hiddencost

A good quality practitioner knows that improving quality is a moneymaker.

Although this is universally acknowledged, it’s not always clear how to go about

improving poor quality. Poor quality is opportunity lost and the loss of precious

resources, such as time and money, on unnecessary tasks and wasted materials.

Poor quality has catastrophic effects on top and bottom lines.

COPQ ( Cost of Poor Quality ) is the matrix used to measure the cost of non-

conformance. It is measured by estimating the cost of all efforts undertaken in an

organization, including materials and processes used in assembling products, that

don’t provide value to customers. COPQ is the sum of all nonvalue-added costs

divided by the total revenue that’s generated. The resulting measurement is the

percentage of revenue that’s lost due to waste.

When this cost is measured, reported, and tracked in each of the business units it

can be used to measure progress within the organization and to identify best

practices that can be shared throughout the company. COPQ is a metric and a tool

helps an organization to understand what’s nonvalue-added and to establish

opportunities for improvement. Measuring COPQ establishes a baseline, and

eventually a trend line heading toward the goal.

We have found through research of over 400 manufacturers, that up to 12- 15

percent of revenue is wasted due to poor quality. In a typical organization, a great

deal of effort is spent in improving  waste elimination. However, inspection, waste,

rework, and warranty costs are only the tip of an iceberg composed of many

unknown and misunderstood nonvalue-adding activities that go into the COPQ

metric. Most alert organizations realize that losses can accrue from wastes such as

excess inventories, unnecessary motion, and supplier non-performance. The

enlightened company will also see that losses can occur from more obscure wastes,

such as unnecessary paperwork, large lot sizes, and excessive auditing. These

wastes may lead to additional estimated losses of up to 35 percent of revenue. In a

typical facility, there’s normally much less effort spent on improving (and profiting

from) these more activities. But these are real opportunities and often the root

causes of wastes.

Another insidious waste is the safety margin. In most instances of this problem,

quality appears to be excellent, and no action seems to be required. To make

matters worse, this hidden problem can continue to grow while quality appears to

improve.

An example of this phenomenon and its consequences can be seen in the garment

industry. There, a shipment must meet the specifications and numbers or there will

be serious consequences from clients. A margin of safety can be added to the

production lots to make certain that the numbers are maintained, but an extra piece

or two represents waste and eventually leads to a loss.  The most obvious reason is

the cost of the extra material. Not as obvious are the indirect costs for handling,

shipping, and finishing the material. These can be quite high and won’t be directly

attributable to the safety margin. A margin of is a proof of a imperfect process.

In most industries the safety margin appears innocuous and is considered a

lifesaver.  In many cases this seems like a prudent alternative, but this is a

dangerous protocol. It’s easier to add a little to the design so that the requirement is

always met than to ensure that the process is exact. What’s a little additional

material when it decreases failures and improves product quality? Well as high as

upto 15% of your revenue.

In order to identify this problem one has to take the following steps:

  • Compare your products to your competitors’, to a similar product from another facility, or to a product from a world-class manufacturer with same characteristics.
  • Compare the weight, size, number of components, fit and finish, and cost : If your product is heavier, larger, or more complex, there is an opportunity to simplify.
  • Compare labor hours, throughput time, the number of process steps, the complexity of the process, and the product yields.
  • Look into the time lines : when your order-to-delivery time is longer than your competitors’, there’s  an opportunity being lost.
  • Consider how much bigger, heavier, or more complex your product is due to the safety margins.
  • Look into the amount of packaging required
  • Consider how much more expensive a heavier and larger product is to ship, how much more handling is required

Conclusion

Poor quality has hidden costs which cut into your profits. Poor quality is a loss of

opportunity.

To know more on how to look into the root cause of your losses and identify the

opportunities you are losing due to quality and other factors, reduce rework &

reject percentage & dramatically improve the bottom line talk to us.

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