How to Calculate Defect-Cost?
Use the online tool to quantify the financial benefits of quality-centric improvement projects with focus on reducing overall non-quality cost (NQC). The following video explains how the calculator works, how to determine the impact of rework and failures on the bottom line.
Cost of Poor Quality - Financial Modeling
Non-quality cost and cost of poor quality refer to the impact of defects, delays, deviations, disconnects, and customer dissatisfaction that reduce the bottom line. Rolled throughput yield (RTY) is the product of individual process yields, the share of units that are complete and accurate (C&A), passing the value stream right fist time (RFT) and first time through (FTT). Scrap refers to unusable parts and service failures, causing a financial loss. Improving quality creates bottom-line value by reducing rework, repairs, returns, claims, and scrap.
What You Need to Know when Using the NQC Calculator
The financial benefit calculator helps managers, engineers, and controllers to quantify improvement potentials, determine the feasibility of a project, and estimate the return on investment (ROI). Please note that these ‘back-of-envelope calculations’ are based on a simplification of reality. The result is illustrative and depends on the completeness and accuracy of the data entered. This cost calculator is for general information purpose only and not intended to provide specific direction or advice. As each situation is unique, there may be conditions that are not factored into the model. Taking into account the limitations, the financial benefit calculations still provide a great starting point to make quality improvement potentials explicit.
Input Data to Calculate Non-Quality Cost
- Planning Yield: adjust quality of resource planning.
- Operating Yield: adjust quality of operations output.
- Fulfillment Yield: adjust quality received by customer.
- Solving Rate: adjust the level of successful rework.
- Total Cost: enter expenses for labor, materials, rent etc.
- Rework Cost: adjust share of expenses allocated to rework.
- Scrap Cost: adjust share of scrap that is unrecoverable.
- Results: calculate financials for current & future state.
- Benefit: calculate the financial gain = current – future.
Non-Quality Cost Model and Formulas
The non-quality cost model calculates the gap between the current state (with defects) and the ideal state (zero defects), applying these formulas:
- Good Rate = Planning Yield x Operating Yield x Fulfillment Yield
- Rework Rate = (1 – Good Rate) x Solving Rate
- Scrap Rate = (1 – Good Rate) x (1 – Solving Rate)
- Rework Cost = Rework Rate x Rework Cost
- Scrap Cost = Scrap Rate x Scrap Cost
- Non Quality Cost = Rework Cost + Scrap Cost
Quality Performance Data
Quality Improvement Potential
Definitions and Assumptions to Calculate the Benefit of Defect Reductions, Saving Non-Quality Costs
- Rolled Throughput Yield (RTY) or “Good Rate” represents the share of output passing the value chain right first time (RFT) or first time through (FTT).
- RTY is the product of individual process yields, for example: RTY = Planning Yield x Operations Yield x Fulfillment Yield = 0.9 x 0.9 x 0.9 = 0.73 = 73%.
- Planning Yield represents the capability of capacity resource planning (CRP) to ensure availability of people, materials, equipment right first time (RFT).
- Operations Yield represents the capability of production or service processes, the share of items or services meeting specification right first time (RFT).
- Fulfillment Yield represents the delivery of products and services on time in full (OTIF), complete and accurate (C&A), fully meeting customer needs.
- Rolled Throughput Yield (RTY) measures the overall quality of the value chain; non-quality is 1 – RTY; example: 80% first time right and 20% problems.
- Non-Quality Cost (NQC) is calculated by the number of defectives, multiplied by the unrecoverable cost per unit, mainly driven by Rework and Failures.
- NQC represents the extra costs for rework, returns, replacement, repairs, rescheduling, scrap, appraisal, sorting, handling, warranty, claims, penalties.
- Non-Quality Cost Savings Potential is the cost difference between the current state with quality losses and the ideal state with zero-defect capability.
- Non-Quality Cost Planned Savings is the cost difference between two simulations: current state (more defects) and planned future state (less defects).