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Author Topic:   Cost of Quality
Marc Smith
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posted 03 July 1998 05:22 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
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

>From: Miguel Guerra >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 >mguerra@se.efacec.pt

From: Cheong and sons company > 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

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Kevin Mader
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posted 11 December 1998 05:04 PM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
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....

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Marc Smith
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posted 12 December 1998 08:00 PM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
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).]

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Kevin Mader
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posted 14 December 1998 09:34 AM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
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.

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Dawn
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posted 04 January 1999 10:10 PM     Click Here to See the Profile for Dawn   Click Here to Email Dawn     Edit/Delete Message   Reply w/Quote
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!

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Don Winton
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posted 05 January 1999 10:42 AM     Click Here to See the Profile for Don Winton   Click Here to Email Don Winton     Edit/Delete Message   Reply w/Quote
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

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Howard Atkins
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posted 05 January 1999 11:15 AM     Click Here to See the Profile for Howard Atkins   Click Here to Email Howard Atkins     Edit/Delete Message   Reply w/Quote
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Kevin Mader
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posted 05 January 1999 11:26 AM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
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...

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Dawn
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posted 05 January 1999 07:10 PM     Click Here to See the Profile for Dawn   Click Here to Email Dawn     Edit/Delete Message   Reply w/Quote
Thank You!

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Marc Smith
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posted 06 January 1999 08:41 PM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Howard, Kevin, and Don:

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

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Kevin Mader
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posted 07 January 1999 10:18 AM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
Any time!

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waberens
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posted 17 May 1999 12:10 PM     Click Here to See the Profile for waberens   Click Here to Email waberens     Edit/Delete Message   Reply w/Quote
Howard,
I tried your links for cost of quality but am restricted access. Anyplace else that these are available?

I finally got some interest in implementing COQ so I want to as well versed as possible.

Thanks,
Bill

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chen
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posted 17 May 1999 08:23 PM     Click Here to See the Profile for chen   Click Here to Email chen     Edit/Delete Message   Reply w/Quote
hello:

traditionally Q-COST includes A,P AND F COST, but A and P cost are good cost and keep up fixedness. so now the COPQ(cost of quality) is ordinarily calculated by many companys. it is also a continuous improvement project as qs9K mentioned on page 19. Now we are developing the computer system of COPQ include all failure(poor) cost such as scrap,sorting loss,re-inspection,A/S loss and re-working,ect. just for your reference.

have a nice day.
cc.chen may18/1999

[This message has been edited by Marc Smith (edited 20 November 2000).]

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Woraphot
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posted 18 May 1999 04:40 AM     Click Here to See the Profile for Woraphot   Click Here to Email Woraphot     Edit/Delete Message   Reply w/Quote
Good Morning,

Our company is conducting COQ program to meet QS9k and it is in step 1 and 2 for collecting data. But we have not set any really target yet. Is there any acceptable target by each categories for COQ ? or depend on each company? Any suggestions would be appreciated.

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John C
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posted 18 May 1999 10:27 AM     Click Here to See the Profile for John C   Click Here to Email John C     Edit/Delete Message   Reply w/Quote
Grrr...Grrr
CoQ exercises make me mad. Grrr....

There aren't four, there's six. The unmeasurable costs of Lost Opportunity and Lost Reputation. They outweigh all the others by miles and make measurement of CoQ meaningless.
Even if you could measure them, why would you? If you need to justify prevention and continuous improvement, then compare you actual cost of sales with your standard cost, compare your growth with the industry's growth, or with that of your main competitors. ISO 9000 does not tell you to measure quality costs, but to eliminate them. Concentrate on yield percentage and field performance, identify the major causes and fix them. This data is already available and should be getting attention every day.
Measuring cost of quality tells you to do what you should be doing anyway and burns up resources doing it.
rgds, John C

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Kevin Mader
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posted 18 May 1999 03:38 PM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
JC,

I like the way you are thinking! Unfortunately, most folks need the hard numbers in front of their nose in a neat report. For that, I would say there is some worth to creating the CoQ report. It makes the things that should/could be visible, visible.

The unknowables: Lost Opportunity and Lost Reputation. Yes they are very large numbers. Now how to make the invisible, visible? This is where the key may lay. Perhaps even more spent resources to determine a number, maybe more of the same, but probably more insightful. The picture they paint makes a decent impression eitherway. I'll have to admit your thinking is very Deming like (personaly my favorite). Why cry over spilt milk? Find ways to prevent spilt milk, the rest becomes an ancillary benefit (no crying). True, true. Concentrate on the input, the outputs should meet expectations. Yet how can we be so sure of our actions and their results meet expectations? Measurements perhaps?

Regards,

Kevin

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Marc Smith
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posted 18 May 1999 07:16 PM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
quote:
Lost Opportunity and Lost Reputation
Back around 1976 my father bought a chrysler station wagon specially outfitted to pull a 2 horse trailer. It was a piece of crap. I ended up stranded with horses in a trailer and a broken car in timbucktu several times. It was MISERY! To this day I will not even consider a product in any way related to chrysler.

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Don Winton
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posted 19 May 1999 09:46 AM     Click Here to See the Profile for Don Winton   Click Here to Email Don Winton     Edit/Delete Message   Reply w/Quote
quote:
Is there any acceptable target by each categories for COQ?

Yes, zero. Seriously, before you establish targets, you must first establish your current capability. For example, you could set a goal of 15% of sales and the goal not be reachable. My suggestion would be to first establish your current position and areas for improvement, then determine a goal of x% reduction per year of the baseline you are currently running. This also accomplishes the continuous improvement objectives.

Personally, I have never been a big fan of CoQ, as defined in the current media. As pointed about above, they have measured what has gone wrong, not preventing what may go wrong. I tend to agree with John that the largest costs inflicted by poor quality are unknown and unknowable. But, if you must have a dollar value, it is a good starting point.

quote:
Concentrate on yield percentage and field performance, identify the major causes and fix them.

These, among some others, are my preferred metrics. These can be translated into costs, if needed. For example, if a complaint call to the factory costs $1.75, obviously reducing the number of calls reduces costs (I know it does not cover the unknown and unknowable. That is accomplished by ensuring the call is not required). Through continuous improvement techniques, the number of calls are reduced, i.e. dollars saved.

quote:
I finally got some interest in implementing COQ so I want to as well versed as possible.

The book Kevin mentions above is an excellent resource.

Regards,
Don

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Marc Smith
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posted 13 June 1999 05:26 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
I could not resist adding this when I saw it:

Subject: Q: Defining "cost of quality" /Pfrang
Date: Tue, 1 Jun 1999 11:47:36 -0600
From: ISO Standards Discussion

From: pfrang@nicolet.com (Doug Pfrang)
Subject: Q: Defining "cost of quality"/Pfrang

Can anyone explain. to me what precisely is meant by the expression, "Cost of Quality?"

This seems like an absurd expression to me, for at least the following reasons:

1. "Cost of Quality" suggests that "quality" is something separable from other activities in the plant, as in "Cost of Labor," "Cost of Electricity," or "Cost of Raw Materials." I do not see how "quality" can be separated like this, since it seems to me more an inherent characteristic of everything and everyone in the facility. The expression "cost of quality" suggests that "quality" is. something distinct and external to everything else, which seems nonsensical.

2. "Cost of Quality" suggests that "quality" has this downside called "cost," when it seems to me that "cost" is more likely to result from a "lack of quality." To me, the company first decides what level of performance, reliability and capability (i.e., "quality") it is going to build into its products, processes and services, and then it decides how its facility and processes are going to achieve those goals. Because the firm, presumably, incurs whatever expenses result from the initial marketing decisions it made regarding the placement of its products, processes and services, the resulting expenses are therefore driven by the company's strategy, not by "quality." Accordingly, "cost of quality" does. not appear to have any meaning to me in this context.

3. Now, what might. have meaning is when a company is producing a product that has a certain. level of performance, reliability and capability (i.e., "quality"), and the company decides it wants to increase this level of "quality." Perhaps it is going to redesign its product, or buy better components and raw materials, or improve its facility with new production equipment, or restructure its processes. Of course, these changes cost money, but they still do not seem to be a "cost of quality," because they are an INVESTMENT (presumably made after some ROI calculation to show that they are justified) that the company makes in the hope of achieving some greater financial reward in the future (e.g., greater selling price, fewer returns, lower warranty costs, etc.). Therefore, "cost of quality" still. does not seem to have any obvious meaning in this context either -- the. company is making a short-term investment to achieve a higher long-term. return.

4. Another scenario. is when a company is operating under a quality control scheme (rather. than a quality assurance scheme), where it is trying to "inspect quality into" its products. To such a company, "increasing quality" might mean hiring more inspectors to create more "quality." Of course, this costs money, but this is still not a "cost of quality," because,. in fact, it is simply a higher cost of labor that has been traded off. (presumably) for an increase in production or a reduction in the number. of returns. Again, it is merely a short-term investment to achieve a. higher long-term return.

5. Finally, if "cost of quality" is to be quantified in terms of dollars and treated as an expense, how does this calculation take into account the financial gains that result from the quality initiatives? Again, it seems absurd to allocate "cost" to something with the ambiguous name of "quality," but then to allocate the revenue somewhere else. Looking at "cost" in. isolation just seems distorted.

Based on the above,. I just don't see how "cost of quality" has any meaning. Can anyone please. explain?

-- Doug Pfrang

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Marc Smith
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posted 13 June 1999 05:42 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
And the debate rages on:

Subject: Re: Defining "cost of quality" /Pfrang/Hankwitz
Date: Fri, 4 Jun 1999 09:10:32 -0600
From: ISO Standards Discussion

From: "Hankwitz,. John"
Subject: RE: Defining "cost of quality" /Pfrang/Hankwitz

Doug,

I suggest you read. both Frank M. Gryna's section on Quality Costs in the "Quality Control Handbook", and Armand V. Feigenbaum's in "Total Quality Control." Both. give a good description of what this is all about.

Your question indicates that you are associating cost of quality with the costs associated with incorporating quality features into a product. I believe this is a bit off-base.

Cost of quality are those costs associated with producing a product. These costs are grouped into two groups, and these into two categories each:

1. Costs of Control
1.1. Prevention Costs -
Quality system, quality engineering, and employee training
1.2. Appraisal Costs -
Inspection and test, and quality system audits

2. Costs of failure
2.1. Internal Failure Costs -
Scrap, nonconforming product, rework & repair
2.2. External Failure Costs -
Service calls, phone support, replacement costs

The whole idea is to apply efforts to optimize these total associated costs to minimize their total.

Suppose you made no effort to prevent or appraise your product. No quality system, engineering, employee training, inspection or test, or system audits. In this situation, your failure costs would probably be through the roof. I worked with a large company about 5 years ago where the cost of failure for a particular product line were over six times the cost of product sales. Every item sold was replaced six times on average, obviously with defective product. But how do we know that if we do no inspection? Our cost of control is zero, but our cost of failure is putting us out of business.

At the other end of the field, you create 10,000 procedures; inspect every part, assembly and product dozens of times; have your employees in training 3 out of 4 weeks each month; have a team of auditors constantly monitoring every process, and so on. Now our cost of control is putting us out of business, but we have no failures.

In either case, the. total cost of quality is killing us. We need to apply an appropriate. amount of "Control" measures to minimize the total cost of quality. . We may still have failures, but total costs will be minimized.

Then, after this is accomplished, the system is continuously improved to drive ALL quality costs down.

The downside to this cost of quality idea is that no objective value can be attached to the cost of lost business. When your product arrives at your customer's site, and it doesn't work, he'll check out your competition. How much will this cost you? Hundreds? Thousands? Millions?

Another tough point is getting your employees to report the fact that they caused internal failures or rework. This can skew your data.

At least this cost of quality program gives you a good starting point.

John Hankwitz
JHankwitz@qtiworld.com

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Marc Smith
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posted 13 June 1999 05:49 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Subject: Re: Q: Defining "cost of quality" /Pfrang/Naish
Date: Fri, 4 Jun 1999 09:22:53 -0600
From: ISO Standards Discussion

From: PNaish@aol.com
Subject: Re: Q: Defining "cost of quality" /Pfrang/Naish

Doug,

Your points are well made. From what I have seen many companies equate cost of quality to cost of lack of quality. I have seen few who truly measure the cost of quality if in fact we say one exists.

Years ago at Intel. we ran a "project" for about six months in the quality organization to. help measure the cost of quality. It included the cost of lack of quality:. that is inspection, test, rework, repair, scrap. But it also included. the cost of planning for quality such as reliability testing to ensure. the product met the customer's requirements. It included the review of. previous design problems and how they affected the new products so as. to avoid repeating the same mistakes. It included the cost of working. with suppliers to ensure effective communication of requirements. It. included the development of workmanship criteria to know what was good. and what was not.

Now you may say all. of the cost of quality items list were just a part of doing business. and you are right. As Cosby put it "quality is free". And if we lived. in an ideal world, there would be no mistakes and so we would not have. to plan for them or take extra care to build them in as they would just. be there. We would not need criteria because we would all know exactly. what it should be. And we would not need reliability testing but we would. know it was going to be reliable because we don't make mistakes in designs.. And we would not need to ensure good communicatiosn because we would. have no communications problems because we all think alike and intuitively. know what everyone else wants.

However, since there. is no ideal world (despite some thinking that is we just thought good. thoughts and made a "paradigm shift in our thinking" there would be no. mistakes) the only way to measure the cost of quality is to measure the. costs of prevention, detection, and repair and scrap.

Phyllis

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Marc Smith
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posted 13 June 1999 05:54 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
And another voice:

Subject: Re: Defining "cost of quality" /Pfrang/Kohn
Date: Mon, 7 Jun 1999 11:36:37 -0600
From: ISO Standards Discussion

From: Brian Charles Kohn
Subject: RE: Defining "cost of quality" /Pfrang/Kohn

> From: pfrang@nicolet.com. (Doug Pfrang)
> Can anyone explain to me what precisely is meant by the expression, "Cost of
> Quality?"

There are a lot of perspectives, and even whole books on the subject (such as amazon.com).

> 1. "Cost of Quality" suggests that "quality" is. something separable from
> other activities in the plant, as in "Cost of Labor," "Cost of Electricity,"
> or "Cost of Raw Materials." I do not see how "quality" can be separated
> like this, since it seems to me more an inherent characteristic of
> everything and everyone in the facility.

The way I understand Cost of Quality is in the manner that it can indeed be
separated out. CoQ is typically divided into four aspects:

1) Cost of Appraisal
2) Cost of Prevention
3) Cost of Internal Failure
4) Cost of External Failure

The Cost of Appraisal is the cost of all those activities within your operation strictly devoted to inspecting, measuring or otherwise appraising whether the product or service you produce meets the requirements. Imagine the division between work done: Sometimes you'll be screwing parts together; sometimes you're looking to make sure they were screwed together.

The Cost of Prevention is the costs associated with evaluating and implementing processes and systems to find better, more robust ways of doing things. Think about it this way: Sometimes you have people who are thinking about how to better screw things together so that the folks who are looking to make sure they were screwed together right don't find as many that weren't, and more importantly the customer doesn't find as many that weren't.

The Cost of Internal Failure is the cost associated, typically, with the materials and work that went into building something that you end up having to scrap because it doesn't meet specifications.

The Cost of External Failure are the costs associated with providing warranty or goodwill service, and perhaps even more important, the cost associated with having a customer experience a failure of your product or service.

> The expression "cost. of quality"
> suggests that "quality" is something distinct and external to everything
> else, which seems nonsensical.

Quality Professionals, like myself, love to say that, because it keeps myopic managers from focusing on the very measurable costs and ignoring the almost-unmeasureable benefits of quality control, quality assurance and quality improvement. However, the reality is that there are measurable costs associated with these activities, and if the cost is higher than the benefit (which, admittedly, we can't possibly measure accurately in advance) then good business sense would dictate that we re-evaluate the quality program and make it more effective.

> 2. "Cost of Quality" suggests that "quality" has. this downside called
> "cost," when it seems to me that "cost" is more likely to result from a
> "lack of quality."

The key word you. use here is "seem." What you really need to do is "know." As I've indicated. earlier, it is very hard to know that more cost is likely to result from. lack of quality *activities*. (Remember, in the case of Cost of Appraisal. and Cost of Prevention, we are talking about the cost of activities,. not of poor quality.)

> To me, the company. first decides what level of
> performance, reliability and capability (i.e., "quality") it is going to
> build into its products, processes and services, and then it decides how its
> facility and processes are going to achieve those goals. Because the firm,
> presumably, incurs whatever expenses result from the initial marketing
> decisions it made regarding the placement of its products, processes and
> services, the resulting expenses are therefore driven by the company's
> strategy, not by "quality." Accordingly, "cost of quality" does not appear
> to have any meaning to me in this context.

Perhaps the words "Cost of Quality" aren't. precise, but they have a very valid place in the discussion. Since the. words were coined over a decade ago, it is a bit late to try to change. them now.

> 3. Now, what might. have meaning is when a company is producing a product
> that has a certain level of performance, reliability and capability (i.e.,
> "quality"), and the company decides it wants to increase this level of
> "quality." Perhaps it is going to redesign its product, or buy better
> components and raw materials, or improve its facility with new production
> equipment, or restructure its processes. Of course, these changes cost
> money, but they still do not seem to be a "cost of quality," because they
> are an INVESTMENT (presumably made after some ROI calculation to show that
> they are justified) that the company makes in the hope of achieving some
> greater financial reward in the future (e.g., greater selling price, fewer
> returns, lower warranty costs, etc.). Therefore, "cost of quality" still
> does not seem to have any obvious meaning in this context either -- the
> company is making a short-term investment to achieve a higher long-term
> return.

The question is what is the investment for? If it is to reduce the cost of poor quality (i.e., the Cost of Internal Failure or the Cost of External Failure) then the investment is indeed a Cost of Quality, specifically the Cost of Prevention. Investments are indeed costs of a sort. The ROI calculation you mention is definitely the right way to go.

However, as I mentioned. earlier, sometimes the benefits are unquantifiable. How much benefit. do you derive from 10% less dissatisfied customers? No matter how much. market research you do, you never can really know what the impact will. be; heck, sometimes you go into an "investment" like this with only a *forecast* of the physical improvement you expect to yield. There is often a "technology risk" associated. with such investments; they sometimes don't pan out at all.

> 4. Another scenario. is when a company is operating under a quality control
> scheme (rather than a quality assurance scheme), where it is trying to
> "inspect quality into" its products. To such a company, "increasing
> quality" might mean hiring more inspectors to create more "quality." Of
> course, this costs money, but this is still not a "cost of quality,"
> because, in fact, it is simply a higher cost of labor that has been traded
> off (presumably) for an increase in production or a reduction in the number
> of returns. Again, it is merely a short-term investment to achieve a higher
> long-term return.

Again, you're getting mired in the words. It is surely a Cost of Quality to add more inspectors. It increases the Cost of Appraisal. You're simply pointing out that it is, too, an investment. Fine. You have to break some eggs to make an omelet, but you STILL have to break the eggs, i.e., spend the money--incur the cost.

> 5. Finally, if "cost of quality" is. to be quantified in terms of dollars
> and treated as an expense, how does this calculation take into account the
> financial gains that result from the quality initiatives?

This is an accounting question, and where this issue gets really muddy. I won't even attempt to go into it without getting my CPA first...

> Again, it seems
> absurd to allocate "cost" to something with the ambiguous name of "quality,"
> but then to allocate the revenue somewhere else. Looking at "cost" in
> isolation just seems distorted.

This is almost always what is done. At the companies I've worked with, the costs associated with making the kinds of investments you're talking about are often represented as expenses, increased operating costs, etc. The benefits can only very rarely be directly attributed to specific investments. Sad.

Brian

****************
EDITOR'S NOTE: Shortened url so page does not wrap to far out. Software html error.

[This message has been edited by Marc Smith (edited 20 November 2000).]

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Marc Smith
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posted 13 June 1999 06:05 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Subject: Re: Q: Defining "cost of quality" /Pfrang
Date: Tue, 8 Jun 1999 10:10:41 -0600
From: ISO Standards Discussion

From: pfrang@nicolet.com (Doug Pfrang)
Subject: Re: Q: Defining "cost of quality" /Pfrang

Thank you all for your replies and for giving me some resources to investigate. I have followed up with some of the references that were suggested and found them to give excellent definitions of cost of quality.

In fact, you were. so good at answering my original question, that I now have a more perplexing. follow-up question. I understand the trade-off between "cost of control" and "cost of failure," and I see how they can be used to compute a "cost of quality" metric,. but now what I don't understand is why it makes any sense to compute. these metrics, because I don't see how anyone can actually use these. metrics to make management decisions.

The difficulty I. anticipate is as follows: Let's say I want to minimize my "cost of quality." The question is, how do I find the minimum? When I go into my factory and I tally up my actual COQ -- i.e., when I compute my "cost of control" and "cost of failure," and. add them together -- I get only one number, which means I only have a. single data point on my COQ curve. How do I plot the rest of the curve,. or find its minimum, using only one data point? Moreover, if I look for. other data points, such as by computing my COQ on different dates over. an extended period of time, what can I do with these data points? Even. if they show a trend, indicating that I am going in the direction of. higher or lower COQ, does this really tell me anything useful? Let's. say the trend is downward, which would seem to be a good thing because. it seems to indicate I am heading in the direction of minimizing my COQ.. But maybe the trend is downward because my shipments are down (and thus. I have fewer inspections and fewer failures), I have laid-off half my. employees (and therefore I have less training), or I have stopped introducing. new products (and thus I have less quality system activity and fewer. customers calling with questions). Even if I compute these metrics as. a percentage of sales, the COQ metric does not necessarily tell me anything. useful because the changes in this metric over time might be the result. of factors unrelated to the company's quality initiatives. Such factors. could include changes in the economy (cyclical changes, inflation, etc.),. general improvements in technology (i.e., better price/performance),. loss of key personnel, etc. Moreover, notice how many different things. can affect the COQ equation: the calculation responds to so many different. inputs that a change in the aggregate number doesn't say anything about. where those changes came from. Thus, if it begins moving higher, then. even if I think I have a problem I would not know where that problem. might be located. Accordingly, the COQ metric seems to offer me no new. insights about my company that I would not already have by looking at. standard company performance and financial metrics. Moreover, unlike. standard company performance metrics, COQ cannot even be compared to. others in the industry, because the method of computation is not standardized.

To my surprise, Feigenbaum avoids these difficulties entirely, while Gryna, to his credit, points out the problem of minimizing COQ and then admits that he has no answer to it.

In other words, regardless of how COQ is defined, even the experts cannot seem to explain how it gives meaningful insight for purposes of making management decisions.

Am I missing something, or is COQ just a decoration that looks nice in the quarterly meeting speech by the head of QA? Does anyone actually use COQ and, if so, how exactly do they use it?

Geez, give me a little information and I can be a real pest.

Thanks everyone!

-- Doug Pfrang

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John C
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posted 14 June 1999 08:18 AM     Click Here to See the Profile for John C   Click Here to Email John C     Edit/Delete Message   Reply w/Quote
Doug,
No, you're missing nothing. It is "just a decoration that looks nice in the quarterly meeting speech by the head of QA". I think your long, convoluted analysis is a good example of what we are likely to be drawn into. Best to keep clear of it and spend our time where we have clear, undisputable goals.
To quote Brian: "if the cost is higher than the benefit then good business sense would dictate that we re-evaluate the quality program and make it more effective".
But we already know that we need to re-evaluate the quality program and make it more effective (and more efficient, of course).
My mother used to say;
"It's only a fool, that asks the road he knows".
There is such a thing as the law of diminishing returns but CoQ exercises aren't designed to pick up the precise engineering data normally needed for finding this point.
It's safe to assume that sensible process engineering, based on yields, is always necessary and will provide positive returns.
rgds, John C

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Batman
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posted 16 June 1999 08:18 PM     Click Here to See the Profile for Batman   Click Here to Email Batman     Edit/Delete Message   Reply w/Quote
Doug-
Years ago, from my past as the COQ reporter, I found that the COQ report had value, when used and presented in a format that was useful. It was NOT just a report. The president got pie charts for relative comparisons, overall trends, etc. The supervisors used this report (along with other information) for any needed root cause investigations, continuous improvement efforts, etc. The trends and data were used in part as "company level data."

Some of the items we tracked were:
Scrap (who doesn't) as % of sales; Late delivery charges - expedited shipments, etc.; Customer Returns $$ value and PPM,
Efficiencies as $$, Uptime in $$, many more.


I accumulated the COQ data and sent out the reports. We had several departments,. each department was given the overall report and their individual report.. It included "the four" with many subcategories. I found that unifying. some of the data was beneficial to the trend analysis.
For instance (just an example):
Department A had an upward trend in % of sales scrap. Department B had a downward trend in their scrap as % of sales. Department A had ongoing increases in sales, and it was discovered that he had a couple of issues with bringing in untrained folks on weekends to keep up. It was also discovered that some of his equipment was breaking down more often due to increased use. It was easier to go to the president with the COQ trend chart and the supporting information to request more resources.

Department B was also finding increasing sales. These sales were NEW business, not just increased old business. His department and his technical support folks were congratulated for lowering % scrap by bringing on new business well, and correcting things in a more timely manner. This superisor was paying attention to the business plan, the development of the strategy, and the monthly COQ reports that were not so kind two years earlier.

So, while I agree. in part with John C's evaluation of COQ, I think that if you are doing. nothing in this regard, then starting a good COQ can get some focused. on the problems, and aid in decision making. It cannot be used to compare. your company to another (unless you are privvy to some info), but if. you know there are positive and negative trends, it can help with the. WHERE of something, and it can steer you to the WHY, WHERE, and WHO.. If there is a "bad" trend, detailed information should be available for any follow-up. "Good" trends. could also be examined, perhaps to apply lessons learned in one department. to another.

By the way, John C, I like the higher level considerations you mentioned.

As far as setting goals, some come to mind - 25% decrease in scrap as a percent of sales, 10% increase in training, 100% On Time deliveries...

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John C
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posted 17 June 1999 09:43 AM     Click Here to See the Profile for John C   Click Here to Email John C     Edit/Delete Message   Reply w/Quote
Batman,
Sorry to keep on about this, but persistence is my greatest virtue;
The examples you described were predominently "cost of scrap as a percentage of sales". Well that's as good an example as any:
What does "cost of scrap as a percentage of sales" mean? Is it the cost of the replacement items? The cost of that plus the administrative costs of scrapping the old items? All of that plus ordering, holding and fitting the replacement parts? All of that plus the cost of doing overtime or extra work to fulfill the orders which were missed because of the fallout due to the scrap? or, etc, etc, up to the really unknowable costs which are the ones which hurt so much they can be terminal.
If you've got scrap, it's because your yield is down by so much percent. And if your yield is down, you know. Or, if you don't know, then it's because you are not controlling your main activity - you haven't got the basics, whether it be line fallout, untrained operators, unanswered queries or complaints, whateve. If you've got scrap, you know you've got all those problems and accumulating costs and you know that you have to do something about it. Not measure, do something. Investigate the cause, not the second, third and fourth and subsequent effects - it's too late to do anything about them. Stop the scrap, prepare a source of trained backup operators, apply preventive (CofQ must be the antithesis of preventive quality!) control as far as possible and, where not possible, immediate and direct action. If your managers don't know that, then that is another problem. Investigate it and find the root cause. Who hired managers who want indirect information when the immediate need is obvious to the janitor? What sort of management school did they go to?
People keep saying 'the managers want it' or 'it is better to hand off this sort of info to the managers'. Well, we all know that, 'without management commitment and involvement, ISO 9000 will not work'. We've heard that so many times. Well, their involvement will not be much use if it is the wrong sort of involvement. The Quality Professionals have usurped a big slice of management responsibility and have put their own slant on it. They have a lot to answer for.
rgds, John C

[This message has been edited by John C (edited 17 June 1999).]

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Batman
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posted 17 June 1999 06:48 PM     Click Here to See the Profile for Batman   Click Here to Email Batman     Edit/Delete Message   Reply w/Quote
Hi John
Persist away!
I agree in most of what you say, generally the Cost of Quality data is useful to some in different ways. It was not the only data we used. I was offering Doug Pfrang a method of compensating for some of the items he stated affect the COQ report. Even if sales go up or down, the % of sales ignores this. That is not to say that declining sales is not an issue, just that a percentage report can have value.

The managers used the information to help make resource decisions. The COQ report was only one of other data that was evaluated each week / month. We always have scrap, is it going up? is my continuous improvement projects working? which part(s) do I work on? Which department needs the most (and of course limited) technical resources? That was what the COQ report was used for. The persident could see where the profit impact was occuring most. Of course you can't report on everything, so we picked what was important and meaningful to the business.

I guess there are. many ways to approach the problem of gathering "company level data" that. is meaningful. I think COQ as described above is one good way, especially. if the receivers really understand what the data means; certainly it. is better than nothing.

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John C
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posted 18 June 1999 08:16 AM     Click Here to See the Profile for John C   Click Here to Email John C     Edit/Delete Message   Reply w/Quote
Batman,
Well, I've got to hand it to you for persistence, as well. When neither side will move then the question of who is right becomes irrelevant. One thing is sure in life; In the long run, it's better to be wrong along with all the others, rather than the single, solitary individual who is right.
Sure, the CofQ is one ecellent way to do the job - An awful lot better than nothing. It's usually not what you do but the way that you do it (and that's what gets things done), so I've heard. The Astecs and the Incas build magnificent civilisations without ever inventing the wheel and it didn't do them an ounce of harm.....
except disaster, destruction and eventual annihilation, of course.
Imagine what their war chariots would have done to Cortez, if they had had wheels instead of sledge runners. Oh, and horses...well... er....??....
I think I've given it my best shot, so I'll give up.
Give 'em hell, Batman,
and regards,
John C

[This message has been edited by John C (edited 18 June 1999).]

[This message has been edited by John C (edited 18 June 1999).]

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Marc Smith
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posted 20 October 1999 12:54 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Subject: Re: Q: ISO Cost Effectiveness /../Ohri/Smith
Date: Mon, 18 Oct 1999 11:50:15 -0600
From: ISO Standards Discussion

From: "Gary V. Smith"
Subject: Re: Q: ISO Cost Effectiveness /../Ohri/Smith

> From: Edith Ohri
> Subject: RE: Q: ISO Cost Effectiveness /../Ohri/Smith/Ohri
>
> Right, but those "hard numbers" are coming through lots of interpretations of
> the idea of quality, therefor their authenticity is far from being self
> evident. For example, let's take measuring dimensions:
> First, all chances are that the cost would catch only the control and
> re-works, but not the illusive error prevention.
> Second, the physical qualities are only one part of the product quality and
> focusing on partial cost figures may cause neglecting other qualities,
> such as good design and integration.
> What's worse, I have a feeling that the illusive cost/benefit of good design
> worth an order of magnitude more then the measurable qualities.
>
Dear Edith,

In the case of a "hard" product. the customer establishes boundaries which they have determined gives. the product the desired form, fit and function. These boundaries are. usually some class of dimensions and/or attributes which gives the product. the desired quality. If planned efficiently quality will be designed. into the product by having determined early in the process how the boundaries,. i.e., specifications, are to be met. Whether the product is a wheelbarrow. or a 747 jet all the parts must be designed to fit together well, look. right and function properly at a reasonable cost and delivered on time.

A good cost of quality program, whether manual or software based, captures as many of the factors in this process as possible. The cost of quality program that I use has upwards of 100 separate cost categories that cover all contingencies within the major classifications of the cost of prevention, appraisal, and internal and external failures.

However, a great deal is made of the perception of quality, but this is not always a good gauge of quality. For example, a Rolex watch and a Rolex knockoff. Cosmetically they both look like Rolex watches and at first perception they operate the same, but the difference in the quality in the design will become apparent to the practiced eye. An authentic Rolex could cost $5000 and the knockoff could cost $100. All else being cosmetically equal the perception is that the $5000 watch is better than the $100 watch. But they will both tell time, although probably not equally as well. The accuracy of the watches is determined by the form, fit and function of the internal parts and the cost of making them all work properly. How accurate does the customer need the watch to be? Are you a train conductor or a beachcomber?

Anyway, the cost of (poor) quality can be as accurately measured as is necessary to provide the desired indicators. The user has to determine what is important.

Gary Smith

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Sam
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posted 01 November 1999 09:01 AM     Click Here to See the Profile for Sam   Click Here to Email Sam     Edit/Delete Message   Reply w/Quote
Juran states that cost of poor quality is but one of several tools that can be used to seek improvement in thew system and should bwe used as such ,on a project by project basis. Crosby bulit his reputation on Cost of Quality (Along with zero defects).

Why don't more people use it ?,primarily they are afraid of it. And for good reason. Cost of quality is measured in DOLLARS, and nothing is of more interest to upper level management than DOLLARS.
Cost of quality is also and excellent tool for measuring the effectiveness of management,i.e., High (or low) cost of quality is a direct result of how good (or bad) the system is managed. It is the only tool, that I know of , that is directly owned and controllable by management.


------------------
Sam Goody

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barb butrym
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posted 01 November 1999 05:39 PM     Click Here to See the Profile for barb butrym   Click Here to Email barb butrym     Edit/Delete Message   Reply w/Quote
people are afraid to visualize the wasted dollars.......and they show very clearly what the weakness is...SO once told...the culprit is soon found....and depending on the culture of the company...could produce very painful actions. the old 'be careful what you wish for....' syndrome.

AND alot of people just don't get it

[This message has been edited by barb butrym (edited 01 November 1999).]

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Kevin Mader
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posted 02 November 1999 08:21 AM     Click Here to See the Profile for Kevin Mader   Click Here to Email Kevin Mader     Edit/Delete Message   Reply w/Quote
Sam,

In my limited experience, I find that most folks just aren't aware of it. At least, to the degree that they should be. In addition, most organizations only realize the losses when their butt is in the fire, often too late. While an organization makes money, enough to a bunch, they aren't interested in the waste within the system. This is part of the Caretaker Syndrom that Crosby speaks about. If things aren't broke, don't fix them. Stay the course.

Most organizations are aware of the blatently obvious, scrap and rework. These are normally 'measureables' within their systems. They measure these because they are taught to. Just a part of the failing Western Management Philosophy plaguing our Business Schools (my own opinion). A monkey see, monkey do approach. Sad, but true. Also, many times organizations only measure the Poor Costs of Quality, which traditionally only include Failure Costs. Doing this, you miss the Preventive (value added approach) and Appraisal (non value added, but necessary). Organizations are only concerned about measuring the 'waste' and issuing CA. While this is important, the move should be towards PA and away from CA. That is where the big savings are!

People need to made aware of the losses. But just a Barb points out, the sometimes hits the people in the sensative areas. Especially as organizations continue to make money in spite of themselves, these efforts often go unheaded and often resented. Too bad!

Regards,

Kevin

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Marc Smith
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posted 20 November 2000 01:22 PM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Also see https://elsmar.com/ubb/Forum5/HTML/000172.html

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Marc Smith
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posted 23 March 2001 08:46 AM     Click Here to See the Profile for Marc Smith   Click Here to Email Marc Smith     Edit/Delete Message   Reply w/Quote
Also see https://elsmar.com/ubb/Forum1/HTML/000424.html and https://elsmar.com/ubb/Forum5/HTML/000000.html

[This message has been edited by Marc Smith (edited 23 March 2001).]

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