COPQ Training Materials
COPQ Training Materials
COPQ Training Materials
Agenda
1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
History/Background of COQ
Joseph Juran first discussed cost of quality analysis in 1951 in the first edition of Quality Control Handbook Armand Feigenbaum identified the four cost categories in 1956 in Total Quality Control in the Harvard Business Review, Vol. 34, No 6
History/Background of COQ
Armand Feigenbaums original categories Cost of Control
Prevention costs Appraisal (i.e., inspection) costs
History/Background of COQ
The Quality Cost Committee was established by the then ASQC in 1961 Philip Crosby, a former CEO, popularized the concept of COQ with his book Quality is Free in 1979 The current revisions of ISO 9000, QS-9000 and AS9100 reference the use of COQ in quality improvement
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History/Background of COQ
Crosbys categories Price of Conformance (POC/COC)
Prevention costs Appraisal costs
Deming the cost of nonconformance, and the resulting loss of good will, is so high that measuring it is not necessary Juran as defect prevention increases, the cost of scrap/rework decreases faster. Need to know where to look Crosby money is the language of management, you need to show them the numbers
You can easily spend 15 - 30% of your sales dollars on PONC. - Crosby In most companies the costs of poor quality runs at 20 - 30% of sales. - Juran
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Example 1
Paper Mill April 2004 Report to New CEO Sales: $220,000,000 (460 employees) POC: $7,600,000 PONC: $35,300,000 COQ: $42,900,000 EBITDA: $12,678,000 Net Profit: $3,150,000
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Example 1
Paper Mill April 2004 Report to New CEO Sales: $220,000,000 POC: $7,600,000 (>90% appraisal) PONC: $35,300,000 COQ: $42,900,000 3X 11X EBITDA: $12,678,000 Net Profit: $3,150,000 Net Profit/Sales = 1.43%
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Example 1
Paper Mill April 2004 Report to New CEO Sales: $220,000,000 ~ 5X POC: $7,600,000 PONC: $35,300,000 COQ: $42,900,000 EBITDA: $12,678,000 Net Profit: $3,150,000 Net Profit/Sales = 1.43%
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Example 2a
Transportation Industry Supplier (1998) Sales: $130,000,000 COC: $4,400,000 (92% appraisal) COPQ: $18,500,000 COQ: $22,900,000 3X EBITDA: $6,531,000 Net Profit: $2,050,000 Net Profit/Sales = 1.57%
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9X
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Example 2b
Transportation Industry Supplier (2003) Sales: $185,000,000 COC: $8,600,000 (45% appraisal) COPQ: $8,100,000 COQ: $16,700,000 0.5X 1.2X EBITDA: $19,900,000 Net Profit: $6,650,000 Net Profit/Sales = 3.6%
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COPQ
Profits
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Background of Quality Costs Evolution of Quality Traditional vs Value Driven Quality Strategy
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What is Quality?
Quality is fitness for use (Joseph Juran) Quality is conformance to requirements (Philip B. Crosby) Quality of a product or service is its ability to satisfy the needs and expectations of the customer
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Inspection with the aim of finding the bad ones and throwing them out is too late, ineffective and costly. Quality comes not from inspection but improvement of the process.
Dr. W. Edwards Deming Founder of the Quality Evolution
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All quality improvement of a lasting nature occurs as the result of a project. Joseph Juran
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Traditional Strategy
Historically, organizations tend to treat strategic planning and quality improvement planning as two separate and unrelated activities Strategic planning tends to be regular and scheduled, but with no follow up Continuous improvement is not a process, it happens randomly, with no connection to the big picture
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1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
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Total Quality Costs represent the difference between the actual (current) cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure to meet specifications, failure of products, or defects in their manufacture.
Campanella, Principles of Quality Costs
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Prevention
The costs of all activities specifically designed to prevent poor quality in products or services. Examples include:
Quality planning New product reviews Quality education Process capability evaluations Supplier capability surveys Quality improvement projects
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Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Profit
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Prevention
In the ideal situation, prevention costs will be the largest portion of the Total Cost of Quality. Typically, prevention is less than 10% of TCOQ It should be over 70%!
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Appraisal
The costs associated with evaluating or auditing products or services to assure conformance to quality standards and performance requirements. Examples:
Incoming inspection/test Calibration of inspection/test equipment Final inspection/test These are all planned activities
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Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Profit
Appraisal
Appraisal costs should be the second largest category, but should not exceed prevention costs.
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Internal Failures
All costs resulting from products or services not conforming to requirements or customer/user needs which occur before delivery/shipment of product, or the furnishing of a service. Examples include:
Scrap/rework Reinspection/retesting Material Review Board
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Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Profit
Internal Failures
The goal is to identify all internal failures and resultant costs, and then systematically identify and eliminate root causes until internal failure costs are eliminated. Remember, all firefighting is a the result of a failure!
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External Failures
All costs resulting from products or services not conforming to requirements or customer/user needs which occur after delivery/shipment of product, or the furnishing of a service.
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Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Profit
Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Int. Failure: $400,000 Ext. Failure: $330,000 COPQ $730,000 COPQ/Sales = 18.3%
Profit
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Income Statement Income Sales Returns Income Cost of Goods Sold Labor Materials COGS Expenses Salaries Services Depreciation Training Supplies Interest Rent Accounting Legal Office Supplies Travel Licenses/Certification Meals and Ent. Advertising Sales Shows Repairs Telephone Utilities Expenses
$960,600 $1,118,000 $2,078,600 $483,800 $98,400 $194,340 $3,300 $36,900 $61,500 $287,000 $24,600 $28,200 $16,400 $28,700 $12,300 $15,300 $82,000 $41,000 $44,600 $20,500 $36,900 $1,515,740 $400,660
Profit
TCOQ Summary
Sales: $4,100,000 Profit: $400,660 COC/Sales = 6.5% COPC/Sales = 17.8% TCOQ/Sales = 24.4% COPQ/Profit = 1.8 TCOQ/Profit = 2.5
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Int. Failure: $400,000 (40%) Ext. Failure: $330,000 (33%) COPQ $730,000 (73%) TCOQ: $1,000,000 (100%)
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PONC
Year 2
Year 3
Year 4
Year 5
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PONC
You must INCREASE the POC, mostly Prevention costs, BEFORE COPQ will start to drop.
Year 1
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Spending more on prevention will reduce appraisal and failure costs over time
Failure
Costs
Appraisal
Prevention
Time
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Failure
Appraisal
Prevention
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Over 70% thought their organizations COPQ was less than 10 percent of sales Twenty-seven percent admitted they had no idea what their companies COPQ was One of the conclusions of those conducting the survey: too many people still do not understand the relationship between cost and quality
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Artificial Hip
$10,000
Litigation loss
$1000
Field Failure/Repair
$100 $10
Receiving Inspection
Failure Costs
Final Inspection
Internal
Subsystem/Assembly Component
$1
Prevention
Process Time
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1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
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A key finding in a four-year study* for the Institute of Management Accountants, of more than thirty industry leaders, is the importance of understanding the cause and effect relationship among strategy, quality, productivity, profitability and competitiveness.
* Atkinson, Hamberg and Ittner, Linking Quality to Profits, 1994
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Higher Quality
Which Leads to
Increased Productivity
Which Leads to
Increased Profitability
Which Leads to
Increased Competitiveness
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Any Similarity?
Effective Quality Improvement
Which Leads to
Higher Quality
Which Leads to
Increased Productivity
Which Leads to
Increased Profitability
Which Leads to
Increased Competitiveness
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Increased Profitability
Which Leads to
Increased Competitiveness
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1. Cut budget
5. Poor quality
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1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
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Two Approaches
Ad-hoc informal system
Purpose is to quickly get a good estimate of how large TCOQ and COPQ are Output is TCOQ report for a point in time
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Disadvantages
Typically underestimates COPQ and does not get managements attention
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Disadvantages
Slower to get first report Adds infrastructure (costs) although these will be more than offset IF COQ projects are successful
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For every cost, and cost category, be willing to ask this question: If all of our processes (admin and manufacturing) produced the correct results the first time, would this cost still be here?
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1. Linking Quality Improvement to Profits 2. Cost of Quality Definitions and Types 3. Understanding Cause and Effect in COQ Measurements 4. Establishing COQ Baseline 5. Cost Driver Analysis
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$447,144
100
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Poor-QualityCost Element Late shipments Penalties Incorrect shipments Partial shipments Cost Drivers
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15% 5%
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15% 5%
10%
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15%
$198,714 Penalties
Partial Shipments
15% 5%
10%
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$101,940
5%
15%
$198,714 Penalties
Partial Shipments
15% 5%
10%
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Partial Shipments
Penalties
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Last Thoughts
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Typically Missing
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Key Points
COPQ is big, usually 15-20% of sales! COPQ is usually 3-5X profits, can be 10X. Understanding poor cost of quality drivers is the key to understanding the right project to work on. Must capture white collar/indirect COPQ costs. Prevention/Appraisal costs have to go up, before overall COQ can go down. There are no exceptions to this!
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Questions
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