What is your Cost of Poor Quality (COPQ)?

C

captainmajid

#1
A thread on an American Society for Quality web site addressed the topic of the cost of poor quality (COPQ). It was opened when one group member posted, “The cost of poor quality in manufacturing companies ranges from 5 percent to 35 percent of sales. What has your company done to reduce this cost?” His query generated a number of responses, among them:

What is the practical use of reporting COPQ as a percentage of sales? Sales revenue can be affected by many other factors than Quality. For example, I would guess that COPQ/Revenue has gone up enormously in the oil industry over the last year. Has quality got worse? Has the quality of Blackberry products declined over the last decade? Surely a more meaningful way to report COPQ would be as a percentage of total COQ [cost of quality]; by which I mean: Total COQ = cost of prevention + cost of appraisal + internal cost of failure + external cost of failure.

I like the idea of a trackable metric COPQ/TCOQ because it could work for manufacturing/sales/service (including laboratories). But since COPQ is essentially internal failure + external failure, arithmetically wouldn't you end up with essentially something like 1/Prevention + Appraisal?

The question was, “What has your company done to reduce
cost of poor quality?” How does knowing that your company's COPQ is 20% of your company's sales help you understand where you are relative to other companies and why is that helpful?

It's a metric used to help top level management make a decision. If management sees the metric and decides to attempt to increase sales to cover for poor quality, well, that's why companies go out of business.

At the end of the day, it's a decision making tool that should not be used in a vacuum. When briefed effectively, it can be used as a powerful tool to help sway top management to invest in critical quality improvement initiatives.
I decided to join the conversation and posted.
 
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normzone

Trusted Information Resource
#2
Do any of the forum posters actually have an active system where this is tracked and reported? I could use a good model - I've lobbied for such a system in my current environment, but I seem to be the only one who can get excited about it.
 
T

Tyler C

#3
Total COQ = cost of prevention + cost of appraisal + internal cost of failure + external cost of failure.
I may be off base here, but I don't really see what this formula would tell you, other than some numerical value of the cost of quality. This would have a lot of potential to raise questions such as "what does that tell us?" and may be seen as something that doesn't add any value to the QMS.

I would change this formula to create a model that tells me whether or not I am spending too much money on COQ, not enough, or just right. For example, I would change this formula to:
COQ=(cost of prevention + cost of appraisal) - (internal cost of failure + external cost of failure).

If the cost of failure is potentially a million dollar a year customer, and your cost of prevention and appraisal is minimal, this would give you a negative number, telling you this could be a high risk and you may want to consider increasing your cost of prevention and appraisal. However, if the cost of failure is minimal, yet you are spending thousands on prevention and appraisal, perhaps that money could be better spent elsewhere (this would give you a high positive number). The closer to zero you are, the better ROI you should receive.

If done correctly, I could see this becoming a model that could satisfy the ISO9001:2015 Risk-Based Thinking requirement while actually adding some value to the company and the QMS.

Thoughts?
 
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Access2hc

Involved In Discussions
#4
I agree with Tyler C.

in practice, the numbers will be challenging to obtain AND validate, and it would really have to be an elephant in the room, and done a bit on the stealth for something substantial to be revealed as COPQ. Unless the company culture is completely open and honest, having attention to the exercise typically reveals sandbagging or fudging with numbers to try 'stay still and hope the problem goes away on its own"

perhaps a bit cynic here but just tampering with reality. hope it helps

Cheers,
Ee Bin
Access2hc
 

Bev D

Heretical Statistician
Staff member
Super Moderator
#5
Well, "modern" thought is that the COQ is counterproductive. By modern I mean that Motorola (and many others of course) threw out the 'prevention' cost because it only drove the pencil heads to argue that quality improvements were not cost effective - something that Motorola disproved in the eighties. Plus what all do you put in preventive costs? All of the basic things we do to design a quality product or capable process? Buying the right kind of equipment? Training our people? Design reviews? Tolerance stack up analysis? Contracts with your suppliers?

This is today's quality professionals advocate for calculating the Cost of POOR Quality.

Normzone: my organization has tackled a fairly accurate COPQ system in the past. It didn't really help us. What did help was getting people to experience the costs of failures for themselves. We had to get people to see beyond their little world and see the cost to the whole system. We also had to utilize the Toyota Production System approach to seeing the 7 wastes, which no accounting system can see. Once we started requiring crossfunctional teams and having leadership personally lead Problem solving efforts we achieved a turnaround in attitudes towards quality. cold COPQ numbers never had that effect.
 
T

Tyler C

#6
I see your point Bev D. In your example they were probably using the traditional COQ=Prevention + Appraisal + Internal Failure + External Failure where I am suggesting breaking the good and the bad up and compare to each other.

My counterpoint is that when figuring COQ, you are figuring the COPQ along with the COGQ (cost of good quality) and comparing them in my above example. The above example is more of an estimation or projection of results (plan).

If the projected cost of poor quality outweighs the cost of good quality, maybe you should spend more on good quality to reduce the actual cost of poor quality. If the projected cost of good quality heavily outweighs the projected cost of poor quality, you may be able to afford to cut some costs in regard to good quality (do).

Remember, the risk definitions also includes positive opportunities. If you can cut good quality costs without actually jeopardizing your quality and spend that money on marketing for example, you could increase business. This is also a risk that should be considered. Of course, you would want to monitor to see if the projections matched reality and check for things such as an increase in potential quality issues along with how much business is being brought in through the expanded marketing. Run the formula again but with actual data instead of projected data (check).

Then, make adjustments as appropriate (act).

ASQ has a decent example of what should be included in all aspects of the traditional formula.

Thoughts? Keep in mind, this is not based on actual experience with this model, rather just thoughts around the subject. I may find that I could be 100% wrong when it comes to actual practice.

Also, could you share some examples of how you got people to experience the costs of failure for themselves?
 
#7
I am an accounting graduate student now and looking into use of COQ tools in Quality Systems. I was a quality manager in manufacturing. I have read Jack Campanella's book on Quality Costs.

Does anyone know of use of COQ in the Medical Device Industry?
 

qcman

Registered Visitor
#8
I thought I would bring this thread back up since it deals with a question I have. Our COQ is nothing more than a number that seems to be ignored here by most. I am reviewing this now to determine if we need to make changes to it so its actually useful or drop it all together. The question I have for those using COQ is do you include Quality Department staff salaries in prevention?
 

Bev D

Heretical Statistician
Staff member
Super Moderator
#9
. The question I have for those using COQ is do you include Quality Department staff salaries in prevention?
I don’t use COQ, only CO Poor Quality when I calculate a COPQ cost.
As for your question: The ‘rules’ for COQ place Quality personnel in either appraisal or prevention. It depends on what the Quality department staff are doing. If they are inspecting product, performing audits, reviewing change orders or administering controlled documents, etc. they go in appraisal.

Arguably if they are dealing with correction actions, or developing/training quality system procedures like change assessment, new product development, etc. then they go into prevention.

However, lets think about what prevention is: it really is any activity related to ‘doing it right the first time’. So MSAs, Design reviews, creating fixtures and jigs that hold a part correctly, mistake proofing, good mold design, change assessments, checking your math, writing code, designing products, etc. is preventive. In other words ALL activities in an organization go into 1 of the 4 categories. This is why preventive costs have gone out of favor. Too many people can reduce preventive costs - which provide a short term boost to the bottoms line - that only serve to increase all of the other costs related to poor quality. So it really isn’t a cost so much as it is an investment...
 
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