Last Updated on 13 September 2023
The reason why much of Six Sigma occurs is to reduce the cost of quality (COQ), or more often the cost of poor quality (COPQ). Most of the cost of (poor) quality is not easily visible to observers, and it is often compared to an iceberg. This means that the impact that this cost has on the company can easily be underestimated, and improving it can have effects much better than people expect.
You should try to calculate your Cost Of Quality on a monthly or annual basis to show its effect on your organization. It’s also very helpful to calculate a per-defect COPQ, as this will help show the benefits that process improvement could bring.
Visible cost of quality
- Lost raw materials and employee time making defective products
- repair cost
- cost of inspection
Invisible cost of quality
- Lost sales, especially if the customer finds the quality issues, but also if quality issues cause a shipment to go late or you don’t have enough product to sell due to internal rejections
- excess inventory
- additional controls and procedures
- complaint investigation time
- Fines and legal fees
There are three main category of costs from poor quality:
- Failure, which includes those found internally or externally
There are costs that will probably be charged to the ‘quality’ cost center in your company accounts, and is some of the most visible cost of quality.
- Quality staff
- Training costs
- Costs changing the design of the processes and products to reduce the number of future issues
These are usually unavoidable and in fact many prevention costs are desirable, and an investment in prevention costs will often lead to an even greater reduction in costs of failure
Tests and inspections
- Auditing the process and controls
- Sample testing the products, suppliers and customers
Costs of failure
When things go wrong in production, there is a cost from the business. We use our quality control departments to try to catch these whilst the product is still in the company, leading to an internal failure. Sometimes though they’re missed and are found by the customer, leading to failure.
We want there to be zero failures, but if something does go wrong, we want to find it before the customer does.
The costs to the company from internal failures include:
- Cost of scrapping the defective products, including the raw materials and employee working time lost, and disposal costs
- Rework costs
- Need more raw material to compensate for scrap levels, as you will need to plan to build more than you need. This will tie up working capital to purchase the product, and require storage capacity to store the raw materials, both of which cost the company.
- More inspection and testing required both to stop the failures going to customers and to re-test the reworked products
- Lost sales from lower production speed, as producing defective products and
External failure is the worst type of failure, but you may not even find out when it occurs, making it often the least visible of costs.
The costs vary in type, and can include:
- Returns from customer
- Penalties in the sales contract
- Staff time in the customer services department
- Rework and replacement costs
- Legal claims against your company
- Management time reducing the company impact of the failure
Why it’s important to measure cost of poor quality
To achieve investment in quality prevention, you need management buy-in, and a good way to get management attentions is to put the advantages in quantifiable monetary terms. If you can quantify the amount currently being spent on the cost of quality, you can justify spending money on Six Sigma projects improving the procedures, in order to reduce the amount already being spent. Quantifying the amount of money saved by the Six Sigma projects will help maintain the funding for the Six Sigma process, ensuring its continued success. This is especially important due to the hidden nature of the cost of quality, so improvements if not measured may be attributed to other causes.
Cost of quality calculation
Calculating your cost of quality (or cost of poor quality) is difficult due to the huge number of hidden costs that you won’t easily see. The best place to start is to calculate your visible COQ, as this will give you a feel of the scale of the issue.
There are usually two elements to this: labor cost and materials
Calculate the labor COQ
Over a period of time, add up the number of defects. There are two types – items which can be fixed, and write-offs.
For the items that are to be fixed, add up the amount of hours taken to fix the items, and multiply this by the number of people working on it.
For items to be written off, it is the full time taken to make the product, i.e. the cycle time, multiplied by the number of people working on the product if there is more than one operator at a time. This is likely to be the majority of the labor COQ.
Adding these together gets you the labor COQ.
This one is a lot easier to work out:
Material COQ = material cost per item x defects per period
Essentially if you write off any defective parts to a cost center, you may be able to just take this figure from your accounting system.
Your total visible COQ is therefore Labor COQ + Material COQ
Another cost that can build up quick is your quality meetings COQ:
Quality meeting COQ
For regular quality meetings, your annual costs is:
Meeting COQ = number of employees in meeting x weighted average hourly wage x length of meeting x number of meetings in period
The costs can really add up on this one, especially if e.g. the chief executive attends and the meetings take a few hours. Once you get to grips with the Meeting COQ, you’ll learn to make your meetings a lot more efficient!