What is your cost of poor quality?

Beware: COPQ is an incomplete and misleading estimate of the true cost!

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,

Interesting thread, but bear in mind that COPQ falls short of defining the true cost.  It's traditionally comprised of the cost of scrap, rework, returns, QA department overhead, and inspection and test.  We can add some other variables, but still end up defining only the tip of the iceberg.

The cost of product field failures, replacement product, expedited deliveries, extra operations, past due receivables, complaint investigation time, ECO processing, and a host of other costs lurk below the waterline, waiting to sink the ship.

We also have to avoid Dr. Deming's 5th deadly disease; i.e., managing by visible figures only.  Don't forget the unknown and unknowable cost of the multiplying effect of the unhappy customer, lost customer loyalty, and the cost of the untrained employee, working in fear. Management needs profound knowledge more than COPQ estimates to spur decisions and investment in “critical quality improvement initiatives.”  As Deming often said, there's no substitute for knowledge.

© 2016 James F. Leonard.  All rights reserved.

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