Cost of Poor Quality (COPQ) is what not having your house in order costs your organization. There are 3 ways to categorize this waste:
- Prevention costs – incurred on prevention activities.
- Appraisal costs – incurred by testing, measuring, and auditing.
- Failure costs
- Internal failure – prior to delivery of the product or service
- External failure – after delivery.
Example of Cost of Poor Quality (COPQ)
Quality assurance is everything for an organization. By incorporating Six Sigma and other Lean tools, this allows companies to decrease waste (Raw materials, Logistics costs, and unnecessary man hrs) which increases their bottom line.
Let’s say you are running a DMAIC project. In the define phase, you want to quantify the cost of poor quality. You start by defining what a defect is, then measuring how many defects per million opportunities your process has. (You would use this same material to create your baseline sigma in the measure phase, next.)
Ex. Imagine producing TVs and for every 1M produced 2% were damaged… That’s 20,000 TVs. If those damages were not salvageable, and it cost $100 to produce each unit, then it cost your company 20k *$100 = $2 Million
But that’s not all. How many people would you have to staff to answer 20,000 calls, returns, inventory management etc.? Let’s say that figure is an additional $10 per unit. At 20k units, that is $200k. The total cost to the company would be $2.2 Million!
Why Pursue a Six Sigma Level of Quality / Excellence?
Let’s use the same example. At a Six Sigma level you would only produce 3.4 defects per million opportunities. In the previous example the process was making 20,000 defects per million. Moving to a six sigma level of quality would mean 19,996.6 less defects per million units made! That’s a savings of $2.2M – (3.4 * $110) = $2.2M – $374 … so, nearly $2.2 Million!
Example: Z Scores and Dollar Figures
Sometimes you have a process that is already in control and you want to see if it’s worthwhile to move to a higher level of quality.
The process is the same as above, but you would turning your Z Score or yield % in a dollar amount. First, get the proportion of defectives from your Z score or yield % then calculate the cost per unit of those defectives then you’ll get the appropriate $.
The best in any field figured out how to avoid errors very early on. We should, too, if we want to engineer a great process.
For example, Simon Ramo notes that among the very best tennis players, to win you need good winning shots; to be a good average player, you need to merely lower your failure rate. In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: beginners should focus on avoiding mistakes, experts on making great moves. – Erik Falkenstein, Author The Missing Risk Premium
“The most important thing to do if you find yourself in a hole is to stop digging.”
Economic Considerations of Quality
Cost of Poor Quality (COPQ) Videos
Ironically, this video has poor sound quality, but the content is good.
Videos on the Economic Considerations of Quality
Cost of Poor Quality (COPQ) Books
Quality is Free
Like every other human domain, we need to identify what the problem is before we can fix it. And that doesn’t always happen in business.
“The first erroneous assumption is that quality means goodness, or luxury, so shininess, or weight. We must define quality as conformance to requirements if we are to manage it. The second erroneous assumption is that quality is an intangible and therefore not measurable. In fact, quality is precisely measurable by the oldest and most respected of measurements – cold hard cash. It is much less expensive to prevent errors than to rework, scrap or service them.” – Quality is Free
The book has a quality improvement program that can be installed in any service or manufacturing company.
Business @ Speed of Thought
I list this here because Bill Gates’ Business @ the Speed of Thought is influenced by Crosby’s Quality is Free work. It may resonate a little better with modern audiences as the case studies are newer – despite being 16 years old in 2015. But you can see the the basic concepts of Quality is Free represented here.
- There is no reason for having errors or defects in any product or service.
- Businesses are slow to change because we reject newness.
- How you come across to others should not be left to chance. Quality products and services is something you can control.
- It is much less expensive to prevent errors than to have rework.
Six Sigma Black Belt Certification Cost of Poor Quality Questions:
Question: Which of the following best describes internal failure costs? (Taken from ASQ sample Black Belt exam.)
(A) The economic costs associated with a catastrophic failure of an internal subsystem.
(B) The unavoidable quality system costs associated with the production of any product or service.
(C) The opposite of external failure costs.
(D) The costs resulting from a nonconformance detected before a product or service is provided.
Question: Which of the following will have the most influence on consumers’ perception of quality?
(A) Industry standards
(B) Company financial performance
(C) Audit results
(D) Service and repair policies