Cost of Poor Quality (CoPQ)

What is CoPQ?

Cost of poor quality is the total financial loss incurred by a company due to providing poor-quality products or services to the customer. It would not exist without errors, rework, and/or field failures. Defects that occur before delivering the product to the customer should be added to the manufacturer’s cost. Similarly, defects that occur after the customer receives the product should be added to the customer’s and producer’s costs.

Depending on how far along in the process the product gets, the cost can differ. The time and resources needed to repair a defect and the impact they have on the process flow should be considered. When an error is detected early in the process, the cost is lower. The repair may not involve disassembly or multiple departments, and the tools for repair are usually available. When a repair involves disassembly or multiple departments, the cost is higher. More labor, time, and coordination may be required. In addition, there is a cost of spending time to find the error, which is manageable, but immediate identification is preferred. If the error is not detected before the customer receives the product, coordination significantly increases, which can cause the repair cost to skyrocket.

The Juran trilogy diagram shows the before-and-after difference of quality improvements. The level of chronic waste (CoPQ) was built into the concept of “it was planned that way.” Quality improvements can reduce the zone of quality control. Also, the infographic shows a “sporadic spike,” which is a sudden increase in waste. This spike can occur unexpectedly because it arises from unexpected sources. Personnel eliminate the spike and restore the previous level of chronic waste. This action cannot permanently solve the problem, but quality improvements should be made to decrease the level of waste. Usually, personnel need to troubleshoot, take corrective action, or firefight.

Source: Juran’s quality handbook / Joseph M. Juran, co-editor-in-chief, A. Blanton Godfrey, co-editor-in-chief. — 5th ed.

Benefits of using CoPQ

• Reduce total cost of the product and lead time
• Satisfy customers with the quality of the product
• Optimize sources and identify process waste
• Diffuse the continuous improvement culture by engaging employees
• Make profits that are driven by quality
• Provide key indicators, which are desired by management

Disadvantages of not using CoPQ

• Financial loss
• Customer dissatisfaction (competitors can take advantage)
• Redundant spending on resources
• Program delays
• Demotivated associates
• More controls and checks
• Reputation at stake

CoPQ can be divided into 2 categories: internal failure cost and external failure cost.

Internal failure costs

Deficiency costs can be found before the customer receives the product or service. Fixing defects that occur prior to delivery incurs costs for:

• Scrap: defective product or material that is not repairable, usable, or sellable
• Waste: unnecessary work or stock because of errors, poor organization, or miscommunication
• Reworking: change the defective product or material to achieve required quality standards
• Analyzing failure: determine what caused the product or material to fail
• Retesting: reanalyze the product to ensure that it can achieve required quality standards
• Rejecting raw or in-process material: decide whether the product complies with required quality standards or not

External failure costs

Deficiency costs can be found after the customer receives the product or service. Fixing defects discovered by the customer incurs costs for:

• Repairs and servicing: can be applied to returned and field products
• Warranty claims: can be replaced under a guarantee
• Complaints: handling and servicing customer complaints
• Returns/replacements: handling and investigating recalled or rejected goods, including the cost of transport

Other external failure costs include customer visits, penalties, loss of goodwill, etc.

Implementing CoPQ

1. Define the quality goals and objectives of the organization
2. Gather and assess the resources (equipment, systems, and processes)
3. Collect data for each kind of CoPQ
4. Validate the CoPQ and CoGQ data with the finance department
5. Prioritize and implement corrective actions, such as:
   • Scheduling periodic quality audits
   • Streamlining the inspection process
   • Implementing mistake-proof tools (Poka-Yoke)
6. Compare the cost of quality before and after implementation
7. Present the CoPQ and CoGQ improvements to management

Effects of identifying CoPQ

Improving processes and cost of quality could decrease the total cost of quality. While transitioning from poor quality to good quality, organizations eliminate excess waste (work, labor, material, and time).

Reporting CoPQ

1. Follow the project-by-project approach and apply CoPQ
2. Collect data that diagnose the problem and track change
3. Create a scoreboard to track categories, reports, and metrics; if a scoreboard is already in place, review previous scoreboard data
4. Look beyond the assertions of advocates; look at the realities derived from experience
5. When the categories of the scoreboard are ready, collect and summarize the data, establish base comparisons, and report results. Summarize the data by:

• Product, process, component, type, or other defect concentration pattern
• Organizational unit
• Category
• Time