COQ

Boman Moradian
(compiled by Ms. Shalini Sadhwani)
MMS student at JBIMS


Cost of quality = Price of nonconformance and price of conformance.

COQ = PONC + POC

PONC = All those costs incurred because things were not done
right the first time.

POC = Those costs incurred to ensure that things are done
right the first time.



THE COST OF QUALITY (COQ) SYSTEM

Origin

The system probably originated in the 1940s in Western Electric and was used as an attempt
to measure the efficiency of work processes in financial terms. The system has been around
for some 40 odd years but has not been successfully implemented by many organisations.

In any company, the total operating costs can be broken down into:
- PONC
- POC
- Error-free costs

Error-free costs include all expenses incurred for operating processes as they were designed,
assuming no planned waste; rework or non-conformance was part of the design. Expenses
the word include those for materials, labour, equipment, plant, officer energy, etc.

The cost of quality typically runs at 10 to 30% of sales in manufacturing companies and 20 to
50% of operating costs in service companies.


The cost of quality is not an accounting system

The cost of quality is a communications tool and should not be viewed as a classical
accounting system. An analogy may help to make this clear. You are walking down the street
and, unprovoked; a maniac fires a shotgun at you. You fall to the ground, alive, but seriously
wounded and bleeding from numerous perforations. The accountants and quality specialists
would try to devise a system of counting precisely the number of red blood corpuscles that
you are loosing. The cost of quality specialist (doctor) simply wishes to know roughly but with
some accuracy and consistency, where the worst leaks are so that he can plug them fast. In
the first instance the patient would die before the system was perfected (if it ever was). In the
second, remedial action could be taken and the patient would survive and hopefully thrive.


Why do we need a cost of quality system ?

As discussed earlier, the only subject that sustains managements attention for any l;ength of
time is money. It is the yardstick by which company and executive performance is judged and
is the basic language of business. The purpose of Cost of Quality is therefore to :

Gain Managements attention A Cost of Quality of 25% of sales gets managements
attention.

Sustain managements attention Seeing the Cost of Quality drop from 27% of sales to
19% in 18 months keeps them interested.

Direct Corrective Action The system highlights where the company is hemorrhaging
money and shows where corrective actions should be focused.

Justify Corrective Action - The payback for both major and minor corrective actions can
be assessed and the action (with any attendant expenditures) can be justified.

Measure improvement - Many quests for improvement, quality or excellence are
frustrated because there is no way to measure improvement.



COST OF QUALITY


(A) LEGAL DEPARTMENT :
Price of conformance :
1. Seminars on prevention of product liability claims.
2. Label copy evaluation.
3. Advertisement copy review.
4. Safety programme audit.
5. Checking paperwork for errors.
6. Compliance audit on environmental laws.
7. Review of state submissions (new products, patents, etc.).

Price of non-conformance :
1. Product liability matters (travel, litigation, outside forms, time).
2. Warrantry reviews.
3. Penalties for late filing.
4. Product complaint reviews (internal and with regulatory agency).
5. Product recalls.
6. Defense of patent infringement suit.
7. Representing grievances.
8. Internal department rework (re-write, retype, etc.).
9. Seminars on defending product liability suits.
10. Settlements.

(B) MANUFACTURING :

Price of conformance :
1. Training
2. Special review
3. Tool / equipment control
4. Preventive maintenance
5. Identification of incorrect specifications drawings
6. Housekeeping
7. Controlled overtime
8. Checking labout
9. Trend charting
10. Customer source inspection
11. First piece inspection
12. Stock audits
13. Certification

Price of non-conformance :
1. Rework
2. Scrap
3. Repair and return expenses
4. Obsolescence
5. Equipment / facility damage
6. Equipment / material repair
7. Controllable absence expenses
8. Supervision of manufacturing failure element
9. Discipline costs
10. Lost time accidents
11. Product liability
12. Low productivity

( C ) HUMAN RESOURCES :

Price of conformance :
1. Pre-screening applications
2. Interviewing
3. Personnel testing
4. Reference checking
5. Security clearance, if necessary
6. Orientation
7. Training
8. Job description and work plans
9. Safety programme
10. Quality Improvement Process
11. Exit interviews
12. Performance appraisal
13. Attendance tracking
14. Personnel records audits
15. Employee development
16. Salary administration programmes

Price of non-conformance :
1. High turnover rates
2. Grievances
3. Untimely filling of position
4. Cost of injuries
5. Legal costs
6. Sick pay

(D) QUALITY CONTROL :

Price of conformance :
1. Quality training
2. Test planning
3. Inspection planning
4. Audit planning
5. Product design review
6. Vendor qualification
7. Predictability / quality analysis review
8. Process capability studies
9. Machine capability studies
10. Calibration of quality equipment
11. Operator certification
12. Incoming inspection
13. In-process inspection
14. Final product inspection
15. Product test
16. Product audits
17. Test equipment
18. Checking gauges, fixtures, etc.
19. Prototype inspection
20. Quality system audits
21. Customer / agency audits
22. Outside lab evaluations
23. Life testing

Price of non-conformance :
1. Scrap analysis
2. Rework analysis
3. Warrantry cost analysis
4. Concessions analysis
5. Factory returns analysis

(E) PURCHASING :

Price of conformance :
1. Vendor review and approval
2. Sending proper specs to vendor making it clear what is required.
3. Periodic seminars.
4. Forecasting cost of carrying hard-to-get materials.
5. Material cost resulting from multiple sourcing
6. Evaluation of vendors equipment that will be used to do the job.
7. Reviewing of vendors incoming quality practices.
8. Recertification of vendors.
9. Incoming inspection cost.
10. Information systems cost associated with vendor rating.

Price of non-conformance :
1. Scrap
2. Sorting
3. Reinspection due to rejects
4. Rework
5. Excess inventory due to lack of confidence in vendor delivery.
6. Loss incurred as a result of vendor delinquencies
7. Corrective action cost
8. Shipping cost on returns to vendor
9. Purchase order rewrite
10. Purchase order changes resulting from error
11. Premium freight
12. Trips to suppliers to resolve problems
13. Expediting cost to assure proper deliveries (i.e. Phone bill).

(F) SALES & MARKETING :

Price of conformance :
1. Procedures
2. Training
3. Forms design
4. Sales support material
5. Design specifications
6. Competitive analysis
7. Market forecast
8. Legal and product safety review
9. User market research
10. Sales support cost
11. Customer survey
12. Service cost by area / advertising
13. Pilot and field test
14. Incentive programme
15. Market survey

Price of non-conformance :
1. Labour of re-dos / administration
2. Incorrect order entry
3. Accounts receivable
4. Special instruction
5. Excessive field service
6. Warranty
7. Literature reprint
8. Contingent liability
9. Unit productivity
10. Trial and error
11. Product recall
12. Firm orders not executed

(G) ACCOUNTS DEPARTMENT :

Price of conformance :
1. Forecasting performance
2. Training and procedures
3. Ledger review of profits and losses and balance sheet
4. Budget generation
5. Long-range planning
6. Job descriptions
7. Cost of Quality budget
8. Capital expenditure reviews
9. Total expenditure reviews and delegation of authority
10. Product cost standards
11. Cost reduction
12. Cost of Quality reviews
13. Data processing report / financial report reviews
14. Ledger reviews

Price of non-conformance :
1. Billing errors
2. Inventory out of control
3. Improper accounts payable vendor payments
4. Incorrect accounting entries
5. Bad debts turnovers, overdue accounts receivable
6. Payroll errors

(H) INFORMATION SERVICE DEPARTMENT :

Price of conformance :
1. Software planning
2. Software reliability projection / prediction
3. System analyst interrogating activities
4. Documentation review
5. Learn / understand customer requirements / business
6. Preparation and review of system specifications
7. Flowchart review
8. Correlation analysis
9. Keypunch operator training
10. Tape duplication and verification
11. Programme testing
12. Performance test
13. Code verification
14. Depreciation of software (outdated)
15. System test
16. Inspect programmes
17. Cost benefit analysis
18. Risk analysis of project
19. Proper communication of user / requirements between user and information systems
20. Verification of input data
21. Test techniques
22. Pilots
23. Parallel runs
24. Post implementation audit
Price on non-conformance :
1. Keeping track of system failures
2. Going back to customer to re-evaluate
3. Customer change requirement
4. Recode, debug, retest
5. Documentation changes
6. Reruns
7. Corrective maintenances
8. Systems dont meet user requirements redo
9. Scheduling failures
10. Order entry errors
11. Debugging time

(I) ENGINEERING :

Price of conformance :
1. Design specification reviews
2. Drawing checks
3. Supplier evaluation
4. Preventive maintenance
5. Process capability studies
6. Fabrication of special test fixtures
7. Verify workmanship standards
8. Review of test specifications
9. Pilot production runs
10. Packaging qualification
11. Customer interface
12. Safety review / operator safety
13. Technical manuals
14. Pre-production reviews
15. Defect prevention programme
16. Schedule reviews
17. Process reviews
18. First piece approval
19. Agency approval
20. Vendor qualification
21. Education
22. Prototype inspection and test
23. Testing
24. Receiving sample testing
25. In-process sample testing
26. Final sample testing
27. Laboratory analysis and test
28. Fault insertion test
29. Engineering audits
30. Training for special testing
31. Personnel appraisal

Price of non-conformance :
1. Warranty expense
2. Engineering travel and time on problems
3. Engineering Change Notices
4. Redesign
5. Premium freight costs
6. Material review activities
7. Failure analysis (return evaluation)
8. Corrective action
9. Failure report
10. Return goods analysis
11. Product liability (design related)
12. Explanation time.