Cost of Quality vs Cost of Poor Quality | COQ vs COPQ | PDF

What is the Cost of Poor Quality (COPQ)?

→ The cost of poor quality is the financial loss of a business due to inefficiencies, errors, or defects available in its processes, products, or services.

→ In easy words, we can say that it is the company's total financial losses from doing the wrong things.

→ COPQ is a key metric in business.

→ Also we can say that the COPQ is the expenses incurred from failing to produce quality outputs the first time.

→ COPQ would disappear if the operations and process are smooth.

→ COPQ is the hidden cost and most organizations do not have a proper assessment method.

Table of Contents:

• What is the Cost of Poor Quality (COPQ)?
• Examples of the COPQ
• What is the Cost of Quality (COQ)?
• Examples of the Cost of Good Quality
• Cost of Poor Quality Iceberg
• Cost of Quality vs Cost of Poor Quality
• Prevention Cost
• Appraisal Cost
• Internal Failure
• External Failure
• Impacts of COPQ
• How to Reduce COPQ?
• Benefits of Tracking COQ and COPQ
• Conclusion

Examples of the COPQ:

→ In the automotive industry COPQ is rigorously tracking for cost saving and profitability improvement.

→ In this industry the quality issues can have significant financial and reputational impacts on the business.

⏩Examples of the COPQ are:

• Repair
• Rework
• Scrap
• Warranty failure
• Wastes of Manufacturing

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What is the Cost of Quality (COQ)?

→ The COQ is the total cost of ensuring that a product or service meets specified standards.

→ Also, it is the costs associated with failures when quality standards are not met.

→ It provides a comprehensive view of the cost that businesses need to pay in terms of producing good products.

→ COQ is the cost of achieving good products or providing good services.

→ COQ = Costs of Achieving Good Quality + COPQ

→ Most people think that a good product requires higher costs but this is not true actually.

Examples of the Cost of Good Quality:

→ Cost of Good Quality refers to the costs that are spent for products or services to meet defined standards and avoid defects.

⏩Examples of the COGQ are:

• Training and motivational activity
• Vendor evaluation
• Vendor development
• Process Capability Study of machines
• Calibration of measuring devices and equipment
• Incoming material inspection
• Stage inspection
• Final inspection

Cost of Poor Quality Iceberg:

→ As per the iceberg, where only a small part is visible above water.

→ The visible costs of poor quality are just the tip of the iceberg.

→ While a larger portion of hidden costs lies under the surface.

→ Most of the costs associated with poor quality remain unnoticed or unidentified.

→ But they have a significant impact on a business's profitability.

⏩Components of the COPQ Iceberg:

1. Above the Surface (Visible Costs)
2. Below the Surface (Hidden Costs)

01. Above the Surface (Visible Costs):

→ Visible costs are direct and easily identifiable.

→ That is easily detected by the inspectors or operators.

⏩Examples of Visible Costs are:

• Scrap
• Rework or Repair
• Returns and Warranty Claims
• Inspection and Testing
• Product Recalls and Penalties
• Non-Conformance
• Rejections
• Obsolete and scrape

02. Below the Surface (Hidden Costs):

→ The hidden costs are often much larger than the visible ones.

→ Also this has a long-term impact on the business.

→ They are harder to quantify but can significantly affect a business's profitability and reputation.

⏩Examples of Hidden Costs are:

• Overproduction and overtime
• Planning delay
• Employee attrition
• Field service expenses
• Complaint handling
• Premium freight
• Long set times and high tool change over time
• Late paperwork and lack of follow-up work
• Customer allowances
• Unused capacity
• Nonconformance
• Customer dissatisfaction and brand damage
• Overdue receivables
• High inventory
• Employee dissatisfaction
• Legal and regulatory issues
• Lost sales and lost market share
• Opportunity costs
• Increased supplier and capital costs

Cost of Quality vs Cost of Poor Quality:

→ The COPQ is a part of COQ and specifically includes internal and external failure costs.

→ If the processes are perfect then we do not need to bear extra cost.

⏩Four Elements of Cost of Quality are:

1. Prevention Cost
2. Appraisal Cost
3. Internal Failure
4. External Failure

→ Prevention and Appraisal costs are considered as investments to avoid COPQ.

→ Internal Failure and External Failure are considered as direct costs due to failure.

→ Refer to the below classification for the relationship between COQ and COPQ.

→ Now we will learn in detail about all the above four elements.

01. Prevention Costs:

→ Prevention is incurred to prevent defects or problems.

→ This is associated with the design, implementation, and maintenance of the QMS.

→ Prevention is the action taken before the actual operation to prevent defects or errors.

→ They are proactive investments, typically resulting in lower failure and appraisal costs over time.

→ It is all about the planning of quality, reliability, production, and inspection.

→ Cost incurred for the preparation and validation of specifications for incoming, in-process, and final product inspection.

→ The creation, and maintenance of the system that assures the defect-free output after each process.

⏩Examples of Preventive Costs:

• Quality training, planning, audits, and certifications
• Process improvements
• Supplier development programs
• Planning
• Training and development of the workforce
• Assurance
• Supplier management
• Process improvement
• Preventive maintenance

02. Appraisal Costs:

→ An appraisal is associated with measuring and monitoring activities.

→ This is associated with all kinds of evaluation such as supplier and customer evaluation.

→ That will help us to ensure that all products and services conform to specifications.

→ Appraisal costs are costs incurred to detect defects before they reach the customer.

⏩Examples of Appraisal Costs:

• Inspection and testing of materials
• Audits 
• Supplier assessments
• Calibration of equipment and instruments
• Verification:
• Acceptance testing
• Field testing

03. Internal Failure:

→ Internal failure is the cost related to the rework or repair of defects.

→ Also it is the cost to correct the errors in service.

→ This cost occurs when we fail to meet the specifications and are detected before they are dispatched to the customer.

→ If a product or service is not produced or supplied right the first time then we need to correct it.

→ This includes additional labor, material, and process costs.

→ Now we are considering another case where a finished good or service hasn't been made right the first time and also it is not reworkable or repairable.

→ In such a case, we have no other choice apart from scrapping it.

→ Failure activity is required to establish the causes of an internal failure.

⏩Examples of Internal Failure:

• Rework
• Scrap
• Repairs
• Rejection and Scrap
• Machine downtime
• Re-inspection and retesting
• Process inefficiencies
• Failure analysis

04. External Failure:

→ External failure is the cost incurred due to remedy of the defects discovered by customers.

→ This occurs when products fail to meet specified design standards and are not detected until they reach at the customer end.

→ External failure is more dangerous than others because it directly affects customer satisfaction and business reputation.

→ External failure also included the cost incurred due to customer complaint handling.

→ Also we can add the cost due to warranty claim handling, and investigation of rejected or recalled products, including transport charges.

⏩Examples of External Failure:

• Warranty claims
• Product returns and recalls
• Repair or replacement after delivery
• Lost sales and reputation due to poor customer experience
• Legal claims and liabilities
• Customer complaints

Impacts of COPQ:

→ There are many bad impacts of COPQ on business.

→ We will learn about the key impacts on business.

→ We need to bear the financial loss due to scrap, rework, and repair of defective products.

→ Also business lost the sales and brand reputation.

→ Defective products can cause delays, inefficiencies, and higher resource consumption.

→ Thus the operation efficiency and effectiveness decrease.

→ External failures lead to loss of customer trust.

→ Failing to meet regulatory or statutory requirements can result in penalties, lawsuits, or loss of certifications.

How to Reduce COPQ?

→ We can reduce COPQ by implementing continuous improvement methodologies such as Lean or Six Sigma.

→ Arrange training and development of employees.

→ Implement process control and risk management.

→ Perform Root Cause Analysis (RCA) to identify and eliminate the cause of defects.

→ Integrate the process automation to minimize human error.

→ Perform process and system audits regularly to ensure consistent product output.

⏩Key Strategies that Reduce the CQPQ:

• Product and process traceability
• Non-conformance and corrective action
• Preventative Maintenance
• Stronger engineering change management
• Customer complaint and returns management
• Employee training management
• Management of supplier quality
• Management of electronic documentation

Benefits of Tracking COQ and COPQ:

• Improved Decision-Making
• Increased Operational Efficiency
• Enhanced Customer Satisfaction
• Increased Profitability
• Risk Mitigation
• Reduced Internal and External Failures
• Enhanced Reputation and Customer Retention
• Cost Saving
• Supports Continuous Improvement

Conclusion:

→ The COQ is the total costs associated with ensuring that the products or services meet required standards.

→ Businesses can prevent defects by optimizing the COQ and COPQ.

→ By investing in prevention and appraisal activities, businesses can reduce failure, improve efficiency, and increase customer satisfaction.

→ In the long term, businesses can achieve good profitability.

→ Focusing on reducing COPQ is essential for any business that wants to stay competitive and profitable.

→ By identifying and addressing the root causes of failures, businesses can significantly reduce the hidden costs of poor quality.

→ This improves process efficiency, enhances customer satisfaction, reduces risk, and strengthens brand reputation.