Cost of Quality (COQ): How do I measure it? As a % of Sales?

[RosieA]

Cost of Quality: how do you measure it?

My present company measures Cost of Quality as a % of Sales. The measure includes the salaries of all the quality department personnel, including test engineering, rework costs, warranty costs and scrap.

The goal is 2.5% of sales. I don't know if this is good or bad. How are other people measuring this? Anyone else using the % of sales method, and if so, would you share your goals?

 

[Kevin Mader]

Hello Rosie,

Do a search of the topic. As I recall, we have discussed this a few times and there should be tons of ideas you might want to consider.

2.5% of sales: you guys must be good!!! ;-) Just teasing!! Most company's are in the 15-40% range of revenue, but I could be wrong. It might be sales. I'd have to do some research on this figure in old posts or my library at home.

Juran offers several suggestions on how to present data, so I'd refer you to any of his QC texts. This might be a good place to start.

Regards,

Kevin

 

[RosieA]

Thanks, Kevin. I did try a search and while I found several C of Q discussions, I didn't find any that were relevant to the actual measurement method.

I'm not sure if 2.5% is a good number or not. It could mean we're controlling things well, it could mean we're understaffed, it could mean we're awful, I just don't know without something to measure it against.

 

[Al Rosen]

My present company measures Cost of Quality as a % of Sales. The measure includes the salaries of all the quality department personnel, including test engineering, rework costs, warranty costs and scrap.

The goal is 2.5% of sales. I don't know if this is good or bad. How are other people measuring this? Anyone else using the % of sales method, and if so, would you share your goals?

Rosie:
% of sales is pretty much the standard way of loking at COPQ Cost of Poor Quality. Juran's Quality Control Handbook has a section on this topic. There are prevention co$ts (Quality planning, training etc) +Appraisal co$ts (inspection,test, equipment calibration etc)+Internal Failure co$t(rework, scrap etc.)+External Failure Co$t(warranty repairs). I think it's a good to categorize it this way since you want to show (hopefully) that increases in the prevention co$t will have the effect of reducing the other co$ts.

BTW 2.5% of sales is a good no.

 

[bpritts]

I have a couple of clients (auto parts suppliers) who have COQ in the range of 2 - 4%, and they are pretty good co's from a quality performance point of view.

If you have multiple plants that you can compare that may be beneficiial but the best benchmark target in my opinion is to improve vs. myself. (But there are many managers who would disagree with me!)

I think that the best use of the figures, as suggested by Al Rosen, is to break out the components and track them independently. In particular,

External failure costs - drive down at highest priority (protect the customer)

Internal failure costs - work on them diligently

Inspection/appraisal costs - Work on them once you're fairly happy with E and I failures - in particular, by investing in process capability improvements so that they can be eliminated without too much risk

Prevention costs/investments - Spend the savings from the others to do more of this!

We have found that these are interesting from a long term direction point of view, but month to month the figures aren't terribly helpful If we get a field hiccup the external failure costs go thru the roof, and that can't be helped except thru more prevention. Meanwhile inspection/appraisal are either fixed (due to salaried inspectors) or variable with production (if hourly inspectors).

Regards,

Brad

 

[Sam]

Thanks, Kevin. I did try a search and while I found several C of Q discussions, I didn't find any that were relevant to the actual measurement method.

I'm not sure if 2.5% is a good number or not. It could mean we're controlling things well, it could mean we're understaffed, it could mean we're awful, I just don't know without something to measure it against.

It could also mean you are not reporting the "true" costs of quality.
IMO the Phil Crosby books provide the best information for measuring COQ. Particularly a study book "Quality Improvement through Defect Prevention". It's also interesting that Phil Crosby defined the process approach as described by 9K2K and TS2; sometime back in the late 70's early 80's.

 

[Kevin Mader]

Al,

Right on the mark. I think that placing it into the four traditional bins creates good visual comparisons that most leaders/managers can relate to. In fact, most folks can relate to it.

Brad,

Thanks for your client CoQ range. Your distinction to industry appears consistent with my own impressions. The automotive industry does not normally enjoy huge margins on the parts they sell, thus to remain in business, they are forced to be more efficient. 2-4% for automotive might translate to some larger number/range for another (i.e. medical). Benchmarking off an Automotive Supplier is not a bad idea.

Sam,

You said what I was thinking. My own experience tells me that most organizations under estimate their CoQ losses, believing that they are better than they are. This is not to say that an org needs to include a hundred inputs into their CoQ reporting. It just means the for the ones they choose to include, they should validate that the measurement processes for these inputs are consistent. Make the numbers as 'hard' as possible. 'Soft' numbers lead to wrong conclusions and a muddled composition.

Great advice folks. I'll throw one more book out there that I found useful, although I tend to lean back to Juran's guidance on most occassions. It's Ray Campanellas (sp?) book. I may have done a quick write up on it in the Book Review section. I'm sure of the author, fuzy on the spelling, and the complete title of the book. But it is available through most book stores and the ASQ bookstore. As for how to report things, think of your audiance. Translate things into usable formats. While the tendancy is to adjust all measures into dollars, the warehouse manager might be more interested in knowing what square footage those dollars might bring. Write for the Reader, not the Writer.

Back to the group...

Regards,

Kevin

 

[gpainter]

Look in Quality Progress May 2001 issue. A fairly good article. It starts on page 29-37. Also in QP May of 1998 pg 61 has a chart on COPQ.

 

[ben sortin]

My rule of thumb is 10% of the workforce should have their quality hats on. Ask the sales manager who is logging preventive quality costs in his or her department.

 

[Icy Mountain]

My present company measures Cost of Quality as a % of Sales.

Rosie,
Always make sure that your Quality Numbers are related rates. Using % of Sales, or % of the Cost of Goods Sold as the denominator in your rate is imperative. I had a CEO that just about had a fit about the $60K per year scrap and rework figure presented at management review. Quote: "I can pay an engineer for that and they can fix all the causes." Next management review my presentation was a scrap rate of 0.35% (CEO grins broadly and says "That's much better than last time"). That is $60K (scrapped parts $, scrapped assemblies containing parts and labor $, and rework labor $) out of the $17M worth of parts and labor that went in the products we produced during the same period. I never even had to pull out my magic bullets: data from the QMs at several other similar companies showing an average of ~2.5% and data showing the average cost of an engineer (including bennies) was ~$90K at our company.