Game Plan Cost of Poor Quality

Introduction

Poor quality has a cost, but it is often hidden therefore requiring a framework and a common approach to be able to tackle it at the GBU and Group levels.

1. Principles and definitions

1.1. Principles

The building blocks of CoPQ at Solvay are the following : 

1. Cost of Customer Complaints - financial compensations, return logistics
2. Cost of additional freight caused by quality issues
3. Cost of Non Conforming Materials (non Right First Time) - rework, scrapping, distress sales, storage, inventory, QC cost
4. Cost of adjustments during the production process - additional QC, materials, utilities

• Cost of Supplier Quality

Not all components of CoPQ will be relevant or important for all GBUs, but this document aims to identify and define all building blocks; and to determine which ones will be mandatory (provided adequate means of calculation are available) and which ones will be optional according to GBU specificities.

1.2. Definitions

1.2.1. Scope

In terms of scope:

1. Customer Complaints : justified complaints only; any motive; for loss of sale and customer compensation, external customers only. Returned materials are handled as NC (see #3)
2. Additional freight : any freight cost incurred above the standard cost of the order caused by a quality issue and paid by Solvay (if paid by customer see #1); excluding complaints (see #1)
3. Non-Conforming Materials : finished products which do not meet sales specifications (regardless whether they can be reworked, downgraded or sold at concession); intermediates which do not meet internal specifications; raw materials made NC by Solvay; returns from customers confirmed as NC; any material declared NC by site QA/QC (eg, through contamination or unusual appearance, even if there is no specification)
4. Adjusted materials : materials which, even though exiting the production process as conform, have required one or more adjustments on top of what is specified in the SOP
5. Supplier Quality : related to any incidents for which the root cause lies entirely with the supplier (for example, failed production due to inadequate PRS is not a supplier issue)

Not all reporting is mandatory, we will differentiate the following:

• M: mandatory - reporting of these components will be mandatory provided adequate means of calculation are available
• O: optional - according to GBU specificities and priorities

1.2.2. The different types of costs

There are different types of impact that we will treat differently: 

• E: impact on EBITDA - the total of these costs represents the baseline from which we can track any improvements which will increase our EBITDA
• C: impact on Cash - this cost represents the baseline from which we can track any improvements which will decrease our cash tied up in non value added inventory
• S: soft cost - this represents man-hours whose reduction would not necessarily lead to an actual reduction in fixed costs, but would free up time for more value added tasks

1.2.3. Detailed definitions

1.2.3.1. Cost of Customer Complaint

1.2.3.2. Cost of additional freight

1.2.3.3. Cost of Non Conforming Materials

1.2.3.4. Cost of adjustments

1.2.3.5. Cost of Supplier Quality

1.3. Glossary

2. Provide guidance for calculation

2.1. How to calculate CoPQ

Work in progress.

2.2. How to Reduce CoPQ

The methods and best practices to reduce the Cost of Poor Quality are described in the Quality Playbooks. You can find the links to these Playbooks in the Useful Links section.

3. KPIs

• CoPQ is a lagging KPI which should be reported monthly (once reports are available):
• CoPQ impacting EBITDA (mandatory elements at least)
• CoPQ impacting Cash (mandatory element at least)
• CoPQ impacting man-hours (optional)
• Other related lagging KPIs are
• Conformity rate - see upcoming NC material management playbook
• Customer Complaint Rate (CCR) - see customer complaint management playbook
• Leading KPIs to reduce CoPQ should be defined at GBU level according to the main root causes.