COPQ: Tracing Unseen Factory Expenses
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COPQ: Tracing Unseen Factory Expenses
 
Article Introduction
As with any quality improvement exercise, the journey to reducing costs of poor quality (copq) should begin by sizing up the enormity of the challenge. Data collection on copq, analysis, and planning of an improvement strategy that attacks chunks of the glacier rather than ice chips, remains the recommended process for reducing copq. Of late, copq is associated with the hidden factory costs. Analysis techniques for quality costs are as varied as those used for any other quality problems in industry. They range from simple charting techniques to complicated mathematical models of the programme. The most common techniques are trend analysis and pareto analysis.

Article Description
The concept of quality has come a long way from being a buzzword to a practice that is ingrained in every aspect of a companys work. Quality not only impacts the nature of products (goods and services) produced, but also governs how much is spent on producing them. In fact, world-class companies have realised that quality begins and ends with the profit and loss account and the balance sheet. Yet, the scope to improve quality and simultaneously reduce costs remains one of the greatest opportunities in creating value.

Unseen Factory Expenses
One of the key reasons for the locked up potential is the functional expertise- driven and department-based structure of companies resulting in multiple but isolated silos of quality excellence. However, this structure is at odds with the overall core processes aimed at delivering quality products to the customers consistently. Each core process must orchestrate the output of various departments in order to meet customer expectations while ensuring uniformity of quality every single time.

On the other hand, achieving customer satisfaction remains a moving target given a plethora of alternatives available in the marketplace. In such a situation, the only way out for companies is to look beyond the quality control issues and proactively challenge their quality standards. They must evaluate quality in financial terms and apply the norms of financial prudence to quality management. Companies must understand the strategic importance of cost of poor quality (COPQ) and take remedial steps. And, leaders must drive the initiative.

Margins of quality control
The current quality planning strategies assume certain proportion of defects in the production output and plan for that by benchmarking against industry standards. In addition, the variations around the standards have a higher bandwidth of tolerance. Quality control through appraisal is more reactionary than preventive and aims at enforcing conformance to the standard. Typically, it is an after the fact attempt to find out what went wrong, which makes the discovery and correction of errors an extremely expensive proposition. Moreover, quality control measures do not rectify the standard itself.

Considering cost of poor quality
The sheer size of internal failure costs, external failure costs and appraisal costs indicate that cost of poor quality (or chronic waste) does not exist as a homogenous mass. Instead, they occur in specific segments, each traceable to a specific cause(s). These segments are unequal in size and a relative few account for a bulk of the costs. Ironically, these costs seldom show in traditional accounting reports. However, quality-related costs are much larger than are commonly understood. For most companies, these costs run in the range of 20 to 30 per cent of sales or 25 to 40 per cent of operating expenses.

Quality costs are not simply the result of factory operations. Support operations including maintenance, human resources and so on, are also major contributors. The bulk of these costs are the result of incapable support processes. Such costs are buried in the standards, but are in fact avoidable. The problem is that while these costs are avoidable, there has been no clear responsibility for action to reduce them. Fortunately, today there are structural approaches for doing so.

Reducing COPQ
As with any quality improvement exercise, the journey to reducing COPQ should begin by sizing up the enormity of the challenge. Data collection on COPQ, analysis, and planning of an improvement strategy that attacks chunks of the glacier rather than ice chips, remains the recommended process for reducing COPQ. A major by-product of COPQ evaluation is the identification of those vital few segments, which contribute most to COPQ. This results in setting priorities for the effective use of resources. Depending on the case, either a complete overhaul of the existing core/support processes or an incremental project-by- project approach maybe adopted. However, in both cases, the following steps may prove beneficial in diagnostic as well as remedial exercises.

Revival of Quality
Every quality improvement exercise requires an investment of resources, which in turn, must be justified by the dramatic improvement in the return on quality (RoQ) investments. Successful COPQ exercises result in reduced cost of errors, improved process capability, reduced customer defections, increase in new customers, and so on. Considering the size and range of the benefits, the investment required may include diagnosis and other forms of analysis, training, redesign or products and processes, testing and experimentation, and equipment. Surprisingly, many improvement projects require little or no costly equipment or facilities. The investment is mainly in the analytical work.

The concept of minimising cost of poor quality aims at preventing the failure costs and minimises the appraisal costs. It represents a way forward to creating processes with a defect free philosophy.

Role of leadership
Considering the fact that COPQ can hide nearly one-third of a plant, the mission assumes strategic importance. Hence, executive ownership and top-down approach to COPQ elimination is warranted. At companies like Jamshedpur- based Tata Steel and Indonesia-based PT Elegant Textile Industry, the top leadership went after COPQ with an evangelical zeal and achieved great success. Interestingly, both are into commodity and highly cyclical businesses - steel and spun yarn/textiles respectively - and managed to hold or strengthen their market leadership positions during downturns. Leaders of both companies institutionalized the processes to tackle COPQ.

It is widely observed that managers loathe taking the ownership and leading the change for some reason. If the COPQ assessment is thrust on managers, they typically call in consultants. This is largely because many of them either does not know how to proceed or, are afraid of the tougher part: execution. Both reasons doom the effort. A key takeaway then is, unless the management and the line staff take ownership, COPQ initiatives are bound to fail.

Deliberate Proposal
Qimpro believes that companies must look at assessing their COPQ on a priority basis. COPQ not only unlocks the hidden plant and thus directly contributes to the bottom line, but can also go a long way in improving customer satisfaction. The leaders should take initiative and drive COPQ activities. All the stakeholders must take ownership and become cost conscious. Companies should look at quality improvement projects to address chronic problems. They should aim at challenging the standard. By taking a project-by-project approach, companies can gain sustainable benefits.

Discovering Trouble Areas
When quality costs are displayed to managers who have not been exposed to the concept, the initial question is likely to be "how much should it be?" or "how much does this compare with other organisations or products?" Unfortunately, it is not practical to establish any meaningful absolute standards for such cost comparisons. A quality cost system should be tailored to a particular companys needs, in order to perceive trends of significance and furnish objective evidence for management decisions as to where the assurance efforts should be placed for optimum return.

Analysis techniques for quality costs are as varied as those used for any other quality problems in industry. They range from simple charting techniques to complicated mathematical models of the programme. The most common techniques are trend analysis and Pareto analysis.

Trend analysis is simply comparing the present cost levels to past levels. It is suggested that costs be collected for at least one year before attempting to draw conclusions or draw actions programmes. The data for one-year (minimum) should be plotted in several ways.

The Pareto analysis technique involves listing the factors that contribute to the problem and ranking them according to the magnitude of their contribution. In most situations, a relatively small number of causes or sources will contribute a relatively large percentage of total costs. To produce the greatest improvement, effort should be spent on reducing costs coming from the largest contributors.

Case study:
Reduction in coils rejection in Appliance Business Group coil shop at Voltas
Project identification:
The team studied-the complete process of coil manufacturing in the coil shop and identified various sources of scrap generation. It was observed that the scrap consisted of two main elements: End pieces & damaged copper tubes and damaged or defective coils.
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Posted : 8/29/2005

 
 
COPQ: Tracing Unseen Factory Expenses