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Vishwadeep Khatri

COPQ , Cost of Poor Quality

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Q18. While it is possible to go into details of the cost of poor quality, it is really worthwhile to do a painstakingly detailed assessment of this metric?  Also, explain how precise can one get on this? Please use your own words. 

 

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Background

Cost of Quality (COQ) is a quality metric that denotes the ratio of costs involved in guaranteeing high quality products to the total revenue generated by those products.

It can be understood to be a combination of two main components as shown:

COQ = COGQ + COPQ

  • COGQ is the cost of good quality, which denotes the cost incurred to prevent poor quality and assure high quality products
  • COPQ is the cost of poor quality, which denotes the cost incurred in failure to produce high quality products i.e. scraps, defects, rework, rejects.

The COPQ can be denoted as following:

COPQ = IFC + EXC

  • IFC is Internal Failure Costs consisting of Scrap costs, Defect costs and Rework costs. Some of the factors that affect IFC are weakness in quality resolution (CAPA/FMEA), Improper Resource and Material planning, Equipment downtime, Re-engineering and Re-designing.
  • EFC is External Failure Costs consisting of Returned Product Costs, Warranty Costs, Product Recall Costs.Some of the factors that affect EFC are Poor service management, unresolved customer complaints, environmental non-conformances and so on.

 

Analysis

The COPQ metric can be useful for a product line or smaller systems, but I believe, it may not be a beneficial metric to track for complex systems and the organization as a whole. The effective scope of COPQ analysis is minimal and pertains mostly to the IFC components. It will be a challenge to accurately measure the EFC (External Failure Costs) component of COPQ.

 

Measures should definitely be taken to produce high quality products, but a balance should be reached as to how much investments are done to improve quality.  Over doing quality could actually result in over processing which is one of the wastes identified in Lean. E.g. A Six sigma process is good but for process related to aviation and flights it is not good enough while for processes such as apparel manufacturing it could be an over kill and may not be required.

 

Moreover, Investments into innovation, new technologies and better production techniques could have a better ROI than investing in the bottom – up approach of COPQ.

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W Edward Deming once said, Defect are not free. Someone makes them and get paid for making them. Cost of Poor Quality (COPQ), can simplistically said to the payment made to the people making the defect and then to people who correct the defect.

 

COPQ can be divided into two major categories, Cost of corrective actions and Cost of preventive actions. Cost of Corrective action can be further categorised into Cost of correction for internal failures and Cost of correction for external failures. In addition their can be cost of reputation loss, customer dissatisfaction cost, legal penalties, etc.

 

COPQ adds to the cost of producing goods or services and therefore needs to be managed  to have a positive impact on the organisations long term objectives.

 

Examples of Internal failure costs are as follows:

Scrap, 

Rework

Failure Analysis

Inspection/ Testing of rework

Degrading of product - which is then sold at lesser price

 

External failure costs can be:

Warranty costs

Customer returns

Customer complaint resolution

Potential loss of customer

 

Appraisal cost:

Inspection and testing

Tools and equipment used for Inspection and Testing

 

Prevention costs:

Process Cotrol

Supplier Appraisal

Training

 

It is important to keep a tab on the cost of all the above activities. Ideally, prevention should be a fool proof so that Internal or external failures are not encountered. Even though tangible cost of internal and external failure can be taken care of, intangible harm to reputation could be much more.

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Figure 1: Cost of Quality

 

 

Figure 2: The Iceberg Model of Cost of Quality

 

 Sigma Level and the Cost of Quality

Sigma Level

DPMO

Cost of Quality as Percentage of Sales

2

298,000

More than 40%

3

67,000

25-40%

4

6,000

15-25%

5

233

5-15%

6

3.4

Less than 1%

Assuming that the average performance of a company is 3 sigma, 25 percent to 40 percent of its annual revenue gets chewed up by the cost of quality. Thus, if this company can improve its quality by 1 sigma level, its net income will increase hugely.

 

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Cost of Quality assessment benefits the organizations translate efforts into profits. It draws the attention of the management towards the overall work accomplished while delivering quality the first time and to the hidden factory ignored which is notoriously run under the pretext of “business as usual”. COQ aligns quality with goals and promotes effective use of resources.

 

Delivering Quality is relatively cheaper when compared to the expenses incurred lack of it. The costs of conformance will be relatively higher at the start however once the quality is built in the product/service, the profits are well managed.

Below is the breakup of the components.

 

CONFORMANCE – Cost of Quality

NON CONFORMANCE -  Cost of Poor Quality

Prevention includes Quality planning and assurance, process definition, process capability assessment

Internal Failures includes substandard service, rework, downtimes, unused resources, scrap and abandoned projects.

Appraisal includes tests, inspections, Quality audits, surveys, reviews and skill assessment

External Failures includes recalls, complaints, lawsuits, DSATs and servicing

50% +20% = PREVENTION + INSPECTION

20%+10%  = REWORKS + DAMAGES

 

In order to look into what is happening to the voices heard from the market and the criticality identified thereafter, the organization should

  • Determine the processes and their interaction with the system. The functions and the roles of each process. For instance - Quality ( Analyst, Level II etc ), SME and the Operations( TL, Level III).
  • The activities and tasks in the process which are identified as value add for the vision. Effective value stream mapping is the key.
  • These activities are categorized and sorted into the four components. Their occurrences in a month and the time spent on each instance is captured.
  • Later, the manhours invested into these activities in a given month are calculated. Activity based costing helps us to understand the hours put in and billable for the role.
  • Finally one would have the COQ efforts of the organisation as the cost of carrying out the activity in a month will be segregated based on the table above. Modifications and redirecting the approach towards attaining 10-20% of non conformance costs will drive reduced variation and delivery within the specification limits.

 

A snapshot of activities (corresponding hourly dollar value is missed) and proportions in regards to the COQ components. This is for a Quality Analyst.

 

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Everyone agrees that quality is expensive but we do not agree on what constitutes that expense or why it costs so much. Actually amount of money spent on quality control, & inspection is quite small.

 

Cost of poor quality (COPQ) are costs that would disappear if systems, processes, and products were perfect. They are costs associated with providing poor quality products or services. Cost of poor quality is a means of calculating a return on investment for quality improvement or quality management. It is meant to be a comprehensive measurement that includes direct costs such as reworks, returns, downtime and indirect costs such as customer satisfaction and reputation.

 

There are four categories:

·         internal failure costs (costs associated with defects found before the customer receives the product or service) e.g scrap, rework, re-inspection, re-testing, material review, material downgrades.,

·         external failure costs (costs associated with defects found after the customer receives the product or service) e.g processing customer complaints, customer returns, warranty claims, product recalls.,

·         appraisal costs (costs incurred to determine the degree of conformance to quality requirements (measuring, evaluating or auditing) e.g inspection, testing, process or service audits, calibration of measuring and test equipment.

·         prevention costs (costs incurred to keep failure and appraisal costs to a minimum) e.g New Product Review, Quality Panning, Supplier Surveys, Process Reviews, Quality Improvement Teams,

 

Education and Training.

 

Cost of quality is a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.

 

One of the fundamental tenets of modern quality management is that quality should be planned, designed and built in – not inspected in. This is because the cost of preventing mistakes is much less than the cost of correcting them when they are found by inspection. Consequently, quality conscious organizations are striving to have a shift in the organizational culture from Quality Control to Quality Assurance. Quality Assurance (QA) is more effective than Quality Control (QC) – because in QA, the emphasis moves to the development process. This enables attempt to fix problems before and during the development process itself. Lessons learnt from past projects help to improve the process and therefore reduce the number of defects in a lasting manner. Incorporating Six Sigma and other Lean tools allows companies to decrease waste (Raw materials, Logistics costs, and unnecessary man hrs) which in turn increases profits.

 

The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one. It should become dynamic and have a positive impact on the achievement of the organization’s mission, goals, and objectives.

 

These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities.

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The principle, "No pain No gain" used by body-builders, athletes and sportsmen is applicable to all aspects of life, including the corporate world. Cost of Poor Quality (CoPQ) is a classical example of the truth of this adage.

 

Would explain CoPQ as the cost of the four "tion"s - Prevention, Detection, Correction, Dereliction. The last "tion" may raise more than just a few eye-brows, but the more popular term, "failure" happens ultimately due to some kind of dereliction somewhere.

 

CoPQ when correctly assessed and used turns out to be a great "Decision-making" tool. It speaks the language preferred by the Top Management - the language of Vitamin M - Money. Convincing the Top Management to take decisions and approve investments becomes easier when the negative impact (Costs) are realistically assessed and presented. After all, avoiding the loss of a rupee is considered the equivalent of three rupees earned.

 

For example, the decision to invest in an advanced machine or in specialised training becomes easier when the costs of dereliction (failure) i.e. revenue already lost or revenue that can be lost are quantified realistically and presented. In certain other scenarios, awareness beforehand of the expected costs of 100% inspection and rework (Detection and Correction) can sway a decision on investment in Prevention efforts. This investment need not be only equipment. It could also be increased inspection of inputs and raw material or a longer training programme for staff that preclude possibilities of dereliction leading to increased losses downstream. In yet other situations, the decision to implement sample inspection or audits of the output becomes easier to make if the costs of not doing this are known beforehand.

 

To reach the position described above, where an organisation can calculate the various components of CoPQ quickly as well as accurately, is not easy. It requires a lot of effort to set up the system, but only some effort at periodic intervals to maintain the system. Be it costs of various activities done by different people of different skills, at different levels, using equipment of varied sophistication, or the costs of Management time spent in discussions, meetings video conferencing etc. root cause analysing, defending, explaining or apologising for defects, the basis needs to be established first in terms of (say) Cost per Hour of people at various levels,  Functions and roles, and Cost per hour of various activities in terms of the equipment used. Once this made available and periodically updated, extracting the value of various components of CoPQ is not as difficult as it would have been when doing it for the first time.  Review and update of these cost norms should happen regularly both at a fixed period and also be triggered by specific events. An annual review is a good trade-off between keeping the CoPQ cost norms updated without indulging in an overkill. Salary increases happen once a year and all costs including CoPQ would also change. Other events warranting a review, even if not immediately, at the next opportunity would be organisational changes, equipment replacement, equipment AMC changes, National Budget & tax regime changes and so on.

 

For any metric to be accurate, there needs to be time, effort and money invested in setting up and maintaining the metric infrastructure. This is applicable to CoPQ also. The CoPQ measured and reported needs to be accurate enough to differentiate between the different products, different types of errors or defects and different market situations. If with the good intentions of simplifying calculations of CoPQ to increase its usage, the process of calculation is approximated to the extent that the system becomes insensitive to some of the key points of differentiation listed above, the effectiveness of usage of CoPQ derived from this method will not be very high. One need not always measure CoPQ to the last paisa, but CoPQ need to remain accurate in the context in which it is used. When projecting costs of the future, one can weight it down with a probability factor to project a realistic picture. Typically, if a defective piece reaches a strategic customer, the potential loss of business with that customers and a chain reaction from some others could be a crore of rupees. But if it is assessed from past history that the likelihood of that happening is only 5%, the CoPQ could be 5% of one crore, which is the less threatening than the total value of business. Such considerations may avoid the usual branding of CoPQ as theoretical by Operations and the Top Management.

 

Monthly CoPQ reports will add more value when it contains trends for the earlier months of the current year and also the last year. It would also be a good idea when publishing Monthly CoPQ Reports to add narratives that seek to explain changes especially increases. For example, in a month, if due to an unavoidable reasons, there has been inputs of quality slightly poorer than normal and having known this before hand, a temporary pre-processing cell is created to filter out defect-ridden inputs and if for various reasons, this cost cannot be passed on to the supplier, it can appear that the costs of prevention have increased. In such a case, if the narrative can include an estimate of the value of other components of CoPQ that have been avoided by investing upstream in prevention, there may be better understanding of the reasons for increase.

 

To summarise, it may be asking too much to expect people to appreciate CoPQ but if consistent, organisation-wide understanding is achieved, it would be a commendable job done.

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Every business serves a purpose of customers via processes. These processes gives output as per customers needs. To execute a process cost is incurred where customer willing to pay. Quality of cost need to measured to conclude profits made by business

There are 2 types of cost quality 1) Cost Of Good Quality (COGQ), 2) Cost of Poor Quality (COPQ).

 

Every process has variations whether the variation is within control limits(customer acceptance limits). Process output is within limits, can be called as COGQ, process output is beyond limits can be termed as COPQ.

Cost of Quality(COQ) = COGQ + COPQ

 

let assume 1000 items produced by process. and delivered to customer, but customer accepted 900 items which is COGQ and rejected 100 items which is COPQ.

 

COGQ is not required to discuss much, customer willing to pay. COPQ need to be analysed to improve business profits and reduce operations cost.

 

How to calculate COPQ

Few organisation calculates quality cost traditional methods like scrap, rework, and returned materials. These cost are directly emerging from production. There are external factor also influence failure cost such exeternal services by companies the use of the supply-chain etc. it's important to identify bot internal and external cost

CoPQ = IFC + EXC, where:

IFC = Scrap Costs + Rework Costs

EFC = Returned Product Costs + Warranty Costs + Product Recall Costs

 

Costs incurred internally and externally are caused not only by defects in products, but also by inefficiencies in production and processes. A more in-depth list of factors affecting IFC and EFC is below.

 

Factors Affecting Internal Failure Costs

Weaknesses in quality resolution (CAPA/FMEA)

Delayed work schedules

Poor Materials Planning

Materials shortages

Equipment downtime

Materials review

Reengineering/redesigning products

 

Factors Affecting External Failure Costs

Poor service management

Unresolved customer complaints

Weak enterprise communication

Environmental/sustainability nonconformances

Adverse reputation events

 

Improving the Cost of Poor Quality

Small improvements in IFC and EFC can bring into aggregate CoPQ improvements very quickly.  

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Cost of poor quality (COPQ): The costs associated with providing poor quality products or services. There are four categories: internal failure costs (costs associated with defects found before the customer receives the product or service), external failure costs (costs associated with defects found after the customer receives the product or service), appraisal costs (costs incurred to determine the degree of conformance to quality requirements) and prevention costs (costs incurred to keep failure and appraisal costs to a minimum).

 

Cost of quality is a methodology that allows an organization to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the organization’s products or services, and that result from internal and external failures. Having such information allows an organization to determine the potential savings to be gained by implementing process improvements.

 

Quality-related activities that incur costs may be divided into prevention costs, appraisal costs, and internal and external failure costs.

 

1. Prevention cost:

Prevention costs are incurred to prevent or avoid quality problems. These costs are associated with the design, implementation, and maintenance of the quality management system. They are planned and incurred before actual operation, and they could include:

  • •Product or service requirements—establishment of specifications for incoming materials, processes, finished products, and services
  • Quality planning  -creation of plans for quality, reliability, operations, production, and inspection
  • Quality assurance -  creation and maintenance of the quality system
  • •Training—development, preparation, and maintenance of program

 

2. Appraisal cost

Appraisal costs are associated with measuring and monitoring activities related to quality. These costs are associated with the suppliers’ and customers’ evaluation of purchased materials, processes, products, and services to ensure that they conform to specifications. They could include:

  • •Verification—checking of incoming material, process setup, and products against agreed specifications
  • Quality audits—confirmation that the quality system is functioning correctly
  • •Supplier rating—assessment and approval of suppliers of products and services

 

3 Internal failure cost

Internal failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer. These costs occur when the results of work fail to reach design quality standards and are detected before they are transferred to the customer. They could include:

  • •Waste—performance of unnecessary work or holding of stock as a result of errors, poor organization, or communication
  • •Scrap—defective product or material that cannot be repaired, used, or sold
  • •Rework or rectification—correction of defective material or errors
  • •Failure analysis—activity required to establish the causes of internal product or service failure

 

4. External failure cost

External failure costs are incurred to remedy defects discovered by customers. These costs occur when products or services that fail to reach design quality standards are not detected until after transfer to the customer. They could include:

  • •Repairs and servicing—of both returned products and those in the field
  • •Warranty claims—failed products that are replaced or services that are re-performed under a guarantee
  • •Complaints—all work and costs associated with handling and servicing customers’ complaints
  • •Returns—handling and investigation of rejected or recalled products, including transport cost. 

 

The costs of doing a quality job, conducting quality improvements, and achieving goals must be carefully managed so that the long-term effect of quality on the organization is a desirable one.

These costs must be a true measure of the quality effort, and they are best determined from an analysis of the costs of quality. Such an analysis provides a method of assessing the effectiveness of the management of quality and a means of determining problem areas, opportunities, savings, and action priorities.

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 Cost of poor quality (COPQ) or poor quality costs (PQC), are costs that will appear if systems, processes, and products are not in control.

 

Cost of quality is a methodology that allows a business to determine the extent to which its resources are used for activities that prevent poor quality, that appraise the quality of the  products or services , and that result from internal and external failures.

 

The Cost Of Good  Quality is for quality related efforts (Prevention/+Appraisal)

 

The Cost of Poor Quality is for Internal Failures(Deficiencies)/External  Failures(Deficiencies

 

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In the Food Industry, in modern times, given the plethora of options that the customer hasin the market ,the core fundamental of the business is to satisfy the customer 100% - This is the best way to main a sustained business. The quest is to provide maximum value to the customer and save costs at all possible steps in a value stream, and have a worthwhile bottom line.. Thus the controllable costs is the point of focus. Costs incurred due to poor quality are mostly wastes that create a negative impact on the profit margins.

 

The COPQ benefits the business through  :

-       Direct flow to the bottom line

-       Indentifying quality improvement candidates:

·         Identify all failures cost

·         Detect root causes and eliminate them

-       Promotes the effective use of resources

-       Measure of the Success of the Business process

-       Provides for incentive budgets, for doing the job first time right.

 

What is mentioned above by itself the motivation to do the detailed analysis of COPQ, though it is a metric that needs to be done meticulously with lot of patience and focus.

 

The best way to go forward is to do an FMEA or FTA , depending on the process of activities that have the scope to be resolved with maximum ease and best results. The Pareto Diagram will help in prioritising the activities.

-       Select a Pilot Project

-       Formation of a COPQ team(Preferably QA & QC + Planning)

-       Give a mandate to the COPQ team (For accurate Measurement)

-       Regular periodical (Fixed) reporting from the COPQ team(Areas of Improvement)

Once the COPQ team identifies the areas for correction/ Improvement:

-       Perform RCA

-       Take corrective actions

Results do not happen immediately- It is very important to be patient and Top management Sponsorship is required across the project. However we have seen many successful COPQ projects, where the bottom line was impacted positively .- “Money is the language of the Management, You need to show them the numbers- Crosby.

 

Quality by itself is a profit Center:

Decreases

Increases

Defects

Sales

Overall Costs

Profit

Returned Good

Capacity

Customer complaints

Customer Satisfaction

Management Stress

Market Share

Legal Cost

Competitive Edge

Employee turnover

Employee Satisfaction

 

 

 

The QSR industry focuses a lot on the following to have control on Quality- Training, Portion standardisation, Raw waste Control(Unprepared food Stuff), Complete waste control (Completely ready food),Periodical Maintenance, labor cost, Utility cost, property maintenance cost etc, through stringent control charts and periodical audits.

 

Thus the COPQ is kept under as much control and there is always a strive to improve to the most favourable COPQ – Ideally "NO COPQ" wherever possible, every step every day- Kaizen fits in the best here!!

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COPQ

The cost of poor quality (COPQ) are total cost that are due to offering poor quality services and products. The cost of poor quality can be divided into four different categories: the internal failure costs, the external failure costs, the appraisal costs, and the prevention costs.

The internal failure costs are usually associated with the defects that are found on the products and services before they reach the customers.

The external failure costs are related to the costs that your company has when the product or service reaches the customer with a defect.

The appraisal costs are the costs that your business incurs in order to check the actual quality of the product or service according to some pre-specified degree.

 

The prevention costs are the costs are the costs that you need to have to prevent both appraisal and failure costs to a minimum acceptable.

 

Really worthwhile to do a painstakingly detailed assessment of this metric?

Off-course Yes !!

What we can measure that only we can improve.

COPQ is a very good measure, to set the targets to teams.

Assessment of COPQ BRINGS FOCUSE to prevention rather than correction.

 

How precise can one get on this? 

Yes, its true that one can not be so precise about it.

Its like iceburge, 10% visible and 90% under the surface.

Practically one can not measure more than 50% of the COPQ, other costs are totally hidden. It is still important to work on it and get it in control. Efforts will have effect on 100% COPQ automatically even if it is invisible in the business.

 

Thanks and Regards,

Vivek M Dahake 

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Analysing COPQ (cost of poor quality) is always a worthwhile for every process.  Measuring quality is measuring the requirements to get the job done right the first time out. 

 

Poor quality is a form of waste that is not an integral part of a product/ service. It does not add value for shareholders and customers. Cost of poor quality is a concept that helps quantify the impact of process inefficiency and waste has on internal and external customers. It helps quantify the impact of not fixing any process and tool that touches both internal and external customers. Measuring cost of poor quality is easier to identify when it comes to processes that directly impact external customers. Most systems report out metrics around external quality issues that lead to lower customer satisfaction. COPQ increases as we move from Prevention to Rejection. The goal is to invest time and money on defect prevention to eliminate as much as possible Inspection, Internal and External failure costs.

 

Measuring of COPQ can be divided into 4 categoroies.

1.    Internal failure cost – Defects corrected internally before release to customer

2.    External failure cost – Defects that reached customer

3.    Appraisal cost – Measuring /monitoring activities related to quality

4.    Prevention cost – Training /educating personnel to prevent errors from occurring.

 

 So, If we can control the COPQ the cost incurred on the product and production can be reduced leading to the decrease in product cost with increase in quality which satisfies the customer.

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