If the cost of quality is high, looking through the Six Sigma glass the cost of poor quality is still higher. Companies bear a huge cost of about 9-16 percent of their revenues on problem solving. This is the cost of poor quality, or COPQ, as it is known. Motorola discovered this in the late 1970s at a huge price. General Electric has put the cost difference between 3 or 4 Sigma and Six Sigma at an astonishing $8-12 billion a year.
Anatomy Of COPQ
COPQ comprises costs which have generated as byproducts of defective and inconsistent manufacturing process. Six Sigma directly assigns a dollar value to cost of poor quality, meaning that the COPQ is measurable. The cost of poor quality originates at all places where the product or a part thereof is being made.
1. COPQ originating from suppliers
2. COPQ at the production points
3. COPQ at warehouse
4. COPQ at transportation and distribution
The cost effect due to poor quality from suppliers is defined at two levels. One is straight from the defective production of materials and the other is due to handling and delivery. The second and the third points are very much under the control of the manufacturer.
The following are the generally applicable consistent costs of poor quality:
1 Wastage Or Under-Utilization: This is also referred to as spoilage in Six Sigma, arising out of raw material wasted due to inconsistent and inefficient processes.
2 Cost Of Reworking: This cost includes the cost of repairing and replacing some parts. In addition, this also includes the cost labor to repair.
3 Cost Of Additional Utilities: The overall cost of setting up the extra infrastructure and utilities consumed to run the recycling operation needs to be considered while calculating the COPQ.
4 Lost Opportunities: The dissatisfaction triggered business loss can not be just the loss of margin. You have to include the capital to be invested to regaining the lost revenue and offset the cumulative revenue loss.
5 Lost Revenue Due To Poor Quality: This cost refers to the potential loss of new business due to defective quality.
6 Poor Customer Satisfaction: This is the mother of all costs of poor quality. This cost is compounded by the loss the customer suffers due to the defective product first and servicing second.
While Six Sigma provides for all labor, disposition and reworking costs, it does not permit inclusion of costs like that of inspection and prevention. But it is obvious that these efforts are only aimed at reducing the process variation and any resulting damage.
Quantifying The Cost Of Poor Quality And Six Sigma
The cost of poor quality is directly proportional to the level of Sigma. In other words, the COPQ is directly connected to the number of defects per million opportunities. Supposing your Sigma level is 4, and then across the industry, the standard cost of poor quality for you is 15%. It goes on decreasing with the increase in the Sigma level till it becomes equal to 6. At this point (Six Sigma) the cost of poor quality will be less than 5%. This means you have reduced the number of defects from around 60,000 to 3.4 per million opportunities.
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution’s Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.