What is COPQ

Cost of Poor Quality(COPQ) calculation is done in terms of $ value or % of sales, COPQ is explained here with a very simple example. COPQ is a very important concept not only for Quality but for all the functions in any industry.

Background of COPQ

Traditionally companies utilize financial reports which compare actual with budgeted costs. Similarly departmental budgets are also prepared. These costs are necessary to carry out the functions of each department including control of product and process quality. The responsibility for financial control rests at the department or plant level. Gradually in 60’s and 70’s, customers’ expectations started becoming more sophisticated and they demanded service after the sale and expected support on field failures. This resulted into a method of defining and measuring quality cost and cost of poor quality(COPQ).

Initially, managers discovered that prevention costs are too low and failure costs are too high. Often, failure costs will outstrip the appraisal costs as well. So internal and external failure costs may point to needed changes in planning or product design.

Quality costs consists of all those costs associated with all the efforts devoted to planning the quality system, and those associated with failures resulting from inadequate systems like scrap, rework, service calls, complaints, warranty claims etc. Experts have estimated that cost of poor quality generally amounts to 5%-25% of sales in a manufacturing or service company.

Let us understand with an example, a manufacturing company has gross annual sales of $200 million. Its quality department calculated cost of prevention, appraisal, scrap, repair, warranty claims and all other COPQ related costs. The total cost amounted to 20% of gross sales. This cost of 20% implies that one day of each work week, entire company spent its time and effort making scrap. Any saving from COPQ of $40 million will add into the bottom-line of the company.

Calculating cost of poor quality allows an organization to determine the extent to which organizational resources are used for activities that exist only as the result of deficiencies that occur in its processes. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.

Types of COPQ

Let us understand COPQ in detail, there are four broad categories in which we can track or calculate COPQ for any company. Examples are given for easy understanding.

There are three categories of quality Cost:

1. Prevention costs : The costs of activities specifically designed to prevent poor quality in product or services. Some of the examples are :

2. Appraisal cost : The costs associated with measuring, evaluating or auditing products or services to assure conformance to quality standards and performance requirements.

Some of the examples are :

3. Failure cost : The cost resulting from products or services not as per customer needs or the cost resulting from poor quality. Failure cost is divided into Internal and External failure cost categories.

a) Internal failure cost : Cost occurred due to failure of the product before being delivered to customer.

Some of the examples are :

b) External failure cost : Failure costs which occur after the shipment of the product to the customer. When the product fails it can have direct cost repercussions as well as indirect impact on reputation of the product.

Some of the examples are :





Advantages

Aligns Quality and organizational goals

Provides a problem prioritization system, high COPQ areas can be identified

Improves the effective use of resources

Provides a single overview of quality

Provides a way to distribute controllable quality costs for maximum profit

Limitations