Cost of Poor Quality (COPQ)

Cost of Poor Quality (COPQ) is the cost associated with producing poor-quality products or services for the customer. In other words, it is the total financial losses incurred by the company due to errors and subpar work. For example, scrap, rework, repair, and warranty failure all add to the cost of poor quality.

Cost of Quality is a methodology used in the organization to measure the resources used for good quality. In other words, it is the cost of making quality products or services.

Cost of Quality combines the cost of good quality and the cost of poor quality.

Why Cost of Poor Quality (COPQ) Matters

• It tells how profit is affected by the quality.
• Speaks management’s language.
• Helps to prioritize improvement actions
• Optimize the resources and also help identify waste in the system.
• Improves continuous improvement culture

Categories of Cost of Quality

The cost of quality can be divided into four categories: prevention cost, appraisal cost, internal failure cost, and external failure cost.

Preventive Cost– Preventive costs are the costs of activities that are specially designed to prevent poor quality of products or services. In other words, these efforts ensure that failures never happen in the first place.

• Quality planning
• Contract review
• Trainings
• Quality system audits
• Supplier evaluation
• Market research
• Process capability studies

Appraisal costs: Appraisal costs are the costs of checking products or services to find defects. In other words, appraisal costs are related to testing, measuring, inspecting, and auditing. The appraisal cost focuses on the discovery of defects rather than the prevention of defects.

• Incoming goods inspection
• In-process inspection
• Supplier inspection
• Laboratory testing
• Final goods inspection
• Calibration
• Product and process audits

Inspections and audits: prevention or appraisal? Ask what the activity looks at. If it checks a product, or the output of a process, to find defects that already exist, it is appraisal. Inspections, tests and product or process audits all fall here. If it checks the quality system itself so defects are not made in the first place, it is prevention. An audit of the quality planning system is one example. When an exam question lists inspection or audit with no other context, treat it as appraisal.

Internal failure: Internal failure costs result from the finding of defects prior to delivery of the product or service to the customers. In addition, these are the costs due to the failure of a product to achieve the required quality standards.

• Rework
• Repair
• Internal scrap
• Re-testing
• Efforts spent on failure analysis
• Raw material rejects
• In-process rejects

External failure: External failure costs arise from the rejection of the product or services by the customers after delivery. In other words, these are the costs when a product or service fails to meet the required quality standards and is detected after it reaches the customer.

• Warranty claims
• Customer visits
• Penalties
• Replacements
• Investigations
• Loss of goodwill

When to use Cost of Poor Quality (COPQ)

Organizations use COPQ to understand the opportunities to improve quality by reducing internal and external failure costs. They do this by spending more on preventing problems than fixing them.

Steps in implementing Cost of Poor Quality (COPQ)

• Define the organization’s quality goals and objectives
• Estimate the current capabilities of machines, systems, and processes
• Collect data for prevention cost, appraisal cost, internal failure cost, and external failure cost.
• Validate the quality cost data with finance
• Pareto the quality costs and adopt an action-first mindset
• Implement corrective actions such as automating the quality audits, streamlining the inspection process, implementing Poka-Yoke, etc.
• Compare the quality costs before and after you have implemented the above steps. Check out the figure shown below for an example.
• Finally, present the new quality cost model to top management.

Example of Cost of Poor Quality (COPQ)

Quality assurance is everything for an organization. Incorporating Six Sigma and other Lean tools allows companies to reduce 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, you measure 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).

Example: 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 costs your company 20k *$100  = $2 Million.

But that’s not all. How many people would you need to hire for re-inspection, warranty repair, supplier evaluation, etc.? Here you go for the breakup of the costs. Below is the split-up of various costs (Just as an example).

Total material cost is $100 per unit, and an additional $10 per unit is spent on quality costs. At 20k units, that is $200k. The total cost to the company would be $2.2 Million!

Cost of Poor Quality Template

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 fewer defects per million units made! That’s a savings of $2.2M – (3.4 * $110) = $2.2M – $374 … nearly $2.2 Million!

Avoid Errors

The best in any field figured out how to avoid errors early. We should, too, if we want to engineer a great process.

Some links on this page are affiliate links. If you buy through one, I may earn a small commission. It costs you nothing extra. As an Amazon Associate I earn from qualifying purchases.

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.”

Warren Buffett

Disadvantages of Cost of Poor Quality (COPQ)

• Financial loss
• Schedule delay
• Need more controls and checks
• Unnecessary spent on resources
• Leads to associates de-motivation
• Reputation at stake
• Competitors take advantage

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 better with modern audiences as the case studies are (slightly)newer. But you can see the basic concepts of Quality are Free represented here.

• There is no reason for any product or service to have errors or defects.
• 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 are 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.

Answer:

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

Answer:

When you’re ready, there are a few ways I can help:

First, join 12,000+ other Six Sigma professionals by subscribing to my email newsletter. A short read every Monday to start your work week off correctly. Always free.

* * *

If you’re looking to pass your Six Sigma Green Belt or Black Belt exams, I’d recommend starting with my affordable study guide:

1)→ 🟢Pass Your Six Sigma Green Belt: a study guide organized by the exam Body of Knowledge, 1,000+ practice questions with detailed answer explanations, and 15+ full-length mock exams

2)→ ⚫Pass Your Six Sigma Black Belt: the full Black Belt Body of Knowledge, 2,000+ practice questions with detailed answer explanations, and 15+ full-length mock exams

You’ve spent so much effort learning Lean Six Sigma. Why leave passing your certification exam up to chance? This comprehensive study guide offers 1,000+ exam-like questions for Green Belts (2,000+ for Black Belts) with full answer walkthroughs, access to instructors, detailed study material, and more.

​ Thousands have used this system to prepare. Join them here.