LOGISTICS & SUPPLY CHAIN
Cost of Quality (CoQ) - An Analysis of the
Cost of Maintaining a State of Compliance
“You can easily spend 15% - 30% of your
sales dollars on non-conformance.” (Philip Crosby)
A Little History
Since the 1930s, famous quality gurus
(including: Deming, Juran, Crosby,
Ishikawa, Taguchi) have promoted the
use of quality tools and techniques to
improve product quality and reduce
operating costs.
Their contributions have made a
significant impact on the world, improving
not only manufacturing operations and
businesses, but all organisations including
state and national governments, military,
educational institutions and many others.
One of the tools and techniques, Cost of
Quality, allows organisations to analyse
and address the cost of poor quality.
Dr Joseph Juran first discussed cost
of quality analysis in 1951 in the first
edition of Quality Control Handbook.
Dr Armand Feigenbaum identified the
four cost categories in 1956 in “Total
Quality Control” in the Harvard Business
Review, Vol. 34, No 6.
The Cost of Quality
“The cost of quality” is a term that is
widely used – and widely misunderstood!
The “cost of quality” isn’t the price of
creating a quality product or service.
It’s the cost of NOT creating a quality
product or service. Every time work is
redone, the cost is really the cost of poor
quality.
The Cost of Poor Quality (CoPQ)
“COPQ is the sum of all costs that would
disappear if there were no quality
problems.” (Dr Joseph Juran)
Obvious examples of the cost of poor
quality include:
• Reworking a manufactured item;
• Retesting a product;
• Rebuilding or repairing a machine;
• The correction of mistakes in
documents and records;
74 INTERNATIONAL PHARMACEUTICAL INDUSTRY
• Reworking a service, such as the
replacement of an erroneous order.
In short, any cost that would not have
been expended if quality were perfect
contributes to thecost of quality.
Example:
Documentation and the associated errors
are familiar aspects of all parts of the
pharmaceutical industry. To illustrate
the points made in the text, we will look
at cost of quality examples relating to
managing documentation so as to reduce
the CoQ.
CoQ Categories
Dr Armand Feigenbaum identified the
four cost categories in 1956 in “Total
Quality Control” in
the Harvard Business Review, Vol. 34,
No 6:
• Prevention costs
• Appraisal costs
• Internal failure costs
• External failure costs
Prevention Costs
Costs incurred in planning, implementing
and maintaining a quality management
system that is intended to ensure
conformance to quality requirements.
This is the cost of preventing failure.
This represents the application of a
quality assurance approach to quality
and focuses on developing robust,
reliable systems.
Prevention Costs
Prevention of errors in documentation
can be achieved by good document
design. The aim is to create documents
that are:
• easy to understand;
• unambiguous in terms of the
information required;
• simple and quick to complete;
• easy to verify for completeness by
the users.
Appraisal Costs
Costs incurred in measuring and
auditing design, products, components
and materials in order to establish the
degree of conformance with quality
requirements.
This is the cost of checking to try to
prevent failure.
This represents the application of a quality
control approach to quality and includes
checking and testing, measurement of
performance, auditing, etc.
Appraisal Costs: includes the costs of
measuring, evaluating, auditing, etc.
Quality Assurance and Quality Control
If an activity is carried out to PREVENT
the possibility of occurrence of defects it
is usually QUALITY ASSURANCE.
If an activity is carried out to appraise an
outcome or DETECT defects it is usually
QUALITY CONTROL.
“Quality cannot be tested into products;
it should be built in or should be by
design.”
(FDA, Guidance for Industry: Process
Analytical Technology)
QC testing based on sampling will
miss errors, so cannot be relied upon.
Similarly, manual
inspection relies on the human animal,
which is prone to make mistakes, so
also cannot be relied upon. Automated
inspection of 100% of all components,
activities, etc. has a higher level of
reliability, but can be expensive and
cannot be applied to many activities.
QA focuses on developing systems that
are configured so as not to be able to fail
– quality right first time, right every time.
QA systems are designed to be mistake-
proof. Practical everyday examples
of mistake-proof systems and devices
include: the UK 3-pin plug, which can
only ever be inserted in the socket of the
Spring 2014 Volume 6 Issue 1

right type with the connections properly
connected; a car with an automatic
gearbox, which can only be started in
“park” and is impossible to stall by driver
error; a photocopier or computer printer
which will prevent operation if the correct
reassembly procedure is not followed
following a paper jam; computer software
that won’t progress if critical fields have
not been completed properly, etc. The
Japanese manufacturing industry uses
the term “Poka-yoke” for systems that are
mistake-proof.
Many industries have moved away
from using QC testing to manage quality
and adopted a QA approach. Examples
include: automotive, aerospace,
electronics, consumer durables (white
goods). Consider the reliability of these
compared with, say, 30 years ago.
However, the pharmaceutical industry
has been slow to adopt a QA approach
and is reluctant to move away from QC.
Internal Failure Costs
Internal failure costs arise where products,
components and materials fail to conform
to quality requirements prior to transfer
of ownership to the customer. This is the
cost of dealing with internal failure. This
category will include scrap, rework, etc.
Internal Failure Costs
These are the costs incurred as a result
of document errors – either mistakes in
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the information recorded, or missing
information. Included will be the costs
associated with correcting omissions and
errors, delays in releasing product, etc.
External Failure Costs
External failure costs are incurred when
products fail to conform to quality
requirements after transfer of ownership
to the customer.
This is the cost of dealing with external
failure. This is the most damaging
as it results in significant customer
dissatisfaction as well as cost.
External Failure Costs
These are also the costs incurred as a result
of document errors, but where the error
is found by the customer - i.e. too late!
Included will be the cost of replacement
product, customer complaints, company
reputation, loss of future sales, etc.
Genentech
Genentech introduced a CoQ initiative in
2008/9 at their US facility. They noted
that CoQ is:
• the process of determining costs
associated with quality and poor
quality work;
• a measure used to align quality
and production goals to drive right
first time and engrain quality in
operations;
INTERNATIONAL PHARMACEUTICAL INDUSTRY 75
LOGISTICS & SUPPLY CHAIN
• a systematic approach for
identifying, understanding and
remedying the financial impact of
poor quality;
• more than the cost of the quality
organisation; more about providing
an activity-based costing model to
drive decision-making.
“It’s not an accounting exercise. . . . It’s
meant to empower employees to make
better quality decisions.”
“Defects cost us money . . . and the closer
the defect gets to the customer, the more
expensive it is. The earlier we address
defects, the more cost-efficient and
effective we can be as an organization.”
(Matt Pearson, Associate Director,
Operational Excellence)
CoQ Application
Although used widely in many industries –
automotive, consumer goods, electronics,
aerospace, etc. – the take-up in the
pharmaceutical industry is low.
This is symptomatic of an industry that
is generally very slow to adopt tools,
techniques and
methodologies from other industry
sectors.
Calculating CoQ
Using a simple but detailed questionnaire,
data is collected under the four categories:
• Prevention costs: quality planning;
audits; reviewing and verifying
designs; process and equipment
qualifications and validations;
training; quality improvement
programmes; etc.
• Appraisal costs: in-process
inspection; inspection and test
equipment; finished product
inspection and test; product
and material identification and
traceability; standard documents
and records – use, control and
storage; etc.
• Internal failure costs: non-
conforming product; replacements,
rework; re-inspection; downtime,
breakdown; scrap, write-offs, low
yields and wastage; quality records
investigations – errors & corrections;
surplus inventory; etc.
• External failure costs: loss of
reputation; customer complaints,
investigations and reports; market
withdrawals; product rejected and
returned; customer defections/sales
loss due to poor service; total cost of
recalls and product liability, etc.
LOGISTICS & SUPPLY CHAIN
How Much Quality Costs
Generally, pharmaceutical companies
enjoy a very high overall profit ratio,
with a net profit margin of around 30%
(Various sources).
However, individual operating units and
factories are often a cost centre, not a
profit centre, such that a tight control over
operating costs is a key driver.
Other parts of the pharmaceutical supply
chain, such as distribution, will have
much lower profit ratios – <4% is quoted
for the logistics industry (Source: Global
Transport & Logistics Financial Ratio
Analysis 2012. Transport Intelligence
Ltd.)
Total Cost of Quality is, on average,
25% of the value of sales. (Source: Cost
of Quality as a Driver for Continuous
Improvement, Roger E Olson, Systems
Quality Consulting.)
“You can easily spend 15% - 30% of your
sales dollars on non-conformance.”
(Philip Crosby)
“In most companies, the cost of poor
quality runs at 20% - 30% of sales.”
(Dr Joseph Juran)
Therefore the cost of poor quality is often
equivalent to the value of net profit!
At 25% CoQ:
• the first two hours of the eight-hour
working day are spent covering the
cost of poor quality!
or
• you haven’t cleared the cost of poor
quality until sometime Tuesday!
Managing CoQ
The most expensive cost is that of external
failure. Not only does it have a financial
impact, it is severely damaging to the
company’s reputation. Activities should
focus on eliminating external failures.
The focus should then be on reducing
internal failure costs to zero. If a goal
greater than zero is selected, it’s like
saying defects and failure are OK in this
organisation!
Internal failures create scrap.
Appraisal costs result from checking
and testing – QC.
76 INTERNATIONAL PHARMACEUTICAL INDUSTRY
“Inspection with the aim of finding the
bad ones and throwing them out is too
late, ineffective and costly. Quality comes
not from inspection but improvement of
the process.” (Dr W. Edwards Deming)
Activities should focus on developing
robust processes that require minimal
inspection.
The most effective way of achieving the
highest quality at the lowest cost is by
developing robust, reliable processes that
produce quality product on a consistent
basis – right first time, right every time.
This is a QA approach to quality.
Aim for aerospace levels of reliability –
6-sigma and beyond!
Maintaining Performance
“You can’t manage what you don’t
measure.” (Quality mantra, incorrectly
attributed to Dr W. Edwards Deming.)
“If you don’t keep score, you’re
only practising.” (Jan Leschly, CEO,
SmithKline Beecham, 1994-2000)
Maintaining Performance
The key to running any operation is
timely measurement of the drivers of the
desired output.
The output from any process is determined
by the way in which the process modifies
and changes the various inputs. Knowing
which parameters of both input and
process have an influence on the output is
key to managing the process; otherwise,
it’s simply luck that the process delivers
the desired output.
Measuring the output without an
understanding of how it is derived will
lead to frustration and inappropriate,
and possibly damaging, tampering with
the process.
Conclusion
A full and proper analysis and
understanding of the sources of the cost
of poor quality allows the identified costs
to be eliminated or reduced.
With cost of (poor) quality representing
a very significant proportion of the
overall cost of running an operation, the
opportunities in terms of measureable
operational improvements and financial
savings are very significant.
There are a number of widely-used and
well-proven tools and techniques to
help with the analysis of cost of (poor)
quality and to address the identified
improvement opportunities.
Robert J Hayes
has worked in the
Pharmaceutical
Industry for over
thirty years. His
experience includes
Production and
Engineering
Management, New
Product Development, Factory Design,
Supply Chain Management, Validation
and a variety of support functions.
He has a special interest in the use of
risk management and modern quality
methodologies.
Bob is Vice-Chair of the Pharmaceuticals
Technical Activities Committee of the
Institution of Mechanical Engineers
(London). He is a Fellow of the IMechE.
As well as his experience in the
Pharmaceutical industry, Bob has also
worked in a range of other industries,
including: aerospace, precision
engineering, FMCG, insurance
and e-commerce. This breadth of
experience presents the opportunity for
Bob to introduce new ideas and best
practices when working with his current
clients.
Email: bob.hayes@seerpharma.co.uk
Spring 2014 Volume 6 Issue 1