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The Six Sigma Philosophy Of Cost Of Poor Quality

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The majority of justifications for implementing process improvement concentrate upon the benefits it delivers to a business. Many people, however, find it inspiring to look at the problem from the other side: What do you stand to lose?

The Cost of Poor Quality (COPQ) tool from Six Sigma allows you to make such evaluation. COPQ immediately makes two things clear. The first is that firms incur huge opportunity costs when they fail to execute continuous process improvement. The second point to make is that quality is the most important success indicator.

Before we go any further, let us first understand what Six Sigma is.

SIX SIGMA

It is a process improvement methodology which works on the principle of reducing variation in a process by elimination of defects.

Still Didn’t get what it means? Let us understand in simple terms. Six Sigma is a business methodology for quality improvement that measures how many defects there are in a current process and seeks to systematically eliminate them. For eg -If there are 50 candies in a jar of chocolates and 7 of them are faulty, Six Sigma will measure the defects and attempt to eliminate them by removing them from the jar. This lesson is extremely important for business executives.

This argument was made by the late Joseph Juran, a renowned specialist on quality. He wrote.

“It is most important that top management be quality-minded. In the absence of sincere manifestation of interest at the top, little will happen below.”

The Six Sigma management technique was created in 1984 by Motorola engineer Bill Smith to eliminate variations in the company’s electronic production processes that were resulting in defective products.

Since then, top management and project teams in a wide range of industries have adopted the tactics, tools, and cultural norms that support the management system to increase operational excellence.

Furthermore, the definition of “defect” has expanded to cover any shortcoming in business procedures that inhibits a corporation from satisfying the needs of its customers.

The very existence of Six Sigma and Lean Six Sigma revolves around the issue of quality, or the lack thereof. Motorola first put Six Sigma into play to reduce errors and reduce defects on the factory floor. Toyota created Lean to put the focus on meeting the needs of customers at all levels of an operation. The highest quality product is inherent in the ideas behind both.

COPQ (Cost Of Poor Quality) in Six Sigma

Six SigmaDPMOCost of Poor Quality as Percentage of Sales
2298,000More than 40%
367,00025-40%
46,00015-25%
52335-15%
63.4Less than 1%

COPQ, also referred to as the “cost of waste,” calculates the expenses incurred by a company as a result of flaws and subpar process performance. It isn’t precisely a component of a Lean Six Sigma project, but rather a Six Sigma tool that is frequently used to assess possible projects and organize them in terms of importance. Using COPQ is a very efficient technique to find processes’ non-value-adding activities, which makes it simpler to get rid of those activities and save money. Expert practitioners can create estimated measurements with sufficient accuracy for Six Sigma project prioritization by using COPQ analysis extensively and efficiently.

In some cases, COPQ is determined during the “define” stage of a DMAIC project. By dividing the expenditures into the Juran-recommended portions, COPQ can be quantified.

The DMAIC model is a Six Sigma road map designed to raise the quality of output from business processes. It is used to correct a process that already exists.

Define: List all customer deliverables as well as the project’s objectives.

Measure: Recognize present efficiency.

Analyze: Discover the underlying reasons of any flaws.

Improve: Establish approaches to get rid of flaws and fix the procedure to improve.

Control: Manage the efficiency of upcoming processes.

  • Appraisal – Costs involved in determining if materials, processes, goods, and services adhere to standards through appraisal. Testing, measuring, and auditing all incur costs.
  • Internal failures – These expenses occur when a flaw is found and needs to be fixed before a product is sold to a customer. Materials being wasted, redoing work, machine breakdowns, and even worker injuries are among them.
  • External failures These expenses occur when a client finds a mistake. They can consist of fees and employee time incurred to satisfy a guarantee, repairs, time spent addressing complaints and returns, and repairs.
  • Prevention – Costs incurred for prevention efforts such as quality planning, preventive maintenance, and training.

Since a corporation is ultimately designed to produce money, it is possible to view total revenue or profit margins as the most crucial indicator. However, subpar work will eventually compromise both. On the other hand, high quality will enhance both. As many as 15% to 20% of a company’s sales revenue is spent on quality-related expenses, according to ASQ. These low-quality charges might sometimes account for 40% of total operating expenses. According to ASQ, COPQ should only be used in 10 to 15 percent of operations as a “general rule of thumb.”

There are four broad components of COPQ :

1) Internal Failure Costs

Costs associated with product or service flaws discovered prior to client delivery are included in this category. Costs associated with internal failure include items like:

  • Rework of Scrap 
  • Waste resulting from processes with inadequate design
  • machine failure brought on by poor maintenance
  • expenses related to failure analysis
2) External Failure Costs

Costs incurred by an organization as a result of flaws discovered after the product or service has been delivered to the customer are included in this six sigma tool category. The following are some examples of external failure costs:

  • Costs of Service and Repair
  • Warranty Claims
  • customer grievances
  • Returns of Goods or Materials
  • erroneous sales orders
  • BOMs with gaps
  • Shipping Damage Caused by Poor Packaging
3) Appraisal Costs

Costs incurred by an organization to check and gauge a product or service’s conformity to quality specifications and regulations are included in this category. Examples of appraisal charges include the following:

  • Product Specification Establishment
  • Planning with quality
  • Developing new products, and testing
  • Making a Quality Management System (QMS)
  • proper training for employees
4) Prevention Costs

The expenses required by an organization to carry out any kind of defect prevention for a good or service are included in this category of Lean Six Sigma tools. Costs associated with prevention include items like:

  • Inspections of incoming materials
  • Process limiting
  • Check the fixtures
  • Supplier Evaluations and Quality Audits

Why We Measure the Cost of Quality?

The determination of the cost of quality remains to be critical and varies for different organizations. If this cost is not measured and quantified, the organizations working in the competitive industries would never gain the upper hand and survive the ever-changing dynamic environment. Therefore, measuring it is necessary as it helps the business maintain a healthy and positive bottom line.

Goal

  • It aids the company in identifying incorrect and poor output.
  • It aids in problem-solving by performing cost-benefit analyses on projects for process and quality improvement.
  • When evaluating quality performance at a single point, the model or cost of quality is helpful.
  • It also assesses the costs of failures and assigns them a suitable value.

An organization’s expenditures associated with poor quality and waste can be generally accurately estimated by adding up the costs associated with the four failure categories. The right lean Six Sigma projects may then be identified using this tool estimation, and the projects that will yield the highest return on investment can then be prioritized. Therefore, a strong COPQ is essential to lean Six Sigma planning and ought to be included in every corporate Lean Six Sigma program.

Recommended Read Next: The Many Hats of Operations Manager: Fundamentals ,Work And Responsibilities

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