COST OF QUALITY

Cost Reduction Strategy (home page)     Seminars     Consulting     Articles     Books     Site Map 

Copyright © 2014 by Dr. David M. Anderson, P.E., fASME, CMC

How much is Cost of Quality?

According to Chuck Cox, Master Six-Sigma Black-Belt of the George Group, if you haven't been doing ongoing continuous improvement then you can expect that your COQ will be between 20 and 35% of the revenue stream or the product’s selling price. For military/government contracts the figure could be 45%.

Companies that implement quality programs can cut a Cost of Quality of 25% in half in 18 months, and cut that in half again it in half again in another 18 mos. So, with the correct approach you can get to World Class in 3 yrs. But there has to be a concerted, continuous effort to do that.

REDUCING THE COST OF QUALITY

The Easiest Way to Reduce Cost of Quality

The low-hanging-fruit in reducing the company’s Cost of Quality is to rationalize products to get rid of low-volume, low-profit products that get less kaizen focus (continuous improvement) and have less sophisticated tooling and procedures. Legacy products and spare parts may need to be eliminated or outsourced if they are not synergistic with the current generation of products.

Infrequently built products would have higher Cost of Quality because of: missing or vague instructions, procedures, and “know-how;” and damaged, missing, or discarded tooling, build fixtures, test fixtures, or repair tools, resulting in costly and error-prone manual or “plan B” procedures. In addition, infrequently built products will probably have many defects and scrap before first good units can be successfully built.

Older products, legacy products, and spare parts may have: worn tooling; less sophisticated diagnostics, tests, and repair tools; less effective design for manufacturability and quality; old parts that may have deteriorated, especially true in end-of-life buys; and older generation parts that are lower quality because all the above effects apply to older/low-volume parts too.

Designing in Quality

The first step to reducing the Cost of Quality for new products is designing in quality and reliability (see article).

Quality Programs

If a company is serious about reducing the Cost of Quality, it must implement serious quality improvement programs like Design for Manufacturability, Lean Production, and Six-Sigma (for more on Six-Sigma programs, contact Chuck Cox at ccox@georgegroup.com).

In order to identify the opportunities, structure the programs, and measure the progress it must use total cost measurements to quantify all the categories of the Cost of Quality (next).

COST OF QUALITY CATEGORIES

Each of the below categories should be identified as a cost driver and quantified. The sum of all these (and any others needed) would be the Cost of Quality.

Factory/Supply Chain Costs
- Rework
- Diagnostics (the cost of discovering what is wrong)
- Reinspection of rework
- Scrap = the value up to that point of whatever can not be reworked
- Value of replacement materials and parts
- Purchasing actions to procure replacements materials/parts
- Analysis of quality problems
- Cost of planning and corrective actions
- Supplier corrective actions and change-induced quality costs
- Setup change scrap/rework until first good part
- Sorting/screening out sub-optimal merchandise
- Inventory carrying costs for extra inventory caused by quality problems
- Discounting sub-optimal merchandise
- Change orders to correction the design
- Change-induced quality costs

Failure in the Field
- Dealing with customer complaints
- Refund/compensation/allowance costs
- Returned goods
- Warranty costs
- Recall, retrofit, and patch costs
- Penalties
- Liability costs
- Goodwill, reputation degredation
- Damage control costs
- Lost sales

Inspection/Testing
- Incoming inspection
- In-process testing
- Diagnostic tests, including the cost of testers and test development
- Final testing
- Internal quality audits
- Field quality audits
- Corrective actions on all of above
- Equipment test and calibration

Prevention
- Quality planning and programs
- Training
- Designing in quality and reliability
- Process controls
- Quality audits
- Qualifying suppliers
- Preventive maintenance

REFERENCE

Jack Campanella, editor, "Principles of Quality Costs; Principles, Implementation, and Use," (1999, Quality Press, American Society for Quality).

For more information about cost reduction, call or e-mail:

Dr. David M. Anderson, P.E., fASME, CMC
www.HalfCostProducts.com
phone: 1-805-924-0100
fax: 1-805-924-0200

e-mail: anderson@build-to-order-consulting.com
 

Cost Reduction Strategy (home page)     Seminars     Consulting     Articles     Books     Site Map