Reducing the Cost of Quality by Operational Excellence Consulting


Presentation Description

The COQ methodology is a practical approach to quantifying the financial impact of the Cost Of Non-Conformance (CONC) and Cost Of Conformance (COC), shifting the problem-solving focus from quick fix to prevention, and prioritizing quality improvement opportunities based on the expected financial return. To download this complete presentation, please go to:


Presentation Transcript

Reducing The Cost Of Quality:

Reducing The Cost Of Quality

Contents 1:

Contents 1 Introduction & Basic Concepts of COQ Business case for quality Impact of quality improvement program Link between quality costing and profits Why are quality costs important? Why measure COQ? What is COQ? COQ iceberg model COQ versus Lean & Six Sigma Goal of COQ system Preparation Four phases of a COQ system Phase 1: Identifying COQ Items PAF model Prevention costs Appraisal costs Failure costs Internal failure costs External failure costs Seven types of waste CONC checklists Guidelines for identifying COQ items

Contents 2:

Contents 2 Phase 2: Collecting COQ Data Matching accounts with CONC items Quality costing COQ Data source Example calculations of Failure cost, Appraisal cost and Prevention cost COQ scorecard and indices Process flow for COQ reporting Collecting and reporting COQ data Role of Finance Role of line managers/supervisors Practical guidelines Phase 3: Analyzing COQ Data Selecting quality cost bases Trends analysis Pareto analysis Variance analysis SMART criteria Set targets for improvement Case study Phase 4: Reducing COQ & Improving Quality Reduce COQ through quality improvement programs Tools and techniques System for quality is prevention Some results from industries Sustaining COQ


Objectives To understand the COQ methodology To identify major cost components related to the Cost Of Non-Conformance (CONC) and Cost Of Conformance (COC) To acquire skills to identify and collect cost and COQ information To analyze the COQ information obtained and relate the data to possible solutions that can help reduce COQ in their organizations

1. Introduction & Basic Concepts of COQ:

1. Introduction & Basic Concepts of COQ

Business Case for Quality Improvement & Cost Management:

Business Case for Quality Improvement & Cost Management Quality & Cost – key competitive factors Sustained cost advantages result from concentration on quality Cost management/reduction is a continuous process Inspection is a poor substitute for quality High cost of poor quality

Vicious Cycle of Poor Quality:

Vicious Cycle of Poor Quality Extensive Reworking Fire-Fighting High Defects No Time To Look For Real Solutions Poor Quality Unhappy Customer 1 4 3 2

Philip Crosby: Law of 10:

Philip Crosby: Law of 10 1 10 100 Minimal defects due to prevention-based activities Defects found within the company and corrected internally Customer finds defects and makes complaints

Impact of Quality Improvement Program:

Impact of Quality Improvement Program Before quality improvement program Quality Costs After quality improvement programme Reduction of Quality costs A P C D Time

Impact of COQ – How a Company Approaches It:

Impact of COQ – How a Company Approaches It Where we’re headed if nothing changes To meet PBT objectives, revenues have to increase more than 85% in 2 years Total revenues Profit (PBT) Avoidable Costs Necessary Costs Where we’re headed if we focus on Avoidable Costs PBT objectives are met with a modest increase in Revenues Profit (PBT) Avoidable Costs Necessary Costs 0 1 2 0 1 2 Year Year Total revenues

Two Approaches to Increasing Profits:

Two Approaches to Increasing Profits SALES SALES COQ PROFITS COQ PROFITS Net Sales Present Future Traditional Approach Double sales SALES SALES COQ PROFITS PROFITS SALES COQ PROFITS COQ Present Future TQM Approach Double sales Reduce COQ by half

Link Between Quality Costing & Profits:

Link Between Quality Costing & Profits Track quality costs to gain top management’s attention Look at high quality cost area Identify problem Analyze root cause Take corrective action & Institutionalize change Profit & Loss Statement Total Cost of Quality Cost of Non-Conformance Cost of Conformance Prevention-based activities Ultimate impact of COQ is here!

Why Are Quality Costs Important?:

Why Are Quality Costs Important? Cost Focused Cost Leadership Differentiation Focused Differentiation Cost Differentiation Competitive Advantage Broad Target Narrow Target Competitive Scope Michael E. Porter on Competitive Advantage:

Why Measure COQ?:

Why Measure COQ? Gain senior management commitment - $$$ A scorecard with a common unit of measurement ($, or as % of sales) Find areas for improvement Allocate resources for quality improvement Help set and monitor departmental quality improvement targets Determine effectiveness of the quality plan

What is COQ?:

What is COQ? Cost of Quality (COQ) is the total cost of ensuring product and service quality Total COQ is the sum total of the Cost of Non-Conformance (CONC) and the Cost of Conformance (COC)

Cost of Non-Conformance (CONC):

Cost of Non-Conformance (CONC) The costs incurred as a result of not doing things right the first time Examples Mistakes Scrap Rework Equipment Downtime Handling customer complaints Warranty claims Customer return analysis

Cost of Conformance (COC):

Cost of Conformance (COC) The costs incurred in ensuring that things are done right the first time Examples: Quality training Quality auditing Inspections and tests Process capability studies Vendor assurance Continuous improvement programs Customer satisfaction surveys

COQ Iceberg (The Hidden Factory):

COQ Iceberg (The Hidden Factory) Mistakes Scrap Defects Rework Inspections Reviews Overtime Billing Errors Change Orders Product Recalls Product Failure in the Field Rush Delivery Costs Retraining Late Charges Customer Dissatisfaction Turf Battles Low Morale Excess Inventory Confusion Equipment Failure Unwanted Turnover Idle time Absenteeism Miscommunications Grievances Time Lost Due to Accidents Poor Teamwork Less Visible Visible Customer Complaints

COQ and Lean (Waste Elimination):

COQ and Lean (Waste Elimination) Waiting Processing Defects Transportation Motion Overproduction Excess Inventory Waste Waste Reduce COQ by eliminating waste!

COQ and Six Sigma:

COQ and Six Sigma Sigma Level Defects per Million Opportunities (DPMO) Percent Defective Percentage Yield Cost of Quality (as % of Sales) 1 691,462 69% 31% N.A. 2 308,538 31% 69% N.A. 3 66,807 6.7% 93.3% 25 – 40% 4 6,210 0.62% 99.38% 15 – 25% 5 233 0.023% 99.977% 5 – 15% 6 3.4 0.00034% 99.99966% < 1%

Philip Crosby on COQ:

Philip Crosby on COQ Companies can increase their profits by 5-10% of sales if a proper TQM system exists Ideal benchmark = 2.5% of sales

Goal of COQ System:

Goal of COQ System Elimination of Failure Costs Reduction in Appraisal Costs Investment in Prevention activities/programs Strategies To facilitate quality efforts that will lead to cost reduction opportunities

COQ Program Management:

COQ Program Management Define a problem statement Define a program objective Identify a COQ Program Manager (PM) or manager responsible for team of PM’s Provide sufficient authority to the COQ PM’s Align incentive throughout the company with the COQ objectives Develop a process to measure progress toward the COQ objectives Measure and track progress Recognize and reward the success of the COQ program


Preparation *Form a COQ committee Appoint a COQ sponsor Provide COQ training Define scope of COQ program Commit necessary resources *can be part of a TQM steering committee

Four Phases of a COQ System:

Four Phases of a COQ System

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