CONTENTS Part 1 : Introduction to COQ Part 2 : Setting Up a COQ Measurement System Part 3 : Important Considerations for a Successful COQ

Measurement System Part 4 : Some Results from Companies

PART 1 : INTRODUCTION TO COQ

THE CASE FOR QUALITY
y

Companies which take Quality seriously are more successful. Rising expectations of customers. Quality differentiates companies from the competition. Sustained cost advantages result from concentration on Quality. High cost of poor quality. Inspection is a of poor substitute for Quality.

y y

y y

LAW OF 10
1 : 10 : 100 rule

You catch the mistake in the process.

10

Final QC catches the mistake.

100

Your customer catches the mistake.

Traditional concept:

Sales = Costs + Profit

Modern concept:

Profit = Sales - Costs

COST OF QUALITY (COQ)

Cost of Quality = Cost of Conformance + Cost of Non-Conformance

OR

COQ = COC + CONC

Mistakes Rework Defects

Inspection

Reviews Overtime Change Orders Rewrites Scrap

Overruns

Citizens Not Product Failure in Served the Field Customer Dissatisfaction Retraining Unnecessary Reports Excess Battles Inventory Late Charges Confusion

Rush Del Costs

Turf

Low Morale Time Equipment Failure Miscommunications

Unwanted Turnover

Time lost Due to Accidents

Idle Duplication of Effort Past-Due Workplace Receivable Hassles Absenteeism

Grievances

Cost of Conformance (COC)

The costs incurred in ensuring that things are done right the first time.

Examples:
y y y y y

Quality training Quality auditing Inspections & tests Process capability studies Supplier assurance

Cost of Non-Conformance (CONC)

The costs incurred as a result of not doing things right the first time.

Examples:
y y y y y

Scrap Rework Downtime Handling customer complaints Customer return analysis

COST OF QUALITY

COST OF CONFORMANCE

COST OF NON-CONFORMANCE

PREVENTION

APPRAISAL

INTERNAL FAILURES Rework Scrap

EXTERNAL FAILURES Handling customer complaints Warranty claims

Writing of procedures & Incoming inspection instructions In-process inspection Supplier assurance Final testing & Process capability inspection studies Production trials Quality planning Materials consumed Quality training during inspection & testing Quality Auditing Analysis & reporting of Collection, analysis & inspection results reporting of COQ data Field performance Quality improvement testing programmes Inspection and test Quality review equipment

Downtime Bad debt Subcontractor faults Returned products Replacement Failure analysis Reinspection & retesting Downgradings Product liability Engineering change orders Accidents Improper invoicing Obsolescence Excess inventory Extended warranty Product recall Overdue accounts receivable Customer return analysis Concessions Loss of sales

Note: This is not a complete list

WHY MEASURE COQ?

Gaining senior management commitment. Targeting areas on which to focus their quality improvement efforts. Allocating resources for quality improvement projects. Monitoring the progress of the quality improvement process. Helping to set and monitor departmental quality improvement targets. Determining the effectiveness of the quality plan.

NPB 92 COQ SURVEY

y

Singapore companies lose $10 billion annually. Manufacturing sector: COQ = 5% of sales Service sector: COQ = 3% of sales

Philip Crosby:
y

Companies can increase their profits by 5-10% of sales if a proper TQM system exists. Ideal benchmark: COQ = 2.5% of sales PAT = 4 to 8% of sales

Quality Improvement Impact

(Where Were Headed if Nothing Changes)

To meet PBT objectives, Revenues have to increase more than 85% in two years.

Necessary Costs
1994 1995 1996

(Where Were Headed If We Focus on Avoidable Costs)

PBT objectives are met with a modest

increase in Revenues.

1994

1995

1996

2 STRATEGIES TO REDUCE COQ

1. Reduce COQ using industry approach.
y 6 industries participated in the COQ Industry Project.

Plastic Products Industry Printing Industry Garment Industry Electrical Industry Packaging Industry Hotel Industry 2. Create a company-wide quality culture through TQP.
y 120 companies have implemented TQP. y 15,000 people have received TQP.

PART 2 : SETTING UP A COQ MEASUREMENT SYSTEM

FORM A TASK FORCE y Chaired by a senior manager. y Representations from ALL departments. y Defined roles of Financial Controller and line managers. y Meet regularly (e.g. monthly) to analyse COQ data and to take corrective actions.

FOUR STAGES

y Identify COQ items y Collect and report COQ data y Analyse COQ data y Reduce COQ

STAGE 1 : Identify COQ Items

y Retrieve from existing data whenever possible. y Start with non-conformance (internal / external failure) items. y Choose COQ items that can improve after taking corrective actions. y Get team agreement on: - Definition for each COQ item; - Formula for calculating each COQ item.

COMMON COQ ITEMS

Manufacturing sector:
y CONC (top 3) - Scrap and wastage - Handling customer complaints - Repair and rework y CONC (top 3) - Planned inspections and test - Inspection of purchased supplies and services - Quality-related education and training

Service sector:

y CONC (top 3) - Handling customer complaints - Repair and rework - Correcting services / repairing goods after delivery

y CONC (top 3) - Quality-related education and training - Operations quality planning - Inspection of purchased supplies and services

COST OF QUALITY CHECKLIST

FAILURE COSTS INTERNAL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Billing Errors CAD/CAM Downtime Computer Breakdown Defect/Failure Analysis Delayed Attendance due to the Transport Breakdown Delivery to Wrong Customer Downgrading Employee Turnover Engineering Change Orders Excess Inventory Excessive/Shortage of Labour Late Delivery Loss due to Handling/Storage Loss due to Late Supplies Lost-time Accidents Machine Downtime Machine Modification Machine Redesign Obsolescence Order Entry Errors Payroll Errors Premium Freight Costs Product Redesign Purchasing Order Errors Replacement Reruns Retest & Reinspection Rework Rework Analysis Sales Order Errors Scrap Sickness/MC Software Errors Subcontractor Faults Trips to Suppliers to Resolve Problems Wrong Packing

FAILURE COSTS EXTERNAL

1 2 3 4 5 6 7 8 9 10 11 Bad Debt Handling Customer Complaints Customer Return Analysis Order Cancellation Overdue Accounts Receivable Product Liability Product Recall Repair & Return Cost Sales Concessions due to Earlier Mistakes Trips to Customers to Explain Problems Warranty

APPRAISAL COSTS
1 2 3 4 5 6 7 8 9 10 11 12 13 Analysis & Reporting of Test & Inspection Results Approvals & Endorsements Field Performance Testing Final Inspection & Testing In-process Inspection Incoming Inspection Inspection & Test Equipment Laboratory Acceptance Testing Materials Consumed During Inspection & Testing Stock Evaluation Storage of Test & Inspection Records System Testing Trial Runs

PREVENTION COSTS
1 2 3 4 5 6 7 8 9 10 11 Calibration & Maintenance of Test & Control Equipment Collection, Analysis & Reporting of COQ Data Design & Development of Test & Control Equipment Process Capability Studies Quality Auditing Quality Improvement Programmes Quality Planning Quality Review & Verification of Design Quality Training Supplier Assurance Writing of Procedures & Instructions