Cost of Poor Quality (CoPQ) - Scrap element of calculation includes lost margin?

[shellig]

Cost of Poor Quality (CoPQ) - scrap element of calculation includes lost margin?
The group I am working with to formalize this metric have gone back and forth on this. It is easy to get the amount of lost raw materials and effort hours for scrap element (what you paid to produce).

When you are sold out, you have the lost margin as opportunity cost (the value of the product in the market vs what you paid to produce). I have looked through threads and some use this and some do not in their calculation. I would say that the majority of calculators and discussions do not include this in the scrap element of the calculation.

My point of view is the missed opportunity cost should be included in the scrap element of CoPQ regardless of whether you are in a sold out condition or not.
1) To have a consistent calculation, 2) to focus effort on this as the biggest thing to work on to avoid and 3) because it is real loss when you are sold out.

Wanting to see other's input on this. Thanks!

 

[Jim Wynne]

I think that you might be taking this to a level of detail that's not really necessary, but I could be wrong. What sense does it make to include costs of missed opportunities if no opportunities are missed?

 

[Miner]

Ultimately, it is what works best for your company and that you are consistent. You DO NOT want to include things that would call the numbers into question by your leaders. The intent of CoPQ is to show the magnitude of the problem and get leaders to act. If leaders think you have exaggerated the magnitude by playing games, they will ignore the numbers and you will have lost.

 

[outdoorsNW]

You have an interesting thought. However, if the process scrap is predictable, and therefore never causes an out of stock condition, you are counting a cost that would not occur. Also, even if you yield 100%, if at least one input has a long lead time, and if demand is not predicted correctly, you may still have an out of stock condition.

On a company specific basis where yield is hard to predict and you have a good idea of the actual number of shipments lost to out of stock conditions, maybe adding the margin of sales lost to out of stock parts makes sense. But on a general basis no.

 

[shellig]

My thought process is that this would not be "process scrap" but scrap due to non-conformity or deviation from the process. In fact, I do not think expected process scrap should be included in this calculation - that is part of the process and not due to poor quality.

This is for a global company with multiple sites, some are sold out, others are not, and a sold out condition could happen at any time in some of the sites. If we only apply to sites that are sold out wouldn't that unduly bias the calculation?

 

[Jim Wynne]

My thought process is that this would not be "process scrap" but scrap due to non-conformity or deviation from the process. In fact, I do not think expected process scrap should be included in this calculation - that is part of the process and not due to poor quality.

This is for a global company with multiple sites, some are sold out, others are not, and a sold out condition could happen at any time in some of the sites. If we only apply to sites that are sold out wouldn't that unduly bias the calculation?

I'm not sure it's a good idea to lump data from multiple sites together--it's sort of like mixing process streams in SPC. One reason for my opinion is illustrated in your question--you find yourself having to make illogical decisions in order to account for the worst case.

 

[Bev D]

The crux of the decision comes from what really happens when you "sell out"? (1) Does the Customer just go buy from someone else? this is truly lost revenue. (2) Or do they simply wait until more is available? This is only delayed revenue.

If you have case 1, then it makes sense to add in the lost profit. if it is 2, then it doesn't make sense since you haven't lost the profit, only delayed it.

You also have to take into account the amount of work it takes to get the data vs. how much it actually changes the COPQ assessment.

 

[shellig]

We are not lumping anything together but comparing sites and their CoPQ and RFT metrics to help allocate resources. We are trying to automate getting the data from our production and finance systems and putting it in a dashboard. Pulling out the lost margin would take some work. For some of our businesses, it is case 1 and some it is 2 (just to complicate things). I will propose to our group we do it without but think about another "bucket" metric for the opportunity cost loss for those markets where we are actually losing revenue. Truly appreciate the feedback!