In the life sciences industry, the concept of quality transcends mere compliance and enters the domain of strategic business importance. The cost of quality, a pivotal communication tool, was profoundly emphasized by Philip Crosby, a titan in the quality field. Crosby introduced the term “price of nonconformance,” shedding light on an often-overlooked truth: organizations inadvertently choose to pay for poor quality. These can lead to serious financial consequences, which are far from insignificant.
For many organizations, true quality-related costs can add up to about 15% to 20% of sales revenue, with some even reaching an alarming figure of 40% of total operations. This is not just a marginal concern but a significant financial burden. For growing companies, a general rule of thumb suggests that the costs of poor quality typically account for about 10% to 15% of operations. These figures are not just numbers on a balance sheet; they are powerful reminders of potential improvement and growth.
Don’t give a hump, there's a silver lining. Effective quality improvement programs, rooted in stringent standards such as ISO 9001, ISO 13485, and FDA CFR 21 Part 820, can dramatically reduce these costs. You can transform a loss source into a strategic asset by addressing the root causes of nonconformities and embedding quality into every stage of operations.
In this article, we will explore the layered nature of the cost of poor quality, its implications, and the strategies to mitigate it, thereby unlocking new pathways for organizational success and sustainability.
What is the Cost of Poor Quality (CoPQ)?
A company's cost of poor quality refers to the financial loss it incurs due to providing poor-quality products or services to its customers. These include products with errors, that need rework, or lead to failure in the field. Defects that occur before the product is delivered to the customer should be added to the manufacturer's costs. A defect that occurs after the product has been delivered to the customer should also be charged to the customer and the producer.
The cost of quality method allows organizations to determine how much of their resources are spent on activities that prevent poor quality and assess the quality of their products or services.
Difference between the cost of quality and the cost of poor quality
Quality assurance professionals in the life sciences industry should understand the differences between the Cost of Quality (CoQ) and the Cost of Poor Quality (CoPQ). CoQ, also known as Total Cost of Quality, is an umbrella term that encompasses two main categories. Fundamentally, these two categories are different in their nature and impact on the organization.
Cost of Good Quality (CoGQ)
It refers to the proactive investments made to prevent poor quality. CoGQ includes costs associated with preventing failures before they occur and appraising the quality of products or services. These costs can be increased through quality planning, training, preventive maintenance, and early design reviews.
Cost of Poor Quality (CoPQ)
In contrast, CoPQ is reactive in nature and encompasses the costs that materialize only after poor quality has occurred. These costs arise from internal failures (such as scrap, rework, and downtime) and external failures (including returns, recalls, and loss of customer goodwill). CoPQ is often more visible and tangible, as it directly affects customer satisfaction.
There is a common misconception within the quality world that CoPQ is the main focus of quality management. However, this disproportionate focus on CoPQ can lead to a narrow view of the overall quality, leaving out the strategic benefits of investing in CoGQ.
The key difference between CoGQ and CoPQ is the timing and approach. CoGQ is about investing in quality before problems arise, while CoPQ is about dealing with the consequences of quality failures. This differentiation is critical for QA professionals in making informed decisions about where to allocate resources. By understanding and balancing these two aspects of CoQ, organizations can not only mitigate the risks and costs associated with poor quality but also build a robust foundation for continuous quality improvement.
Components of Cost Of Poor Quality (COPQ)
The Cost of poor quality (COPQ) is the cost(s) inherent in providing poor-quality products or services.
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Although many organizations have found it useful to divide the costs into two categories and then split these two main categories into two subcategories such as internal failure, external failure, appraisal, and prevention, this structure may not apply to all processes. The organization and the Quality team should decide on a structure that suits their needs best.
When defining the cost of poor quality of your organization, you should keep in mind:
- Customization of cost category definitions: Tailoring definitions to fit the specific needs of an organization involves various functions in the process.
- Prioritization of the failure and appraisal costs: Focusing on failure cost elements for significant cost reduction and customer satisfaction improvement, along with appraisal cost management.
- Management involvement and data collection agreement: Ensuring upper management's involvement and consensus on cost categories before beginning data collection.
- Recognition of overlooked poor quality costs: Identifying traditionally accepted costs, such as redesign and process changes as part of the cost of poor quality.
- Handling of controversial cost categories: Strategically addressing controversial costs, focusing on major areas for potential reduction, and avoiding unnecessary disputes.
Impact on the business of cost of poor quality
Quality improvement is a strategic investment that yields tangible returns, besides its pivotal role in enhancing compliance. This strategic investment, often expressed as a "return on quality" (ROQ) concept, parallels the traditional return on investment (ROI) seen in other business areas like marketing campaigns. ROQ is a powerful indicator that can analyze both the reduction in costs and the potential increase in sales revenue as a result of quality improvement efforts.
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Return on Quality (ROQ) calculation
ROQ calculations require careful analysis of assumptions and estimates. Sensitivity analysis should be used to understand the changes in these estimates on the ROQ. The calculation includes both hard data and soft data, such as the cost of errors and potential sales revenue increases due to quality improvement or customer retention.
Investment justification and benefits:
The justification for investing in quality improvement is multifaceted. The benefits are in the form of reduced costs and enhanced business opportunities which can be categorized into four main areas:
- Reduced cost of errors
- Improved process capability
- Reduced customer defections
- Increase in new customers
How to reduce the cost of poor quality: Tips and Strategies
Implementing an integrated quality management system (QMS) is a foundational step in reducing quality costs. Here are some strategic approaches and tools to effectively manage and reduce the cost of poor quality:
- Implement a robust QMS to streamline quality processes, ensure compliance, and reduce the likelihood of quality failures.
- Implement an effective Corrective and Preventive Action (CAPA) module to identify problems, prioritize them with a risk-based approach, and promptly address them.
- Implement an effective Change management module to assess the cost and impact of changes, ensuring that decisions are data-driven and that transitions are smooth
- An integrated eQMS with related processes like Employee Training and Document Control simplifies and streamlines change management.
- Apply preventive measures such as employee training, quality planning, and early trend reviews.
- Conduct regular quality audits and inspections to identify potential issues before they become costly problems.
- Use data analytics to identify trends and areas of improvement to make informed decisions that can reduce both CoGQ and CoPQ.
- Foster a culture where employees are aware of the importance of quality and are engaged in maintaining high standards.
- Utilize supplier management tools to evaluate and improve supplier performance.
- Regularly analyze customer feedback to understand customer needs and expectations to improve product quality and reduce the likelihood of customer defections.
- Utilize real-time data and alerts to address potential issues preemptively.
- Utilize audit management tools to identify and prioritize strategic follow-up actions.
- Recognize the hidden costs, such as reduced customer loyalty and brand reputation damage.
Conclusion
Establishing a quality cost system is just the beginning of a journey. Once you’ve implemented some of these strategies, your organization's mission, goals, and objectives will be positively affected.
The life sciences industry is evolving, so you should shift your focus from traditional quality management to more holistic approaches, such as continuous improvement, and long-term benefits to increasing sales revenue and market share.
