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Cost Of Qualty

Cost of Quality (“COQ”)  is a measurement used for assessing the waste or losses from some defined process (eg. machine, production line, plant, department, company, etc.).

Cost of Quality (“COQ”) is measured in currency (eg. $), requiring all losses and wastes to be converted to their liquidated cost equivalent (ie. man-hrs lost or spent are converted to $ by multiplying by the hourly rate, $/hr).

PQA has developed numerous proprietary Cost of Quality (“COQ”) systems for ensuring the effectiveness of Cost of Quality (“COQ”) implementations.

COQ Category Typical Descriptions (may vary between different Organizations) Examples
Internal Costs associated with internal losses (ie. within the process being analyzed) off-cuts, equipment breakdowns, spills, scrap, yield, productivity
External Costs external  the process being analyzed (ie. occur outside, not within).  These costs are usually discovered by, or affect third parties (eg. customers).  Some External costs may have originated from within, or been caused, created by, or made worse by  the process being analyzed.  They are defined as External because of where they were discovered, or who is primarily or initially affected. customer complaints, latent defects found by the customer, warranty
Preventive Costs associated with the prevention of future losses:   (eg. unplanned or undesired problems, losses, lost opportunities, breakdowns, work stoppages, waste, etc.) planning, mistake-proofing, scheduled maintenance, quality assurance
Assessment Costs associated with measurement and assessment of the process. KPI’s, inspection, quality check, dock audits, third party audits, measuring devices, reporting systems, data collection systems, forms


Cost of Quality (“COQ”) can be used to identify the global optimum for a process, and monitor that process’ progress towards its global optimum.  Global optimum is defined as the best possible outcome from all physically possible operating modes, combinations, and permutations of the current process.

For info on $ losses typical associated with organizations and their quality levels

Cost of Quality (“COQ”) is used to collect cost data on a sampling basis (eg. all data occurring during a 24 hr period, calculated once each quarter), or on a continuous basis (eg. Cost of Quality (“COQ”) is calculated with all data occurring in the month, and reported monthly) .

After confirming that the data is accurate and comprehensive, and consistent with previous definitions and implementations, it is analyzed for opportunities and trends.  Based upon statistical analysis (eg. regression analysis, indexes, correlations, Pareto analysis, factor analysis, etc.), conclusions and recommendations are presented to managers of the process being analyzed.

In some cases (supported by process modeling, heuristics, prior experience, or intuition) the optimum Cost of Quality (“COQ”) can be predicted, and the process design necessary for achieving this global optimum Cost of Quality (“COQ”) can be defined.  A plan can then be defined to modify the current process, phase by phase, so as to move towards this global optimum process.

Management responsible for the process can decide on if, how, and when they will run the current process, or modify the process for even better results.

All projects are analyzed for their impact on Cost of Quality (“COQ”), and projects that show high ROQ are implemented on a priority basis
(ROQ%= $Cost of Quality (“COQ”) savings/$Implementation cost*100%).

When all costs are included, Cost of Quality (“COQ”) as a % of gross sales $ will probably be around 30% to 35% for a profit orientated organization, 40% to 60% for a not-for-profit organization (ie. hospitals, charities, government, etc.).  Many organizations take only a sub-set of the costs, including only those that tend to fluctuate, or that often need management intervention.  The others are assumed to be constant.

When manufacturing companies often earn only 5% NPBT (Net Profit Before Tax), a 35% Cost of Quality (“COQ”) indicates that 40% of gross revenue is generated by the company as profit, but only 5% of that gets trapped as NPBT.  Therefore, the profit yield is only 12.5% (87.5% of the available profit is lost before it gets to the bank).

For improvements in Cost of Quality (“COQ”), some manufacturers have been able to reduce manufacturing costs by as much as 7.65% per year, every year, for more than 10 years.

For Six Sigma processes, Cost of Quality (“COQ”) is usually reduced to less than 1% of gross sales $.   This indicates that, as large and unbelievable as Cost of Quality (“COQ”) $ seems to most managers, it is a real number that can be eliminated through hard work and dedication.

Result——

Obviously, as more and more improvements are made, it becomes more difficult to find the next saving.  This is when an excellent Cost of Quality (“COQ”) system can help point out the remaining opportunities.

symptoms

For organizations that:

  • Currently have no Cost of Quality (“COQ”) system, but could benefit from a well-designed & implemented Cost of Quality (“COQ”) system
  • Have a Cost of Quality (“COQ”) system, but that Cost of Quality (“COQ”) system is poorly designed, or poorly implemented.

the following symptoms are typically felt:

  • Slow rate of improvement
  • Low or no profitability
  • Bureaucracy or complexity of business processes continue to get worse and worse
  • Changes in one area tend to have disastrous effects in other areas
  • Management get personally involved in quality problems only during a major crisis
  • Management is running out of ideas on where to cut costs any further
  • All employees are not actively and personally involved in driving the Organization’s Mission forward
  • Many individuals and departments disagree on what are the top priorities for the Organization
  • Sub-processes and Departments are operated in a manner that is detrimental to the Organization’s overall best interest.
  • For organizations not using COQ Software, there are often higher costs for running the COQ system, inconsistent implementation, and non-optimum results from the COQ system.

Problem Encountered

Because of poor design or poor implementation of Cost of Quality (“COQ”) systems, the Cost of Quality (“COQ”) systems often suffer from one or more of the following problems:

  • COQ data collection is watered-down, or have superficial implementations that quickly become make-work exercises with little or no benefit, other than to fill filing cabinets or hard disk drives on computers.
  • Efforts are directed at where it is easy to collect data, or easy to implement changes, instead of focusing on the Cost of Quality (“COQ”) priorities (eg. largest cost category, most variation, largest business risk, etc.)
  • The Cost of Quality (“COQ”) input data are often incomplete.  The Cost of Quality (“COQ”) definitions are often un-clear, or not fully understood, resulting in varying interpretation and implementation over time.  This variability tends to add significant noise to the Cost of Quality (“COQ”) data, clouding the interpretation and hiding significant trends for extended periods of time.
  • Management does not actively use the Cost of Quality (“COQ”) data in an effective manner.  Decisions are often made without realizing nor considering the impact on Cost of Quality (“COQ”), thereby neutering the Cost of Quality (“COQ”) system to irrelevancy.
  • When Cost of Quality (“COQ”) is not utilized during project approval decisions, as management makes changes (supposed “improvements”), Cost of Quality (“COQ”) $ tend to shift from one category to another, with little net effect.  For example, a new machine is purchased to reduce scrap.  Higher setup, first-off, inspection, and maintenance costs offset the scrap savings, with no net improvement in Cost of Quality (“COQ”).
  • Cost of Quality (“COQ”) costs oscillate between the four Cost of Quality (“COQ”) categories on a revolving basis, with little or no reduction in the total Cost of Quality (“COQ”).  For example, money is spent to increase surveillance, which indicates a problem exists with internal &/or external failure costs.  Surveillance costs are stopped, but prevention actions are taken to reduce failure costs, thereby increasing prevention costs.  The preventive actions are not comprehensive or not consistently implemented, so the internal and/or external failures eventually come back.  The rising internal &/or external failures prompt another round of surveillance activities, with additional assessment costs incurred.
  • The collection of Cost of Quality (“COQ”) data becomes more and more costly and bureaucratic over time, making it slower to respond to significant changes, and less useful.
  • Statistical analysis of Cost of Quality (“COQ”) data is not performed.  Early recognition of trends are missed, and random variations are mistaken for significant signals; starting “wild goose” chases, wasting time & resources, and distracting everyone from the real issues.
  • Cost of Quality (“COQ”) system is isolated from other KPI (Key Performance Indicators) systems, missing the opportunity for more in-depth understanding of cause-effect relationships for the Cost of Quality (“COQ”) results.
  • For any measurement system, it should cost less than ~1% of the savings generated by the use of the measurement.

Consideration before Implementing COQ

  1. Is the management team committed to making rapid changes for maximum profitability, within the imposed constraints (eg. Company’s Mission, laws & regulations, stakeholder satisfaction, etc.)?
  2. Are there “sacred cows”, legacy systems, departmental silos, and empire building that are exempt from re-evaluation?
  3. Are the hard costs (payroll, raw materials, utilities, etc.) more easily measured (or more important) than the soft costs (morale, employee satisfaction, market share, plant capacity utilization, customer’s losses, supplier’s losses, societal losses)?
  4. Are the current management measurement systems (eg. KPI’s, scrap, rework, excess freight charges, stock outages, absenteeism, productivity, profitability, etc.) compatible with Cost of Quality (“COQ”)?  Can these other systems be adapted to include Cost of Quality (“COQ”) without neither duplication nor conflict?
  5. Will people be receiving mixed messages and conflicting signals between Cost of Quality (“COQ”) and the traditional management measurements?
  6. Is there management commitment to do something about the Cost of Quality (“COQ”) data on a timely basis?
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