Quality Tools
Cost of Quality (COQ)
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Table of Contents
Cost of Quality ("COQ") Overview
Why is Cost of Quality ("COQ") Important?
Synonyms &
Related Terms
Typical Cost of Quality ("COQ") Uses
Typical Cost of Quality ("COQ") Results Achieved
Typical Symptoms
Typical Cost of Quality ("COQ") Problems Encountered
Things to Consider
What's the PQA Advantage?
The Next Step
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Cost of Quality ("COQ") is a measurement used for assessing the waste or
losses from some defined process (eg. machine, production line, plant,
department, company, etc.).
Recognizing the power and universal applicability of Cost of Quality
("COQ"), PQA has developed numerous
proprietary Cost of Quality ("COQ") systems for ensuring the
effectiveness of Cost of Quality ("COQ") implementations.
The Cost of Quality ("COQ") measurement can track changes over time for one particular
process, or be used as a benchmark for comparison of two or more different
processes (eg. two machines, different production lines, sister plants,
two competitor companies, etc.).
Usually, Cost of Quality ("COQ") is measured in currency (eg. $), requiring all losses and
wastes to be converted to their liquidated cost equivalent (ie. man-hrs
lost or spent are converted to $ by multiplying by the hourly rate, $/hr).
Most COQ systems are defined by use of 4 categories of costs:
| COQ Category |
Typical Descriptions (may vary between
different Organizations) |
Examples |
| Internal |
Costs associated with internal losses (ie. within the process
being analyzed) |
off-cuts, equipment breakdowns, spills, scrap, yield,
productivity |
| External |
Costs external the process being
analyzed (ie. occur outside, not within). These costs are usually discovered by, or affect
third parties (eg. customers). Some External costs may have
originated from within, or been caused, created by, or made worse by
the process being analyzed. They are defined as External
because of where they were discovered, or who is primarily or
initially affected. |
customer complaints, latent defects found by the customer,
warranty |
| Preventive |
Costs associated with the prevention of future losses:
(eg. unplanned or undesired problems, losses, lost opportunities,
breakdowns, work stoppages, waste, etc.) |
planning, mistake-proofing, scheduled maintenance, quality
assurance |
| Assessment |
Costs associated with measurement and assessment of the process. |
KPI's, inspection, quality check, dock audits, third party
audits, measuring devices, reporting systems, data collection
systems, forms |
COQ systems are sometimes assisted by specially designed
COQ Software
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Cost of Quality ("COQ") can be used to identify the global optimum for a process, and
monitor that process' progress towards its global optimum. Global
optimum is defined as the best possible outcome from all physically
possible operating modes, combinations, and permutations of the current
process. For info on $ losses typical associated with organizations and
their quality levels, see Cost of
Quality ("COQ") and Six Sigma |
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CNQ (Cost of Non-Quality)
ROQ (Return on Quality, a proprietary system for Cost of Quality ("COQ"),
developed by PQA)
Losses
Non-Value Added
Waste Measurement
Muda (Japanese for waste) |
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Cost of Quality ("COQ") is used to collect cost data on a sampling basis (eg. all data
occurring during a 24 hr period, calculated once each quarter), or on a
continuous basis (eg. Cost of Quality ("COQ") is calculated with all data occurring in the
month, and reported monthly) .
After confirming that the data is accurate and comprehensive, and
consistent with previous definitions and implementations, it is analyzed
for opportunities and trends. Based upon statistical analysis (eg.
regression analysis, indexes, correlations, Pareto analysis, factor
analysis, etc.), conclusions and recommendations are presented to managers
of the process being analyzed.
In some cases (supported by process modeling, heuristics, prior
experience, or intuition) the optimum Cost of Quality ("COQ") can be predicted, and the
process design necessary for achieving this global optimum Cost of Quality
("COQ") can be
defined. A plan can then be defined to modify the current process,
phase by phase, so as to move towards this global optimum process.
Management responsible for the process can decide on if, how, and when
they will run the current process, or modify the process for even better
results.
All projects are analyzed for their impact on Cost of Quality ("COQ"), and projects that
show high ROQ are implemented on a priority basis
(ROQ%= $Cost of Quality ("COQ") savings/$Implementation cost*100%).
COQ Software is often used to enhance the
COQ data collection, reduce the cost of running a COQ system, and ensure
excellent data as fast and cheap as possible. |
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When all costs are included, Cost of Quality ("COQ") as a % of gross sales $ will probably
be around 30% to 35% for a profit orientated organization, 40% to 60% for
a not-for-profit organization (ie. hospitals, charities, government,
etc.). Many organizations take only a sub-set of the costs,
including only those that tend to fluctuate, or that often need management
intervention. The others are assumed to be constant.
When manufacturing companies often earn only 5% NPBT (Net Profit Before
Tax), a 35% Cost of Quality ("COQ") indicates that 40% of gross revenue is generated by the
company as profit, but only 5% of that gets trapped as NPBT.
Therefore, the profit yield is only 12.5% (87.5% of the available profit
is lost before it gets to the bank).
For improvements in Cost of Quality ("COQ"), some manufacturers have been able to reduce
manufacturing costs by as much as 7.65% per year, every year, for more
than 10 years.
For Six Sigma processes, Cost of Quality ("COQ") is usually reduced to
less than 1% of gross sales $. See
Cost of Quality ("COQ") and Six Sigma.
This indicates that, as large and unbelievable as Cost of Quality ("COQ") $
seems to most managers, it is a real number that can be eliminated through
hard work and dedication.
Obviously, as more and more improvements are made, it becomes more
difficult to find the next saving. This is when an excellent Cost of
Quality ("COQ")
system can help point out the remaining opportunities. |
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For organizations that:
- Currently have no Cost of Quality ("COQ") system, but could
benefit from a well-designed & implemented Cost of Quality ("COQ") system
- Have a Cost of Quality ("COQ") system, but that Cost of Quality
("COQ")
system is poorly designed, or poorly implemented.
the following symptoms are typically felt:
- Slow rate of improvement
- Low or no profitability
- Bureaucracy or complexity of business processes continue to get
worse and worse
- Changes in one area tend to have disastrous effects in other areas
- Management get personally involved in quality problems only during a
major crisis
- Management is running out of ideas on where to cut costs any further
- All employees are not actively and personally involved in driving
the Organization's Mission forward
- Many individuals and departments disagree on what are the top
priorities for the Organization
- Sub-processes and Departments are operated in a manner that is
detrimental to the Organization's overall best interest.
- For organizations not using COQ Software,
there are often higher costs for running the COQ system, inconsistent
implementation, and non-optimum results from the COQ system.
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Because of poor design or poor implementation
of Cost of Quality ("COQ") systems, the Cost of Quality ("COQ") systems often suffer from one or more of the
following problems:
- COQ data collection is watered-down, or have superficial implementations
that quickly become make-work exercises with little or no benefit, other than
to fill filing cabinets or hard disk drives on computers.
- Efforts are directed at where it is easy to collect data, or easy to
implement changes, instead of focusing on the Cost of Quality ("COQ") priorities (eg.
largest cost category, most variation, largest business risk, etc.)
- The Cost of Quality ("COQ") input data are often incomplete. The
Cost of Quality ("COQ") definitions
are often un-clear, or not fully understood, resulting in varying
interpretation and implementation over time. This variability
tends to add significant noise to the Cost of Quality ("COQ") data, clouding the
interpretation and hiding significant trends for extended periods of
time.
- Management does not actively use the Cost of Quality ("COQ") data in an effective
manner. Decisions are often made without realizing nor considering
the impact on Cost of Quality ("COQ"), thereby neutering the Cost of
Quality ("COQ") system to irrelevancy.
- When Cost of Quality ("COQ") is not utilized during project approval
decisions, as management makes changes (supposed "improvements"),
Cost of Quality ("COQ") $ tend to
shift from one category to another, with little net effect. For
example, a new machine is purchased to reduce scrap. Higher setup,
first-off, inspection, and maintenance costs offset the scrap savings,
with no net improvement in Cost of Quality ("COQ").
- Cost of Quality ("COQ") costs oscillate between the four Cost of
Quality ("COQ") categories on a revolving
basis, with little or no reduction in the total Cost of Quality ("COQ"). For example,
money is spent to increase surveillance, which indicates a problem
exists with internal &/or external failure costs. Surveillance
costs are stopped, but prevention actions are taken to reduce failure
costs, thereby increasing prevention costs. The preventive actions
are not comprehensive or not consistently implemented, so the internal
and/or external failures eventually come back. The rising internal
&/or external failures prompt another round of surveillance activities,
with additional assessment costs incurred.
- The collection of Cost of Quality ("COQ") data becomes more and more costly and
bureaucratic over time, making it slower to respond to significant
changes, and less useful.
- Statistical analysis of Cost of Quality ("COQ") data is not performed.
Early recognition of trends are missed, and random variations are
mistaken for significant signals; starting "wild goose" chases, wasting
time & resources, and distracting everyone from the real issues.
- Cost of Quality ("COQ") system is isolated from other KPI (Key Performance Indicators)
systems, missing the opportunity for more in-depth understanding of
cause-effect relationships for the Cost of Quality ("COQ") results.
- For any measurement system, it should cost less than ~1% of the
savings generated by the use of the measurement.
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- Is the management team committed to making rapid changes for maximum
profitability, within the imposed constraints (eg. Company's Mission,
laws & regulations, stakeholder satisfaction, etc.)?
- Are there "sacred cows", legacy systems, departmental silos, and
empire building that are exempt from re-evaluation?
- Are the hard costs (payroll, raw materials, utilities, etc.) more
easily measured (or more important) than the soft costs (morale,
employee satisfaction, market share, plant capacity utilization,
customer's losses, supplier's losses, societal losses)?
- Are the current management measurement systems (eg. KPI's, scrap,
rework, excess freight charges, stock outages, absenteeism,
productivity, profitability, etc.) compatible with Cost of Quality
("COQ")? Can these
other systems be adapted to include Cost of Quality ("COQ") without neither duplication nor
conflict?
- Will people be receiving mixed messages and conflicting signals
between Cost of Quality ("COQ") and the traditional management measurements?
- Is there management commitment to do something about the Cost of
Quality ("COQ") data on
a timely basis?
- Is there COQ Software available that
suits your current and future needs for maximum value from data at
minimum cost?
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PQA has 17 years experience at implementing Cost of Quality ("COQ") systems in various
industries. We have developed proprietary Cost of Quality ("COQ") systems that ensure
Cost of Quality ("COQ") data is accurate, timely, believable, and useful for management to
make the best decisions.
Cost of Quality ("COQ") systems implemented by PQA typically include one or more of the
following features:
- Cost of Quality ("COQ") is custom designed to each organization's
specific needs. One-size Cost of Quality ("COQ") doesn't fit
all
- Cost of Quality ("COQ") data is collected for each of the 21 internal processes that
exist in most For-Profit and Not-For-Profit organization. This
means that Cost of Quality ("COQ") data is available to managers on a departmental, as well
as a business process basis (across 1 or more departments).
- Cost of Quality ("COQ") data is linked to the 9 Competitive Factors (the 9 reasons why
customers buy from you instead of your competitors)
- Cost of Quality ("COQ") data is linked to the 7 Deadly Sins for Customer Service (the 7
typical failures that occur between a company and its customers)
- Web-based Cost of Quality ("COQ") data entry software system is open 24/7/365 for
collecting Cost of Quality ("COQ") data from all source (all personnel, suppliers,
customers, and other stakeholders), where and when it occurs.
- Customer & supplier satisfaction & loyalty survey is linked to
Cost of Quality ("COQ")
data for generating objective Cost of Quality ("COQ") data for the "soft
Cost of Quality ("COQ") costs"
- Project analysis templates for analysis of implementation cost,
savings, cash flow, ROI, and ROQ (proprietary to PQA) before a project is approved.
- COQ Software
- Cost of Quality ("COQ") assessment, consulting, coaching, and implementation assistance
to ensure effective implementation at all stages of your Cost of Quality
("COQ") project.
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If you or your organization want higher profitability, or significantly
improve your stakeholder satisfaction, a properly designed and implemented
Cost of Quality ("COQ") system may be of interest.
E-mail,
or phone PQA (1-800-837-7046) for a free, confidential discussion of your
current situation, and how Cost of Quality ("COQ") system may help.
PQA's typical recommendation is to do a rapid assessment of your
organization. This includes the accounting system, current
management measurement systems, all business processes, and interviews
with key personnel. PQA then provides a report on our findings and
recommendations on Cost of Quality ("COQ") or other techniques that would be
beneficial. You are provided an approximate cost to implement, as
well as the currently estimated losses from the current system. An ROI and ROQ can then be calculated for the
Cost of Quality ("COQ") upgrade
or implementation project.
If you decide to proceed, PQA can provide any necessary skills,
training, or implementation assistance to ensure an effective system.
PQA also offers quarterly or annual assessments to ensure the Cost of
Quality ("COQ") system is working at peak effectiveness, or offer recommendations
for further improvement. |
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