Cost of Quality (CoQ) generally is between 15-40% of Sales

Cost of Quality

I saw this on COQ and thought some of you might be interested:

Subject: Re: Q: Cost of Quality/Guerra/Cheong
Date: Thu, 2 Jul 1998 14:06:20 -0600
From: ISO Standards Discussion <[email protected]>

>From: Miguel Guerra <[email protected]> >Subject: Q: Cost of Quality/Guerra
>Does anyone in the list have an idea about how much, in a percents base,
>usually represent cost of quality in a company budget ?
>Are there many companies calculating this cost?
>Miguel Guerra >[email protected]

From: Cheong and sons company <[email protected]
> Subject: Re: Q: Cost of Quality/Guerra/Cheong

Hi, Our company is a Tier 1 automotive parts supplier serving Big three and our cost of quality is currently at 3.2% of total sales and our 1998 target is 2.5% of total sales.

Eric

Thought I might try to breathe some life back into this topic. At a fairly recent two day seminar, the speaker mentioned that the Cost of Quality (CoQ) generally is between 15-40% of Sales. This is a fairly interesting statistic. With marginal gains in efficiency, the rewards may be several fold. A company at 3.2% of Sales is extremely rare. I would have to suppose that the number in the posting above is likely very soft.

This is a great source of determining Continuous Improvement projects since it generates good baseline data for a company. Anyhow, back to the group for debate and discussion....

I believe Cost-of-Quality is an important aspect of a company's systems, but few companies actually utilize all 4 'main' components. And as I remember, Germany's VDA6 had CoQ as a requirement.

Do you see many companies out there with valid (and working) CoQ systems?

[This message has been edited by Marc Smith (edited 12-12-98).]

Marc,

Sadly, not many are aware of it. When I visit suppliers I often ask them if they calculate these costs. Some have numbers on scrap and rework costs (Cost of Off Quality, Failure Cost only) but nothing in the way of using all four contributing categories.

What is most interesting is that when I follow to the question on 'if you do gather this data' I give them the 15-40% figure. Many, many wide eyes! Sometimes I ask them to compare that number to the company profit for the past year. Some smaller shops admit that if their systems run to the 15% figure that they could increase profits by 50%! What a few adjustments within the system might reveal?!

Currently my organization is running below the 15% figure by a nice chunk. Reporting systems are not overly complicated and we track a significant number of inputs for each category. While we are fairly good, this report shows many areas for CI projects.

I know this is a million dollar question, but I am with a fairly new company and I am helping them develop a quality system where I will be pretty much responsible for tracking quality costs in the future. I am looking at different things in regard to quality cost and I would really appreciate any help from soneone who's been there-done that if I can.
Thanks!

Dawn,

I do not know if the following will help, but I add it for consideration.

Generally, formal quality costs are categorized into four areas:

Prevention: Those efforts devoted to keeping nonconforming product from occurring.
Appraisal: Those efforts devoted to maintaining quality levels by means of formal evaluations.
Internal and External Failure: Those efforts devoted to product that do not meet specifications or which fail to meet customer satisfaction.

Examples of prevention are training, capability studies, vendor surveys and quality design.

Examples of appraisal are inspection and test, test equipment maintenance, inspection and test reporting and other expense reviews.

Examples of internal failure are scrap/rework, design changes, retyping letters, late time cards and excess inventory costs.

Examples of external failure are warranty costs, customer complaint value, field service training costs, returns/recalls and liability suits.

The typical steps to set up when beginning a CoQ effort may include:

Set up categories of prevention, appraisal and failure (both Internal and external) to account for costs.
Arrange for accounting to collect and present costs.
Insure accurate figures or reasonable estimates by category.
Analyze the data for major improvement candidates.
Utilize the Pareto principle to isolate specific vital areas.

Too many companies monitor only Internal and External (maybe) failure costs, and even then do not include all the possible areas that should be included. The key is to first identify the potential areas within your organization that fall into the four categories and design a system that will effectively track them. Hope this helps.

Regards,
Don

Dawn,

Don presents a good point about organizations that only calculate Failure Costs (the Cost of Off Quality or the Cost of Poor Quality). I also do not like this calculation. It shows selectivity while I believe a company should be working on the whole. I believe that some companies do this because these two categories generally account for the biggest $$.

Remember to start off small, gather good data and establish economical reporting systems. Keep it simple at the start. Establish good baseline data to judge effectiveness of the program. It is too easy to have a bunch of subcategories with poor reporting systems that can bog down the process and kill CoQ reporting quick.

I recommend:

Step one: Use the four categories.

Step two: Determine which subcategories you would like or can measure (refer to Don's examples if you like)

Step three: Use the four steps outlined by Don (I believe the key here is getting Finance (accounting) to play their role. In actuality, CoQ should be calculated by Finance with strong involvement from all departments, especially Quality).

Step four: How will you present the information. As a % of Sales? Determine the most meaningful way for your organization.

Step five: Post it visually throughout the organization and use in Management Review (a super source of CI projects and system effectiveness indicator). When posting, you may find it more effective to present the information the way the reader expects it (i.e. Dollars for senior management, % for other associates in the organization).

Recommended reading: Principles of Quality Costs by Jack Campanella available through the ASQ. It is a quick read and covers the topic fairly well I feel.

Hope this helps. Back to the group...

Thank You!

Howard, Kevin, and Don:

I want to thank you for the excellent info each of you has provided on CoQ! My thanks as well!

Any time!