Cost of Poor Quality (COPQ)

Cost of Poor Quality is a measure which identifies poor quality in terms of monetary value. It is always measured in money, regardless of the underlying currency.

The organization can monitor and track COPQ in a standard way across the organization. Benchmarking COPQ values within a department against market leaders or competitive ones helps it to gauge its performance and determine the best target. The COPQ values can be broken down and analyzed in depth to give an indication of the areas where there are problems.

There are many software and ERP packages that can be used to combine inputs to CoPQ calculation using linked processes. They can also calculate and publish CoPQ, and then integrate it with business results. This way it is easy and straightforward to measure and utilize CoPQ effectively.

How is COPQ calculated?

Technically, it is the cost incurred by the function as a result of producing defective products. It could be that the defect was identified internally or externally by the customer.

Therefore:

Poor Quality = External Failure Cost and Internal Failure Cost

Let’s look at these terminologies in detail.

Internal failure cost can be a cost that is incurred due to rework, additional material procurement, over-time costs for employees to maintain delivery schedules, scrap cost, and so forth. The business type will determine which components are required.

External Failure Costs include warranty and penalty costs as well as replacement and product recall costs. They also cover transportation of stock returns and exchange goods and sales lost due stock shortages.

An intangible loss, or the loss of customer reputation and loss of market share and loyalty is even more important. Many organizations are now recognizing the relationship between Customer retention rate and CoPQ.

Phil Crosby’s book, “Quality is free”

Before we can discuss the Cost of Quality (COQ), or even the COPQ, it is important to understand the history of the term. Phil Crosby was one of the pioneers in quality and called his book “Quality is Free”. He once said, “Do things right the first time and you won’t have to pay to fix or redo them.”

Crosby discovered that quality-related costs can be as high at 20 percent of turnover for many organizations, while some creep up to 40 percent of total expenses. Crosby estimates that the COPQ within a successful company is between 10 and 15 percent. This is how the concepts of COQ/COPQ were formed.

COQ vs COPQ – What is the difference?

The basic concept of quality is to provide a product or service that meets customer needs. As can be seen, COQ and COPQ can both be further broken down as they each consist of two elements.

Quality at a lower price

  • Appraisal – Any activity that involves the inspection of a product or service is included in this category. 
  • Prevention Cost – This is the cost to prevent a problem from happening. This category includes costs such as employee training, competency management and machine maintenance. Certification costs can also be included.

Low Quality at a High Cost

  • External Failure This is the most serious failure. This refers to the failure of a product/service at the point of delivery or use by the customer/user. This is due to two factors. The product has been added to its full value by the producer, which includes transportation costs and storage.
  • Internal Failure These are the costs associated with recognizing that a defect exists before the product reaches the customer. This category includes scrap due to cosmetic damages, scratches, and other costs. Then there are rework expenses.

Second, the reputation is damaged. The customer was the one to suffer the loss. Depending on the severity, it could cause severe damage to the reputation of the organization and possibly prevent future business. This can be especially damaging if the product is used in safety-critical applications like pharmaceutical, aerospace, medical, automotive, and medical. 

The 1-10-100 Rule

The 1-10-100 rule, a quality management model that quantifies the hidden costs of poor product quality, is used. This conceptualization model is used to give an idea of how much cost will rise as quality problems arise throughout the product’s lifecycle. The illustration below shows that a unit of prevention can save 10 units on corrective measures and 100 units on failures costs. The failure costs increase as the product moves through the various events, from design to dispatch.

COPQ 1

Quality Costs

Below is the graph detailing Total Cost of Quality. This is a financial model of costs that are incurred to maintain and operate quality in a company.  This model includes all activities that a company might perform to provide quality products and services to customers. It compares the rising costs of proactive quality management to the declining costs associated with improving the quality.

COPQ 2

The economic conformance point is the lowest point on the curve (the “Sweet Spot”). This is the lowest price for quality a company can afford without causing a defect. The goal is to find a balance between costs for preventing problems from happening and costs for dealing with them once they do happen.

Prevention

It is a good idea to think of prevention as a positive thing. It should be viewed as an investment in high quality, rather than a cost of low quality. It is, however, a cost because we spend money on prevention. Preventive costs are actions that prevent poor quality. It’s a well-known saying that an ounce prevention is worth a thousand cures. This is how quality works.

You cannot design quality from the start. If this happens, you’ll have to check quality at the end and deal with any external or internal failure costs. Quality managers should be focusing on prevention. Quality managers tend to focus on prevention rather than correction.

COPQ 3

Prevention cost examples include:

  • LEAN error proofing
  • Plans for quality control
  • Supplier evaluations
  • Capability studies
  • Work instructions, policies, and procedures
  • New product reviews
  • Education, training, and quality awareness
  • Failure Modes Effects Analysis (FMEA).
  • Events, meetings, and projects for quality improvement

Conclusion

Philip Crosby showed how COQ can be used to increase awareness about the importance of quality, and get it discussed at the boardroom. Crosby referred to this measure as “cost of nonconformance” and suggested that organizations will make conscious choices to pay less quality if their management systems are not optimized.

A quality system must be dynamic and have an impact on the achievement of the organization’s goals and objectives. This allows you to assess the system’s effectiveness and identify problem areas and opportunities for cost reduction.