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COPQ Formula – Determining lost revenue

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  • #34635

    walden
    Participant

    Hello,
    My Green Belt project is to improve our unit forecast accuracy X%.  I am trying to determine how much additional revenue can be generated if the accuracy is 15%, 25%, etc.   Forecast accuracy equals how close we are to predicting a customer’s purchase order quantity.  Has anyone ever done this type of project or has an knowledge as to how I can set up my COPQ to gauge how an increase in forecast accuracy will  increase revenue?  15% accuracy = $100k, 25% accuracy = $175k, etc????  Please help!!!!  Thank you all.
     

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    #95721

    Schuette
    Participant

    Chris,
    Because you are launching a project, you must have some measures. So, what does it cost you to under-estimate a purchase quantity? You may lose the order (data – how many orders lost, value of those orders, amount underestimated that lost the order, etc).  You may have to run overtime to fill the order, or airship the balance, or fill from another order and pay a late charge, etc.  These would be expense reductions, not revenue, but still project saves.
    Now, what does it cost to over-estimate?  You have inventory carrying costs, possible scrap costs if you can’t sell the overproduction, damage costs while in storage, etc.  These are all expense reductions, not revenue.
    Just figure out what your results from inaccurate forecasts are, and your finance department should be able to tell you in a second where it shows up on the balance sheet. 

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    #95722

    walden
    Participant

    Jim,
    Thanks for the quick reply and the very useful information.  I am in the define phase of my project as we speak.  I need to come up with a COPQ formula that reflects all of these factors.  Do you have any idea as to how I can set this up in the most logical way?  I’m very confused on this part.  Thanks again for your help!
     

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    #95723

    Schuette
    Participant

    Do you have a team?  Who is on your team?  You need someone from every area affected by inaccurate estimates of cutomer order estimates.  Add the most obvious members to your team, and brainstorm the affect on your business of inaccurate forecasts.  Those first team members will think of who is missing on the team – bring them in too.  Add to the list of what happens when you have an inaccurate estimate.  Now you have the list of what happens, now ask your Finance partner on your team to help you estimate the cost of each of those things that happen.  Scrap, inventory, lost orders, air shipping – add them up – there is your potential cost of poor quality.
    After you do that, you have to estimate how much of that your project scope will tackle – that will give you your project savings estimate.  Are you going to reduce variation, and still have over and under estimates?  Are you going to make sure you only under or only over-estimate, because one is much worse than the other?  These are questions for the process owner.
    What you need to do is engage your team – they must help you come up with the answer.

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    #111702

    Peter Hladun
    Participant

    Just doing a follow up to see how your project got underway. I am just starting the design phase on my COPQ project. Any information you can send me would be helpful.
    Sincerely,
    Peter Hladun

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    #113489

    Whitehurst
    Participant

    Hi Chris, I’m also following up to see how your project got underway.  Were you able to apply Jim’s suggestions to your project?  How did it go?
    Regards,
    Joe

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    #118583

    Puneet
    Participant

    Dear Chris
    I think you have already got a lot of inputs on how to determine cost of poor quality(COPQ). like excess inventory, cost of urgent shipments, lost customers due to unfulfilled orders etc.
    Clearly your Y is forecast accuracy. You need to focus strongly on various Xs ie where these forecasts are coming from, regions, sales people, business units. Then you need to analyse which ones are most accurate and which ones are least. Try to pick up the worst few and see if those attribute to a large chunk of revenue loss. Well if that turns out to be the case you know what area to fix first. Else do the same exercise with other forecasting channels and see where is the accuracy the least. I assume 80 % of damage must be happening from a few places (Pareto Principle)
    See if this approach works
    Best Wishes
    Puneet

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