Cost of Quality and Lean Six Sigma projects should have a relationship. The concept Cost of Poor Quality (COPQ) is usually included in Lean Six Sigma training; however, COPQ is typically considered to make up a small proportion of the costs that a company experiences relative to Cost of Quality (COQ).

Organizations benefit when a potential or completed Lean Six Sigma project considers all cost implications. Neither COPQ nor COQ addresses all costs that a business might incur relative to process ″waste.″ To illustrate this point, consider how COPQ and COQ do not consider WIP (work in process or work in progress) costs, which could have a very large organizational benefit if there were a reduction in its magnitude, with no other negative impact to the process.

With a Business Process Management (BPM), Integrated Enterprise Excellence (IEE) approach for implementing Lean Six Sigma, preference is given to use of the term ″Cost of Doing nothing Differently″ (CODND) in lieu of COPQ. CODND considers all costs related to a process, whether that be determining the potential gain for a new project or determining the achieved profit from an actual project.

Organizations benefit if they use a CODND approach when addressing the financial benefits from Lean Six Sigma projects. A CODND approach would include the following COQ considerations.

Cost of Quality and Lean Six Sigma Projects: Deployment’s Measurement of Success

The measure of an organization’s Lean Six Sigma deployment success is typically the amount of achieved savings from process improvement efforts. One of the following two problems can occur from these calculations:

1. $100 million dollars was reported in savings, for example, but no one can find the money.
2. Hidden costs to an organization are not addressed in the calculation.

The first point addresses improvement project selection. With this issue, improvement efforts are not focusing on making strategic enhancements to an organization so that the enterprise as a whole financially benefits. How to overcome this issue with Lean Six Sigma project selection is addressed in the article ″Project Selection with Whole Enterprise Benefit."

This article will focus on the second point, where within a Lean Six Sigma deployment, hidden costs to an organization are not addressed in the calculation.

Costs of Quality (COQ) can have many hidden costs to an organization, as illustrated in the figure:

From Integrated Enterprise Excellence Volume III Improvement Project Execution: A Management and Black Belt Guide for Going Beyond Lean Six Sigma and the Balanced Scorecard

Cost of Quality

Essentially, the quality cost to an organization is heightened each time work needs to be redone. Whether it is the re-manufacturing of items, tools, service or retesting systems, the cost of quality will always be affected in a negative way. Thus, it is the cost that could have been saved only when the item or service quality was flawless. As an organization enhances quality, the good costs are incurred while reducing the cost of bad quality.

To lessen or eradicate low quality, organizations may implement performance measures to enhance poor quality. For instance, a car company should spend more time in detecting, preventing and handling defects than using the finest quality metal or leather. Taking a closer look at the four types of quality costs will be beneficial in gaining better understanding. They include the following: prevention costs, appraisal costs, internal failure costs and external failure costs.

Cost of Quality: 1. Prevention Costs

Avoiding any defect to take place is the most proven way to handle the cost of quality. This is what prevention cost is all about. Preventing issues and defects from happening is more cost effective than finding solutions once these took place. In short, prevention costs relate to all activities that are meant to trim down or eliminate defects.

Cost of Quality: 2. Appraisal Costs

All defects in the products or services must be detected in an early time frame throughout the process of production. This is where appraisal costs will enter the picture. Also known as ″inspection cost″, it is used to spot defects prior to the delivery to customers. However, performing such activities does not guarantee that defects will not take place. This leads to the fact that even the use of many inspectors cannot lead to 100 percent quality. Plus, this approach in quality cost is expensive and ineffective in that defects can be overlooked.

To resolve this, most current organizations realize the importance of quality control on the part of their employees. All employees should be accountable for quality control. This measure, along with improving the design and easy manufacturing of products, contributes to better quality control, rather than relying solely on human inspection.

Cost of Quality: 3. Internal Failure Costs

Failure costs exist every time products fall short to the specified design. Internal failure costs are generated from detecting defects prior to shipping. This type of cost may involve rejected and scrap products, fixing defective items as well as downtime brought by problems in quality. In some cases, this type of quality cost also includes review of materials, material downgrades and re-testing.

An organization with a more efficient appraisal approach has a better chance of identifying issues internally. This also means improved internal failure costs. With a better internal failure cost strategy in place, gigantic costs of external failure can be prevented.

Cost of Quality: 4. External Failure Costs

External failure cost occurs when defective items are shipped to customers. This may cover costs like product recalls, warranty repairs, product replacements, and legal issues, as well as lost profits brought about by poor reputation. These costs can be devastating to an organization’s revenues; thus, these are the costs that are acquired once the products have already been shipped.

In the pasr, managers tended to rely on warranty evaluations too much when it came to handling problems with products. Shipping items to customers without dwelling much on quality control measures resulted in great external failure costs, as well as a decline in profits and market share – and customers’ ill spirits.

Reducing Total Quality Costs and Improving Organizational Financials

The sum of the four above Cost of Quality categories account for ″total quality costs.″ Organizations might be spending as much as 20 percent on the cost of quality. But then, many state that it is possible to reduce this cost to 3 percent to 5 percent range.

A challenge for today's organizations to reduce overall quality cost. One approach to accomplish this is to improve the integration of Cost of Quality with Lean Six Sigma project selection; however, these costs are often not in plain view in an organization.

An IEE value chain, which can offer automatic predictive metrics updates, provides a means for highlighting not only COQ and COPQ costs on an on-going basis but highlighting other organizational expenses relative to CODND as well. When this is done, more significant organizational improvement opportunities can readily be identified through the nine-step IEE business-management system. The result: Lean Six Sigma and other process improvement projects are identified and executed so that there is an enhanced, direct linkage to making a positive impact on financials. This is done by reducing the magnitude of CODND predictive metrics, which can be monitored in organizational-value-chain scorecards at the 30,000-foot-level.