Analysis
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
1999 2000 2001 2002
Prevention
Appraisal
Internal Failure
External Failure
Total COQ
Case Study
27. © Operational Excellence Consulting. All rights reserved.
“All quality
improvement occurs
on a project-by-
project basis and in
no other way.”
Joseph M. Juran
28. © Operational Excellence Consulting. All rights reserved. 28
Sustaining COQ 1
• Constantly understand and meet the needs of
customers
• COQ is primarily a cost reduction program and
must be managed as such
• Senior management support across multiple
functions is critical to the success of COQ
• Take a holistic approach for optimum results,
e.g. position COQ as part of a TQM program
29. © Operational Excellence Consulting. All rights reserved. 29
Copyrights of all the pictures used in this presentation are held by their respective owners.
30. © Operational Excellence Consulting. All rights reserved. 30
Other Presentations You May Like…
Check out our presentations catalog at http://www.oeconsulting.com.sg/#!training-presentations/c1les
32. © Operational Excellence Consulting. All rights reserved. 32
About Operational Excellence
Consulting
• Operational Excellence Consulting is a management training and
consulting firm that assists organizations in improving business
performance and effectiveness.
• One of our unique strengths is going beyond a tools-focused
approach to seamlessly integrate people, processes, technology
and continuous improvement initiatives to suit the specific needs
and situations of our clients.
• We provide corporate learning programs and management advisory
services to assist our clients to achieve breakthrough in business
performance and effectiveness. Our aim is to support our clients in
designing, managing and executing lasting beneficial change.
33. © Operational Excellence Consulting. All rights reserved.
www.oeconsulting.com.sg
www.oeconsulting.com.sg
END OF PREVIEW
To download this presentation,
please visit: