Cost of Poor Quality (COPQ) is the cost associated with providing poor quality products or services to the customer. In other words, it is the total financial losses incurred by the company due to performing incorrect things. For example, scrap, rework, repair, warranty failure.
Cost of Quality is a methodology used in the organization to measure the amount of resources being used for the cost of good quality. In other words, it is the cost of achieving quality products or services.
Cost of quality is the combination of cost of good quality and cost of poor quality.
Why Cost of Poor Quality (COPQ)
- COPQ tells how profit is affected by the quality
- It speaks the language of management
- Helps to prioritize improvement actions
- Optimize the resources and also helps in identify wastes in the system
- Improves continuous improvement culture
Categories of Cost of Quality
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 the activities specially designed to prevent poor quality of products or services. In other words, efforts are related to preventing failures.
- Quality planning
- Contract review
- Quality audits
- Supplier evaluation
- Market research
- Process capability studies
Appraisal costs – Appraisal costs are the costs incurred due to those activities which are performed to detect the poor quality of product or services. In other words, appraisal costs are related to testing, measuring, 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
Internal failure – Internal failure costs result from the identification 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 required quality standards.
- Internal scrap
- Efforts spent on failure analysis
- Raw material rejection
- In-process rejection
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
- Loss of goodwill
When to use Cost of Poor Quality (COPQ)
Organizations use COPQ to understand the opportunities to improve the quality by reducing internal and external failure costs. Basically, by increasing the expenditure on prevention.
Steps in implementing Cost of Poor Quality (COPQ)
- Define the organization 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 prioritize the actions
- Implement the corrective actions such as automate the quality audits, streamline the inspection process, implement Poka-Yoke etc.,
- Compare the quality costs before and after process improvement (as shown below)
- Finally, present the quality cost improvements to top management.
Example of Cost of Poor Quality (COPQ)
Quality assurance is everything for an organization. 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.)
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 cost your company 20k *$100 = $2 Million
But that’s not all. How many people would you work on re-inspection, warranty repair, supplier evaluation etc.? Here you go for the breakup of the costs. Below are the split-up of various costs (Just as an example).
Total material cost is $100 unit and an additional $10 per unit 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 less defects per million units made! That’s a savings of $2.2M – (3.4 * $110) = $2.2M – $374 … so, nearly $2.2 Million!
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.”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 a little better with modern audiences as the case studies are newer – despite being 16 years old in 2015. But you can see 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