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Cost of poor quality

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It has been suggested that this article or section be merged with Quality costs . (Discuss)

Cost of poor quality (COPQ) or poor quality costs (PQC), are defined as costs that would
disappear if systems, processes, and products were perfect.
COPQ was popularized by IBM quality expert H. James Harrington in his 1987 book Poor
Quality Costs.[1] COPQ is a refinement of the concept of quality costs. In the 1960s, IBM
undertook an effort to study its own quality costs and tailored the concept for its own use.[2].
While Feigenbaum's term "quality costs" is technically accurate, it's easy for the uninitiated to
jump to the conclusion that better quality products cost more to produce. Harrington adopted the
name "poor quality costs" to emphasize the belief that investment in detection and prevention of
product failures is more than offset by the savings in reductions in product failures.
COPQ decomposes COPQ into the following elements:
Cost Description
Direct COPQ can be directly derived from entries in the
company ledger.[3]
Direct poor-quality costs
• Controllable COPQ is directly controllable costs to
• Controllable poor-quality cost ensure that only acceptable products and services
○ Prevention cost reach the customer.[4]
○ Appraisal cost • Resultant COPQ are costs incurred because
unacceptable products and services were delivered
• Resultant poor-quality cost
to the customer, resulting from earlier decisions
○ Internal error cost about how much to invest in controllable COPQ.[5]
○ External error cost • Equipment COPQ are costs to invest in equipment
• Equipment poor-quality cost to measure, accept, or control a product or
service[6]. It is treated separately from controllable
costs to accommodate the effects of depreciation.
Indirect poor-quality costs
Indirect COPQ is difficult to measure because it is a
• Customer-incurred cost delayed result of time, effort, and financial costs incurred
• Customer-dissatisfaction cost by the customer. These customer costs add up to lost sales
• Loss-of-reputation cost and therefore do not appear in the company's ledger.[7]

Contents
[hide]
• 1 Examples
• 2 White collar COPQ
• 3 Cost of poor quality by inception point:
• 4 See also
• 5 References

[edit] Examples
Cost element Examples
• Quality planning (for test, inspection,
audits, process control)
Prevention • Education and training
cost
• Performing capability analyses
Controllable
poor-quality cost • Conducting design reviews

• Test and inspection

Appraisal
• Supplier acceptance sampling
cost
• Auditing processes

• In-process scrap and rework

• Troubleshooting and repairing
Direct poor- • Design changes
quality costs Internal error
cost • Additional inventory required to support
poor process yields and rejected lots

Resultant poor- • Reinspection and retest of reworked items

quality cost • Downgrading

• Sales returns and allowances

• Service level agreement penalties
External
error cost • Complaint handling
• Field service labor and parts costs incurred
due to warranty obligations
Micrometers, voltmeters, automated test
Equipment poor-quality cost equipment (but not equipment used to make the
product)
Indirect poor- Customer-incurred cost • Loss of productivity due to product or
quality costs service downtime
• Travel costs and time spent to return
defective product

Customer-dissatisfaction cost
Loss-of-reputation cost
• Repair costs after warranty period
• Backup product or service to cover failure
periods
Dissatisfaction shared by word of mouth
Customer perception of firm

[edit] White collar COPQ

Harrington noted that expanding cost analyses to management and clerical workers could also
make a significant dent in waste.[8] He defined the following costs by functional area:
Functional area Controllable COPQ Resultant COPQ
• Timecard reviews
• Billing errors
• Capital equipment
Controller COPQ • Incorrect accounting entries
reviews
• Payroll errors
• Invoicing reviews

• Crashes
• Design reviews
Software COPQ • Deadlocks
• Code reviews
• Incorrect outputs

• Security • Disclosure of trade secrets

• Facility inspection and • Facilities redesign
Plant administration
testing
COPQ • Overstaffing/understaffing
• Machine maintenance
training • Equipment downtime/idle time

• Vendor reviews
• Line-down cost
• Periodic vendor surveys
• Excessive inventory due to
Purchasing COPQ • Follow-up on delivery suppliers
dates
• Premium freight cost
• Strike built-in costs

• Sales material review

• Overstock
• Marketing forecast
Marketing COPQ • Loss of market share
• Customer surveys
• Incorrect order entry
• Sales training
Personnel COPQ • Prescreening • Absenteeism
applications • Turnover
• Appraisal reviews • Grievances
• Exit interviews
 • Attendance tracking

• Packaging evaluations
• OSHA fines
• Layout reviews
Industrial • Shipping damage
engineering COPQ • OSHA reports
• Redoing layout
• Inspection of contract
• Paying contractors for poor work
work

[edit] Cost of poor quality by inception point:

The damages of poor quality augment as the inception point is farther down the supply chain:
TCFP [Total Cost of Faulty Part] =
Direct Cost (manufacturing cost)
➔ failure at supplier's site (bad)
+ Labor Cost (assembly and testing)
+ Overhead Cost (Inventory, handling, shipping costs)
+ Scrapping Cost (of part and attached parts assemblies: Sometimes assemblies cannot be
disassembled and have to be scrapped altogether)
+ Rework (applying a new part instead)
➔ failure at manufacturer's site (worse)
+ Repair / Recall Costs (these are costs associated with repairing or replacing a new part /
assembly under warranty)
+ Product Liability Costs (These are costs resulting from damages caused by the faulty part to
3rd parties)
➔ failure at customers' site (worst)
[edit] See also
• Gold in the mine
• Quality costs
[edit] References
1. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
ISBN 9780824777432, OCLC 14965331
2. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 128, ISBN 9780824777432, OCLC 14965331
3. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 13, ISBN 9780824777432, OCLC 14965331
4. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 14, ISBN 9780824777432, OCLC 14965331
5. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 23, ISBN 9780824777432, OCLC 14965331
6. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 25, ISBN 9780824777432, OCLC 14965331
 7. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 125, ISBN 9780824777432, OCLC 14965331
8. ^ [|Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality,
p. 103, ISBN 9780824777432, OCLC 14965331
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