Cost of Quality (COQ) is a way of measuring the costs associated with ensuring that a Culture of Quality thrives in an organisation, as well as the costs associated with Quality failures. There are four types of Quality-related costs:
Prevention costs
These are our planned cost of ensuring that our design and implementation of the QMS supports the operation. Think of it in the same light as “maintenance costs”, which are accepted part of the overheads of running an operation. We wouldn’t think of omitting these, so we should have the same desire and intention to include effective “quality” management costs.
Appraisal costs
These costs are the result of measuring the effectiveness of a Quality Management System and apply to both manufacturers and the supply chain. These costs include verification, Quality audits, and supplier assessment.
Internal failure costs
These costs are associated with discovering failures in our systems, which include the assessment of quality, with the important feature being we identify these BEFORE they are delivered to or collected by the customer.
They include waste from poor processes, excessive scrap, rework to correct errors, and the activity required to diagnose the cause of Quality failures.
External failure costs
Another way of looking at this is “reputation cost” as these costs only become apparent after the product or service has been delivered or used by the customer. Also, these costs escalate within the business such that if it is deemed significant, then senior management- even the Managing Director – are usually involved to discuss the reasons with the customer and placate any unfortunate actions which may result.
Your reputation has been dented and can only be recovered by prompt and professional action.
Therefore, one of the areas which the management team (including the Quality Manager) often ignore all the hidden costs, which few people discuss and make appropriate allowances.
These hidden costs must be assessed under the title of “Cost of Poor Quality” or COPQ.
COST OF POOR QUALITY
This is the area of the business, which everybody, including senior management would rather not discuss and sweep it under the carpet, in the hope that it won’t be noticed.
C O P Q. We tend to want to ignore this because it is an embarrassment AND it is also difficult to measure with accuracy. This is where we really test the Culture of Quality in our business.
The primary consequences of COPQ are the most obvious. Costs associated with process failures inside the organisation include:
- Excess scrap and waste material created by inefficient manufacturing processes
- Rework on defective or damaged products before they ship to market
- Retesting and analysing processes and procedures to determine point of failure
- Recalls
- Warranties
- Complaints
- Returns
- Repairs
- Field support.
The traditional Cost of Poor Quality has usually been assumed to be between 4% and 5% of an organisation’s annual revenue. How is that with you? If you’re saying that is not true for me – best check again.
It’s like an iceberg! And issues associated with COPQ can include:
- Decreased employee engagement
- Higher employee turnover and attrition
- Employees addressing Quality failures instead of focusing on Quality improvement through innovation
- Overtime costs
- Machine downtime
- Long-term customer dissatisfaction
- Brand damage
- Poor inventory turnover
- Decreased customer lifetime value.
When we account for these hidden and long-term costs, COPQ is more like 10% to 25% of an organisation’s annual revenue. Investing in Quality is therefore the most effective way of reducing these staggering costs.