Cost of Poor Quality

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 Cost of Poor Quality
Contents

• What is Cost of Poor Quality?

• Quality Cost Categories
• Estimating Cost Savings from a Six Sigma
Project
• Hard vs. Soft Costs

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 Cost of Poor Quality – Learning Objectives

After completing this module, you will be able to…

1. Identify costs due to poor quality.

2. Categorize quality costs as failure costs,

appraisal costs or prevention costs.

3. Categorize specific savings as either hard or soft

savings.

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 Six Sigma Roadmap – Cost of Poor Quality

Define To identify project opportunities.

Measure To estimate potential savings and to

establish focus.
Characterize
Analyze
Breakthrough
Strategy
Improve To quantify actual savings.

Optimize
Control To validate savings.

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 What is Cost of Poor Quality (COPQ)?

Costs incurred due to not having 100%

confidence that product or process quality is
perfect all the time.

Costs that would disappear if there were

no defects.

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 Quality Cost Categories
Internal Failure Costs
- costs that would disappear if no defects existed in the product
prior to shipment to the customer.

External Failure Costs

- costs that would disappear if no defects were shipped to the customer.

Appraisal Costs
- costs incurred to discover the condition of the product (during “first pass
through”).

Prevention Costs
- costs incurred to keep failure and appraisal costs to a minimum.

What are some examples for each category?

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 Internal Failure Costs

Internal
Failure
Costs Examples
• Scrap (labor and material)
External • Rework (labor, extra operations)
Failure
Costs • Retest
• Downtime due to defects
Appraisal
Costs • Yield losses
• Excess inventories
Prevention
Costs

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 External Failure Costs

Internal
Failure Examples
Costs • Lost business

External • Warranty
Failure • Dealing with complaints
Costs
• Returned product
Appraisal
• Price concessions due to lower
Costs
grade product
Prevention
Costs

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 Appraisal Costs

Internal
Failure Examples
Costs
• Incoming material inspection
External
• In process inspection
Failure
Costs • Maintaining test equipment
• Quality audits
Appraisal
Costs • Materials consumed through
destructive testing
Prevention
Costs

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 Prevention Costs

Internal
Failure Examples
Costs • Maintaining production equipment

External • Process Control & Capability

Failure evaluation
Costs
• Process improvement:
Appraisal -Error proofing
Costs -FMEA
-DOE
Prevention • Training
Costs

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 Cost of Poor Quality (COPQ)
Internal Costs of Poor Quality!
These costs would disappear
Failure if there were NO DEFECTS!
Costs

External A portion of these costs may disappear when a

Failure process is brought to a stable and capable state.
Costs Some appraisal will always be needed.

Appraisal
Costs Ideally, these costs would be no larger than
necessary to keep failure & appraisal costs to a
Prevention minimum. Prevention activities will
Costs always be needed.

Costs incurred because defects are produced

are the Costs of Poor Quality (COPQ).
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 Group Exercise 9.1 – Cost of Poor Quality

1. Refer to your workbook.

2. For the scenario to which your team is assigned ….

a.) list the specific quality cost items

b.) categorize each cost item as
– failure cost
– appraisal cost, or
– prevention cost

3. Identify additional process inefficiencies that create

unnecessary cost.

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 COPQ in Six Sigma Projects
The Cost of Poor Quality (COPQ) is used to ….
• Estimate the potential savings the project could yield
(MEASURE phase)
• Quantify the actual savings once improvements have
been made (IMPROVE phase)

COPQ
Savings
re

r
te
fo

Af
Be

Cost comparison before and after the Six Sigma project

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 COPQ – What to Include?

In Six Sigma, COPQ should include all unnecessary cost, that is, all cost
that does not add value to the product or service delivered to the customer.

When estimating the potential savings from a Six Sigma project, include
savings that could be realized by …

• Reducing defects
- reduced failure costs
- possibly, reduced appraisal costs
• Reducing variation and waste
- improved work flow
- improved cycle time

E Some of these savings are difficult to estimate.

NOT
Use cost data that is available and the expertise
of controllers and process owners.
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 Cost of Poor Quality - Example
A Six Sigma project is focused on improving productivity of the “Number 3 Assembly Line”.

Quality Costs Over Past Year ( $ 000)

Losses due to failures (defects)
Line shut downs (yield loss)………………………. 120
Material loss due to scrap…………………………. 49
* Rework labor………………………………………… 64
Dealing with customers complaints, labor………… 12
Express shipping……………………………………. 14
Total: 259
Appraisal expenses
Incoming inspection, labor…………………………. 32
End of line inspection and testing, labor………….. 84
Maintenance of test equipment……………………. 9
Total: 125
Prevention Expenses
Improvement projects, labor……………………….. 3
Training, labor……………………………………….. 5
Data collection and analysis, labor………………… 12
Total: 20
Total Quality Cost: 404
* This cost pertains to the one built-in rework loop. The Black Belt recognizes
that additional rework is conducted on line for which no cost data is available.
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 Cost of Poor Quality – Example (Cont.)
Project: Improve productivity of the “Number 3 Assembly Line.”

The Black Belt predicts the following gains may be realized from the
improvement project:
68% reduction in Failure Costs Savings
(0.68) x ($259,000) = 176,000
20% reduction in Appraisal Costs
(0.20) x ($125,000) = 25,000
Increase in Prevention Costs: -20,000

Potential Savings: $181,000

E The estimated annual savings will be refined once the

NOT
team has conducted a thorough analysis of the causes of
defects and variation.

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 Estimated Cost Savings
Why might the estimated cost savings change?
With additional data collection and cause analysis, the team could
learn….
Many of the causes for defects are outside of the team’s control.
The original estimated savings was overstated.
OR
The now visible “hidden factory” reveals additional opportunities for
cost savings. The original estimated savings was understated.

E By the end of the ANALYZE phase, the team

NOT
determines an improvement goal to which it can
commit.
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 Hard vs. Soft Costs
Six Sigma is primarily aimed at reducing spending by eliminating
defects and inefficiencies.
Two types of savings categories:
Hard Savings –
the absolute removal of spending Hard and Soft Cost

Soft Savings -
the removal of spending from a specific process step, but the
spending still takes place and the resources are not applied to
another productive use.

E Soft savings create opportunities to ultimately

NOT
reduce spending. Both hard an soft savings are
reported in Sigma Trac.
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 Hard Savings Example
Absolute spending reductions. Examples include:

$ Scrap dollars reduced as a result of eliminating

defects.

$ Rework costs are reduced as a result of eliminating

defects and the people who perform the work are
transferred to an “Approved Open Requisition.”

$ Overtime reduced as a result of process

improvement.

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 Soft Savings Examples
Opportunities for future savings or cost avoidance. Examples
include:

$ Rework costs are reduced, but the people performing

this rework are not able to be assigned to other
productive activities.

$ Space requirements for an activity are reduced, but we

are not able to vacate a facility, nor reassign the space to
another function, nor sublet the space to another tenant.

$ Avoiding the purchase of additional planned equipment

(even if the purchase is budgeted).

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 Exercise 9.2 – Hard vs. Soft Savings

1. Refer to your workbook.

2. For the examples given, categorize the savings as

either….

Hard cost savings

or
Soft cost savings

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