COST OF POOR QUALITY VIDEO (COPQ) I SIX SIGMA I LEAN SIX SIGMA I JSIXSIGMA.COM

hi everyone welcome to lecture 2 for module 1 which is cost of poor quality or cost of quality as most of you know before I start I would like to quote a historical and Henri food Ellis total once said that quality is not an act but it's in habit and Henry Ford said that quality is doing things right when no one else is looking means if I need to stay in business I have to get hundred percent quality I cannot compromise on quality so if I were to give you one definition of cost of poor quality a very simple one and a positive one it is cost of poor quality can be defined as those costs which would disappear if systems processes and products were perfect this means I have targeted and achieved 100% quality before I move on I would like to give you two examples of cost of poor quality they are quite famous example the first one is from NASA NASA launched its space shuttle Challenger in 1986 but it blasted within 73 seconds of takeoff why because there was a quality failure in the o-ring seal you know what was most shocking was that NASA managers knew about this potential flaw but they chose to ignore it because they had a mutually supplier beneficial relationship and the second rule they broke was that they ignored the warning from the engineers about the dangers of launching the space shuttle in low temperatures NASA had to bear huge losses they are the human loss was seven astronauts were dead and the financial loss was over 1 billion dollars if NASA would have chosen to fix the defect it would have only costed them few hundred thousand dollars so what we learned the lesson learned from this is that we should always take factual approach to decision making if we know the facts we should always use them the second one is bit different it is from Toyota Toyota in 2009 recalled nine million cars why because there was a quality failure there was a defective floor mat and defected brakes which led to unintended acceleration quality failure is not expected from Toyota the cost to attack is a quality leader and it always lived to their motto of continuous improvement so why this happened in 1990s tight I decided to become world's number one car manufacturer obviously quality came second so what were the quality rules which were broken the first rule was there was less employee engagement and the second one was not sharing of best practices so these accidents were happening that is why the quality failure happened Toyota soon realized this mistake and they present a cure Toyota apologized for the error and halted production and sale of eight models which led to losses obviously there was a human loss 52 people were dead and 32 injured and Toyota had to face financial losses of over 5.5 billion dollars but what we learn from this we learn that we should always take a proactive approach and if we know there are defects we should always try to fix them because quality comes first let's go to components of cost of poor quality so cost of quality has four components the first one is appraisal cost then internal failure cost external failure cost and prevention cost so what are appraisal costs appraisal costs are those cost which are in occurred when the inspection is done when my product is being manufactured so this inspection is not done free of cost it will cost me money so it comes under appraisal cost then comes failure cost failure costs are those costs which are in occur due to faulty services defective products or parts there are two of failure cause the first one is internal failure costs and the second one is external failure cost let's say cup internal failure cost first internal failure cost are those cost which are in occurred when my product has not been delivered so whenever for example I manufacture this pen before I can market it it will go through quality checks quality people will check it whether it's fit to be delivered or not so for example they find a batch of pens which is not up to the optimum quality might be there might be some ink issues the ink is spit on just coming out or the lid is not fixing properly anything anything so on and so forth so there are two kind of internal failure cost one is crap and another one is rework now what is the scrap for example I am manufacturing these pens and the quality people say this pen is not of good quality it nothing can be done on it no River can be done it's a total waste so money was spent when I manufactured this pen how raw material was used my machinery was used manpower was used so all this has gone waste so all the money was used which was used to manufacture this pen has gone waste so it's a scrap another call internal failure cost is rework for example the pen is working fine everything is good only the lid is not good it's loose or it's not fitting properly so what I am supposed to do is I am to get any I am I should get a new lid so that I can just market this thing so if I get a new lid again it won't be free raw material will be used manpower will be used so all these expenses are covered under the waste because I have to base my first product only then I could create a new one which could be marketed and they come under internal failure cost then comes external failure cost I believe they are very dangerous why I am just going to explain you right now external failure costs are those costs which are in occurred by me when my product has already been delivered it's in the hand the customer so it includes warranty issues plus product replacement or repair okay now suppose I manufacture this pen I also give a variety of six months that if there is any manufacturing defect the customer can replace it or ask for a refund now the customer finds this pen is faulty it is not working properly so he will use his warranty period and he will either ask me to replace it or repair it so both will cost me money so this comes under external failure cost now why I say external failure costs are dangerous not only it will cost me money but it will also cost me goodwill the brand name I am which I am having next time the customer will go to the market to buy a pen he will choose not to buy this pen why because we had problems when he bought it for the first time so it will bring down my reputation as a manufacturer so these are the dangerous costs then let's come to prevention costs I have written them in green because these are good costs we should be any manufacturer should be investing in prevention cost what comes under prevention cost customer assessment process control quality improvement costs okay now what are the prevention costs of you all know prevention is better than cure so if I know I am going to market this I have to manufacture this pen what if I just do little market research of what customers need or what other pen companies are offering so I will do some cut customer assessment so that I can manufacture the pens which are really in demand then I need to control my processes and improve my quality when I say I am going to improve my quality this means I am checking if my raw material is good the ink I am using is of high quality and mind labor or manpower is trained or not because if my manpower is trained I have good processes I have done customer assessment this means all these costs will shrink because the product which I am making has less defects obviously if it has less defects less inspection would need to be done so this cost will come down and the products are good there are less defects this means there will be no or little a little scrap or little rework this means I will be saving here and obviously if I am manufacturing a very high quality pen or a very high quality product my external failure cost will be nil because if the product is good nobody will ask me to repair or replace it and obviously I will enjoy a good reputation and more customers will come to me so what do we learn I learned that if my appraisal costs are high then my internal failure costs are high and my external failure costs are high this means I am producing lot of defects if I am giving lot of defects this means I am occurring occurring a lot of these internal failure cost external failure cost and appraisal costs I won't be able to stay in market or in business with so many defects so what should I do I should be using more money or I should be investing more in these prevention costs these are the best ROI that is return on investment if I am using my money here obviously I will be saving here and I'll enjoy a good good business now let's go to cost of poor quality it's of two kinds one are the visible costs and other are the hidden cost visible pasture which are obviously very clear like scrap rework warranty issues we just did them little before but I am just going to tell you scrap again if you just remember the lecture one that whatever we produce should be in a certain range like its low spec limit and the upper spec limit whatever is produced in this range is acceptable to the customer you can sell it and whatever is produced here or here is not desirable this is just rejected you cannot sell this stuff it is rejected so this is scrapped so the total money you put on the air producing this scrap or whatever has been rejected is wasted so this is your visible cost of quality then comes rework obviously some things need little rework they need fitting here and there and then you can sell them but this rework also is not free of cost you have to spend some money to get things done so this is also visible cost of quality then obviously comes variety issues if there is a customer whom you have given like you have just sold a product and you say it's a six month warranty it's under six months warranty for manufacturing faults he can use his warranty either he can ask for replacement refund repaired so all this is done when all this is done you are spending money or money on it so all these are visible costs of quality and the other one are hidden costs of quality for example conversion efficiency of Tyrael so now there's a robbery raw material which you have to make into a final product so if you are not doing it efficiently this means you are wasting your material this is not optimum quality and this wastage is a loss then comes inadequate resource utilization this means your labor or your machinery is not utilizing the resources properly so this under utilization is also waste it will it will in occur you losses then comes excessive use of material so for example things you need electricity to produce something which will be works on electricity sometimes due to negligence or untrained staff you are using excessively the material is being used excessively so all this is waste it will cause you losses then again control redesign re-inspection these are also hidden cost when you just redesign something or you just free inspect all this will cost you money then comes cost of resolving customer problems ok now the product is in the hand of customer he is not satisfied so whatever you whatever resources you will utilize to resolve this problem all these will cost you either in material in money in pan power so it's not free then comes lost customer and goodwill don't never think that it's only one customer obviously the customer is not happy with your product he can tell many people around him same that this company is not delivering good quality products so loss of customer and goodwill are huge losses to any company you cannot stay in business for long then comes high inventory obviously if all these costs are too high this means you are paying locked for the production and this is not worth it then how to resolve these issues how we can help to be in business what we should do so this is cost of quality finding the incentives like how continuous improvement will help I would like to see that you should see this table from bottom to up so the first cost is prevention cost the prevention cost is the best cost where you should be spending your money how this includes process improvement product simplification and training cost obviously if you have better processes your products are more simple and you just spend on training this means you will be saving here like if your staff is trained your manpower is trained they will be doing all the materials will be converted efficiently into high-end products or the final products they will be using the resources properly there will be no base stage very little or less free inspection or redesign and if the product is good it doesn't have any defects the customer would be happy so there would be no customer resolutions problems and you won't lose any customer when somebody is paying money they think that they should get a good quality product and when they get that they are happy this brings good way to your company and your brand name and obviously then the money wasted will be less so if your prevention costs are up they increase this is always better because then the other cost will shrink then there will be appraisal cost will become decline because there will be little or no inspection because there are no defects then external failure cost which our warranty issues and product liability they will also decline because there will be no dissatisfied customers your product are of good quality they they are like the customer is satisfied this beings in profit and goodwill and obviously if you are manufacturing good products you are using good methods your labor is strained so your internal failure cost would be less there would be very little or no scrap so all these costs will decline if our prevention costs are up so this is the best return on investment and any company or manufacturer who wants to stay in business he should always focus on quality let's move on to traditional outlook to cost of poor quality some people without measuring the actual or the real cost think that it's waste of time to target 100% quality it's waste of money to target 100% quality so what they say is that we should focus on achieving optimum quality level for minimum over cost as 100% quality we will cause them too much so to prove their point what they do is they take all the for quality costs and they just plot a graph to show how so I just plotted the graph for you so that you can know better here you can see this is the graph or traditional outlook here are my quality levels and this is the cost per good unit of products so in blue you can see these are my internal and external failure cost and in green are prevention and inspection cost this red cover curve shows you total quality cost and here they will mark the minimum total cost which can be achieved with optimum quality of production but you can see that this is 900 personal quality and this optimum quality there is a lot of difference between this here my products are 100% error free or defect free so this means if my production is somewhere here so this means my products and services have error so what they forget is that if my production is not 100% if our defect through your error fee ultimately my other costs like internal and external failure cost and prevention and inspection cost will ultimately go up they will rise and what I what I will face I will face more production costs so the traditional outlook is a very narrow and a short term approach you cannot stay in business for long if you are just adopting this traditional outlook so what's the solution the solution is quality and competitiveness theory the Japanese calculated the exact cost of quality and found out that high quality led to benefits and higher sales and this high quality can be achieved with continuous quality improvement with continuous quality improvement I can target 100% quality or defect free services and products there are many benefits of continuous quality improvement basically today we will take two of them that are that a cost fruit benefits and market root benefits first talking about cost fruit benefits if I just tell you what are the cost road benefits I will achieve with continuous quality improvement they are increased depict free output so as we have discussed earlier if my products are defect free obviously I will have my internal failure cost my external failure cost my prevention and appraisal cost will lower so basically with time I will have reduced cost of operations this means quality will become ultimately free so cost food benefits are good quality led to lower cost and increased profits now let's talk about market root benefits now what are the market root benefits if I am producing good quality products I will have an improved competitive position I will being a better standing if whatever I am producing a watch or a pen or a car if I am producing good quality I'll in a good market position which will lead to high prices and increased market share now if I have to talk about high prices how now as a customer when you go to market you won't mind spending a little bit more for a good quality product because you know it will give you better services it will last long so I can if I am producing such a good quality product obviously I can ask for high prices and increased market share if I am producing a good and a high quality product I am providing high quality services I will have a loyal customer base whenever they need my services they will come back to me they won't go to their competitors they won't go to my competitors so obviously I will have an increased market share which will need to increase the revenue obviously if I am selling more products my services in our demand so I will have increase revenue which will ultimately lead to increased profit so market root benefits are they led to profits and savings to my company so this is how continuous quality improvement helps if as a manufacturer I am working on quality and competitiveness theory and my motto is continuous quality improvement then it will lead to increased profits because the result of continuous quality improvement is minimized total quality cost at zero defects I would be able to explain you better if I use this graph you can see this graph is different from the traditional outlook so let's study it these are my quality levels and here I have my hundred-percent quality and these are cost per goods unit of products so now if you can see is that if I try to a target hundred percent quality my internal and external failure cost will ultimately go down to a point where there will be zero my prevention and appraisal cost will also be less why because once my production is in line my staff is straying so I would lead less inspection so less money will be going in here and one major drastic change from the traditional outlook is the total quality cost it will go down and the minimum total cost as we reach 100% quality is very less and it won't go back up again why because when I am targeting 100% quality this means that my products and services are error free and my eyeballs need internal and external failure cost I won't Innoko them my prevention and praise your cost will also be very less so this total quality cost won't go up so this is the broad outlook and if I want to stay in business for long run then I should adopt the approach of continuous quality improvement now let's take another view of looking at cost of poor it is known as taguchi's quality loss function Taguchi is a Japanese quality expert he said any deviation from the target will cause loss so just have a look at this figure here you can see it's lost in dollars this is the target if I produce my goods here this will give my customer maximum satisfaction this is the deviation this is the upper spec limit and this is the lower spec limit anything produced beyond this is waste or this is total waste so Taguchi said and this is the customer tolerance band anything produced within here it's in under the tolerance range so Taguchi said deviation will cause loss loss is higher the more I will deviate from my target whether I move left or right from the target range losses will increase what they Taguchi see Taguchi say talk to customer about his requirements just make customer assessment before producing products and then after knowing the requirements produce products right on target because here the customer satisfaction is maximum and the losses are minimum ok take an example if a shoe manufacturer just wants to make shoes for me he would ask me about my requirements I will tell him about the design the color and the shoe size my shoe size is six and now he produces shoes for me which are not exactly on target which is shoe size 6 he produces something which is like 6.2 6.3 or my upper spec limit which is 6.5 so what will happen okay since is in micah my range it's in my tolerance range i will like if I really like the shoe color or I really like the design I will try to adjust but anything beyond 6.5 or my upper spec limit is waste I won't be using it and in same way if he produces something which is less like 5.8 5.7 or my lord climate which is 5.5 but I really like the color of the shoe it's going on with my dress or I know I won't be walking with this shoe I will try to adjust but anything beyond that is again waste so my maximum satisfaction would have been if the shoe producer would have made something which is of size 6 that's the target but since he deviated and if we would go out of the spec limits I won't be accepting that product and it would cause loss so the basic line is that always know your customer requirements and try to produce the product which is right on target because that will help your business that would give the customer maximum satisfaction and it will give you maximum profits now let's look at attics and quality if a producer is producing something which is substandard work defective products poor design shoddy workmanship substandard parts and products if the producer news that he is producing all these defective products and services and he fails to address them or he just does not make any effort to correct these things this means he is breaching his customer stressed he does not deserve to stay in business because he is not working on the quality of its products you cannot put quality on sake and stay in business it is going to hurt your business so always give quality a lot of importance because ultimately it will pay and keep you in business for long run now let us come to the last topic of lecture 2 which is cost of poor quality and Six Sigma understanding Six Sigma without cost of poor quality and cost of quality without Six Sigma is incomplete Six Sigma benefits penetrate deep into the bottom line why because Six Sigma targets at customer requirements cycle time reduction cost savings and defect evasion and all this cannot be achieved if our quality levels are low quality is low Six Sigma is not just mindless cost-cutting which results in value and quality reduction in fact fixed Sigma tries to eliminate those costs which are of little or no use to the customer and this forms the basis for cost of poor quality cost of poor quality determines how much a company is spending how much revenue is a company is spending to fix the defects for example if a company is running at 3 Sigma or 4 Sigma this means they are spending about 40 percent to 25 percent of their revenue on fixing the defects and if a company is running on Six Sigma this is only spending 5% of their revenue to fix the defect you will better understand if you use this graph you can see that I have plotted my Sigma levels here and this is the revenue spent on fixing defects so you can see that at 2 Sigma if I am operating the company and it's running on to Sigma levels then I would be spending 50% of my revenue to fix the defects which is quite high because my prevention appraisal internal and external failure cost would be too high defect rate is very high so then the money I am spending on fixing those defects is also very high at 3 Sigma I would be spending 45 percent of my revenue at 4 Sigma the amount of revenue I am spending is 25 percent and at 5 Sigma it's just less than 15 percent and at Six Sigma I am only spending 5 percent of my revenue to fix the defense if I convert this percentage into dollar then this gap is really huge this means that as the Sigma levels rise the money are to spend on the collar on defect prevention reduces this means quality is very important because I call Six Sigma is the highest level of quality the defects produced at this level are rarely less so the money I would be using on fixing those defects is also less now you might be think how Sigma levels are associated to cost you know Sigma is the measure of defects and money is spent to fix those defects I just plot a graph for you if you can see these are the Sigma levels and these are the errors parts per million opportunities if a company is running at 3 Sigma this means their processes or the product seven errors which amount to 70,000 and if a company is running at four Sigma this means the defects are like close to 60,000 and if it's on five Sigma then it might be somewhere near ten thousand or less and at Six Sigma it's just may go three point four percent of our defects this number is very less so you would be spending very little amount of money or very small amount of money to fix those defects so you can see that the graph has grow gone down gradually and ultimately this is just a very less amount of money because quality level is quite high at Six Sigma now you might have understood how Six Sigma levels are associated with costs so this would end our lecture - thank you very much

Channel: janam sandhu

Views: 59,271

Keywords: Cost Of Poor Quality, SIX SIGMA BLACK BELT CERTIFICATION, SIX SIGMA CERTIFICATION, SIX SIGMA, APPRAISAL COST, PREVENTION COSTS, FAILURE COST, jsixsigma.com, lean six sigma course, janam sandhu

Id: cTk9KSZzYzI

Length: 30min 58sec (1858 seconds)

Published: Thu Jun 19 2014