In this fictional example, calculate COPQ by using the details included within this case study. A copy of the worksheet used for the case study can be downloaded here (this link opens a new window).
Strategically Fine Writing Instruments (SFWI) is a manufacturer of hand crafted pens located outside of Granger, Ohio. SFWI employs 20 workers, mostly in the manufacturing department.
The company was founded in 2004 by R.D. Stephens in the spare bedroom of his less than spacious apartment. SWFI began operations by purchasing pen hardware kits, then graduating to full writing instrument design in 2005. Some of their fabulous designs are shown in the photo above. The retail price for this style pen is $89.95, wholesale price of $42.25, cost to produce is $18.20; for a profit of $24.05 per pen.
In February of 2006 a major customer notified SFWI that they were returning the 4000 pens purchased during the past 3 months that were still in their stock. Their complaint was the pens were leaking in the display case.
The customer also wanted reimbursement for the cost of a new display case because the ink had stained their display area. Also, this customer had already sold 2500 pens of this style during the same 3 month period. The shipping cost to return the pens was $35.85.
SFWI pens carry a one-year warranty on part and service. Both the wholesale and final retail customers expect SFWI to live up to their warranty. SFWI agreed to pay the cost of any damages incurred by the end users if the investigation proved that SFWI was responsible.
SFWI immediately quarantined all stock for thorough re-inspection at a cost of $400. It was determined during the re-inspection that the inside “Cross-type” refills had a wall dimension within the design tolerance. The investigation also noted a design change to the same wall dimension had been implemented in October 2005.
The thinner wall was cracking during installation or shipping, causing a slow leak to occur. SFWI concluded that all refills purchased after the dimension change were to be considered suspect and replaced. The appraisal cost of the 25,000 refills in stock and 8,000 completed pens was $2500.
The registration records of individual writing instrument owners were downloaded from the database. This information was used to send recall notices to new pen owners regardless of their purchase location. Records indicated 52,952 owners registered their purchase during the November 2005 through February 2006 period.
SFWI informed their 664 other retailers of this recall. The cost to create and send these notices was $2.17 per letter, including a postage-paid envelope to return any pens. The cost of the returns from the other retailers was $14,608.00. These retailers returned an additional 40,000 pens.
Rework time per unit was measured at 5 minutes per pen. The operators performing the rework make a loaded labor rate of $15/hr, making the per unit cost of the rework $1.25. The 8000 completed pens needed to be reworked and consider the refills obsolete. Replacement refills cost SFWI $2.00 per refill.
Two pens per hour will be tested taking 15 seconds per pen (126,664 total pens @12 per hour=21,110 pens to be inspected at a cost of $0.125 per inspection). Additionally, the 25000 refills in stock will be scrapped.
SFWI needed to redesign the refills prior to conducting the rework and replacements. This new design cost $2000.00 in engineering time. But due to the urgency of the leaky pen issue, SFWI paid their supplier a $10,000 expedite fee to ensure the earliest delivery possible for the new refills.
Warranty costs for the pens returned from the retail customers The wholesale cost was calculated to be the same $1.25 for labor, $2.00 for the refill plus an average of $1.00 per pen for a total of $4.25 per unit.
SFWI also incurred a one-time inbound shipping charge of $14,643.85 as a result of the wholesale customers returning their stock. The cost to initiate the recall was $2.17 per notice sent to the 52,952 individual owners plus the 664 other retail dealers. The initial complaining customer did not ask for replacement of their display case.
The case study shows a total calculated COPQ of $603,558.57 for the leaking pen problem. When calculating COPQ it is important to identify as many of the costs associated with the issue as possible, so that both you and management gain a complete understanding of the financial impact of the cost of errors.
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