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Leaning Client Strategy Forward Copyright 2012, Cedar Root, 6 Inc. All rights reserved
Cost of Poor Quality (COPQ) Basic Concepts
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Copyright 2012, Cedar Root, 6 Inc. All rights reserved
Topic Measuring Success Cost of Poor Quality (COPQ)
Internal Failure Costs External Failure Costs
Deployment Guidelines Example Calculations References
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Measuring Success
Defects Waste Down?me $ COPQ
Product $ Revenue Material
= Lost $ Prot = Lost Capacity
Lost Opportunity
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Copyright 2012, Cedar Root, 6 Inc. All rights reserved
Measuring Success
There are (3) key measures that can measure any process. Rolled Throughput Yield (RTY)
(First Quality/First Time or Good Units/Total Units) Capacity ProducAvity (C-P)
(Cycle Ame to produce good units) Cost of Poor Quality (COPQ)
(Cost increase due to poor RTY and C-P)
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Measuring Success
If RTY, C-P or COPQ is your primary metric, the other two can be your secondary metric as a check & balance. For Example: Primary: RTY (Improving Quality Units) Secondary:
C-P (Units/Time) to assure added time is not required to produce quality units
COPQ (increased cost due to higher cycle time and/or inspection)
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Measuring Success
Other Examples: Primary: C-P (Units per time) Secondary:
RTY (Quality Units) to assure quality is not compromised as a result of reducing cycle time.
COPQ (increased cost due to scrap or rework associated with poor quality units or other costs associated with reducing cycle time such as unnecessary capital equipment.
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Measuring Success
Other Examples: Primary COPQ (Failure Costs) Wrong! Go back to
the other primary metrics. RTY (Quality Units) to assure quality is not compromised
as a result of reducing non-value added processes such as the (7) categories of MUDA.
C-P (Capacity Produc?vity) to assure cycle ?me is not increased due to phantom cost reduc?ons.
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Measuring Success
Other Examples: Primary: Other Metrics (i.e Reduce Down Time) Secondary:
C-P (Units/Time) to assure total cycle ?me is not compromised to address local down?me issue, example maintenance.
RTY (Quality Units) to assure quality is not compromised as a result of reducing down?me.
COPQ (increased cost due to scrap or rework associated with poor quality units or other costs associated with reducing down?me.
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Cost of Poor Quality (COPQ) The costs of not producing 100% 1st Quality/1st Time for your
Customer(s) These costs can be categorized into the following components..
Internal Failure Costs RTY (Quality Units) C-P (Good Units/Time)
External Failure Costs RTY (Quality Units) C-P (Good Units/Time)
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Internal Failure Costs
Failure or waste costs that occur prior to delivery or shipment of units to the customer. RTY Categories:
- scrap, rework, inspec?on/tes?ng, material review, seconds, supplier quality, trim, mee?ngs, quality reports, etc.
C-P Categories: - down?me, setup ?me, startup ?me, expedi?ng, rerunning replacement
product, etc.
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External Failure Costs
Failure or waste costs that occur aKer delivery or shipment of units to the customer. RTY Categories:
- scrap, rework, inspec?on/tes?ng, material review, seconds, correc?ve ac?on reports, premium freight, mee?ngs, quality reports, recall, warranty claims, goodwill, lost sales, etc.
C-P Categories: - down?me, setup ?me, startup ?me, expedi?ng, rerunning replacement
product, etc.
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The Real COPQ Most rms only account for about 5% of the waste that occurs in
an organiza?on.
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4-6% of
Sales
25-35% of Sales
Lost Opportunity
TradiAonal Quality Costs
AddiAonal costs of poor quality
Rejects
Scrap Inspec?on
Rework
Long cycle ?mes
Expedi?ng costs Lost sales
Late delivery
Lost customer loyalty
Excess inventory
Rescheduling
Mee?ngs
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Deployment Guidelines You may have to establish a data collec?on process to obtain
necessary cost of poor quality informa?on for your project. Step 1: Iden?fy the major internal and external categories that need to be
captured (use guidelines above).
Step 2: Establish a method to collect data for each category to be measured (solicit team par?cipa?on and Accoun?ng help)
Step 3: Establish cost opportunity for categories being tracked. Obtain help from Accoun?ng.
Step 4: Establish repor?ng format that can easily calculate COPQ, preferably an automated repor?ng system that is very accessible.
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Example Calcula?ons The following are example categories of waste that will leak prot
down the drain and (metrics they drive).
Scrap/Waste (RTY) Customer Returns (RTY) Rework (C-P) Down?me (C-P) Complaint Inves?ga?on Time (SG&A) Disposal Costs (RTY)
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Scrap/Waste (RTY) Material scrapped due to setup/startup, edge trim, quality, etc. Process waste/units may be measured in square feet, cubic feet or
weight or a discrete quan?ty. Example CalculaAons (see accounAng for help)
Opportunity $ = (sales $) - (cost to make) Example ($100 sales - $90 to make) / 10 units = $10 prot margin or
$1 per unit margin. Waste (COPQ) = (sales $) - 2(cost to make) / units sold ($100 sales - $180 to make) / 10 units = -$90 from the bofom or -
$9 /unit from the bofom line. If sales $ are the same for replacement product, then the cost to
make can be used for COPQ and normalized by units produced.
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Customer Returns (RTY) Material returned for warranty or goodwill Includes scrap, inves?ga?on, premium freight, etc. Example CalculaAons (see accounAng for help) If returned
material has to be scrapped add the costs on the previous slide. Otherwise subtract the following costs from sales $ for COPQ. freight cost to return product freight cost to replace product inves?ga?on ?me and repor?ng (see next slide) Warranty or legal costs cost as applicable Rework cost (see slide explaining rework) Lost sales when assigned
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Rework (C-P) Labor & materials to make product salable. Example Calcula?ons (see accoun?ng for help)
Cost factor = labor & materials/units sold COPQ = (Sales $) - (cost to make + rework)
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Down?me (unscheduled) (C-P) Measured in hours of capacity Example Calcula?ons (see accoun?ng for help)
Cost factor = gross margin/total hrs consumed COPQ = (down?me) X cost factor
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Inves?ga?on Time (Overhead) Hours tracking and repor?ng complaint
Example Calcula?ons (see accoun?ng for help) Cost factor = Average wage (hourly + benets)
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Disposal Cost (RTY) Cost associated with material waste disposal, recycle, landll,
regulatory, etc. Example Calcula?ons (see accoun?ng for help)
COPQ = Transporta?on Landll Hazardous waste Regulatory
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References Campenella, Jack. ASQ Quality Press
Principles of quality costs/ Jack Campenella. 2nd ed. ISBN 0-87389-019-1
Jurans quality control handbook / J.M. Juran - 4th e. ISBN 0-07-033176-6
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Copyright 2012, Cedar Root, 6 Inc. All rights reserved
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2012 by Cedar Root. All Rights Reserved.