Six Sigma teams must constantly be conscious of the fact that lousy quality has a price. Many businesses take into account what is referred to as the cost of poor quality, or CoPQ when discussing quality costs. The expenses related to defects brought on by a process are referred to as the cost of poor quality.
The Cost of Poor Quality
In some ways, the cost of poor quality is easier to measure than the cost associated with overall quality. CoPQ is usually broken into two major categories: costs associated with external failures and costs associated with internal failures. External and internal failures are often referred to as the costs of nonconformity-they are the expenses that occur when outputs do not conform to critical to quality requirements
External failures usually occur after delivered products or services, which means they are directly associated with customer dissatisfaction. External failures might include revenue losses related to a reduction in sales because of the quality of products, services, systems, or Information. Other external losses include expenses associated with repairs, returns, or rework associated with a customer complaint; costs associated with warranties; or loss of revenue or sales because of ill customer will or bad word-of-mouth.
Internal failures happen when goods, services, or procedures don’t meet the standards specified by the business and are poorly delivered to the customer. Internal failures are typically fixed by scrapping, reworking, or repairing the work.
Rework results in losses associated with delays, shortages of parts or inventory, and lack of flexibility or the ability to adapt. For example, if a process has such poor quality that 50 percent of the items require to rework, the process might produce 40 percent less daily than it could be. That means the process can serve fewer customers, generate less output, and contribute less to the company’s profit.
Calculating the Cost of Poor Quality
Because it enables executives to grasp how financial requirements are tied to the need for quality improvements, understanding the cost of poor quality is essential for Six Sigma organizations. An organization is more inclined to work toward improvement if the cost of poor quality is higher.
The cost of poor quality may be used to help establish improvement budgets at the project or process level. A project that costs $20,000 but saves RM3,000 a month in quality will pay for itself in seven months if poor quality costs a business RM5,000 a month. On the other hand, a project that requires RM100,000 but only incurs a RM1,000 monthly cost for poor quality is less likely to be justified.
Even though the equation appears straightforward, it might be challenging to list all expenses related to poor quality. Most experts compare the hidden costs of poor quality to an iceberg to explain them. On the surface, you only perceive a tiny portion of the expenses of poor quality. Scrap, reprocessing, warranty requests, client returns, and additional shipment are a few examples.
Beneath the surface, however, an iceberg is always much more significant. The same is usually true of the cost of poor quality, and hidden costs might include:
Loss of customer loyalty
Loss of morale
loss of workers if morale is low over an extended period of time.
Schedule or rescheduling-related conflicts
Higher risks of compliance issues, including fines
Higher administrative costs
Unpredictable revenue, sales, or production
On an enterprise-wide scale, estimating the cost of poor quality is very challenging, and assessing it at the process level is still highly complex. There is no system for formalizing all potential costs into financial values.
When computing CoPQ, the company should create a streamlined process that is applied across the board. In order to ensure that different process teams utilize comparable metrics when they report to leadership, Six Sigma belters within the organization may at the very least create a specific means of listing expenses of poor quality across the entire business.
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