Cost of Quality Where Are We Now? © Omnex All rights reserved
Cost of Quality
Where Are We Now?
© Omnex All rights reserved
Copyright 2006 Omnex. All rights reserved2
David A. Barber, QCE (ASQ)
• Mr. Barber is the General Manager and Senior Quality Consultant / Trainer for Omnex Canada Inc. He has been a full time consultant since 1998, and estimates a total of 5,000 hours of in-class instructional training and 3,000 hours of client consultation since that time.
•• Mr. Barber has over 20 years experience in the Quality profession with the majority of this
time being spent in Quality Director / Manager and Quality Engineering roles. He has a diverse background with experience in the automotive, medical devices, consumer electronic, telecommunications, plastics, machining, and stamping industries. Mr. Barber has assisted companies in the development and implementation of cohesive quality systems that have resulted in the achievement of ISO 9001:1994, QS-9000, TS16949:1999, ISO 9001:2000, TS16949:2002, TL9000, ISO/IEC 17025 and Six Sigma projects.
•• Mr. Barber is a fourteen-year senior member of the American Society for Quality (ASQ) and
is a Certified Quality Engineer. He received his Quality Assurance Certificate (accredited by the ASQ) from Centennial College of Applied Arts and Technology, has a diploma in Electronics from Radio College of Canada.
Copyright 2006 Omnex. All rights reserved3
Omnex provides training, consulting and software to the international market with offices in the USA, Brazil, Canada, India, Mexico,
Venezuela, China (PRC) and Thailand. Omnex offers over 70 training courses in business and quality management systems worldwide.
Internet email: [email protected]: www.omnex.com
Copyright 2006 Omnex. All rights reserved4
12
3
6
9
1951 Cost of Quality Concept – Dr. J.M. Juran
1950’s COQ in GE – AV Feigenbaum
1964 – Q100 Report IBM
1979 – Quality is Free – Philip Crosby
1980’s – Cost of Quality is Popularized
Late 80’s to 90’s – COQ loses favor
1998 – COPQ Reappears in QS-9000
2002 – COPQ present in ISO/TS 16949:2002
1990’s – COQ reappears with Six Sigma & Lean
History of Cost of Quality2006 – New Direction
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Cost of Quality Classic Typology
• Cost of Quality is Categorized into– Prevention and Appraisal Costs
• Prevention Costs• Appraisal Costs
– Failure Costs• Internal Failure Costs• External Failure Costs
Maturity of Quality Management System and reduction in COQ
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Cost of Quality is Categorized
Prevention Costs• New Product Reviews• Quality Planning• Process Capability Evaluations• Quality Improvement Team Meetings• Quality Education & Training• Improvement Transactional Processes
Prevention Costs• New Product Reviews• Quality Planning• Process Capability Evaluations• Quality Improvement Team Meetings• Quality Education & Training• Improvement Transactional Processes
Appraisal Costs• Incoming Inspection• In-process & Final Inspection & Test• Lab Testing• Calibration of Measurement & Test Equipment• Checking Activities to Verify Accuracy (PO’s)
Appraisal Costs• Incoming Inspection• In-process & Final Inspection & Test• Lab Testing• Calibration of Measurement & Test Equipment• Checking Activities to Verify Accuracy (PO’s)
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Cost of Quality is Categorized
Internal Costs• Scrap• Rework/Repair• Downtime• Redesign• Excess Inspection• Excess Inventory•Re-doing any Activity (Not Right the First Time)
Internal Costs• Scrap• Rework/Repair• Downtime• Redesign• Excess Inspection• Excess Inventory•Re-doing any Activity (Not Right the First Time)
External Costs• Warranty• Retrofits• Service Calls• Recalls• Lost Sales• Long Cycle Times•Customer Service Resources due to a Complaint
External Costs• Warranty• Retrofits• Service Calls• Recalls• Lost Sales• Long Cycle Times•Customer Service Resources due to a Complaint
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Problems with Traditional COQ Models
1. COQ undervalued based on traditional calculations2. COQ cumbersome and difficult to calculate3. Senior Management use other methods to drive
improvement4. Focus is on measuring cost, not using cost to
improve performance while reducing cost.
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Problems with Traditional COQ Models
1. COQ is used as a status indicator rather than as a driver2. Focus is on the details of gathering and reporting3. Inadequate resources allocated to effect real prevention
and change4. False reporting to protect the guilty5. Viewed as too much administration to follow through6. Viewed as an unrealistic goal short on methods
COQ systems fail due to “poor management planning, implementation, and follow-up.”
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COPQ is “The Hidden Factory”
As is Could be
Cost of failurein the field
Cost of failurein the field
Internal failurecosts
Internal failurecosts
Cost appraisaland inspectionCost appraisaland inspection
Cost to improveand preventpoor quality
Cost to improveand preventpoor quality
Opportunity lost
• Avoided capital cost• Opportunity cost of additional volume if
Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer
•• Opportunity cost of additional volume if
Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer• Improvement program costs• Process control• Quality engineering and admin
• Improvement program costs• Process control• Quality engineering and admin
• Inspection/test (materials, equipment, labor)• Vendor control• Quality audits
• Inspection/test (materials, equipment, labor)• Vendor control• Quality audits
• Warranty claims• Maintenance and service• Warranty claims• Maintenance and service
As is Could be
• Scrap/rejects• Rework• Longer cycle times and excess inventory
• Scrap/rejects• Rework• Longer cycle times and excess inventory
5%20
-25%
65-7
0%
?
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Cost of Poor Quality (COPQ) the Tip of the Iceberg
Quality engineeringand administration
Inspection/test (materials,equipment, labor)
Expediting
Scrap
Rework
Rejects Warrantyclaims
Maintenance and service
Cost to customer
Excess inventory
Additionallabor hours
Longer cycle times
Quality auditsVendor control
Lost customer loyaltyImprovement program costs
Process control
Opportunity cost if salesgreater than plant
capacity
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Cost of Poor Design Quality
1
10
100
1000+
X Millions
A change while still in design
In manufacturing
At customer location
Recall
Litigation
5
50
500
5-50K
10K - X Millions
In-house
In shipping
Customer incoming
Customer mfg
Field
Cost of Poor Manufacturing
COQ Methods
Traditional Costing ApproachSix Sigma Approach
Lean ApproachMeasurables Approach
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Traditional Cost Method % Method
1. Identify the total resources consumed in a category or item.
2. Determine the percentage of those resources used for activities associated with quality problems.
3. Apply the percentage to the total cost of resources to obtain a cost by category/ item
4. Add these costs by category/ item to find the total cost of poor quality.
5. Using Sales Revenue, calculate cost of poor quality as a percentage of sales revenue.
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Traditional Cost Method % Method
Category/Item
Cost Source Cost ofResources
% resourcesassociated withpoor quality
Cost perActivity/Item
Scrap Production CostsWages & BenefitsDisposal Cost
$532,000 8% $42,560
CustomerComplaintSystem
Wages & BenefitsTrainingSystem Maintenance
$63,750 100% $63,750
Total Cost of poor quality $106,310Calculate asa % of Sales
Total COPQ $106,310 Assume $1Msales
10.63% of Sales
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Traditional Cost MethodUnit Cost Method 1
234567
1234567
• Identify the frequency of activities in a category/ item
• Determine an average cost per occurrence• Multiply the frequency by cost per occurrence to
obtain a cost by category/ item• Add these costs by category/item to find the total
cost of poor quality• Using Sales Revenue, calculate cost of poor
quality as a percentage of sales revenue.
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Traditional Cost Method Unit Cost Method
Category/ Item Cost Source Frequency Average Costper Occurrence
Cost perActivity/Item
Scrap Production CostsWages & BenefitsDisposal Cost
50 per year $500 $25,000
CustomerComplaintSystem
Wages & BenefitsTrainingSystem Maintenance
48 per year $2,000 $96,000
Total Cost of poor quality $121,000Calculate costas a percentageof sales revenue
Total cost of failurecategories: $121,000
Assume sales of$1 million
12.1 % of salesrevenue
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Traditional Cost Method
• Aligned with traditional Accounting methods– Focus on responsibility accounting– Revolves around the “command and control”
structure– Allocation of costs to products and services
on some “fair and equitable” basis• Cost measures are (mis)aligned with operating
measures.
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Activity-Based Costing• Focus on process rather
than responsibility– Clear assignment of all costs
to the process that uses the resource
• Identifies process steps wasting resources
• Costs not absorbed in overhead
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Activity-Based Costing
• Steps1. Identify activities2. Determine cost for each activity3. Determine cost drivers that cause COQ4. Collect activity data5. Calculate product cost and COQ
Six Sigma Approach
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Cost of Poor Quality & Industry Average PPM’s
COPQ Sigma PPM30-40% of Sales 2.0 308,537 Non Competitive 20-30% of Sales 3.0 66,807 15-20% of Sales 4.0 6,210 Industry Average10-15% of Sales 5.0 233<10% of Sales 6.0 3.4 World Class
COPQ Sigma PPM30-40% of Sales 2.0 308,537 Non Competitive 20-30% of Sales 3.0 66,807 1515--20% of Sales20% of Sales 4.04.0 6,210 Industry Average6,210 Industry Average10-15% of Sales 5.0 233<10% of Sales 6.0 3.4 World Class
Copyright 2006 Omnex. All rights reserved23
COPQ & Sigma/Yield RelationshipIndustry Averages
COPQ Sigma Yield30-40% of Sales 2.0 5% Non Competitive 20-30% of Sales 3.0 93% 15-20% of Sales 4.0 99.4% Industry Average10-15% of Sales 5.0 99.976%<10% of Sales 6.0 99.999655% World Class
COPQ Sigma Yield30-40% of Sales 2.0 5% Non Competitive 20-30% of Sales 3.0 93% 15-20% of Sales 4.0 99.4% Industry Average10-15% of Sales 5.0 99.976%<10% of Sales 6.0 99.999655% World Class
Copyright 2006 Omnex. All rights reserved24
6050403020100
7
6
5
4
3
2
1
0
C O P Q (% S a les )
Sig
ma
Leve
l
Sigma is Correlated to Cost of Poor Quality
Industry average is 20% COPQ & 4 Sigma Company
Copyright 2006 Omnex. All rights reserved25
Using the Six Sigma Approach
• A supplier to semiconductor industry has approximately 50,000 DPMO (internal and external).
• This translates to a 2.0 sigma system• Such systems average a COPQ of 20-30% of
sales. • This is a non-competitive situation since this
cost directly affects the bottom line.
Lean Approach (Additions)
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Lean Value Proposition
• What competitive advantages would you have if you could: – reduce manufacturing and overhead costs by
20%?– deliver products in 50 to 80% less time?– free up capital through a 75 to 90% reduction
in inventories?– improve labor productivity by 40 to 50%?– improve quality by a factor of 10x or 100x?– reduce the cost of poor quality by 50%?– reduce time-to-market by 50%?
Copyright 2006 Omnex. All rights reserved28
Manufacturing Waste - Muda
• Inventory – Sleeping Money• Defects – Cost to find, fix or replace• Transportation of Parts & Materials• Unnecessary Motions• Unnecessary Operations• Waste of Waiting• Waste of Overproduction
Copyright 2006 Omnex. All rights reserved29
Five Categories of the COQ1. The cost of failure in the field. This includes costs such
as warranty claims as well as the cost to service problems. Companies have access to data on the costs incurred by the customer as a result of the failure, but normally group these costs as part of the opportunity costs.
2. The internal failure costs, the costs in labor and material associated with scrapped parts and rework. These costs also include the additional inventory that we carry for safety stock to cover quality related problems.
3. The costs of appraisal and inspection. The material (for samples), test equipment, and labor costs to find defects before they escape out of our processes. It also includes the costs related to quality audits and monitoring vendors and dealing with their quality problems.
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Five Categories of COQ (Cont.)
4. The costs related to improving poor quality,including: cost of equipment to better control processes; as well as, the cost of programs to improve quality (CARs, 8-D’s, etc.).
5. The opportunity cost of not producing more products with the same assets. This is in addition to the opportunity cost of lost sales due to poor quality in the past.
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Cost of Poor Flow (COPF) - Addition
Extra Handling & Storage Costs
Expediting Costs
PremiumFreight
Charges
Late Deliveries
Long Leadtimes
Cost to Customer
Excess Inventory
Excess Scrap & Rework
Excess Capacity
Lost Customer loyalty
Excess Labor Costs
Opportunity cost if salesPotential is greater than
Current capacity
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Cost of Poor Flow and Inventory Turns
COPF Inventory Turns Competitive Position20-25% of Sales 8 to 10 Non-Competitive15-20% of Sales 10 to 20 Average Company10-15% of Sales 20 to 505-10% of Sales 50 to 100<5% of Sales 100 Plus World Class Company
COPF Inventory Turns Competitive Position20-25% of Sales 8 to 10 Non-Competitive15-20% of Sales 10 to 20 Average Company10-15% of Sales 20 to 505-10% of Sales 50 to 100<5% of Sales 100 Plus World Class Company
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The Hidden Factory
• The “hidden factory”– Up to ¼ of your plant equipment,
personnel, materials and floor space is wasted performing the non value-added work of finding, fixing and replacing mistakes and defects; and moving, counting and storing inventory.
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OEE and The Six Big Losses
Scheduled Loading Time
Available Time
Productive Time
OverallEffectiveness
DowntimeLosses
SpeedLosses
Breakdowns
Setups/Adjustments
Idling/Minor Stoppages
Speed Loss
Defects
Startup/Yield Losses
QualityLosses
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Cost Savings from OEE Improvement
• TPM not only reduces the frequency of breakdowns, it also improves the overall productive capacity of equipment by reducing the time lost due to minor stoppages and equipment running at less than intended speeds.
– O.E.E.’s of less than 50% are not unusual– T.P.M. with quick changeovers and six sigma
quality can improve O.E.E. to 85% or more.– Increasing O.E.E. to 85% would represent a 35%
increase in productive capacity.
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OEE & Profitability an Example
• Current plant sales: $100 million• Current plant O.E.E.: 50%• Possible sales at 85% O.E.E. =
$100 million x .85 = $170 million.50
•Profit margin on incremental sales = 25% ($170M - $100M) x 25% = $17.5 million
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01020304050
60708090
100
ProjectTeam
Member
Black Belt MasterBlack Belt
Champion Green BeltSeniorManagement
LineManagement
% Time Allocated toLean / Six Sigma
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VA & NVA Timelines
Draw value-added time down on the timeline, draw non value-added time up
Total N.V.A. Time
Total V.A. TimeInventory Days Inventory Days
Cycle Time Cycle Time Cycle Time
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PRODUCTIONCONTROL
Daily Order
6-weekForecast
90/60/30 DayForecasts
DailyOrder
State StreetAssembly
Daily Order
SHIPPING
Staging
C/O = 10minC/T = 1 Sec
STAMPING
Press Changeover
WELD+ASSY
C/T = 56 sec.C/O=0
Uptime=100%
2 ShiftsTotal work
168 sec
coil
coil
batch
Coils
(at the press)Weld
Changeover
Welderuptime Elim.
waste
tote 20 20
LR
1xDaily
2020
20
OXOX
Daily(Milk Run)
1 second 168 seconds1.5 days 1day 2 days
Lead Time = 4.5 days
VA Time = 169 sec
Michigan Steel Co.
Acme Stamping Future State Value Stream Map 3 From “Learning to See” Rother & Shook
Pull SchedulingPull
Scheduling
SupplierDevelopment
Measurables Approach
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Measurables Approach - COPQ• Focus is on COPQ• Identify product and process measurables which
impact quality (and consequently the COPQ)• Collect and track data on these measurables as
a proxy for the costs
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Measurables Approach - COPQ• Internal Yield loss
(Failure) Costs– Incoming material
rejection (LAR)– Photo/Lithography
Rework – Fab line yield loss– Wafer Acceptance /
PCM test yield loss– Wafer / die test yield
loss– Assembly yield loss– Final test yield loss
• External Failure Costs– Customer returned
product cost– Returned product
failure analysis costs– Customer complaint
response costs– Replacement product
cost
Cost Of QualityNew Directions
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Cost of Quality Expanded Typology
I. “Hard” quality costA. Controllable quality cost
(1) Prevention cost(2) Appraisal cost (3) Lost opportunity cost (“valueless” activities)
B. Resultant (poor)quality cost (1) Internal error cost(2) External error cost
C. Equipment/process poor-quality cost
II. “Soft” quality cost A. Customer incurred costB. Customer dissatisfaction costC. Transaction costsD. Lost opportunity costE. Loss of reputation cost
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COPQ is “The Hidden Factory”
As is Could be
Cost of failurein the field
Cost of failurein the field
Internal failurecosts
Internal failurecosts
Cost appraisaland inspectionCost appraisaland inspection
Cost to improveand preventpoor quality
Cost to improveand preventpoor quality
Opportunity lost
• Avoided capital cost• Opportunity cost of additional volume if
Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer
•• Opportunity cost of additional volume if
Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer• Improvement program costs• Process control• Quality engineering and admin
• Improvement program costs• Process control• Quality engineering and admin
• Inspection/test (materials, equipment, labor)• Vendor control• Quality audits
• Inspection/test (materials, equipment, labor)• Vendor control• Quality audits
• Warranty claims• Maintenance and service• Warranty claims• Maintenance and service
As is Could be
• Scrap/rejects• Rework• Longer cycle times and excess inventory
• Scrap/rejects• Rework• Longer cycle times and excess inventory
5%20
- 25
%65
- 70
%
? “Soft” Quality Lost
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COQ – Doing it Right the First TimeIn the past COPQ has only been associated with product quality.
COPQ can be applied to any process within the company, if the “product or service” is identified
What is the product or service of the maintenance department?Of the design department?Of marketing?
What is the COPQ of each of these business processes?
• this can be tied to process measurement and used for continual improvement
This is the greatest opportunity for COQ….
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COQ – Upstream and Doing it Right the First Time
• Design –– Failure costs in design include any
designs that do not make it first pass. – Engineering Changes = Rework– This is the biggest opportunity of
COPQ. • Technology Development –
– Failure costs should include any process that is not qualified on first pass.
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COQ – Process Approach
• COQ is a fundamental characteristic of every process
• Every process has hard and soft quality costs associated with it
Opportunities for COQ
Example -Semiconductor Design and Manufacturing
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Criteria for First Pass Success in Design
• Within budget• On schedule• Meets die size and yield targets• Meets electrical performance targets• First mask set goes into production• Meets sales target• Meets Break Even Time
– recover design and development cost targets
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First Pass Success in Design• Average number of passes per design
– 2.5 Passes.• Cost of second and third design pass as a ratio of the
initial cost– 1 to .5 to .3
• Development Budget for typical Business Line– $10 Million
• Costs for a Business Line – $50 Million
Cost of Quality – $6.5 Million using the development budget.
Some will argue that it should be calculated based on the entire Business line (i.e. COQ = $32.5 Million)
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Internal Failure CostsYield, Rework, and Failure
Yield Loss by Process Step• FAB line loss: 1 – 2 %• Lithography rework rate: ½% to 1% • PCM test – wafer acceptance test: 1% to 1½ % • Wafer/Die electrical – varies by technology:
80% to 97% (newer technology and larger die) • Assembly – line loss: in defects per million• Final Test: 97 to 99%
Chute yield – 74% to 93% depending on complexity and maturity
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Transaction Costs for Quality Problems
• Sales person (enter into system) calls customer service quality (sales office) or sends an email – 4 hours
• Open a complaint in the system• Team is consulted and made aware of issue – 4 hours• Product is received and then sent to plant – 1 hour• Their the quality person will take the product to F/A and put into the
system – 1 hour• Then F/A analysis is done and a F/A report is completed – 3 days• Then 8-D team also meets and 8-D is completed and sent to customer –
4 persons – 2 to 8 days• Goes to product quality engineer who reviews the problem – 4 hours• Goes to sales who sends to customer – 1 hour
Total of 13 to 27 person days at $1000 per day – minimum of $11,000 for analysis only.
And now we have to stop the bleeding and fix the problem
Implementing COQ
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Implementing COQ – Current Perspectives –
• Use COQ costing only if this method is going to be one of the key drivers for setting priorities for continual improvement– Calculate COQ once a year to identify top cost savings priorities
for processes identified– Identify projects for improving key processes
• Prioritize processes/areas for focus based on budget allocation – Design, R&D, Operations
• Identify key COQ drivers/measurables for each area• Do not monitor COQ each month, however measure the
key driver
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Implementing COQ Integration into the Strategic Model
CustomerExpectations
CompetitiveBenchmarks
Mission, Vision &Values
Strategic Objectives
ResultsMeasurement
KeyProcesses
ProcessMeasurement
ImprovementProjects
COQ provides direction on selecting Improvement Actions and track effectiveness
Six Sigma/Varification
Lean/Value Stream Mapping
COQ Measurements
Value Engineering P
roje
ct P
riorit
izat
ion
Met
hod
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Implementing COQ – If COQ Is Not a Driver –
• COQ is calculated because it is a mandated requirement?– Calculate using the easiest method, ie. six sigma method
covered earlier– Continue setting priorities for continual improvement using
other drivers like – six sigma, lean, activity based costing etc.
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Summary: What is COQ?• The value of COQ using traditional methods
decreases as organizations’ poor cost of quality hit approx. 20 ppm
• In addition to the soft quality costs, the Process/upstream COQ approach and soft quality costs are important concepts to consider when using COQ
• Representing quality improvements using “management’s language” (i.e. $$ will surely get management buy-in)
Thank youQ & A!