Cost of Poor Quality (COPQ) investigates the costs that result from the provision of poor quality goods and services in order to find ways to improve business processes and quality. It is a methodology which lets an organization determine the exact extent to which resources are utilized in the improvement of quality, appraises the quality of products or services offered to customers, and the impact of internal and external failures on quality. With all this information at hand, an organization is well placed to calculate the potential savings that it can gain through improvements in its business processes.
Types of Costs
The quality-related business activities that have associated costs could be divided into the following broad categories:
- Internal Failure Costs: These are the costs that are associated with various defects that are discovered before a product or service is offered to the customer.
- External Failure Costs: These costs are associated with the defects which are discovered after receipt of the product or service by the customer.
- Appraisal Costs: Appraisal costs are incurred in order for a company to determine the level to which products or services conform to quality standards.
- Prevention Costs: This is an indication of the costs that an organization incurs in order to keep both failure and appraisal costs as low as possible.
Internal Failure Costs
A company may incur internal failure costs in order to find solutions to defective products or services before they are delivered to customers. The costs become necessary when the results of the company’s work fails to achieve desired quality standards and defects are identified before delivery. These include:
- Waste: Waste requires unnecessary additional work to be performed or inventory withheld due to poor organization, poor communication or errors.
- Scrap: These are defective materials or products which cannot be sold, used or repaired.
- Rectification: This is reworking of defective products or materials to correct errors.
- Failure Analysis: This activity is necessary in order to establish what caused an internal failure in a product or service.
External Failure Costs
When customers discover defects in a product or service offered to them, costs are incurred. The external failure costs occur whenever products or services reach the customer but are later found to be below the designed quality standard. These include:
- Repair and servicing: This could be for both product returns and those still with the customer.
- Warranty: Warranty claims are a cost on failed products which need to replaced or for services that have to be performed again under guarantee.
- Complaints: This involves the cost of all work related to the handling of complaints from customers.
- Returns: This is due to handling and investigation of products rejected by customers and those recalled due to poor quality and include the cost of transportation.
These are the costs associated with the processes related to monitoring and measuring the quality of a product or service when evaluated by suppliers and customers to determine their conformity to set standards. These may include:
- Verification: This is checking of process setup, products and incoming raw materials to ensure they meet specifications.
- Quality Audit: Confirmation that quality verification processes are functioning properly.
- Supplier Rating: An assessment of the suppliers of different products and services to a company.
These costs are incurred during efforts to avoid or prevent problems with quality. They are costs related with design and maintenance of quality management processes. These are planned for, and incurred well before actual operation and include:
- Requirements: The setting up of specifications required for processes, raw materials, products and services.
- Quality Planning: This is the creation of a plan to ensure quality and reliability of operations, inspection and production.
- Quality Assurance: The cost of creating and maintaining a quality system.
- Training: Design, preparation and maintenance of quality assurance programs.
The costs incurred in doing quality work, making improvements in quality and achieving these goals should be managed very carefully in order to have a desirable long-term effect on a business. The costs need to be an accurate reflection of the effort put into ensuring quality, and they are best calculated through analyzing the Cost of Poor Quality. This analysis will provide a way to assess how effective quality management is and is a method used to figure out problem areas, priorities, savings and opportunities.
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