Cost of Poor Quality or COPQ is the building block of a manufacturing industry and might lead to loss of business if not considered as the first priority. Before starting the topic, I would like to point out, ‘What top manufacturers in the world say about quality’.Henry Ford: Quality means doing it right when no one is looking. Click To Tweet Aristotle: Quality is not an act, it is a Habit. Click To Tweet
Both the statements have the same meaning, If you want to stay in business then you have to maintain 100% Quality.
In this article, I am going to discuss the components and different kinds of costs involved in COPQ and also few examples of real-world losses due to lack of quality. Later, I will discuss the Traditional & the Broad outlook to COPQ.
What is COPQ?
Cost of Poor Quality can be defined as those costs which would disappear if systems, processes & products were perfect. This means that the manufacturing industry has achieved 100% Quality.
Components of the Cost of Quality[COPQ]
There are four different components of COPQ. They are:-
1. Appraisal Costs
Inspection is a part of a quality process and every manufacturing company hires an inspection team in order to maintain their product quality. Thus, the appraisal costs are known as the cost involved in the inspection of the product at the time of manufacturing.
2. Internal Failure Costs
If the failure is found before the delivery of the product to the customer then that’s internal failure and the cost used to overcome this failure is known as internal failure cost. These costs are of two types:-
- Rework Cost:- If the error is small and it can be reworked with minimum investment & effort then the cost involved in this is known as rework cost.
- Scrap Cost:- When the error is big & it can’t be reworked then the product is rejected & termed as scrap. The cost involved in the manufacturing of this scrap is known as scrap cost.
3. External Failure Costs
These costs are the most dangerous cost. If the failure has occurred after the delivery of product into the customer’s hand then it’s known as the external failure and the cost used to overcome this failure is known as external failure cost. These costs are two types:-
- Replacement or Repair cost:- If the product is under warranty period then this cost comes in handy. Either customer is awarded a replacement or the rework is done on his products to fulfill the warranty issue.
- Reputation cost:- I already said that external failure costs are the most dangerous costs as these costs might lead to the loss of Company Reputation, customers & goodwill.
4. Prevention Costs
Prevention costs are those costs which are used to prevent quality failure in future. These are good costs and every manufacturer should invest in these costs. These costs are of three types:-
- Customer Assesment costs:- The costs involved in learning about the market demands, customer needs & already available products in the market are known as the customer assessment costs.
- Process Control costs:- Every product has to go through several manufacturing processes and the higher number of processes leads to higher cost. Thus, the cost involved in doing the process control planning of the product is known as process control cost.
- Quality Improvement costs:- The costs involved in checking of whether the raw material used is of optimum quality or not, whether the company’s manpower is skilled or not and whether the manufacturing machinery is performing properly or not are known as quality improvement costs.
Prevention costs are indirectly proportional to the rest three costs i.e. inspection & failure costs. It’s obvious that if prevention is done then there will be no external/internal failure. Moreover, this also reduces the appraisal cost i.e. the inspection cost as less inspection is required when production is in line & staffs are trained. Every manufacturer should spend more amount of money in adapting prevention methods as these costs provide the best ROI.
Types of the cost involved in COPQ
If the manufacturer is not spending on prevention cost then he might suffer huge losses. There are many different kinds of losses due to poor quality product manufacturing.
These losses are categorized into two different types which are as follows:-
1. Visible Cost
- Warranty Issue
2. Hidden Cost
- Excessive use of material
- Inadequate Resource Utility
- Conversion Efficiency of Material
- Control, Redesign, Reinspection
- Cost of resolving the customer problem
- Lost customer + Goodwill
- High Inventory
Real world example of Loss due to Poor Quality
There are many real-world examples of loss due to poor quality. Here are the best two examples.
NASA: Space Shuttle Challenger Disaster
NASA launched its space shuttle Challenger in 1986. Within the 73 seconds of launch, the space shuttle challenger blasted due to the quality failure of ‘O-Ring’ seal. NASA had to pay huge losses due to this quality ignorance. The Human losses were 7 Astronauts & the money losses were more than 1 Billion Dollars.
TOYOTA: Sticking Accelerator Pedal
Toyota recalled 9 million cars in 2009 because there was a quality failure. There was a defective floor mat & defective foot pedal which lead to unintended acceleration. Obviously, this leads to losses. Toyota halted the production & sale of 8 different models which cost them the financial loss of 5.5 billion dollars. Moreover, there were the human losses too, 52 people were dead & 32 were injured.
Traditional Outlook to COPQ
Instead of attaining 100% quality level, many manufacturers aim to attain optimum quality. They fear that 100% quality will cost them too much and to prove this point, they plot a graph between ‘Quality Level’ and ‘Cost per Good unit of products’ considering all the four components of COPQ.
The above graph shows the ‘Traditional outlook to COPQ’. It consists of a red line showing how internal & external failure costs are reduced with the increase in quality level. It also consists of a green line showing how appraisal & prevention cost increases with the increase in quality level and a blue line which refers to the Total Quality Cost(TQC).
According to the traditional outlook to COPQ, the Total Quality Cost(TQC) is minimum at the Optimum Quality level which is far behind the 100% quality level. It is obvious that if 100% quality level is not achieved then all the four components of COPQ will be involved in the total quality cost leading to the higher value of TQC.
Broad Outlook to COPQ
The Solution to the Traditional outlook of COPQ was given by the Japanese as a Competitiveness theory i.e. Continuous Quality Improvement. The Japanese calculated the exact cost of quality and found out that 100% quality leads to more benefits and higher sales. They divided the benefits of continuous quality improvement into two different parts:-
1. Cost Route Benefits
Cost route benefit means that the good quality will ultimately lead to lower cost. These benefits lead to defect-free output & reduced cost of operation and hence, in turn, increasing the manufacturer’s profit.
2. Market Route Benefits
Market Route Benefit leads to increase in profit and savings of the manufacturer. These benefits lead to an improved competitive position of the manufacturer in the market which in turn leads to high prices of their product & increased market share. Hence, in turn, increasing the manufacturer’s profit.
The result of Continuous Quality Improvement is ‘Minimized Total Quality Cost at Zero defects’. The graph given below explains this line better.
The above graph shows a Broader outlook to COPQ. It consists of a red line showing how internal & external failure costs are reduced with the increase in quality level. It also consists of a green line showing how appraisal & prevention cost increases with the increase in quality level and a blue line which refers to the Total Quality cost.
When 100% quality is achieved, the internal and external cost will come down to almost zero. Moreover, if our production is in line & the staffs are trained then the inspection & prevention cost will also go down. As a result, this will lead to the reduction of Total Quality Cost which will also be less the TQC at Optimum Quality in the Traditional outlook to COPQ.
Hence, this broad outlook shows how attaining 100% quality leads to higher benefits & less cost. If a manufacturer wants to stay in the business for the long run then he must adopt Continuous Quality Improvement and always consider quality as his first priority.