Tools for Determining and Reducing the Cost of Poor Quality

Tools for Determining and Reducing the Cost of Poor Quality
Which Six Sigma tools are effective to determine and reduce the cost of poor quality (in the manufacturing sector)?
Since there are lot of quality tools used in industries, selecting correct, effective tools would lead to reduce time of problem solving. Hence it is essential to identify appropriate tools.

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Welcome to the forums of 12manage. In this discussion we exchange ideas about Tools for Determining and Reducing the Cost of Poor Quality.

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Welcome to the forums of 12manage. In this discussion we exchange ideas about Tools for Determining and Reducing the Cost of Poor Quality.

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ARAVIND
Project Manager, India

Tools Used for Arriving at Cost of Poor Quality (COPQ)
Failure Mode and Effects Analysis (FMEA) can be used to estimate the COPQ. In FMEA, we will arrive at the risk priority number (RPN). Based on this, it is possible to arrive at COPQ.
For further details plese refer the article published by Mr. Pankaj Sharma.

Jaap de Jonge
Editor, Netherlands

Calculation Example of COPQ. Breakdown
Let's assume a manufacturing company produces 1.000 units and finds the following costs:

Defects: 200 units are defective, costing €60 each in rework. Total = €12.000
Scrap: 50 units are completely unusable, worth €40 each. Total = €2.000
Returns: 25 units are returned by customers, costing €20 each for shipping and processing. Total = €500
Training/Prevention Costs: €3,000 for quality improvement training.

Total COPQ: €12.000 (Rework) + €2.000 (Scrap) + €500 (Returns) + €3.000 (Prevention) = €17.500.
By determining COPQ, it can now properly assess areas for improvement, prioritize corrective actions, and measure the financial benefit of process improvements.

Jaap de Jonge
Editor, Netherlands

Recommended Methods to Determine COPQ
Determining Cost of Poor Quality (COPQ) is essential for understanding the financial impact of inefficiencies, defects, and errors within a process. Below are some recommended methods to calculate COPQ:
1. DIRECT MEASUREMENT OF DEFECTS

Track and quantify the defects in products or services. This method involves identifying the number of defective units and assigning costs associated with rework, scrap, and warranty claims.
Example: If 100 defective units are produced and the cost to fix each defect is $10, COPQ can be calculated by multiplying defects by repair costs.

2. COST OF REWORK

Measure the additional cost incurred to correct faulty products or services. Rework often involves labor, material, and time costs.
Example: If 50 units require rework at a cost of $20 per unit, the total rework cost would be $1,000, contributing to COPQ.

3. SCRAP COSTS

Scrap refers to materials or products that cannot be salvaged. Track the costs of discarded items that are completely unusable.
Example: A manufacturing plant discards 200 units worth $15 each due to defects. The scrap cost is $3,000, which adds to COPQ.

4. WARRANTY CLAIMS AND RETURNS

Calculate the cost of handling product returns, warranty claims, and associated customer service efforts. This includes repair costs, replacements, and transportation fees.
Example: If warranty returns cost the company $5,000 per month, that figure should be included in COPQ.

5. PREVENTION COSTS

Identify expenses incurred to prevent poor quality, such as training, quality audits, or process improvements. These are typically considered part of COPQ since they help avoid future defects.
Example: A company spends $10,000 annually on training staff to prevent defects. This cost contributes to COPQ by reducing the likelihood of future errors.

6. INTERNAL FAILURE COSTS

These are costs related to defects found before products reach customers, such as inspecting and correcting issues before shipping.
Example: A company spends $2,000 per month on internal inspections and corrections for faulty products before they are shipped. These costs are part of COPQ.

7. EXTERNAL FAILURE COSTS

These costs occur when defects are discovered after the product reaches the customer. This can involve customer complaints, repairs, and returns.
Example: A customer receives a defective product, leading to a $500 refund and $200 in shipping costs to return the item. These external failures contribute to COPQ.

8. CUSTOMER COMPLAINTS AND LOST BUSINESS

Analyze the financial impact of customer dissatisfaction, such as lost sales, damage to reputation, or costs associated with addressing complaints.
Example: A company loses $1,000 in sales due to a negative review from a customer unhappy with a defective product. This lost revenue adds to the COPQ.

9. SUPPLIER QUALITY COSTS

These costs include expenses related to defects or failures in materials or components provided by suppliers. This can involve inspections, returns, or quality disputes.
Example: If a supplier delivers 100 defective parts that need to be returned or replaced, the associated cost (e.g., shipping, inspection, reordering) contributes to COPQ.

10. ROOT CAUSE ANALYSIS (RCA) COSTS

Use RCA to determine the causes of defects and measure the associated investigation, analysis, and corrective action costs.
Example: Conducting an RCA on recurring production errors might incur $2,000 in consultant fees and time spent by engineers, which should be factored into COPQ.

Ger de Waard
Management Consultant, Netherlands

Tools Used for Arriving at Cost of Poor Quality (COPQ)
COPQ (annualized) = [Sum of (RPNi x ACRi) / Sum of (RPNi)] x Annual Reduction in Events

i = item (all the RPN's lines in your FMEA!)
RPN = Risk Priority Number
ACR = Average Cost to Resolve
Weighted Average Cost to Resolve (WACR) = (RPN x ACR) / RPN

If your Lean Six Sigma project team is struggling to calculate the COPQ and is approaching the end of the Measure phase, then it is advisable to use the FMEA approach to obtain this calculation using the RPN. This approach provides objectivity to the estimation of COPQ in particular when no measurements or initial data are available at the Define stage. Also as FMEA offers a structured approach, the above formula becomes easy to use. When capturing the dependence of any event’s cost on its severity, occurrence and detection (i.e. RPN), the determined COPQ will offer a closer estimate to the actual project benefit.
Example: Your lines in the FMEA calculates a total RPN of 1000. it also tells that the total Number of Events (the happenings) are 500 times that year and you want (in first instance) to reduce it by 400 times. (80% less)
Your ACR = $ 25000
This means your COPQ(ann) = ((1000 * $25,000)/1000) * (500-400) = $ 2,500,000.

Yingtao Zhang, China

Value Steam Mapping Tool
When you know the quality is poor, I think you had better to investigate where the poor quality is caused. For this value stream mapping can be adopted. With this tool, you can find where the poor qua (...)

Jim Johnstone
Consultant, United States

Cost of Poor Quality versus FMEA
@Ajay Deshpande: if you are using PFMEA (Process FMEA) as a prevention tool, perhaps you can adjust the severity ranking in the PFMEA analysis to focus on cost so that it is more tailored to what you (...)

MARIO ALVARADO
Teacher, Costa Rica

CTQ to Determine Cost of Poor Quality
(Translated by Editor) The structure of the costs of poor quality can cover a lot of elements, however using the CTQ tree technique allows us to focus on KEY metrics of customer satisfaction. The CT (...)

Ajay Deshpande
Partner, India

Cost of Poor Quality
@ARAVIND: Good input. But in real time working, the challenge is correlation of risks to cost. My experience of FMEA application in the manufacturing industry is that it is not widely used for identif (...)

MARIO ALVARADO
Teacher, Costa Rica

Tools to Determine Cost of Poor Quality
(Translated by Editor) To determine the cost structure, I recommend to initially use the CTQ Tree (Critical to Quality) from which you can derive "non-conformities" that can then be translated into c (...)