The Cost of Quality is made up four cumulative areas:
The Cost of Poor Quality is the sum of just 3 & 4:
COPQ = Internal Failure Costs + External Failure Costs
The picture below illustrates the some of the costs associated with poor quality. All of these represent areas of opportunity.
PREVENTION – cost of devices and actions to prevent defects in products and services.
APPRAISAL – cost of devices
and actions to assessing products and services to verify conformance to customer requirements.
FAILURE – these are
considered the Cost of Poor Quality (COPQ). The costs from products and services not meeting customer expectations.
Internal Failure – costs of failure prior to shipment to the
customer such as scrapping parts
that are in finished goods.
External Failure – costs of failure after, or during, shipment to the customer such as scrapping parts that are in finished goods.
Obviously, a product that can be produced with no cost related to quality is the perfect state but probably not practical. Therefore, the ideal focus for the team is to direct more cost toward prevention and appraisal and at a lower overall costs than the "current" state.
Examples of PREVENTION costs
Examples of APPRAISAL costs
Examples of INTERNAL FAILURE costs
Examples of EXTERNAL FAILURE costs
NOTE: Some of these examples can appear on the INTERNAL FAILURE
lists too. Don’t get caught up in this detail. Just pick a category and stay
consistent in your definition and measurement.
Some say the cost of PREVENTION is 1/7th of the cost of FAILURE. This is a generic claim and highly dependent on the nature of each business but as the saying goes “an ounce of prevention is worth a pound of cure”.
The value of a customer is best measured by their LIFETIME WORTH. Repetitive purchases and the possible spread of good news to other potential customers for a “lifetime” is the best a company can target. • Loyalty and Retention Worth may be options on an exam and are good responses but the best answer is LIFETIME WORTH.
Juran and Gryna are credited with developing the Optimum Quality Cost Model that shows that as Prevention and Appraisal costs increase, the costs of Failures decrease until a optimal value is achieved.
Some costs are not as obvious as others. Often, it is found that a majority of the costs related to COQ in a company is resides in the “FAILURES” category (both internal and external).
Often times companies will relate the Cost of Quality as a percentage of sales (% Sales). However, a different standard may apply to your model or business.
A better metric could be measuring the Cost of Quality as a % of Cost of Goods Sold (COGS). This removes the margin variation and eliminates product "mix" influences.
The first goal is to have all the cost of quality in the Appraisal and Prevention areas and zero Costs of Poor Quality.
Then, work to streamline any remaining costs without sacrificing the quality.
It can be challenging to standardize a calculation and many forms of the calculation exist. There are many obvious direct costs that can be categorized into one of the four areas but most of the costs are indirect and more difficult to quantify.
Work with the financial representative to help quantify and validate hard and soft savings.
Each company should come up with a standard with definitions for their formula. This is the same concept behind making a measurement system repeatable and reproducible.
Create a set of examples to help explain the costs and where they should be allocated.
Examples could be provided to Controllers and financial representatives to check for reproducibility and repeatability. In other words, perform a variable data MSA on the Cost of Poor Quality measurement system to help fine tune the calculation and standard operating procedure or work instruction.
Don't allow the details to interfere with going forward with a COPQ procedure. It can be refined while in use and savings could be at risk without any attention at all.
The COPQ becomes visible evident for the first time in a DMAIC project when a actual state detailed Process Map is created. The team will be surprised how frequently their is detection, appraisal, rework, scrap, or other COPQ related costs. The perfect state should strive to eliminate COPQ but reality is that not all can be economically eliminated. However simply understanding and growing the awareness and measuring the COPQ alone will usually lead to better results.
The actual improvements from the team will help with a fundamental shift of the results and a solid Control Plan and handoff will most importantly...CONTROL the future variation and SUSTAIN the gains.
COPQ is often summarized as findings within 7-Wastes, or also referred to as the 7 forms of Muda. Click here to learn more.
What’s the Cost of Quality (COQ) as a % of Sales if Sales are $1,000,000?
Summing up all four categories, the total COQ is $129,000 (FYI: the COPQ portion is $110,000)
Therefore, $129,000 / $1,000,000 = 12.9% is the COQ as a % of Sales
In summary, this isn't an ideal state. Too much costs are being incurred in the later stages (failures). The Six Sigma team should focus on Prevention and Appraisal investments to reduce the overall COQ.
Six Sigma Slides
Green Belt Program (1,000+ Slides)
Cost of Quality
Cause & Effect Matrix
Central Limit Theorem
MTBF and MTTR
... and more