Sample COPQ Study

All Rights Reserved, Juran Institute, Inc. (slide name here) 2 .PPT

Managers and workers speak the language of things but Senior leaders speak the language of money

… COPQ allows us to translate the things into money.


Prevention

Appraisal: Prediction Audit

Appraisal: Detection

Failure: InternalExternal

Cost of AttainingQuality

Cost of Poor Quality

Cost Of Poor Quality


Components

Non-Conformance

$Conformance

$

$

Quality Costs


Total Quality Cost

Appraisal Internal Failure

ExternalFailure

I want my

money back!

Cost of Quality (COQ)$

Prevention


COPQ Overview

Definitions

All activities and processes that do not meet agreed performance and/or expected outcomes

Costs that would disappear if every task were always performed without deficiency

Actual Cost - Minimum Cost = COPQ


Waste

Testing Costs

Rework

Customer Returns

Inspection CostsRejects

Recalls

Traditional Cost Of Poor Quality

(4-5% of Sales)

When quality costs are initially determined, the categories included are the visible ones as depicted in the iceberg below.


Late Paperwork

Customer AllowancesPremium Freight CostsPricing orBilling Errors

Excessive FieldServices Expenses

Incorrectly CompletedSales OrderLack of Follow-up

on Current ProgramsExcessive

Employee Turnover Planning Delays

Development Costof Failed Product

Expediting Costs

Excess Inventory

ExcessiveSystem Costs

Overdue Receivables

ComplaintHandling

Unused Capacity

Time with DissatisfiedCustomer

Excessive Overtime

Waste

Testing Costs

Rework

Customer Returns

Inspection CostsRejects

COPQ rangesfrom 15-25% of Sales

As a company gains a broader definition of poor quality,the hidden portion of the iceberg becomes apparent:

Recalls

Cost Of Poor Quality


Efficiency Study

Total Cost of Poor Quality is $59,728,973Recurring Costs in One Year

$32,089,143

$13,106,268$14,533,562

53.7%

21.9%24.3%

Internal CostsExternal CostsAppraisals Costs


Efficiency Study

Cumulative TotalCost of Quality is $143,178,401

Internal Failures

External Costs

Appraisal Costs

$115,538,571

$13,106,208

$14,533,562

80.7%

9.2%

10.2%

Internal CostsExternal CostsAppraisals Costs


Cumulative Internal Costs

A B C D E F G H J K L M Q N O P0

10

20

30

40

50

60

70

80

90

100

110

120

0%

20%

40%

60%

80%

100%

Categories COPQ

Dol

lars

/Yea

rM

illio

nsC

UM

.%


Cumulative Internal Costs

INTERNAL COSTS DOLLARS INDIV % CUM % CATEGORIES

Excess inventory reserves $36,253,810 31.38% 31.4% ASafety stock $25,785,999 22.32% 53.7% BIntermediate stock inventory (Net) $16,213,000 14.03% 67.7% CObsolete inventory reserves $11,552,776 10.00% 77.7% DProduction scrap $6,469,000 5.60% 83.3% EExcess inventory reserves carrying costs $5,075,533 4.39% 87.7% FSafety stock carrying costs $3,610,040 3.12% 90.8% GDispositions (Unreserved outermediate scrap) $2,473,000 2.14% 93.0% HProduction rework $2,470,000 2.14% 95.1% JIntermediate stock carrying costs $2,269,540 1.96% 97.1% KObsolete inventory reserves carrying costs $1,617,389 1.40% 98.5% LQC reinspection indirect costs $642,114 0.56% 99.0% MInvestigation of failures-Mfg. Eng. $445,536 0.39% 99.4% NDesign changes $333,000 0.29% 99.7% ODowntime $212,834 0.18% 99.9% P

Vendor rework charges $115,000 0.10% 100.0% QBack-log late payments lost interest 0.00% 100.0% RAccounts receivables 0.00% 100.0% S

0.00% 100.0% TOTAL $115,538,571 100.00%


Internal Costs – 12 Months

A. Excess inventory reserves - Reserves for on-hand slow moving inventory that exceeds the 24 month sales forecast. Reported on the Year 1 Excess and Obsolete Analysis Report from Cost Accounting.

B. Safety stock - Excess inventory maintained as an in-house bank because of the inability to produce reliable yields, forecast consistently, or receive procured products on a timely basis. FGs valued at 2 months the Year 1 annual standard cost of sales; packaging materials valued at 1 month the usage in dollars; raw materials valued at 1 month the usage in dollars. Information reported from Materials Management and Production Planning.

Component Descriptions



C. Intermediate stock inventory (net) – Work-in-process material used as a buffer for inadequate foundry yields, inaccurate sales forecasts and launch plans, design changes which necessitate rapid response, and to support the complexities of instrument assemblies. Data derived from Stock Analysis Report. Net inventory is utilized to not duplicate excess and obsolete reserves costs.

D. Obsolete inventory reserves - Reserves for inventory of inactive product (removed from the price list). Reported on the Year 1 Excess and Obsolete Report.

Component Descriptions (continued)



E. Production scrap - Material discarded in one year and reported by cell and product family. Reported on the Scrap Report as well as multiple journal entries.

F. Provisions for excess inventory - Only money provided from the operations to cover identified excess and obsolete inventory. Reported on the Year 1 Excess and Obsolete Report and the Cost of Sales Analysis.

H. Dispositions (unreserved outermediate scrap) - Quarantine and disposal of units with questionable packaging by QA. Reported on the Full Year Dispositions Report.




J. Production rework - Rework as reported by department. Dollars are actual direct labor hours by department times the conversion rate.

G., K., L. Carrying costs (excess inventory reserves, safety stock, intermediate stock, obsolete inventory reserves) - Calculated values for the cost to maintain inventory and reserves to inventory. Calculated as the weighted average cost of capital (14%) times the specific inventory or reserves dollars.



M. QC re-inspection indirect costs - Estimated non-reported QC indirect labor hours expended in a year as part preparation prior to performing a re-inspection of reworked product. Calculated as an estimated 212 indirect hours per week as part preparation for rework times 46 production weeks times $66 per hour (direct labor rate + variable overhead rate).

N. Investigation of failures (Mfg. Eng.) - Estimate of time spent by manufacturing engineering personnel in the investigation and resolution of internal failure problems. Calculated as approximately 35% of time in units 1, 2, and 3 times an average cost/hr. of $35 times the number of personnel.

O. Design changes scrap - Scrap principally on vended items because of design enhancements. Reported on the Year 1 Customer Returns-Scrap/Rework Report.





P. Production downtime - Reported downtime by department/cell. Calculated as actual reported hours of downtime (bar-coded as downtime) times each cells specific fixed overhead rate.

Q. Vendor rework charges - Vendor charges for reworking a product because of company error. 95% was because of a blister packaging re-inspection that had channeling which was suspect for sterility. Reported on the Cost Accounting Sundry Schedule (misc. charges).

R. Backing

S. Accounts receivable



Internal Costs Category A

Excessive Inventory Reserves is: $36,253,810

Finished goodsWork in processRaw materials

EXCESSINVENTORY

TOTAL $

Finished goods $31,292,402

Work in process $4,460,408

Raw materials $501,000

TOTAL $ $36,253,810

$31,292,402

$4,460,408

$501,000

86.3%

12.3%

1.4%


Pareto Analysis Product Group

EXCESSIVE RESERVE EFFECT DOLLARS '% INDIV '% CUM CATEGORIES

Unit 1 $15,153,840 41.80% 41.8% A1

Unit 2 $8,682,800 23.95% 65.7% A2

Unit 3 $7,368,144 20.32% 86.1% A3

Unit 4 $4,301,665 11.87% 97.9% A4

Unit 5 $552,631 1.52% 99.5% A5

Other $109,447 0.30% 99.8% A6

Accessories $80,283 0.22% 100.0% A7

Miscellaneous $5,000 0.01% 100.0% A8

TOTAL $36,253,810 100.00%

A1 A2 A3 A4 A5 A6 A7 A80

6

12

18

24

30

36

0%

20%

40%

60%

80%

100%

Product Group Categories

DO

LL

AR

S / Y

EA

R

Millio

ns

CU

M.%

Category A: Excessive Inventory Reserves


Internal Costs Category B

Safety Stock (Just In Case Inventory)

$24,832,000

$762,083$191,916

SAFETY STOCK TOTAL $Finished goods $24,832,000Raw material $762,083Packaging materials $191,916TOTAL $ $25,785,999

Finished goodsPackagingmaterials$191,916

Raw materialFinished goodsWork in processRaw materials


Internal Costs Category C

Intermediate Stock is $ 16,213,000

$9,249,000

$6,964,000

57.0%

43.0%

UnitsInstruments

INTERMEDIATE STOCK (NET) TOTAL $

Units $9,249,000Instruments $6,964,000TOTAL $ $16,213,000



Unit Products Total Value is $ 9,249,000

Unit 1Unit 2Unit 3Unit 4AccessoriesCustomOtherUltra

STOCK IMPLANTS (NET) TOTAL $

Unit 1 $3,877,000

Unit 2 $2,330,000

Unit 3 $2,151,000

Unit 4 $483,000

Accessories $270,000

Custom $83,000

Other $37,000

Ultra $18,000

TOTAL $ $9,249,000

25.2%

23.3%

5.2%

2.9%0.9%

0.2%

0.4%



Instruments Total Value is: $6,964,000

Instrument 2Instrument 1Instrument 3AccessoriesInstrument 4CustomUltraOther

STOCK INSTRUMENTS (NET) TOTAL $

Instrument 2 $3,740,000

Instrument 1 $1,823,000

Instrument 3 $739,000

Accessories $349,000

Instrument 4 $283,000

Custom $22,000

Ultra $7,000

Other $1,000

TOTAL $ $6,964,000

26.2%

53.7%

10.6%

5.0%

4.1%

0.1%0.3%


Internal Costs Category D

Obsolete Inventory Reserves is: 11,552,776

OBSOLETE INVENTORY TOTAL $

Finished goods $7,639,002

Work in process $3,913,774

TOTAL $ $11,552,776

$7,639,002

$3,913,774

66.1%

33.9%

Finished goodsWork in process


Pareto Analysis Product Groups

D1 D2 D3 D4 D5 D6 D7 D80

2

4

6

8

10

0%

20%

40%

60%

80%

100%


DO

LL

AR

S /

YE

AR

Mil

lio

ns

CU

M.%

OBSOLETE RESERVE EFFECT DOLLARS '% INDIV '% CUM CATEGORIES

Unit 2 $4,154,014 36.05% 36.1% D1

Unit 3 $3,537,586 30.70% 66.8% D2

Unit 1 $2,927,840 25.41% 92.2% D3

Custom $709,309 6.16% 98.3% D4

Other $69,252 0.60% 98.9% D5

Unit 4 $63,752 0.55% 99.5% D6

Miscellaneous $34,025 0.30% 99.8% D7

Accessories $26,998 0.23% 100.0% D8

TOTAL $11,522,776 100.00%

Category D: Obsolete Inventory Reserves


Year 1 Internal Costs

Pareto Analysis

E Z F G H J K L M Q N O P0

5

10

15

20

25

30

0%

20%

40%

60%

80%

100%

Categories COPQ

Dol

lars

/Yea

rM

illio

nsC

UM

.%


Year 1 Internal Costs

1996 INTERNAL COSTS DOLLARS / YEAR % INDIV % CUM CATEGORIES

Production scrap $6,469,000 20.16% 20.2% E

Provisions for obsolete & excess inventory $6,356,157 19.81% 40.0% Z

Excess inventory reserves carrying costs $5,075,533 15.82% 55.8% F

Safety stock carrying costs $3,610,040 11.25% 67.0% G

Dispositions (Unreserved outermediate scrap) $2,473,000 7.71% 74.7% H

Production rework $2,470,000 7.70% 82.4% J

Intermediate stock carrying costs $2,269,540 7.07% 89.5% K

Obsolete inventory reserves carrying costs $1,617,389 5.04% 94.6% L

QC reinspection indirect costs $642,114 2.00% 96.6% M

Investigation of failures-Mfg. Eng. $445,536 1.39% 97.9% N

Design changes $333,000 1.04% 99.0% O

Downtime $212,834 0.66% 99.6% PVendor rework charges $115,000 0.36% 100.0% Q

Back-log late payments lost interest 0.00% R

Accounts receivables 0.00% S

TOTAL $32,089,143 100.00%


Pareto Analysis

SCRAP CATEGORIES DOLLARS / YEAR '% INDIV '% CUM CATEGORIES

Unit 1 $1,843,000 28.5% 28.5% E1

Unit 2 $1,651,000 25.5% 54.0% E2

Unit 3 $1,576,000 24.4% 78.4% E3

Fixed heads $823,000 12.7% 91.1% E4

Custom $237,000 3.7% 94.8% E5

Internal fixation $235,000 3.6% 98.4% E6

Accessories $44,000 0.7% 99.1% E7

External fixation $33,000 0.5% 99.6% E8

Other $27,000 0.4% 100.0% E9

TOTAL PLANT $6,469,000 100.0%

E1 E2 E3 E4 E5 E6 E7 E8 E90

1

2

3

4

5

6

0%

20%

40%

60%

80%

100%

Scrap Categories

DO

LL

AR

S /

YE

AR

Mil

lio

ns

CU

M.%

Internal Costs Category E Production Scrap


Internal Costs Category E1

Unit 1 Total Scrap Value is: $1,843,000

33.2%

33.0%

13.2%11.2%

9.4%

PCA

OTHER

PRECISION

PARTNERSH

LOCK

Unit 1

PCA $611,000

Other $609,000

Precision $243,000

Partnership $206,000

Lock $174,000

TOTAL $1,843,000



Unit 2 Total Scrap Value is: $1,651,000

Unit 2

PCA $1,154,000

MAX $288,000

OTHER $125,000

MATIC $84,000

TOTAL $1,651,000

69.9%

17.4%

7.6%

5.1%

PCAMAXOTHERMATIC



Pareto Analysis Instruments

INSTRUMENTS '% INDIV '% CUM CATEGORIES

PCA 2 $675,000 42.8% 42.8% E3.1

OTHER 1 $223,000 14.1% 57.0% E3.2

PARTNERSHIP 1 $158,000 10.0% 67.0% E3.3

MAX $133,000 8.4% 75.4% E3.4

ENDO $115,000 7.3% 82.7% E3.5

INTERNAL FIXATION $104,000 6.6% 89.3% E3.6

OTHER 2 $80,000 5.1% 94.4% E3.7

PCA 1 $44,000 2.8% 97.2% E3.8

PRECISION 1 $38,000 2.4% 99.6% E3.9

DISPOSABLE INSTRUMENTS $5,000 0.3% 99.9% E3.10

MATIC $1,000 0.1% 100.0% E3.11

TOTAL $1,576,000 100.0%

E3.1 E3.2 E3.3 E3.4 E3.5 E3.6 E3.7 E3.8 E3.9 E3.10 E3.110

0.2

0.4

0.6

0.8

1

1.2

1.4

0%

20%

40%

60%

80%

100%

Scrap Categories

DO

LL

AR

S /

YE

AR

Mil

lio

ns C

UM

.%


Category Z: Pareto Analysis Product Groups

Z1 Z2 Z3 Z4 Z5 Z6 Z7 Z80

1

2

3

4

5

6

0%

20%

40%

60%

80%

100%


DO

LL

AR

S /

YE

AR

Mill

ion

s

CU

M.%

PROVISIONS FOR OBSOLETE

AND EXCESSIVE INVENTORY DOLLARS / YEAR '% INDIV '% CUM CATEGORIES

Unit 1 $2,837,779 44.68% 44.7% Z1

Internal & external fixation $2,076,955 32.70% 77.4% Z2

Unit 4 $622,876 9.81% 87.2% Z3

Unit 2 $399,295 6.29% 93.5% Z4

Custom $344,445 5.42% 98.9% Z5

Other $45,346 0.71% 99.6% Z6

Accessories $24,706 0.39% 100.0% Z7

Miscellaneous $0 0.00% 100.0% Z8

TOTAL $6,351,402 100.00%

Provisions for Excessive and Obsolete Inventory


Pareto Analysis

Rework Categories

J1 J2 J3 J4 J5 J6 J7 J8 J90

0.5

1

1.5

2

0%

20%

40%

60%

80%

100%

DO

LL

AR

S /

YE

AR

Mill

ion

s

CU

M.%

DESCRIPTION DOLLARS / YEAR '% INDIV '% CUM CATEGORIES

Inspection Instruments $714,000 28.91% 28.9% J1

Inspection Recon $467,000 18.91% 47.8% J2

Unit 2 $390,000 15.79% 63.6% J3

Unit 1 $376,000 15.22% 78.8% J4

Unit 3 $235,000 9.51% 88.3% J5

Packaging $178,000 7.21% 95.5% J6

Foundry $96,000 3.89% 99.4% J7

Plastics $7,000 0.28% 99.7% J8

Custom $7,000 0.28% 100.0% J9

$2,470,000 100.00%

Internal Costs Category J Production Rework


Internal Costs Category J1

Inspection Instruments Total Value is $714,000

$540,000

$174,000

75.6%

24.4%

Instruments & machinesInspection

INSPECTIONInstruments & machine

$540,000

Inspection $174,000DOLLARS / YEAR $714,000



Inspection Recon Total Value is $467,000

INSPECTION RECON

Inspection $401,000X-ray $66,000DOLLAR / YEAR $467,000

$401,000

$66,000

85.9%

14.1%

InspectionX-ray



Unit 2 Rework Total Value is $390,000

$262,000

$128,000

67.2%

32.8%

Part APart B

Unit 2Part A $262,000Part B $128,000DOLLAR / YEAR $390,000



Unit 1 Rework Total Value is $376,000

Unit 1

Finishing $251,000Titanium $79,000Cup $31,000Screw & pin $9,000Primary A $6,000DOLLARS / YEAR $376,000

$251,000

$79,000

$31,000

$9,000$6,000

66.8%

21.0%

8.2%

2.4%1.6%

FinishingTitaniumCupScrew & pinPrimary A


Pareto Analysis by Department

281209

201200

219210

287208

211222

205207

206217

2140

30

60

90

120

150

180

210

0%

20%

40%

60%

80%

100%

Departments

Do

llar

s/Y

ear

Th

ou

san

ds CU

M.%

Internal Costs Category O Downtime


External Cumulative Costs

Pareto Analysis

A B C D E F G H0

2

4

6

8

10

12

14

16

0%

20%

40%

60%

80%

100%

CATEGORIES COPQ

Do

llar

s/Y

ear

Mil

lio

ns

CU

M.%


External Cumulative Costs

EXTERNAL COSTS DOLLARS / YEAR '% INDIV

'% CUM CATEGORIES

Product liability assessment $5,554,000 31.15% 31.1% ACode 4 scrap customer returns $2,546,311 14.28% 71.9% BLitigation expenses $2,240,000 12.56% 84.5% CRepack labor & overhead $1,041,000 5.84% 90.3% DProduct surveillance compl. invest. $651,713 3.65% 94.0% ETechnical relations department 487 $482,219 2.70% 96.7% FProduct recall Regulatory department 260 $374,857 2.10% 98.8% GCustomer return department 447 $216,168 1.21% 100.0% HLost sales 0.00% 100.0% JRecall campaigns 0.00% 100.0% K TOTAL $13,106,268 1


External Costs

A. Product liability assessment charges - Product liability charges for self insured risk sensitive, self insured loss sensitive, and excess insurance premiums. The two main elements of product liability costs are a reserve accrual for self assumed losses and premium costs for the insurance that comes over the self assumed loss level. The self insured reserve accrual is allocated based on risk weighted sales and 5 year loss history.

B. Code 4 scrap customer returns - Customer returns identified by the Customer Returns Department as available for scrap by Inspection Code. Reported on the Year 1 Customer Returns and Scrap/Rework Report.



External Costs Category A

Product Liability Assessment 1996 is$ 5,554,000

$4,750,000

$414,000

$390,000

85.5%

7.5%

7.0%

Self insured loss seExcess insurance preSelf insured risk se

PRODUCT LIABILITY ASSESSMENT TOTAL $

Self insured loss sensitive $4,750,000

Excess insurance premium $414,000

Self insured risk sensitive $390,000

TOTAL $ $5,554,000


External Costs Category B

Pareto Analysis Code Scrap

C1 C2 C3 C4 C5 C6 C7 C8 C9 C10 C11$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

0%

20%

40%

60%

80%

100%

PRODUCT FAMILY CATEGORIES

DO

LL

AR

S /

YE

AR

CU

M. %


Code Scrap

DOLLAR VALUE DESTRUCTION CODE 4 1996 CUSTOMER RETURNS-SCRAP & REWORK

% INDIVIDUAL % CUM PRODUCT FAMILY CATEGORY

$721,492 28.33% 28.3% total knees C1$639,928 25.13% 53.5% total hips C2$457,336 17.96% 71.4% total internal fixation C3$416,213 16.35% 87.8% total endos C4$133,536 5.24% 93.0% total custom C5

$97,915 3.85% 96.9% total external C6$53,481 2.10% 99.0% total simplex & acc. C7$26,410 1.04% 100.0% total other ortho C8

0.00% 100.0% C90.00% 100.0% C100.00% 100.0% C11

$2,546,311 100.00% TOTAL


External Costs Category B

Litigation Expenses is $2,240,000

$1,970,000

$270,000

87.9%

12.1%

General internalGeneral outside

LITIGATION EXPENSES TOTAL $

General internal $1,970,000General outside $270,000TOTAL $ $2,240,000


Cumulative Appraisal Costs

Pareto Analysis

A B

C D

E F

G H

J K

L M

N0

2

4

6

8

10

12

14

0%

20%

40%

60%

80%

100%

Categories COQ

Dol

lars

/Yea

rM

illio

nsC

UM

.%


Cumulative Appraisal Costs

APPRAISAL COSTS DOLLARS / YEAR '% INDIV

'% CUM CATEGORIES

Recon Intermediate & final inspection

$7,709,781 53.05% 53.0% A

Instrument inspection $1,512,357 10.41% 63.5% B

Vendor inspections instruments

$1,352,514 9.31% 72.8% C

Trauma inspection $1,093,999 7.53% 80.3% D

Primary inspection Recon $824,126 5.67% 86.0% E

Quality engineering (QA) $645,358 4.44% 90.4% F

Regulatory (QA) $499,809 3.44% 93.8% G

Sterility assurance (QA) $490,300 3.37% 97.2% H

Metrology engineering (QC) $207,897 1.43% 98.6% J

Packaging verification officers $197,089 1.36% 100.0% K

Vendor Inspection (part of Recon)

$332 0.00% 100.0% L

TOTAL $14,533,562 1


Appraisal Costs


A-E, K,L. Recon intermediate and final inspection, instrument inspection, vendor inspection (instruments), trauma inspection, primary inspection, packaging verification officers - actual dollars spent for inspection of Reconstructive, unit and instrument product. Reported on the Year 1 Responsibility Report for each department.

F. Quality Engineering - time spent in shop floor inspection support and raw material inspection. Calculated as 30% of Year 1 Responsibility Report for Dept. (minus sub-dept. B activity).

Sample COPQ Study

Documents

Transcript of Sample COPQ Study