Defects are Opportunities
In simple terms, ‘Quality’ is whatever a customers accepts, while ‘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, any imperfection or deviation from an expected standard is considered a defect. Defects hurt profitability in the short-term and erode competitiveness long-term. Quality champions consider defects as major opportunities, as every root-cause eliminated adds money to the bottom line. 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 that would disappear if people, product, process, and system were perfect. Our Quality Excellence Program (QEP) generates bottom line savings and frees capacity from improved quality.
Quality Excellence Program (QEP)
- Purpose: improve quality to reduce cost of defects across all categories
- Application: excessive rework, scrap, warranty obligations hurt profitability
- Process: systematic root cause identification and elimination
- Duration: 3 months for design + 3 months implementation per function
- Deliverable: implemented quality improvements, breakeven within months
- Impact: -50% defect rate p.a.; bottom line savings and customer satisfaction
Direct and Indirect Impact of Defects
Quality impacts financial performance in two ways, with direct and indirect Cost Of Poor Quality (COPQ).
- DIRECT COPQ: can be directly derived from the company ledger; it consists of controllable, resultant, and equipment cost to control quality and sort-out defects. See cost components 1-3.
- INDIRECT COPQ: 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 non-quality cost is often considered a ‘soft’ metric and therefore off the radar-screen and not managed at all. See cost components 4-6.
The 6 Components of poor Quality (COPQ)
- Controllable COPQ incur 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 COPQ incur 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 COPQ incur from depreciating assets used for testing and inspection; all instruments that are used strictly for quality control but not for regular production.
- Customer-incurred COPQ are 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 complaint COPQ are dissatisfactions shared by word of mouth, influencing future market potential.
- Loss-of-reputation COPQ involves the customer’s perception of the company affecting future purchasing decisions.
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