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Lean Six Sigma is a problem-solving methodology. As such, one of the ways of quantifying the opportunity for improvement is through an aggregation of the costs associated with that problem. This is known as the Cost of Poor Quality and provides insight into the project benefit.
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Quick reference
Cost of Poor Quality (COPQ)
Lean Six Sigma is a problem-solving methodology. As such, one of the ways of quantifying the opportunity for improvement is through an aggregation of the costs associated with that problem. This is known as the Cost of Poor Quality and provides insight into the project benefit.
When to use
Cost of Quality is most commonly used in the Define and Control phases; although the work of the other phases will affect it. During the Define phase, it is used to explain to stakeholders the business impact of the process problems. During the Control phase, it is often used to explain the impact of the changes that are being implemented.
Instructions
Cost of Quality (COQ) is a construct for translating the impact of doing and not doing process improvement activities in the business. COQ is expressed using monetary units because money is the universal language of business. COQ is normally divided into the Cost of Poor Quality (COPQ) and the Cost of Good Quality (COGQ).
The Cost of Quality is often illustrated with the metaphor of an iceberg. Most of the iceberg lies hidden beneath the water. Most of the costs of poor quality are hidden within the business processes and operational planning and scheduling that assume there will be quality problems.
Cost of Poor Quality
COPQ is the cost of fixing quality problems. Those problems may have been found internally by your business processes or associates – which is considered internal costs. Or the problems may have reached your customers, which would then be classified as external costs.
Examples of internal costs are: Scrap, Rework, Downtime, Delays, Shortages, and Failure Testing.
Examples of external costs are: Complaints, Repairs, Warranties, Sales reductions, Bad will, and Environmental compliance problems.
All of these require that effort be spent to find and fix a known existing problem. If the problem had not been created, no effort would be required. Lean Six Sigma projects are chartered to resolve COPQ problems since in these cases, the problem is already known to exist.
Cost of Good Quality
COGQ is the cost of preventing problems, or of finding them early in the process so that they can be fixed before additional effort is spent on the item. These costs are classified either as appraisal costs or prevention costs. The appraisal costs are the costs of checking your process activities to be certain no errors have been introduced. The prevention costs are the cost of the activities that are done to eliminate the generation of errors.
The categories of appraisal costs are: Inspection, In-process testing, Final testing, Field testing, Quality audits of a process, and Calibration of equipment.
The typical prevention costs are: Quality planning, Supplier evaluation audits, error-proofing design activity, Process capability studies, and Quality training.
All of these require effort that carries a “promise” with it. If done well, they should result in the process creating very few errors. The solutions developed in the Improve phase of a Lean Six Sigma project and that are implemented in the Control phase will often require COGQ expenses.
Hints & tips
- At the Define phase, we are concentrating on COPQ because we want our project to fix a known problem.
- The costs are often buried in multiple departments, not just where the process is normally conducted. If quantifying the COPQ, look both upstream and downstream from the process to see what other costs are occurring due to problems within the process.
- 00:04 Hi, I'm Ray Sheen.
- 00:06 An excellent means of prioritizing and quantifying the impact of
- 00:11 process improvement is to use the concept of cost of quality.
- 00:15 The cost of quality concept is a recognition that there are many different
- 00:20 types of costs associated with delivering high-quality products and services.
- 00:25 These costs go well beyond just measuring the amount of material that is being
- 00:30 scrapped or returned from the customer.
- 00:32 As part of this analysis,
- 00:33 we divide the categories of quality related costs into two basic groups.
- 00:38 One is the cost of poor quality and the other is the cost of good quality.
- 00:42 In essence, the costs of poor quality are fixing things that have gone wrong,
- 00:47 and the cost of good quality is preventing things from going wrong.
- 00:52 One of the subsets of costs of poor quality are internally focused.
- 00:56 Some of these are often captured in internal quality reports.
- 01:00 It includes scrap and rework.
- 01:02 Now, some costs that are often not tracked on quality costs are downtime,
- 01:07 process delays, and shortages.
- 01:09 These are all issues that directly impact internal costs and
- 01:13 are due to failures that have occurred in business processes.
- 01:18 The other subset of the costs of both of poor quality are externally focused.
- 01:22 This means that these are costs associated with fixing issues raised
- 01:27 at customer's locations.
- 01:28 This includes addressing customer complaints or doing repairs and
- 01:32 warranty work for customers.
- 01:34 There are also some indirect impacts such as losing
- 01:38 sales because dissatisfied by customers won't repeat any purchases and
- 01:42 may discourage others from making purchases.
- 01:46 An interesting external cost of poor quality that has recently been added to
- 01:51 the list is the negative impact on the environment due to product failure.
- 01:55 Let's contrast this with the cost of good quality.
- 01:59 Keep in mind, these are actions taken by a company to prevent defects or
- 02:03 to find them at such an early stage that allows the company to fix them at
- 02:07 the point or the process where the problem actually occurred.
- 02:11 This includes the cost of inspection and test steps in the process, and the cost of
- 02:15 audits to find steps in the process that are not being performed correctly.
- 02:19 Another category is prevention costs.
- 02:22 These are really investments into the operation that will enable defect-free
- 02:26 process performance.
- 02:27 This includes planning, training, and evaluation to discover weaknesses and
- 02:32 opportunities for improvement within business operations.
- 02:36 During the define phase,
- 02:38 Lean Six Sigma projects have a tendency to focus on the cost of poor quality,
- 02:43 since these are measuring existing problems that need to be fixed, and
- 02:47 the Six Sigma methodology is a process improvement methodology that fixes things.
- 02:52 So let's get more specific.
- 02:54 Costs of poor quality includes the cost to the business as a result of
- 02:58 making defective products or delivering defective services.
- 03:02 And it is more than the material and labor costs.
- 03:06 In particular, the overhead for problems is much higher because it
- 03:10 requires many decisions which often create delays and
- 03:14 extra effort to study the situation in order to make the correct decision.
- 03:18 Measuring the cost of lost sales is very difficult, but it is normally easy
- 03:24 to measure sales concessions or rebates, which are often because of problems.
- 03:29 Cost of poor quality has the added advantage of putting these quality defects
- 03:34 into financial terms, which is the universal language of business.
- 03:38 Telling a business manager that a 10% yield is a problem is not nearly as
- 03:43 impactful as telling that same individual, we just spent a million dollars
- 03:48 on fixing the defects that we already spent a million dollars creating.
- 03:52 This is why many Lean Six Sigma projects are prioritized and
- 03:57 selected based upon cost of poor quality.
- 04:00 Business leaders and
- 04:02 stakeholders easily understand financial impacts of the problems and
- 04:06 are more likely to support projects aimed at fixing the high cost of poor quality.
- 04:12 The cost of quality is often illustrated with the metaphor of the iceberg.
- 04:16 The visible part of the iceberg is only a small fraction of the total size of
- 04:21 the berg.
- 04:22 Likewise, the visible cost of poor quality such as scrap,
- 04:26 repair or returns are a small portion of the total costs.
- 04:30 These hidden costs are those that the business spends to accommodate
- 04:35 the poor quality.
- 04:36 Internal process costs include things like overproduction,
- 04:40 excess inventory and the cost of operating a material review board.
- 04:45 They are also the internal costs of dealing with design changes and
- 04:49 the over allocation of resources to buffers for the problems or
- 04:53 the excess material ordered only to be eventually scrapped.
- 04:57 Not to mention the money tied up in the excess inventory and
- 05:01 capital equipment for unnecessary capacity.
- 05:04 This is one of the areas where we see the synergy between classical Six Sigma
- 05:09 analysis and Lean Manufacturing analysis.
- 05:11 This is because the cost of fixing these defects is non-value added effort.
- 05:17 Now let me clarify.
- 05:19 I know I've said we want to eliminate non-value added effort.
- 05:22 I'm not suggesting that we don't want to fix problems.
- 05:25 Rather, I'm saying that if we don't create the problems,
- 05:28 we don't have to spend the effort to fix the problems.
- 05:31 When fixing a problem, we're not adding new value to a product or service.
- 05:36 We're just restoring the value that should have been there if the defect hadn't
- 05:40 occurred.
- 05:41 That's why the effort is non-value-added.
- 05:44 As I've mentioned before,
- 05:45 reducing non-value added effort is a key principle in Lean, so
- 05:49 reducing the cost of poor quality is right in line with Lean improvements.
- 05:54 Another term used for this is the hidden factory.
- 05:57 This means that the organization must create a set of processes and
- 06:01 procedures to fix quality issues.
- 06:03 In fact, sometimes it's an entire department and
- 06:06 facility that are devoted to fixing the problem.
- 06:09 That's the part of the iceberg that doesn't show.
- 06:12 If the problem never occurs, there is no need to expend effort on these areas.
- 06:18 In my experience, an operation that has been around for a while but has not been
- 06:22 pursuing process improvements will have a hidden factory that is very large.
- 06:27 The processes for fixing things and working around problems will often require
- 06:32 more time and money than the processes that are intended to do things correctly.
- 06:37 This will be evident when we start doing the value stream mapping in
- 06:40 the measure phase.
- 06:41 We'll find there's no straight-line flow for doing things correctly the first time.
- 06:44 Instead, the process has numerous loops and branches that have been added
- 06:50 over the years and that only cause delays and create even more errors and costs.
- 06:55 The cost of poor quality is one of the best methods available to Lean Six Sigma
- 07:00 team to quantify the business impact of quality issues within a process.
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