I recently walked into a renowned spectacle shop in Mumbai to get a pair of defective glasses rectified. When I informed the Salesman, I was extremely dissatisfied with the quality of the frames; the Salesman immediately concluded that the glasses were malfunctioning because of mishandling. When I pointed out that I had been wearing specs for 32 years and until now I had managed just fine, the Salesman said, “Well, it’s not possible to satisfy all our customers – some will be dissatisfied.” This distressing experience was shared with StitchWorld by Rakhi Handa, Global Head, Unisource Worldwide Quality Assurance and a veteran of this industry. She went on to explain how the Cost of Poor Quality impact the industry profitability and why it should be measured.
I recount the above episode as a perfect example of our attitude towards customer satisfaction in general, and our approach towards quality, in particular.
As a quality assurance professional in the apparel industry for the last eighteen years, I have observed this same attitude in countless manufacturing facilities across the country.
[bleft]The Cost of Quality has very appropriately been likened to an iceberg – what’s visible to a manufacturer, usually, is the direct costs which contribute to less than 20% of the total Cost of Poor Quality, while 80% of the iceberg remains under the surface, and therefore hidden.[/bleft]
While working for Polo Ralph Lauren as a QA and struggling with a factory in Chennai to create awareness about the brand’s quality standards, nothing I said made the sewing operators change this attitude of itna to chalta hai. That is, until I asked them, out of sheer frustration, if they would pay Rs. 4000 (average cost of a Polo shirt is between US $ 85 and $ 125) for a defective shirt. Understanding dawned immediately.
Convincing workers or operators in a factory is, in fact, a relatively easy task. The far greater challenge lies in creating such awareness among the middle and senior management in an organization. A large part of the problem lies in the attitude or mindset, rather than the capability of the individual or the organization. While I can name dozens of factories that are increasingly adopting industry’s best practices in the country, there are still many who continue to follow traditional methods. This is typically witnessed in how factories approach alterations and rework.
[bleft]COPQ is best described as the way to convert quality into finance. It is a symptom, not a defect, and can be as high as 25% of sales in some companies[/bleft]
I once came across a QA Manager in a factory who proudly informed me that the factory’s rejection rate was a lowly 1%. I found his remark significant because it clearly indicated an awareness of and a need to control wastage. However, considering that the company has an annual turnover of over Rs. 200 crore, the 1% rejection amounted to Rs. 2 crore in financial terms per year. This seemed quite high. To me, that was the manufacturer’s cost of lost opportunity – what he could have done with the money, had he not lost it to poor quality.
Factories tend also not to take into consideration the cost of rework or repair. Like the Exporter who ensured that every garment was checked at the end of the sewing line and defects were repaired during the 2 hours of OT allocated for the purpose each day. In the finishing unit, the defect rate was a mere 3%. This seemed like excellent process control, but was this really the best way?
On scrutinizing the level of alteration at the end of line, it was found that almost 25% of the garments came off the line with some kind of defect and required rework. The Exporter had also not evolved any kind of system of feedback to let operators know that they were making mistakes. As a result, operators kept making the same mistake again and again. The Exporter was running his factory for an extra 2 hours for each 8-hour man day – that is, he was running his factory at 125% of his calculated output capacity. With overtime rates, additional electricity costs, added machinery maintenance due to greater wear and tear, keeping the boiler running for those extra 2 hours a day, the Exporter had not even begun to calculate his hidden costs. This, in industry terms, is referred to as his Cost of Poor Quality (COPQ).
[bleft]Quality is the only way to reduce cost and improve profitability. Good quality today isn’t about improving defect finding ability; it is about reducing defects throughout the production process[/bleft]
For those companies who do not evaluate, available estimates suggest that the cost of poor quality can be as high as 25% of sales. Even more frightening, it is believed that in almost every company where COPQ is unknown, the COPQ exceeds the profit margin. In other words, an organization spends one in every four days making scrap or rejection. So, if you are a company with an annual turnover of Rs. 10 crore, you could be losing Rs. 2.5 crore a year in poor quality.
COPQ, to me, is best described as the way to convert quality into finance. It is a metric and is reported as a percentage of sales revenue. It involves quantifying the chronic waste in a process or organization, in the language of management – Money! Most important of all, COPQ is a symptom, not a defect.
Cost of Quality
The Cost of Quality (COQ) has very appropriately been likened to the tip of an iceberg – what’s visible to a manufacturer, usually, is the direct costs which contribute to less than 20% of the total COPQ, while 80% of the iceberg remains under the surface, and therefore hidden.
There are 3 important assumptions in the COQ model:
1. Each problem has a root cause
2. Defects are preventable, in other words, itna nahin chalta hai
3. Manufacturers spend less money when they invest in prevention rather than correction.
COQ consists of 4 basic elements: Appraisal Costs, Preventive Costs and the Costs of Internal and External Failure. (While appraisal costs and preventive costs are computed when calculating COQ, they do not contribute to COPQ since they not only do not contribute to poor quality but also specifically aim at reducing poor quality.
Preventive Cost: These are costs a manufacturer incurs in order to prevent defects and includes expenses associated with prevention testing. In simple terms, all activities to improve a process and reduce quality costs are included under this head. Examples of this type of cost also include training programmes for employees, cost of planning and cost of ensuring design reliability, process design, Industry Engineering (IE) and technical support.
Appraisal Cost: Costs associated with inspection to identify defects that occur during product development and production, as well as errors in a manufacturer’s quality system for example, the cost of inspection of raw material, of parts, in-production process, cost of test equipment and the cost of periodic measurement system analysis, if any. Included also, are expenditures incurred for the review of quality records and internal audits, and the review and inspection of manufacturing processes. As a manufacturer experiences more defects, these costs typically increase.
Internal Failure: This is the cost incurred when there is an inspection failure during the manufacturing process or during final inspection in the factory. It is the cost of addressing those defects. This includes rework and repair (of raw material, parts or finished product, retesting (if required), supplier returns (i.e., defective raw material returned to suppliers.)
External Failure: Costs associated with addressing defects for products that have left the manufacturers control, such as those found by customers or end-users. Obviously, any manufacturer would view this type of failure with far greater seriousness for not only does it mean poor quality, but implies customer dissatisfaction, customer returns and in extreme cases, loss of business. This category also includes the cost of addressing customer complaints. For example, for a buyer or a brand, this would entail the cost of having a customer service desk to address complaints and returns. The cost of this type of failure is probably the most intangible and hence, the most difficult to calculate.
Most manufacturers tend to view the cost of poor quality in its most immediate and visible form – rejected garments. The QA Manager who believes he has his process well under control when he talks of a rejection rate of less than 1%, is a case in point.
Here is another example: A factory has 5 check points between completion of sewing and final shipment. They are: end line checking; 100% checking before pressing; checking done by pressing operators for stains and other surface defects; final checking after pressing; and 100% Quality Control (QC) audit before packing. The factory management is convinced they are doing a thorough job of ensuring good quality to their end customer. The result? Low productivity, late shipment, a thoroughly dissatisfied customer and an unhappy manufacturer who constantly worries about his shrinking profit margins.
In order to achieve the quality the customer wants, and in order to make a profit, it is imperative that quality comes out right first time. It is also the only way to reduce cost and improve profitability. Good quality today isn’t about improving defect finding ability; it’s about reducing defects throughout the production process. But, this can only be done successfully if it is practised during production. Once production is completed, very little corrective measures are possible and the manufacturer is left with no choice but to reject defective product.
And what happens when a buyer QC rejects a final inspection at the factory? Does it really add that much to an organization’s cost? Here is an example:
A shipment of 419 skirts failed final audit by the buyer QA for run off stitches at the waistband. The factory set 12 QC’s to recheck the garments, 2 operators to alter and another 4 people to refold and repack. The total time taken was 2 hours and the shipment went out on schedule. However, 18 people spent 2 hours each to recheck this shipment – that’s a total of 36 man hours or 4.5 working days for one person. If the average salary of these 18 workers to be Rs. 5,000 p.m., it means that the COPQ for the rework on this shipment amounts to Rs. 750. Sounds small? This works out to an added expense of Rs. 1.79 per garment or USD 0.04 per garment. And if you’re an Exporter who ships 10 lakh garments a year and rework 50% of your goods at some stage or other, your COPQ would be at least US $ 20,000 per year. (Add this to the Rs. 2 crore per year that is the value of your 1% rejection and suddenly the figure starts to add up).
What if this rechecking causes some other shipment for the same or perhaps some other customer to be delayed? Put a financial value to that loss too?
And when a shipment is delayed due to failure and the customer switches the mode of shipment from collect to air prepaid, or when a customer demands a discount due to delayed shipment – is that included into your cost?
Most important of all, can you even begin to compute a financial value to the loss your company sustains in terms of loss of reputation in the eyes of your customer for poor performance – because of shipping late or short shipping due to poor quality? And let us be quite clear here. While you have shipped an order which meets your customer’s requirements, you have quite literally done it at a cost.
So how does one go about calculating COPQ? After all, if COPQ is a symptom, it is important to understand the extent of the problem before one can even start to fix it.
Organizations that are process driven usually calculate COPQ simply as the sum of all non-value added (NAV) activities divided by the total revenue of the organization. This provides a percentage of revenue lost or COPQ.
% revenue lost due to waste/COPQ = ————————————–
This method begins with the “Process Flow” of each department (usually those created for ISO 9001 are a sufficient starting point), and then identify all NVA activities, to which a financial cost is then computed.
Identifying the “hidden factory” or added processes which are NOT included in the official process flow is important. Processes that are not closely monitored, end up having steps added (usually by some well-meaning supervisor), unknown to management, hence the term “hidden factories”.
Another way to calculate COPQ is to compute the cost of waste through the “Toyota Production System” of the seven basic elements – as a financial quantification of the waste potential in your business.
These seven types of waste include waste of process, overproduction, transportation, motion, waiting, inventory and rework. However, this method of calculation can be tricky as identifying all categories of waste takes an in-depth knowledge of lean principles, skill and experience.
A less complicated approach for organizations that are out to calculate COPQ for the first time, would be to use the 2 categories of costs associated with COQ – Internal and External Failure costs and then to establish a financial cost to each of these. In this method it is important to calculate costs under 2 heads:
1. Cost of labour
2. Cost of material required
Generally, COPQ should be calculated annualized.
The process flow below is a simplistic overview of how COPQ can be calculated.
The most crucial point to keep in mind is that the calculation of COPQ can be customized to an organization’s specific requirements. So, you can identify and decide which specific activities you want to include when calculating COPQ for your organization. Not only that, you can also decide how to calculate the financial or cost impact of each corrective action. At the end of the day, COPQ is a metric which will help the organization monitor its improvements over a period of time.
A word of caution, however, is that even though you might be able to at last quantify your cost of poor quality, it is necessary to understand that it still does not represent all of the costs that an organization incurs from external and internal defects. It does not take into account opportunity costs such as wasted factory space, wasted labour, poor customer reputation and, not least of all, customer dissatisfaction. At best, you could quantify opportunity costs by identifying what alternative use the wasted resource might have been put to, had it been available.
The point is, until an organization does not make an attempt to calculate its COPQ, management will never know to what extent a problem actually occurs. And this brings me back to the subject of rework. Most garment manufacturing companies still focus on detecting defects and then reworking or altering those defects – focusing on the symptom, rather than the root cause of the problem, as it were.
We would probably do well to learn a thing or two from the Japanese concept of manufacturing – a process where the Quality Assurance department is non-existent for the simple reason that production is responsible for the quality they produce. The role of production in these factories is not merely to produce, but it is to produce a defect-free product in the shortest possible time. A concept of self-check, probably.
In an environment of economic recession where buyers are increasingly squeezing manufacturers for every last rupee, it is imperative for industry to enforce defect-free production. Higher efficiencies, faster production with minimal rework is the way forward for continued success and high profits. Strange as this might sound, it actually implies making a better product at a lesser cost.
And to achieve this, the way ahead is really very simple – on the one hand, to create awareness among the operators, who actually sew these garments, like the operators in Chennai who clearly understood the value expected out of a Rs. 4000 shirt. In the frenzy to meet deliveries and ship out goods on time, in 9 cases out of 10, we forget to close the loop by creating awareness amongst those very people who are actually managing the product – the middle-level executors.
I can site the example of a factory in Noida, Delhi NCR, where the very enterprising finishing manager put up large and attractive posters of the American brand they were manufacturing, all over the factory. Even more shrewdly, he put up posters of those styles which had been manufactured in that very production facility. This successfully created a huge sense of pride among the workers and a far
greater understanding of the product they were handling.
The net result – A great quality garment that has been stitched right – the very first time.
No more facing Chalta Hai – kind attitude!
Over and above all else, Management’s support is imperative. No change could ever be effectively brought without the unwavering support, understanding and awareness from the top. The process of transforming a traditional sector into its modernized counterpart will be successful only when the manufacturers and exporters first understand the significance of and then begin to calculate implications to drive these changes from within and above.