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Defects as Goldmines
Quality is what customers accept. Non-quality is everything else. A missed performance target, an out-of-control process, a rejected proposal, an overdue decision, a returned part, a late delivery, an imperfection causing a problem for customer or provider – are all considered defects. Defects hurt profitability and erode competitiveness in the long run. Quality champions consider defects as ‘gold-mines’ with the potential to generate savings and volume from eliminated root-causes of defects. Cost Of Poor Quality (COPQ) or Cost Of Doing Nothing Different (CODND) is the difference between maintaining the status-quo and achieving perfection. It is the cost which would disappear if people, product, process, and system were perfect. Our Quality Improvement Program attacks COPQ to generate bottom-line savings and additional contribution from improved quality.
Quality Improvement Program (QIP)
- Purpose: improve quality to reduce cost of defects across all categories
- Application: when rework, scrap and warranty obligations hurt profitability
- Process: eliminating root causes of defects
- Duration: 3-6 months for design and rollout
- Deliverable: implemented quality improvements, program breaks even within weeks
- Impact: -50% defect-level p.a. generate savings and additional market potential
Defects have direct and indirect Impact
Quality impacts financial performance in a direct and indirect manner. Therefore, cost of non-quality consists of two components, direct and indirect COPQ.
- DIRECT COPQ (1+2+3) can be directly derived from the company ledger; it consists of controllable, resultant, and equipment cost to control quality and sort-out defects.
- INDIRECT COPQ (4+5+6) is a delayed response in time and does not appear on the company’s ledger. It consists of the lost market opportunities, the lost future sales from delivering poor quality today. Indirect COPQ is often considered a ‘soft metric’ and therefore off the radar-screen and not managed at all. A tremendous potential!
Cost Components of poor Quality
- CONTROLLABLE COPQincur from testing and sorting-out defects to ensure that only acceptable products and services reach the customer. It includes (a) Prevention cost for quality planning, education, training, capability analysis, design reviews, design for six sigma and (b) Appraisal cost for testing and inspection, acceptance sampling, supplier qualification, and auditing.
- RESULTANT COPQincur when unacceptable products and services are delivered to the customer. They are always a result from earlier decisions on how much invest on controllable COPQ, the quality strategy. It includes (a) Internal defect cost for rework, repair, scrap, reinspection and retesting reworked items, downgrading, design changes, shrinkage from poor process yields, additional inventory required to buffer from process variability, and (b) External defect cost to pay for customer returns, complaints handling, penalties, allowances and goodwill, field service and warranty obligations.
- EQUIPMENT COPQincur from depreciating assets used for testing and inspection; all instruments that are used strictly for quality control but not for regular production.
- CUSTOMER INCURRED COPQare losses in productivity due to defects, delays, and downtime. It includes the costs to return and replace a defective product, repair after the warranty period, and additional backups and buffers to cover for failure periods.
- CUSTOMER DISSATISFACTION COPQare dissatisfactions shared by word of mouth, influencing future market potential.
- LOSS OF REPUTATION COPQinvolves the customer’s perception of the company affecting future purchasing decisions.
Contact us to support your journey to world-class quality – ‘Navigating to Results’.
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