‘Cost of Poor Quality

(COPQ)’
 Overview: COPQ Model
• Why ?What ? How ? When ?
 Why COPQ ?????
Equation:
CP + Profit = SP
8 + 2 = Rs 10/-
8 + 1 = Rs 9/-
8 + 0 = Rs 8/- X
7 + 1 = Rs 8/-
 Overview: COPQ Model
Total Cost = RM +Conversion Cost +Depreciation
Out of the above where we should attach ???
Certainly …… Conversion cost …. As this is purely in our control
 Why COPQ ?

It’s not enough to do your best; You must know what to do and
then do your best.
Why Cost of Poor Quality?
• Everyone understands language of Rupee.
• Less COPQ means improved profits
• Can lead to improved Quality management Systems
• Can lead to Actions for improvements
BENEFITS of COPQ Model

Lower rejection & rework

Improved yields
Lower cost
Lesser Lead Times
Higher customer satisfaction
Pleasant workplace
Motivated employees
Improved profits
 1-10-100 Rule

1
Prevention
Rs
Stages

10
Correction Rs

Rs 100
Failure

Rs

Rs
 Target Vs Actual
So it’s always the variance:
Target vs Actual:
• Defects/Rework/Scrap
• Lead Time
• Productivity
• Standard vs Actual Consumption for Consumables
• OEE
• ITR
• Yield
• Inventories
• Change over time
 Why measure COPQ ?
What would happen if all the systems, processes, and
products were perfect. ????
 History of COPQ

• 1950’s COQ in GE – AV Feigenbaum

• 1951 Cost of Quality Concept – Dr. J.M. Juran
• 1964 – Q100 Report IBM
• 1979 – Quality is Free – Philip Crosby
• 1980’s – Cost of Quality is Popularized
• Late 80’s to 90’s – COQ loses favor
• 1990’s – COQ reappears with Six Sigma
• 1998 – COPQ Reappears in QS-9000
• 2002 – COPQ present in ISO/TS 16949:2002
 Making good quality product ??
1. Perfection
2. Consistency
3. Eliminating waste
4. On time delivery
5. All policies and procedures in place
6. Doing it right the first time and every time
7. Moving from Customer satisfaction to Customer delight.
8. Customer Obsession

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 Cost of Poor Quality
Estimation:
20 % : in manufacturing
30 % : in service industry
 Who is Responsible?

If COPQ is high then who is responsible ?

• Management or
• Operators
 What is COPQ ?
“Cost of poor quality is …
the expense of nonconformance –
the cost of doing things wrong.”

• The "cost of poor quality” is all those costs which are incurred in any
company for not producing the product first time right.
 Categories of Quality Costs

Quality Costs

Conformance Non-Conformance

Prevention Appraisal Internal failure External failure

 Cost of Quality
Cost of quality = Cost of conformance + Cost of non-conformance

• Cost of conformance is the cost of providing products or services as

per the required standards. This can be termed as good amount
spent. (Prevention & Appraisal costs)
• This is before a product has been made.
 Cost of Non-Conformance
• Cost of non-conformance is the failure cost associated with a process not being
operated to the requirements. This can be termed as unnecessary amount spent.
( Internal & External failure costs)
 Appraisal Costs

“Appraisal costs are all those costs incurred to

ensure/appraise that the processes are right
as per standards.”

• Any defective parts and products should be

caught as early as possible in the production
process.
• Inspection costs.
 Appraisal Activities

• Incoming Inspection
• In-process Inspection
• Lab Services
• Final Product Testing
• Review of Quality Defects
• Internal Audits
 Appraisal Costs

• Examples
– Incoming inspection and test
– In-process inspection and test
– Final inspection and test
– Document review
– Product quality audits
– Equipment Calibration
– Testing of incoming material
 Prevention Costs

• All of us know that Prevention is better than

cure
• Then how to achieve this ?
• Who is responsible for ensuring that everyone
in the organization starts thinking in this
direction ?
 Prevention Costs

“Prevention costs support activities whose purpose is to

reduce/eliminate the number of defects.”
• The most effective way to manage the
business in such a way that
defects/abnormalities do not occur at all.
 Prevention Costs

Examples
–Quality planning
–New-product review
–Process planning
–Process control
–Supplier up gradation
–Training.
 Prevention Costs

• All those costs incurred that focus on

prevention rather than correction.
• Can you think of reasons as to why this should
not be done ?
 Preventive Actions
• Process improvement program to understand
customer requirements.
• Include surveys, prototypes, and voice-of-the-
customer analyses.
• Internal quality training programs and techniques
to reduce design defects such as review checklists,
defensive design training, and the use of
automated design and test tools.
• Process redesign,
• Increased process validation capabilities
 Prevention Activities

• Quality Plan
• Process mapping
• Investigation into process improvement
opportunities
• Customer focus based activities
• Supplier up gradation activities
• Training on kaizen
• SPC
• FMEA
Mistake Proofing in Everyday Life

• Auto-shut-off on gas pumps

• Double-sided car keys
• Auto-flush in public facilities
• Motion detector activation
• Can’t start your car in gear
• Ground plug only goes in one
way
• Think of some examples
 Characteristics of Mistake Proofing

• Three objectives when mistake proofing;

– Can’t receive bad product
– Can’t make bad product
– Can’t ship bad product
• Reason for mistake proofing device is clear
• Never fails
• Low or no cost
• Made with shopfloor wisdom & ingenuity
• Simple, durable and easy to maintain
• Device idea is transferable to other areas
• Reduces non-value added activities
 Internal failure costs
Internal failure costs occurs when results of work fail to reach
designated quality standards , and are detected before transfer to
the customer takes place.
Characteristics of Mistake Proofing
 External failure costs
External failure costs occur when the product or service from a process
fails to reach designated quality standards , and is not detected until
after transfer to the customer.
Activities associated with External failure costs

ã Processing / investigation of customer

complaint
ã Repair/replacement of sold goods
ã Warranty claims
ã Product liability & litigation costs
ã Interest charges on delayed payment due
to quality problems
ã Loss of customer goodwill & sales.
 Internal Failure Costs
• Cost of Inefficient Processes
– Process variation
– Downtime
– Inventory ( more than norms )
– Not following the standards . (Deviations in
QMS)
– Non-value added activities
• What would happen if the above abnormalities
were not there in the processes ??
 Internal Failure Costs

• Failure to Meet Customer Requirements

and Needs
– Scrap
– Rework
– Defect analysis
– Supplier defects
– Re inspection
– Retesting
 External Failure Costs

“All those costs which are incurred

once the product leaves the plant .”
 External Failure Costs

• Failure to Meet Customer Requirements and

Needs
– Warranty charges
– Complaint adjustment
– Returned material
– Penalties due to poor quality
– Rework on support operations
– Revenue losses in support operations.
 External Failure Costs

• Lost Opportunities for Sales Revenue

– Customer defections
– New customer lost because of quality
– New customer lost because of lack of capability.
 Process improvement tools

Seven QC Tools

1. Flow charts
2. Check sheets
3. Histograms
4. Pareto diagrams
5. Cause-and-effect diagrams
6. Scatter diagrams
7. Control charts

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 Computing cost of poor quality- make it
simple
Am ount Percentage

Internal Failure Costs

Scrap
Repair & rework
Vendor Losses
Failure Analysis
Total internal

External Failure Costs

Failures-manufacturing
Failures-Engineering
Failure-Sales
W arranty charges
Failure Analysis
Total External

T otal Quality Costs

 Steps To Improve Quality
Prevent
Defects
Determine Poke-Yoke
Causes
Rank/Sort
Defects Fish Bone Diagram
RCA- Why-Why
Identify
Defects Data Collection
Pareto
Pictograph
Check Sheet
Root Cause Analysis and Countermeasures

• Ask Why 5 Times

– For each cause of an issue ask why until the root
cause is remaining
• The ROOT Cause:
– Rarely obvious
– You often cannot implement a permanent
countermeasure on the spot
• Temporary Countermeasure or Band Aid :
– Implemented on the spot to get production up and
running
– It is important NOT to let the band aid become the
finale solution!
• Permanent Countermeasure:
– A permanent countermeasure must be developed,
using all resources, to prevent the issue from ever
happening again.
– Permanent countermeasures assure continuous
improvement.
 Mistake-Proofing / Poke-Yoke

• Yokeru – to avoid
• Poke – inadvertent errors
• Poke-Yoke – “mistake proofing”

“It is because the Poke-Yoke system has the

very real capacity to reduce, and eventually to
eliminate, defects that I would like to see it
adopted in as many companies as possible.”
- Shigeo Shingo
 Three Levels of Quality
Successive Self Checks Mistake
Checks Proofing
Definition Operators check Operators check Automatic check
work of previous own work before & prevention of
operator passing to next defect
operator
Plusses Plus: Plus: Plus:
• Instant correction • 100% inspection
& Issues Generally possible usually with no extra
effective in
• More palatable than time or expense
catching defects
supervisor or peer • Instant correction
Issues: check • Can usually be
Corrective action Issues: applied to other
can only occur Operator may processes
compromise quality or • Innovative for the
after defect is forget to perform check competitive
made advantage
 How to Calculate COPQ

• To calculate COPQ, we need to determine the

labor and material costs involved with
external failures, internal failures, appraisal
costs, and investment in preventive action.
Limitations for calculating correct COPQ

• How to find out Opportunity costs

• Increased time to market
• Extra space used
• Poor reputation costs
Roadblocks to ascertain correct COPQ

• Can you list down problems in

identifying correct COPQ ?
 Are we projecting Real Costs?

• There is a fear to project real costs

• Therefore people try to hide facts
 Training

• Train your employees on COPQ principles

• As the awareness about COPQ increases, by
formation of a cross functional team calculate
COPQ
LFM – Learning from Mistakes

• At the completion of any project , conduct a

thorough analysis
• Find what all went wrong
• What could have been done better
• Analyze reasons
• Use these learnings so that in future
projects/work these mistakes are not repeated.
 KAIZEN

Kai + Zen
Change for Better
Continuous Improvement
Continuous Improvement
 Industry Example
COPQ as a percent of total costs Before After
• Failure cost 6.3% 4.0%
• Appraisal cost 2.8% 2.2%
• Preventive action cost 0.2% 0.6%
• Total 9.3% 6.8%
Savings
• Appraisal costs reduced Rs 430,000
• Scrap and rework reduced Rs 2,068,000
• Complaint costs reduced Rs 536,000
Improvement Activities: Manufacturing
• Reduce errors with process design changes (poka-yoke)
• Addition of test fixtures to simplify manual processes
• Capability studies to define optimum parameter settings
• Enhance supplier controls to refine part specifications
• Redesign of device for improved manufacturability
• Addition of automated manufacturing equipment
• Enhanced automated test equipment
• Refinement of acceptance test criteria
• Real time automated test data trending
• Refinement of work instructions
 Improvement Activities:
Research and Development

• Redesign to reduce parts to improve reliability

• More system integration testing for design changes
• Closer participation of R&D in definition of manufacturing
processes
• Conduct early parallel design and test activities
• Use focused checklists to enhance review effectiveness
• Employ focus groups to better understand customer needs
• Use project post-mortems to identify root cause for
historical failures
• Redesign to facilitate future changes
• Implement a culture of defect prevention
 Go Forward Plan (How to Reduce
COPQ?)
1. Review all the costs as per COPQ model.
Consult others who have used COPQ model .

2. Select one location / unit for pilot study. ( One

plant or it may be a large section of a plant)
 Training/Awareness

3.
• Involve key persons in the organization.
• Must include Finance persons
• Train everyone on COPQ model ( through on-
site Training sessions for everyone)
• Undertake specific Time Bound improvement
projects
 Data Collection

4.
• Data Collection: Try to take support of
Accounting department .
• After a careful understanding/analysis of the
data, seek management support to take up
improvement projects to reduce COPQ.
 Involvement

5.
• This activity of reducing COPQ should never
be considered as a singular activity.
• Form a cft ( Cross Functional Team )
• Include persons from:
Production, Quality Control, Finance,
Maintenance, Stores, Supply Chain, Design,
Sales/Service.
 Know the current situation

6.
• The next step should be to calculate present
level of COPQ as % of sales.
 Approval for Improvement Projects

7. Identify improvement projects and seek

management approval.
8. Formation of improvement teams
9. Implement Kaizen / Change Systems
&Procedures/ Improve processes/Implement
Poka Yoke/ Train the Operators, supervisors
and managers
 Calculating COPQ- Tips

1.
• Prepare an account of all the costs as per
COPQ model.
• Inspection department + appraisal activities +
warranty expenses + prevention costs
 Calculating COPQ- Tips

2.
• Check Accounting systems: For example, if a
production person is doing inspection then
take that portion of his work as an element of
COPQ.
 Estimation

3.
• .If accurate data is not available , go for
estimation – use your experience / history of
defects/abnormalities
 Accounting System

4.
• If some production workers spend part of
their time repairing defective product - Create
a temporary record to determine the repair
time and thereby the repair cost.
 Estimation
5.
Engineer in R&D:
• For some part of his work he carries
out Failure analysis – Then take this
part as an element of COPQ
Unit cost method for Estimation

• Track unit cost data.

• Find out cost of correcting one
error and multiply by the number
of errors per year.
e.g Billing errors .
 Loss of Sale Revenue

• Utilize market research data:

• Cost of poor quality includes lost sales
revenue due to poor quality.
• It is very difficult to estimate this, however
we may use market research data and
estimate how many customers have defected
due to poor quality
 Important points to be kept in mind

– Each organization can have it’s own method of

calculating COPQ
– Initially don’t go for very accurate calculations.
– Improve awareness of everyone about COPQ first
– Decide about the strategy for data collection.
– Remember there are many activities which are
considered normal but form a part of COPQ.
– Caution: Some categories of COPQ can tend to be
controversial.
 To do

• Quantify the size of the quality problem

• Identify major opportunities for reduction in cost of
poor quality throughout all activities in an
organisation.
• Identify opportunities for reducing customer
dissatisfaction and associated threats to sales
revenues.
• Provide a mean of measuring the result of quality
improvement activities instituted to achieve the
above mentioned opportunities.
• Align quality goals with organisation goals.
 To do

• Develop a clear understanding of product

and processes
• Make a pareto analysis
• Use systematic problem solving
techniques to find root cause
• Involve everyone (production, quality,
maintenance, store , Supply Chain ,
Service)
 Analyse Collected Data

• There is so much data around.

• Let’s move from band-aid solutions to
preventive actions.
 Analysis
The analysis can be done in various ways:
• Defect wise
• Plant wise
• Product wise
• Area wise
• As per the Category of COPQ
 How to gain the support of senior
management?

• Prepare a well planned strategy .

• May use a successful case study
• Focus on yearly savings
• Calculate ROI
• Involve persons from across the departments
• Identify Time bound improvement projects.
• Nominate a team leader
 important rules to reduce COPQ

• Any problem has a root cause.

• All defects are preventable.
• Remember Old Saying …. ‘ Prevention is better
than cure ‘
Reasons for not being able to implement COPQ in
a holistic way

• Lack of Top Management Commitment and support.

• Lack of infrastructure for quality.
• Low awareness about benefits of COPQ
• Failure to take up small steps.
• Taking too many in initiatives together.
• Low awareness about resource and time requirements.

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 Suggested Road Map (LIR)

• Plan for on-site workshop on COPQ for all the

employees. They should get excited about the
subject. Ideal batch size is 15 ~ 20 persons.
• Conduct Plant Assessment ( Prepare Current value
Stream map and Calculate present COPQ as % of
sales) – For this we need to form a cft
• Train the staff and workers in Lean Six Sigma
• Undertake improvement projects ( Time bound
projects with specific tangible targets)
• Review and Sustain
 Visible and hidden costs

•Scrap
•Rework
Visible costs
•Warranty costs

• Conversion efficiency of materials

• Inadequate resource utilization

• Excessive use of material

• Cost of redesign and re-inspection Hidden Costs

• Cost of resolving customer problems

• Lost customers / Goodwill

• High inventory
Benefits of COPQ Model