Cost Of Poor Quality

( COPQ )

An Overview

By
I.B.K.Murthy

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Cost of a Product
◼ There are certain legitimate costs involved in
producing a product, towards ;

◼ Material Resources

◼ Human Resources

◼ Financial Resources

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Cost of a Product

◼ Optimum usage of these resources is

required.
◼ But any excessive / improper usage of these
resources or any wastages of these
resources, results in additional costs
◼ Sum total of such costs is called ‘cost of
poor quality’ or cost of ‘Not getting it right
first time’
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Cost of Quality ? ( Phil Crosby )

Quality is Free , but not a gift

It pays for itself in terms of reduced

rejections, increased productivity
and improved customer satisfaction

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Cost Of Poor Quality ( Juran )
◼ Aims at Financial Quantification of all
activities involved in prevention and
rectification of defects
◼ Because it is expressed in terms of
money, the language which the
management understands better, it will
act as a powerful force for focussed
improvement
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Cost Of Poor Quality ( Juran )
◼ It gives a shock treatment as costs of not
getting it right first time, ranges from 20 to 30
percent of sales turnover
◼ It makes the management to realize that
quality is a closely managed function using
money ( the language of management )
rather than having quality as something which
is desirable and nice to have, but when it
comes to the point, really of low priority.

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Cost Of Poor Quality ( Juran )

◼ Exactness is not the issue, it is the

trend, approximate magnitude, and the
locations that are important

◼ It is related to one of the seven wastes

( popularized by Taiichi Ohno of
Toyota) , namely ‘ Defects ’.

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Elements of COPQ ( Phil Crosby )
◼ Cost of conformance
◼ Prevention cost
◼ Appraisal cost
◼ Cost of Non-Conformance
◼ Internal Failure Cost
◼ External Failure Cost
◼ Cost of Lost Opportunities
◼ Loss of profits
◼ Loss of potential Profits

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IBKM 9
Visible and hidden costs

•Scrap
•Rework
Visible costs
•Warranty costs

• Conversion efficiency of materials

• Inadequate resource utilization

• Excessive use of material

• Cost of redesign and re-inspection Hidden Costs

• Cost of resolving customer problems

• Lost customers / Goodwill

• High inventory

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Prevention Cost

It is defined as the cost of all

activities that prevent defects /
failures from occurring so as to
keep unsatisfactory products ( at
all stages ) from coming about in
the first place
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Prevention Costs - examples
◼ Contract Review
◼ Design review

◼ Supplier Evaluation

◼ Planning Activities

◼ Quality Training

◼ Validating Customer Requirements

These costs are linked with level of

planning in the company to produce
defect free products
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Appraisal Cost

It is defined as the cost of

activities to find the status (
inspection & testing ) of the
product at all stages of its
processing, in order to
determine the conformance to
requirements, mainly during the
‘ First time through ’
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Appraisal cost - examples
◼ In process inspection / control
◼ Final inspection

◼ Laboratory testing / measurement

◼ Quality audits

◼ Vendor surveillance

◼ Incoming material inspection

◼ Proto type testing

These costs are linked with capability of

processes and contractual requirements
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Internal failure cost

It is defined as the cost of

making, and rectifying defective
output that are identified prior to
shipment to the external
customer

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Internal failure cost -examples
◼ Scrap
◼ Rework
◼ Re-test
◼ Re-inspect
◼ Analysis of Defects and Failures
◼ Cost of delay due to failures
◼ Errors in Invoice
◼ Errors in Engineering Drawings

These costs would disappear if no defects

are produced, prior to shipment to the
customer
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External failure cost

It is the cost of rectification of

product failures after shipment
to the customer

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External failure cost - examples
◼ Warranty costs
◼ After Sales Service
◼ Concessions given due to failures
◼ Product Liability
◼ Analysis of field failures
◼ Retrofit costs
These costs would disappear if only
defect free products are shipped to the
customer.
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Cost of Lost opportunities

It is the profits that a company

does not make due to the
revenue lost by order
cancellation and / or losing to
competitors because of not
meeting customer requirements

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Cost of lost opportunities - Examples
◼ Loss of Customers who go to
competitor(s) who satisfies them, better
◼ Reduced Repeat Orders

◼ Loss of prospective customers who do

not place orders because of the image of
the company relayed to them by
dissatisfied customers
These costs would reduce, if company
produces and delivers products,
which exceed customers’
expectations
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Results of Industrial study ( US )

Cost of Poor Quality amounts to 25 % to

34 % of Sales Turnover

◼ Preventive cost : 1%
◼ Appraisal cost : 4 to 6 %
◼ Internal failure cost : 10 % to 12 %
◼ External failure cost : 10 % to 15 %

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 COPQ at various levels of Sigma

Sigma Defect rate(PPM) Cost of poor quality

Competitive level

6 3.4 <10%
World
5 233 10-15% Class

4 6210 15-20%
Industry
3 66807 20-30% Average

2 308537 30-40%
Non
>40% Competitive
1 6,90000

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Modified definition of COPQ

➢ Any activity that does not add

value to the customer can be
regarded as poor Quality.

➢ Hence the underlying causes of

all forms of Wastes are regarded
as poor quality

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The Seven Wastes ( Taiichi Ohno )
◼ The waste of Overproduction
◼ The waste of Waiting
◼ The waste of Transporting
◼ The waste of inappropriate processing
◼ The waste of Unnecessary Inventory
◼ The waste of Unnecessary Motions
◼ The waste of defects
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Additions to Ohno’s list
◼ The waste of human potential or talent (
not bringing your brain to work )
◼ The waste of excess energy or power
used
◼ The waste of pollution
◼ The waste of space
◼ The waste of unnecessary complexity

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COPQ initiatives
◼ Initial focus on elements of ‘ Internal
Failures ‘ and ‘ External Failures, for
which enough data is generally available

◼ Reduction of COPQ is considered as a

C.I.P. ( Continuous Improvement Program
) –an ISO 9001 / IATF 16949 requirement
◼ Kaizen Type
◼ Project Type

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COPQ initiatives

◼ Selecting them as ‘ Six Sigma’

projects
◼ Critical to Quality
◼ Critical to Cost
◼ Critical to Customer

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Typical Projects for implementation

◼ Reduction of Inventory ( increasing

Inventory Turns )
◼ Reduction of Scrap ( in sheet metal
operations )
◼ Reduction of In-process rejections
◼ Reduction of Mould Changing Times in
Plastics Injection Molding shop
◼ Reduction of Electrical Energy
Consumption
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Implementation Methodology
◼ HOD is the Project Leader
◼ CFTs ( Cross-Functional Teams ) are
formed with members irrespective of their
hierarchical position
◼ All projects are short term ( Max. Six
months )
◼ Progress reviewed in weekly Executive
Committee meeting by CEO.
◼ A senior HOD co ordinates / monitors Six
Sigma projects, additionally.
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Future Trends
◼ To gradually extend the activity to all the
elements of COPQ, over a period

◼ Integrate measurement / monitoring / improving

, into the ongoing QMS( Quality Management
System ), implementation / maintenance

◼ Extend the activity to all Divisions /group

companies, in a phased manner.

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Your inputs please !

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 Thank you
and
May God Bless you

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