Measuring the Real Cost of Quality: Methods, Models & Tips
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The document discusses the 'Cost of Quality' for process manufacturers, highlighting various costs associated with non-conformance and conformance, including internal and external failures. It emphasizes the importance of understanding and quantifying the costs of poor quality, opportunity costs, and the need for preventative measures to enhance productivity and reduce waste. Additionally, it provides insights into effective strategies for improving quality management and reducing operational costs in manufacturing processes.
Measuring the Real Cost of Quality: Methods, Models & Tips
- 1. Beyond Compliance Webinar & Podcast Series for Process Manufacturers Measuring the Real Cost of Quality: Methods, Models & Tips Denis J. Devos, P.Eng. Devos Associates, Inc. Advisors to Industry
- 2. // About SafetyChain ✔Improve Yield ✔Maximize Productivity ✔Ensure Compliance Plant Management Platform
- 3. Casual but Professional Format ✔Ask questions! (Q&A at end) ✔Only panelists are displayed ✔Recording link will be shared ✔Audio issues: use call-in number Before We Get Started BEYOND COMPLIANCE Helpful tips Devos Associates, Inc. 2022 - All Rights Reserved
- 4. BEYOND COMPLIANCE Meet the Speaker - Denis Devos, P.Eng. ● Authority on Quality Management, Lean Methods, Audit, COQ ● Contributor to books on Auditing, The ASQ Certified Quality Auditor Handbook and ASQ Certified Quality Manager Handbook ● Engineer – General Motors and automotive industry ● Training and Advisory services for QA and Operations for manufacturing sectors Denis Devos, P.Eng. Advisor – Devos Associates Inc. Fellow of the American Society for Quality (ASQ) Devos Associates, Inc. 2022 - All Rights Reserved
- 5. BEYOND COMPLIANCE Session Objectives ● Cost of Quality - the Model ● Capturing True Costs of Poor Quality ● Opportunity Costs ● Why Failures Erode Production Capacity ● Tips for Reducing the Cost of Quality Session Overview Devos Associates, Inc. 2022 - All Rights Reserved
- 6. What is the Cost of Quality?
- 7. BEYOND COMPLIANCE Cost of Quality – Definition A method of determining the costs incurred to ensure quality. ISO 24765:2017 Devos Associates, Inc. 2022 - All Rights Reserved
- 8. BEYOND COMPLIANCE Cost of Quality – Model Non-Conformance Costs ● External Failure – warranty, sorting etc. ● Internal Failure – scrap, rework etc. Conformance Costs ● Routine Inspection and Testing, Auditing ● Prevention Costs – HACCP/PFMEA, worker training, automation Devos Associates, Inc. 2022 - All Rights Reserved
- 9. BEYOND COMPLIANCE Hidden CoPQ Visible Less Visible Devos Associates, Inc. 2022 - All Rights Reserved
- 10. BEYOND COMPLIANCE Non-Conformance Costs External Failure Costs ● Warranty ● Sorting ● Re-make an order ● Breaking into the schedule to re- make ● Travel to the Customer / Field ● Customer Grief, loss of reputation Internal Failure Costs ● Scrap ● Rework, Repair ● Re-make an order ● Breaking into the schedule to re- make ● Downtime for Quality issue ● Taking a mark-down to earn concession ● Expedite Raw Materials Devos Associates, Inc. 2022 - All Rights Reserved
- 11. BEYOND COMPLIANCE Conformance Costs Prevention Costs ● Design Choices - DFM ● Failure Modes & Effects Analysis (FMEA) ● Error-Proofing ● Training at All Levels ● Quality Mgt. Systems ● Audits at All Levels Appraisal Costs ● Product Inspections ● Product Testing ● Receiving Inspection ● Inspection and Testing Equipment ● Maintenance and Calibration ● All Labor and Materials Devos Associates, Inc. 2022 - All Rights Reserved
- 12. BEYOND COMPLIANCE Cost of Poor Quality – Bad News One bad batch is too many ● Full Root Cause and Corrective Action ● Spend what it takes to fix the problem Containment – “Controlled Shipping” ● 100% inspection for the defect until the process is under control (30 days). Sometimes it lasts forever ● Third Party Containment – pay another company to 100% check your parts. ($30/hour, three people, 16 hours per day, 20 days per month) $29K/month! Devos Associates, Inc. 2022 - All Rights Reserved
- 13. BEYOND COMPLIANCE Cost of Quality Curve Devos Associates, Inc. 2022 - All Rights Reserved
- 14. BEYOND COMPLIANCE Cost Avoidance - Insurance Understand the true costs of Internal and External failure, and then invest appropriately in Prevention and Appraisal methods to mitigate that risk. Add up your HACCP - what does it cost? That’s your Prevention/Detection cost… Your insurance. Devos Associates, Inc. 2022 - All Rights Reserved
- 15. BEYOND COMPLIANCE Cost of Poor Quality – Free Money! CoPQ comes right off the bottom line. Some customers punish us with crushing costs – so we spend whatever it takes. Savings in COPQ can be invested in ‘quality’ ● Replacement costs – re-making orders ● Expedites to replace orders ● Sorting at customers, in-house ● Travel to customers ● Containment costs Add these up – Free Money Devos Associates, Inc. 2022 - All Rights Reserved
- 16. BEYOND COMPLIANCE Does PFMEA/HACCP Cost or Pay? ● Is the investment in PFMEA/HACCP an asset or liability? ● What is the cost of the Control Plan? (Appraisal) Is it worth it? Does it cost less to avoid more? ● “Occurrence” values speak to internal failure ● “Detection” values speak to external failure ● Use control plan to drive COPQ down and meet targets Devos Associates, Inc. 2022 - All Rights Reserved
- 17. BEYOND COMPLIANCE Opportunity Cost “The loss of potential gain from other alternatives when one alternative is chosen.” Oxford English Dictionary What else could you have been doing while you were doing rework? How much profit could you have earned if you were building products to sell instead of throwing away scrap? Devos Associates, Inc. 2022 - All Rights Reserved
- 18. BEYOND COMPLIANCE CoPQ – The Capacity Killer ● If you’re not busy, who cares? Lots of time for rework and re-runs ● Never late to customers ● True costs/impacts are masked by all the free capacity ● If you’re full, the true cost of every part you scrap is the selling price, you can never get that time back again. ● Rework, reruns are done on overtime ● Customer orders backup and lead times get longer Devos Associates, Inc. 2022 - All Rights Reserved
- 19. BEYOND COMPLIANCE Opportunity Cost “Scrap isn’t a problem, we just melt down the aluminum scrap or regrind the plastic… material is reused, we lose almost nothing.” “We pay employees their hourly wage anyway, so having them sort parts actually costs us nothing.” Devos Associates, Inc. 2022 - All Rights Reserved
- 20. BEYOND COMPLIANCE ● The cost of chasing a bigger reward, but with a higher chance of failure ● Bet $1 to get 3 gems, %100 success ● Bet $1 to get 4 gems, maybe 50% success ● Every time the 4 gem bet fails, I could have had 3. I have to win the 4 gem bet (against the 3) three more times just to break even. Opportunity Cost - Example Devos Associates, Inc. 2022 - All Rights Reserved
- 21. BEYOND COMPLIANCE ● Cheap Gas – 20 minutes out of the way ● Save $6 per tank ● I save $18 per hour of getting cheap gas ● Could I be billable? Am I worth $18 per hour? ● Only if I’m so busy I could sell that hour – full capacity Opportunity Cost - Example Devos Associates, Inc. 2022 - All Rights Reserved
- 22. BEYOND COMPLIANCE What is the value of a half-built house? Opportunity Cost - Example Devos Associates, Inc. 2022 - All Rights Reserved
- 23. BEYOND COMPLIANCE ● IDENTIFY opportunities for cost reduction ● QUANTIFY the true costs of the problem(s) ● PRIORITIZE improvement actions ● ACTIONS to improve ● EVALUATE success as cost reduction ● SUSTAIN and continuously improve Approach to Reducing CoPQ Devos Associates, Inc. 2022 - All Rights Reserved
- 24. BEYOND COMPLIANCE Brainstorming, Pareto Chart etc. Identification - Prioritization Devos Associates, Inc. 2022 - All Rights Reserved
- 25. BEYOND COMPLIANCE Example ● Plastic Extrusion – job shop – many customers, some automotive ● Some parts are painted in-house ● Customer rejections and internal re-runs of about 3-4 per month ● Rework of moulding defects and paint defects, about 2.5% ● Their current CoPQ calculation was $300 per month, $3600/yr ● Plant is at full capacity – customer backlog Devos Associates, Inc. 2022 - All Rights Reserved
- 26. BEYOND COMPLIANCE Example - One Customer Re-Run ● 720 pc order for re-run… Cycle time 3 parts per minute, 4 hours ● Machine Charge Time = $600 per hour, add one hour for set-up ● Labor – 1.5 Operators, weekend (time and a half) = $30/hr x 1.5 ● Cost of additional inspection and packaging, $250 ● Parts sell for $2.10. (selling price, opportunity cost) ● True Cost of Poor Quality for one run - 5 hours x $600 = $3000 - Labor, inspection and packaging = $180 + $250 - Lost sales = 720 x $2.00 = $1440 Devos Associates, Inc. 2022 - All Rights Reserved
- 27. BEYOND COMPLIANCE Example - One Customer Re-Run ● One run - $4870 - Not including Weekend supervision/support - “Administrative” penalties imposed by customer - Travel to customer/field, if required - Staff time with Credits, RMA, investigation etc - Cost of cutting into an already full schedule - Cost of customer annoyance ● If $4870 is an average cost for re-run, 4 per month, 48 per year ● $233,000 per year Devos Associates, Inc. 2022 - All Rights Reserved
- 28. BEYOND COMPLIANCE Example – Rework ● 5000 orders per year, 2% rework, 100 rework per year - Inspect and reject original lot = $30 - Prepare rework ticket = $45 - Rework product (2 people on a weekend) = $90 x 4 = $360 - Move material to/from rework area = $150 - Repackage the parts = $100 - Re-inspect the lot = $45 ● $730…. 100 per year = $73,000 right off the bottom line Devos Associates, Inc. 2022 - All Rights Reserved
- 29. BEYOND COMPLIANCE How bad can it get? ● World's largest automotive air-bag manufacturer ● US recall – 42M cars ● Fines, payouts, bankruptcy ● 400B Yen to 4B Yen ● Bhopal India Explosion ● $470 Million USD in damages ● CEO a fugitive from justice Devos Associates, Inc. 2022 - All Rights Reserved
- 30. BEYOND COMPLIANCE Conclusion ● True Cost of Poor Quality numbers can be shocking ● The real cost is using productive assets to make scrap, or make things twice ● Loss of reputation ● Identify high cost areas, select a project with high pay-off ● CoQ is an important KPI for all organizations Devos Associates, Inc. 2022 - All Rights Reserved
- 31. BEYOND COMPLIANCE Devos Associates, Inc. 2022 - All Rights Reserved
- 33. BEYOND COMPLIANCE Contact the Speaker Devos Associates, Inc. Advisors to Industry www.devosassociates.com (519) 476-8951 Denis@devosassociates.com
- 34. More Resources at www.safetychain.com White Papers & Surveys Webinars & Videos Product & Partner Info Solution Consultation April 5, 2022, 10am PST | 1pm PST Understand SPC Fundamentals safetychain.com/resources/webinars-events/ BEYOND COMPLIANCE Wednesday. August 11, 2021, 10am PT Statistical Methods for Process & Product Optimization safetychain.com/resources/webinars-events/
Editor's Notes
- #15: Map analogy- to get anywhere you have to start with where you are