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About this lesson

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 on the project benefit.

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 on 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).

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 on finding and fixing 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 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.
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  • 00:05 Hi, I'm Ray Sheen.
  • 00:06 An excellent means of prioritizing and quantifying the impact of process
  • 00:10 improvement is to use the concept of cost of quality.
  • 00:16 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.
  • 00:24 These costs go well beyond just measuring the amount of
  • 00:27 material that is being scrapped or returned from the customer.
  • 00:31 As part of this analysis,
  • 00:33 we divide the categories of quality related costs into two groups.
  • 00:37 One is the Cost of Poor Quality and the other is the Cost of Good Quality.
  • 00:41 In essence, the cost of poor quality are fixing things that have gone wrong,
  • 00:45 and the cost of good quality are preventing things from going wrong.
  • 00:50 One subset of the Cost of Poor Quality are internally focused.
  • 00:53 Some of these are often captured in internal quality reports.
  • 00:57 It includes scrap and rework, some that often
  • 01:00 are not tracked as quality costs are down time, process delays and shortages.
  • 01:06 These are all issues that directly impact internal costs and
  • 01:09 are due to failures that have occurred in the business process.
  • 01:13 The other subset of the Cost of Poor Quality are externally focused.
  • 01:17 That means that these are the costs associated with fixing issues raised at
  • 01:21 customers' locations.
  • 01:22 This includes addressing customer complaints, doing repairs or
  • 01:26 warranty work for customers.
  • 01:28 There are also indirect impacts such as losing sales because of
  • 01:32 dissatisfied customers who won't repeat the purchase, and
  • 01:35 may discourage others from making purchases.
  • 01:38 An interesting external Cost of Poor Quality has recently been added to
  • 01:42 the list is a negative impact on the environment due to the product failures.
  • 01:47 Let's contrast these with the Cost of Good Quality.
  • 01:50 Keep in mind these are actions taken by the company to prevent defects, or
  • 01:55 to find them at an early stage allowing the company to fix them at
  • 01:58 that point of the process where the problem occurred.
  • 02:01 One category of these is called appraisal costs.
  • 02:04 These are costs that try to find problems as soon as possible so they can be fixed.
  • 02:08 This includes the cost of the inspection and
  • 02:10 test steps in the process, and the cost
  • 02:13 of audits to find the steps in the process that are not being performed correctly.
  • 02:17 Another category is prevention costs.
  • 02:20 These are really investments into the process or
  • 02:23 operations that will enable defect free process performance.
  • 02:27 This includes planning, training, and evaluating to discover weaknesses and
  • 02:31 opportunities for improvement.
  • 02:33 During the define stage, Lean Six Sigma projects have a tendency to focus on
  • 02:38 the cost of poor quality since they are measuring existing problems that need to
  • 02:42 be fixed and the methodology is a process improvement methodology.
  • 02:47 So let's get more specific. Cost of Poor Quality includes the cost of the business
  • 02:52 as a result of making defective products or delivering defective service.
  • 02:56 That's more than the material and labor costs.
  • 02:58 In particular, the overhead cost for problems is much higher because it
  • 03:02 requires the decisions which often create delays and
  • 03:05 extra effort to study the situation in order to make the correct decision.
  • 03:10 Measuring the cost of lost sales is very difficult, but
  • 03:13 it's normally easy to measure sales concessions or rebates.
  • 03:18 And Cost of Poor Quality has the added advantage of putting these quality defects
  • 03:21 into financial terms which is the universal language of business.
  • 03:26 Telling a business manager that only a 10% yield is a problem
  • 03:30 is normally not nearly as impactful as telling the same individual
  • 03:33 that we just spent $1 million on fixing the defects we're creating.
  • 03:38 But that's why many Lead Six Sigma projects are prioritized and
  • 03:41 selected based upon Cost of Poor Quality.
  • 03:44 Business leaders and
  • 03:45 stakeholders easily understand financial impacts of the problems, and
  • 03:50 are more likely to support projects with high Costs of Poor Quality.
  • 03:55 This is one of the areas where we see the synergy
  • 03:57 between classic Six Sigma analysis, and Lean Manufacturing analysis.
  • 04:01 That is because the costs of fixing these defects is non-value added effort.
  • 04:07 Now let me clarify,
  • 04:07 I know I've said that we want to eliminate non-value added effort.
  • 04:12 I'm not suggesting that we don't fix problems but rather I'm saying if we don't
  • 04:16 create the problems, we don't have to spend the effort to fix the problems.
  • 04:20 When fixing a problem, we're not adding new value to a product or service.
  • 04:25 We're just restoring the value that should have been there all along
  • 04:28 if the defect hadn't occurred.
  • 04:30 That is why the effort is non value added effort.
  • 04:34 As I have mentioned before,
  • 04:35 reducing non-value added effort is a key principle in Lean.
  • 04:39 So reducing the Cost of Poor Quality is right in line with lean improvements.
  • 04:45 Another term used for this is the hidden factory,
  • 04:48 and this means that an organization must create a set of processes or procedures.
  • 04:53 In fact sometimes it's an entire department
  • 04:56 in a facility that are devoted to fixing the problem.
  • 04:59 If the problem goes away, there's no need to expend the effort on those activities.
  • 05:05 In my experience, operations that have been around for awhile but have not
  • 05:09 been pursuing process improvement will have a hidden factory that is very large.
  • 05:14 The processes for fixing things and working out problems will often require
  • 05:18 more time and money, than the process that was intended to do things correctly.
  • 05:23 This will become evident when we start doing Value Stream Mapping in
  • 05:26 the measure phase.
  • 05:27 We'll find that there's no straight line flow but instead the process has numerous
  • 05:32 loops and branches that have been added over the years and
  • 05:35 that only caused delays and create even more errors, costs, and confusion.
  • 05:43 The Cost of Poor Quality is one of the best methods available to a Lean Six Sigma
  • 05:48 team to quantify the business impact of quality issues within a process.

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