Q. 147  Critically analyze the COPQ calculator given at https://www.benchmarksixsigma.com/cost-of-poor-quality/ by providing examples of application.  

 

  

Note for website visitors - Two questions are asked every week on this platform. One on Tuesday and the other on Friday.

• All questions so far can be seen here - https://www.benchmarksixsigma.com/forum/lean-six-sigma-business-excellence-questions/
• Please visit the forum home page at https://www.benchmarksixsigma.com/forum/ to respond to the latest question open till the next Tuesday/ Friday evening as per Indian Standard Time.  
• The best answer is always shown at the top among responses and the author finds honorable mention in our Business Excellence dictionary at https://www.benchmarksixsigma.com/forum/business-excellence-dictionary-glossary/ along with the related term.

 

Cost of poor quality includes any cost that would not be expended if quality were perfect. Total quality cost includes below all four cost:

1. Prevention Cost: cost incurred to prevent the occurrence of Non conformance in the future. for example: marketing, purchasing, operations

2. Appraisal Cost: cost incurred in measuring and controlling current production to ensure conformance to requirement, for example purchasing appraisal cost, operation appraisal cost

3. Internal failure cost: cost generated before a product is delivered to as a result of NC to requirements. for example rework, repair, reinspection, scrap.

4. External failure cost: cost generated after a product is delivered as a result if NC to requirements. for example: return goods, warranty claims, recall cost, penalties, lost sales.

 

now lets see the example in the cost calculator:

1. No of defects identified internally : 20

2. Avg rework cost per defect is : 50

 

so total internal failure cost will be : 50*20 = 1000

 

3. No of defects identified externally : 10

4. Avg rework cost per defect is : 100

5. Recall cost is : 5000

 

so the total external failure cost will be : 10*100+5000 = 6000

 

So total cost of the poor quality will be sum of both internal and external failure that is 1000+6000 = 7000.

No lets understand the problem with the example in automobile industry. 

Toyota & Lexus recalled around 1.7 million cars with deadly Takata Air bags that could explode. so for Takata total failure cost will be the sum of internal and external failure. internal failure cost is to reinspect all air bags before supply to Toyota  and solve the problem and eliminate the root cause of the problem of deadly airbags. on the other hand external cost includes penalties by Toyota.

 

Similarly cost of poor quality for Toyota is internal and external both. Internal failure cost includes rework, reinspection for all air bags and scrap in case of faulty. external cost is recall cost of all 1.7 million cars to recheck and recheck the faulty air bags. 

 

The most expensive quality costs are from non conformance detected by customer. In addition repair, replacement cost loss, any company loses the customer goodwill and their reputation is damaged when the customer relates his experience to others. 

 

Before analyzing the COPQ calculator, let us quickly understand what COPQ is all about.

 

As an organization, when we commit to deliver a product or service to our customers, it is deemed that the quality of this product or service meets and/or exceeds our customer expectations. Hence, right from the Design or Planning phase itself, it is important to give a lot of emphasis to the identified quality parameters associated with the product or service. When it comes to the financial planning part of your project, it is extremely important to assess the budget that needs to be allocated towards meeting the quality criteria.

The two primary costs that will be allocated first are Prevention Cost and Appraisal Cost.

• Prevention Cost generally includes the budget allocated for quality planning (inputs), training (skills to avoid rework), preventive maintenance etc.,
• Appraisal Cost generally includes the budget allocated for testing, inspection, audits, reviews etc.,

In real world scenario, it is often seen that, once the product or service is developed and ready for deployment, there are possibilities that we identify certain defects and post release to market, we can see a set pattern of complaints reported by our customers which needs to be fixed. The former, termed as Internal Failure or Defects still needs to be fixed before we deploy the product or service for which we will need to spend money. Latter, which comes from customer, termed as External Failure or Defects, obviously needs to be addressed but has a larger cost implication.

We can categorize these two as secondary costs as below

• Internal Failure or Defects which generally includes rework, rectification, scrapping, unnecessary hold or inventory etc.,
• External Failure or Defects which generally includes Repairs, Warranty Claims, Replacement Cost, Refunds, Cost of Dissatisfaction etc.,                                                                                                                          

While the Primary Cost associated with Prevention and Appraisal Cost are considered as Cost of good quality, as it strives towards achieving the required quality parameters as committed to the customer, the secondary cost of Internal and External failure are considered as Cost of Poor Quality as it has a negative impact owing to a defective and inefficient product or service. Summary as below.

 

Cost of poor quality is generally referred to as non-conformance cost and acts as a good indicator to the company quality policies and programs. A fairly less trending COPQ indicates a strong governance around Quality Management Programs.

 

Reducing the Cost of Poor Quality in itself is a very strong trigger and provides a good business case for your Lean Six Sigma Projects in the organization as it definitely calls for a systematic DMAIC approach to reduce the cost of non-conformance.

 

Let us now look at a very basic hypothetical example to compute Cost of Poor Quality.

Company AAA manufactures kids play area products – mainly gears such as Swings, Slides, See-Saw etc., Company JKL is a newly formed Kids Play Area Institution and have placed an order for 100 slides for all their offices across India. There is a SOW signed between both the companies with terms and conditions which includes Safety clause (as used by kids), strict delivery timelines, penalty clauses for delayed service etc., Each Slide was priced at INR 6000/- all inclusive (including installation, maintenance etc.,)

 

Post production of 100 slides, it was realized that inclination of the slides were not good enough to give a smooth glide down. Given the core production part was completed, it was not possible to reassemble the set. Post some calculations, it was found that using a tension spring, they can slightly pull back the slide towards the ladder steps (each step is separately assembled to side bars) to give the required further inclination for an enjoyable slide down. The team now had to include a tension spring into the set-up and have the same incorporated with additional efforts.

• In summary, there was one Internal Defect found and had to include the cost of rework i.e. cost of tension spring, required adjustments on both slide and ladder set up and labor cost to make the adjustments. Also, this was the only workable option that company AAA could opt to meet the delivery timelines.

With products delivered, JKL Kids Play area installed these slides across their 5 offices (20 each). While they realized the inclusion of tension spring which perhaps had led to some dissatisfaction owing to losing the aesthetics of the set-up, they kind off ignored it as the overall requirement was met.

• External Defect Synopsis - Within a Span of 3 months, 2 branches reported issues about steps 5 and 6 loosening on the ladder side where tension springs are pulled towards the side bars, due to the stress called by the pull by tension springs. While JKL reported the issue to AAA, within next 15 days all branches flagged the issue and nearly 70 out of 100 slides had this issue. Given it was steps to ascent, they expressed their anxiety as kids were using it and asked for quick fix. While JKL insisted for complete replacement of units, AAA assured of a quick work around. AAA had to send their technicians to replace the two steps firmly to side bar and use additional clamping to support through extended bars connecting the slide and ladder. Infact, they had to take additional steps to clamp all 10 steps to avoid any future issues. An external defect was called out here by customer and had to be fixed but more importantly left the customer unhappy.

Let us now look at the cost of poor quality using our calculator at https://www.benchmarksixsigma.com/cost-of-poor-quality/

a.     Internal Defects Identified = 1 per slide [No proper sliding experience]. So for 100 units, I need to input 100 defects in he calculator

b.     Average cost of internal rework = Cost of tension spring + additional labor cost effort =  INR 75/ + INR 150 = INR 225/-

c.      External Defects Identified = 1 [Steps on Ladder sides loosened]. Issue was found with 70 units only. So in calculator, I need to input 70 units.

d.     Average Cost of external rework = Cost of replacement of 2 steps+ additional bars to hold the steps+ additional clamps to hold all steps + cost of technician = INR 100 + INR 300 + INR 500 + INR 400 = INR 1300

e.     Penalties / Liabilities = INR 25000 claimed by company JKL for lost revenue

 

As per the calculator, Total Cost incurred due to internal and external defects are INR 138,500. AAA had sold 100 slides for INR 6000/- each i.e. INR 600000/- all inclusive.

• Let us assume that AAA had planned for 30% profits with no investment on Preventive and Appraisal costs. So profits made were INR 180,000/ -
• With the Cost of Poor Quality, they lost around INR 138500/- and net effective profit is around INR 41500.

************************************************************

 

Taking my example above and mapping to calculator, below few call outs

 

1.     Internal Defects Identified – In my scenario, it was 1 defect per piece so for 100 units sold, it would be 100 defects. In case if it was more than 1 defect in my example, it would have been number of defects per piece * number of pieces.

• My feedback on calculator - If it is made more explicit in the calculator to input total number of defects across all units or have two separate fields like Defects/Unit and Total number of units which will land up with right number of defects for which the cost has to be estimated.  For Services industry, we can have multiple defects while the unit can still be 1.

 2.     Average Cost of Rework [Both Internal and External] – In my scenario, I have tried to assess the individual cost that goes into the rework for both Internal and External scenarios.

• My feedback on calculator – While it clearly states average rework cost per defect, it will be helpful to include the type of costs that can go it as it will help the user to appropriately think, sum and input into the calculator.

 3.     External Defects Identified – In my scenario, it was across 70 units we found the issue.

• My feedback on calculator - If it is made more explicit in the calculator to input total number of external defects across all units or have two separate fields like Defects/Unit and Total number of units affected which will land up with right number of defects for which the cost has to be estimated.  For Services industry, we can have multiple defects while the unit can still be 1.

4.     Penalties / Liabilities / Recall Costs – In my scenario, I have included a Penalty in the form of loss of revenue.

• My feedback on calculator – It’ll be helpful if more specific inputs are given in relation to this cost. While Penalties and Recall costs are direct, Liabilities if expanded further will be really helpful. If the magnitude of the excursion is large, sometimes, you may have to engage a Third Party Support all together to handle the volumes of your issue. This it will be a huge Opex cost. So being explicit will be helpful.

In summary, this calculator is a good start to proactively look at the possible cost of non-conformance and plan your overall cost of quality as well as ensure to keep your cost of poor quality at minimum through appropriate planning. While meeting customer expectation is at focal, managing profitability is at equal importance to stay competitive in the market.

The winner for the day is Prashanth Datta as that is the only answer providing critical evaluation of the calculator. This, indeed, is the simplest form of the calculator. More details also mean more complexity - one can choose the level of detail that works the best for their product and organization.