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
- Quality audits
- Supplier evaluation
- Market research
- Process capability studies
Appraisal costs–Appraisal costs are incurred when the company pays a consultant or expert to find the causes of the poor quality of the product or service. 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 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.
- Internal scrap
- 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
- 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
D: Service and repair policies. Customers will never be exposed to internal audit results. We can eliminate C off the bat. Unfortunately, plenty of companies are out there performing well financially with poor quality items or services (until a disruptor with great quality comes along!) Very few customers will be familiar with industry standards or privy to how a company measures against them. However, if a customer sees a strong and robust service policy and a company standing behind its product, then they know the company values quality.
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