costof quality

Cost of Quality

Current Perspectives

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Copyright 2003 Omnex. All rights reserved2

Speaker BiographyChad Kymal is a widely sought international trainer and consultant whose broad experience includes TQM, setup reduction, technology

assessment and inventory analysis, statistical process control, and quality function deployment. He has co-authored or championed most of Omnex's quality training courses. He is on the Malcolm Baldrige Board of Examiners and is an RAB certified Lead Auditor.

He has a Bachelor’s degree Mechanical Engineering from General Motors Institute, a Master's degree in Industrial and Operations Engineering from the University of Michigan, and an MBA from the University of Michigan.

Kymal founded Omnex, Inc., a business/quality management solution provider that offers training to semi-conductor, automotive, manufacturing, and service industries. Omnex has worked with Ford Motor Company, Lucent Technologies, Philips Semiconductor, Magna, and most of the Fortune 500 companies worldwide. Omnex provides over 50 training courses in subject areas ranging from APQP to Six Sigma and has 15 offices worldwide.

Chad is also the founder of AQSR, one of the top five rated Quality System registrars in the US as rated by Quality Digest. Chad and AQSR specialize in providing auditing services in ISO 9000, QS-9000, TE Supplement, TS 16949, VDA 6*, AS-9000 and the ISO 14001 series of international standards.

He also founded Omnex Systems, which provides Omnex's industry-leading Advance Product Quality Planning Software, AQuA®, which is being used by several leading companies in the industry. Currently, Omnex Systems is offering the Enterprise-wide Quality Management System (EwQMS™) Suite, which features AQuA, Audit Pro, Boss, Document Pro, MSA Pro, HR Pro, Process Analyzer, Process Pro, and TPM Pro.

Chad has recently published a book on ISO 9001:2000 auditing for Paton Press, and is working on a book for ISO/TS 16949:2002 auditing. Chad led the Omnex team that helped Ford Motor Company rewrite the QOS methodology. He helped write the QS-9000 requirements and did the first worldwide witness audit for the same.

Chad Kymal worked closely with the Automotive Electronic Council (AEC) to develop the Semiconductor Supplement. He has also helped Visteon and Delphi in developing their customer specific requirement.

Chad was named Executive Director of SAC. He is currently leading SAC to develop a second party/third party auditing process for the semiconductor supply chain. He is also helping SAC remove waste and redundancy in quality system requirements auditing in the semiconductor supply chain.


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History of Cost of Quality

1951 Cost of Quality Concept – Dr. J.M. Juran

1950’s COQ in GE – AV Feigenbaum

1964 – Q100 Report IBM

1979 – Quality is Free – Philip Crosby

1980’s – Cost of Quality is Popularized

Late 80’s to 90’s – COQ loses favor

1998 – COPQ Reappears in QS-9000

2002 – COPQ present in ISO/TS 16949:2002

1990’s – COQ reappears with Six Sigma


Cost of Quality Classic Typology

• Cost of Quality is Categorized into– Prevention and Appraisal Costs

• Prevention Costs• Appraisal Costs

– Failure Costs• Internal Failure Costs• External Failure Costs

Maturity of Quality Management System and reduction in COQ


Problems with Traditional COQ Models

1. COQ undervalued based on traditional calculations

2. COQ cumbersome and difficult to calculate

3. Senior Management use other methods to drive improvement

4. Focus is on measuring cost, not using cost to improve performance while reducing cost.


Problems with Traditional COQ Models

1. COQ is used as a status indicator rather than as a driver

2. Focus is on the details of gathering and reporting

3. Inadequate resources allocated to effect real prevention and change

4. False reporting to protect the guilty

5. Viewed as too much administration to follow through

6. Viewed as an unrealistic goal short on methods

COQ systems fail due to “poor management planning, implementation, and follow-up.”


COPQ is “The Hidden Factory”

As is Could be

Cost of failurein the field


Internal failurecosts


Cost appraisaland inspectionCost appraisaland inspection

Cost to improveand preventpoor quality


Opportunity lost

• Avoided capital cost• Opportunity cost of additional volume if

Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer

•• Opportunity cost of additional volume if

Sales > capacity• Lost customer loyalty• Time spent expediting• Cost to the customer

• Improvement program costs• Process control• Quality engineering and admin

• Improvement program costs• Process control• Quality engineering and admin

• Inspection/test (materials, equipment, labor)• Vendor control• Quality audits


• Warranty claims• Maintenance and service• Warranty claims• Maintenance and service

As is Could be

• Scrap/rejects• Rework• Longer cycle times and excess inventory

• Scrap/rejects• Rework• Longer cycle times and excess inventory

5%20

- 2

5%65

- 7

0%

?


Quality engineeringand administration

Inspection/test (materials,equipment, labor)

Expediting

Scrap

Rework

Rejects Warrantyclaims

Maintenance and service

Cost to customer

Excess inventory

Additionallabor hours

Longer cycle times

Quality auditsVendor control

Lost customer loyalty

Improvement program costs

Process control

Opportunity cost if salesgreater than plant

capacity

Cost of Poor Quality (COPQ) the Tip of the Iceberg


Cost of Poor Design Quality

1

10

100

1000+

X Millions

A change while still in design

In manufacturing

At customer location

Recall

Litigation

5

50

500

5-50K

10K - X Millions

Internal to Fab

In shipping

Customer incoming

Customer mfg

Field

Cost of Poor Manufacturing Quality-Semiconductor Example

COQ Methods

Traditional Costing Approach

Six Sigma Approach

Measurables Approach


Traditional Cost Method % Method

1. Identify the total resources consumed in a category or item.

2. Determine the percentage of those resources used for activities associated with quality problems.

3. Apply the percentage to the total cost of resources to obtain a cost by category/ item

4. Add these costs by category/ item to find the total cost of poor quality.

5. Using Sales Revenue, calculate cost of poor quality as a percentage of sales revenue.


Traditional Cost Method % Method


Traditional Cost MethodUnit Cost Method

• Identify the frequency of activities in a category/ item

• Determine an average cost per occurrence• Multiply the frequency by cost per occurrence to

obtain a cost by category/ item• Add these costs by category/item to find the total

cost of poor quality• Using Sales Revenue, calculate cost of poor

quality as a percentage of sales revenue.

1 23 45 67

1 23 45 67


Traditional Cost Method Unit Cost Method


Traditional Cost Method

• Aligned with traditional Accounting methods– Focus on responsibility accounting– Revolves around the “command and control”

structure– Allocation of costs to products and services

on some “fair and equitable” basis• Cost measures are (mis)aligned with operating

measures.

$$


Activity-Based Costing

• Focus on process rather than responsibility– Clear assignment of all costs

to the process that uses the resource

• Identifies process steps wasting resources

• Costs not absorbed in overhead


Activity-Based Costing

• Steps1. Identify activities

2. Determine cost for each activity

3. Determine cost drivers that cause COQ

4. Collect activity data

5. Calculate product cost and COQ

Six Sigma Approach


COPQ Sigma PPM

30-40% of Sales 2.0 308,537 Non Competitive

20-30% of Sales 3.0 66,807

15-20% of Sales15-20% of Sales 4.0 4.0 6,210 Industry Average6,210 Industry Average

10-15% of Sales 5.0 233

<10% of Sales 6.0 3.4 World Class

COPQ Sigma PPM

30-40% of Sales 2.0 308,537 Non Competitive

20-30% of Sales 3.0 66,807

15-20% of Sales15-20% of Sales 4.0 4.0 6,210 Industry Average6,210 Industry Average

10-15% of Sales 5.0 233

<10% of Sales 6.0 3.4 World Class

Cost of Poor Quality & Industry Average PPM’s


COPQ Sigma Yield

30-40% of Sales 2.0 5% Non Competitive

20-30% of Sales 3.0 93%

15-20% of Sales 4.0 99.4% Industry Average

10-15% of Sales 5.0 99.976%

<10% of Sales 6.0 99.999655% World Class

COPQ Sigma Yield

30-40% of Sales 2.0 5% Non Competitive

20-30% of Sales 3.0 93%

15-20% of Sales 4.0 99.4% Industry Average

10-15% of Sales 5.0 99.976%

<10% of Sales 6.0 99.999655% World Class

COPQ & Sigma/Yield RelationshipIndustry Averages


Using the Six Sigma Approach

• A supplier to semiconductor industry has approximately 50,000 DPMO (internal and external).

• This translates to a 2.0 sigma system• Such systems average a COPQ of 20-30% of

sales. • This is a non-competitive situation since this

cost directly affects the bottom line.

Measurables Approach


Measurables Approach - COPQ

• Focus is on COPQ• Identify product and process measurables which

impact quality (and consequently the COPQ)• Collect and track data on these measurables as

a proxy for the costs


Measurables Approach - COPQ• Internal Yield loss

(Failure) Costs– Incoming material

rejection (LAR)– Photo/Lithography

Rework – Fab line yield loss– Wafer Acceptance /

PCM test yield loss– Wafer / die test yield

loss– Assembly yield loss– Final test yield loss

• External Failure Costs– Customer returned

product cost– Returned product

failure analysis costs– Customer complaint

response costs– Replacement product

cost

Cost Of QualityNew Directions


Cost of Quality Expanded Typology

I. “Hard” quality cost

A. Controllable quality cost (1) Prevention cost (2) Appraisal cost (3) Lost opportunity cost (“valueless” activities)

B. Resultant (poor)quality cost (1) Internal error cost (2) External error cost

C. Equipment/process poor-quality cost

II. “Soft” quality cost

A. Customer incurred costB. Customer dissatisfaction costC. Transaction costsD. Lost opportunity costE. Loss of reputation cost


COPQ is “The Hidden Factory”

As is Could be





Cost appraisa land inspectionCost appraisa land inspection



Opportunity lost

• Avoided capital cost• Opportunity cost of additional volume if

Sales > capacity• Lost custom er loyalty• Tim e spent expediting• Cost to the customer

•• Opportunity cost of additional volume if

Sales > capacity• Lost custom er loyalty• Tim e spent expediting• Cost to the customer

• Improvem ent program costs• Process control• Quality engineering and adm in

• Improvem ent program costs• Process control• Quality engineering and adm in



• Warranty claims• M aintenance and service• Warranty claims• M aintenance and service

As is Could be

• Scrap/rejects• Rework• Longer cycle tim es and excess inventory

• Scrap/rejects• Rework• Longer cycle tim es and excess inventory

5%20

- 2

5%65

- 7

0%

? “Soft” Quality Lost


COQ – Doing it Right the First TimeIn the past COPQ has only been associated with product quality.

COPQ can be applied to any process within the company, if the “product or service” is identified

What is the product or service of the maintenance department?Of the design department?Of marketing?

What is the COPQ of each of these business processes?

• this can be tied to process measurement and used for continual improvement

This is the greatest opportunity for COQ….


COQ – Upstream and Doing it Right the First Time

• Design – – Failure costs in design include any

designs that do not make it first pass. – Engineering Changes = Rework– This is the biggest opportunity of

COPQ.

• Technology Development – – Failure costs should include any

process that is not qualified on first pass.


COQ – Process Approach

• COQ is a fundamental characteristic of every process

• Every process has hard and soft quality costs associated with it

Opportunities for COQ

Semiconductor Design and Manufacturing


Criteria for First Pass Success in Design

• Within budget• On schedule• Meets die size and yield targets• Meets electrical performance targets• First mask set goes into production• Meets sales target• Meets Break Even Time

– recover design and development cost targets


First Pass Success in Design• Average number of passes per design

– 2.5 Passes.• Cost of second and third design pass as a ratio of the

initial cost– 1 to .5 to .3

• Development Budget for typical Business Line – $10 Million

• Costs for a Business Line – $50 Million

Cost of Quality – $6.5 Million using the development budget.

Some will argue that it should be calculated based on the entire Business line (i.e. COQ = $32.5 Million)


Internal Failure CostsYield, Rework, and Failure

Yield Loss by Process Step• FAB line loss: 1 – 2 %• Lithography rework rate: ½% to 1% • PCM test – wafer acceptance test: 1% to 1½ % • Wafer/Die electrical – varies by technology:

80% to 97% (newer technology and larger die) • Assembly – line loss: in defects per million• Final Test: 97 to 99%

Chute yield – 74% to 93% depending on complexity and maturity


Opportunities in Wafer Fab

• If Wafer/Die electrical test yields are high, it may be more reasonable to use other continual improvement strategies

• Is there fine tuning of decision algorithms on whether to “scrap” or send “wafer” to assembly?


Transaction Costs for Quality Problems

• Sales person (enter into system) calls customer service quality (sales office) or sends an email – 4 hours

• Open a complaint in the system• Team is consulted and made aware of issue – 4 hours• Product is received and then sent to plant – 1 hour• Their the quality person will take the product to F/A and and F/A input into

the system – 1 hour• Then F/A analysis is done and a F/A report is completed – 3 days• Then 8-D team also meets and 8-D is completed and sent to customer –

4 persons – 2 to 8 days• Goes to product quality engineer who reviews the problem – 4 hours• Goes to sales who sends to customer – 1 hour

Total of 13 to 27 person days at $1000 per day – minimum of $11,000 for analysis only. And now we have to stop the bleeding and fix the problem

Implementing COQ


Implementing COQ – Current Perspectives –

• Use COQ costing only if this method is going to be one of the key drivers for setting priorities for continual improvement– Calculate COQ once a year to identify top cost savings priorities

for processes identified– Identify projects for improving key processes

• Prioritize processes/areas for focus based on budget allocation – Design, R&D, Operations

• Identify key COQ drivers/measurables for each area– This is also an ISO 9000:2000 requirement

• Do not monitor COQ each month, however measure the key driver


Implementing COQ Integration into the Strategic Model

CustomerExpectations

CompetitiveBenchmarks

Mission, Vision &Values

Strategic Objectives

ResultsMeasurement

Key

Processes

ProcessMeasurement

Improvement

Projects

COQ provides direction on selecting Improvement Actions and track effectiveness

Six Sigma/Varification

Lean/Value Stream Mapping

COQ Measurements

Value Engineering

Pro

ject

Prio

ritiz

atio

n

Met

hod


Implementing COQ – If COQ Is Not a Driver –

• COQ is calculated because it is a mandated requirement– Calculate using the easiest method, ie. six sigma method

covered earlier– Continue setting priorities for continual improvement using

other drivers like – six sigma, lean, activity based costing etc.


Summary: What is COQ?• The value of COQ using traditional methods

decreases as organizations’ poor cost of quality hit approx. 20 ppm

• In addition to the soft quality costs, the Process/upstream COQ approach and soft quality costs are important concepts to consider when using COQ

• Representing quality improvements using “management’s language” (i.e. $$ will surely get management buy-in)

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field cost of failure

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