How to Reduce Cost of Poor Quality

What is the cost of quality (COQ)?

Cost of quality (COQ) is the sum of expenses related to both preventing product defects (including audits, training, and product reviews) and dealing with product defects (including calibrations, scrap and rework, and repairs). Calculating COQ helps organizations better understand the trade-offs between investing in prevention and dealing with defects. According to the American Society for Quality, the Cost of Poor Quality (COPQ) at a thriving company will account for 10-15% of operations. By minimizing failure costs and maximizing efficiency, companies can improve overall profitability.

How do you calculate the cost of poor quality?

Companies track and analyze COQ data to find opportunities to improve quality, providing data to better guide decision-making and resource allocation. Cost of poor quality (COPQ) is a metric for evaluating losses related to poor-quality products and services. There are four categories of quality when calculating COPQ:

Internal failure costs

These costs occur when defects are discovered before the product or service reaches the customer. This includes costs due to unnecessary work or stockholding due to poor organization (i.e. waste); defective products or materials that cannot be used (i.e. scrap); and correcting defective material or errors before customer delivery (i.e. rework).

External failure costs

These costs arise when defects are discovered by customers after they receive the product or service. This includes fixing defects found in returned products or those already in the field; expenses incurred for warranty-covered repairs or replacements; and handling customer complaints.

Appraisal costs

These are expenses related to evaluating and inspecting products or processes to identify defects. This includes verifications on incoming material, process setup, and products against agreed specifications; quality audits to confirm quality systems are functioning properly; and rating suppliers to track and improve performance.

Prevention costs

These costs are incurred to prevent problems from occurring in the first place. This includes the cost of new-product reviews that analyze new designs or concepts to ensure they meet quality standards; quality planning expenses to support quality production processes; and the price of supplier surveys to ensure input materials meet your expectations. It should be noted that for most companies, prevention costs are only 5% of COPQ.

How to address cost of poor quality

COPQ is a strategic tool that empowers manufacturers to enhance product quality, reduce costs, and ultimately thrive in a competitive market. Beyond its simple formula, there is much to unpack about COPQ and what it can do for your organization.

Impact on profitability

COPQ provides a clear picture of how quality-related issues directly affect a company’s bottom line. It addresses both tangible and intangible costs associated with poor quality, such as scrap, rework, warranty claims, and customer dissatisfaction.

By quantifying these costs, manufacturers can make informed decisions about quality improvement initiatives. Reducing COPQ drives higher profitability by minimizing waste and maximizing customer satisfaction.

Identifying areas of improvement

COPQ analysis helps pinpoint areas where quality problems occur. Whether it’s in design, production, or supply chain processes, understanding COPQ allows for targeted corrective and preventative actions (CAPA).

The COPQ formula enables teams to zero in on issues early on. For example, if defects are consistently found during assembly, the root cause can be isolated to inadequate training, faulty equipment, or flawed procedures. Identifying these issues early allows for timely interventions.

Resource allocation and quality initiatives

COPQ guides resource allocation by highlighting critical quality-related expenses. Decision-makers can look to COPQ to answer questions like “where should we invest our resources to achieve the greatest impact?” or “how should we focus our quality improvement efforts to boost profits?”

Manufacturers can allocate funds, personnel, and time to address the most significant COPQ components. Whether it’s investing in better equipment, enhancing employee training, or implementing robust quality control measures, COPQ informs strategic decisions.

The importance of a quality management system (QMS)

A quality management system (QMS) is a crucial framework for organizations aiming to maintain and enhance product quality, reduce costs, and mitigate risks. It’s a comprehensive approach to ensure the quality and integrity of assets and products throughout their lifecycle. QMS enables organizations to efficiently manage and maintain high standards of quality. In addition to assessing the accuracy and reliability of data, applications, and systems, QMS identifies potential issues related to quality and overall performance. By proactively addressing these issues, QMS significantly impacts the COPQ by way of supporting appraisal activities, preventing defects, mitigating waste and rework, and so on.

The importance of product lifecycle management (PLM)

Product lifecycle management (PLM) is a comprehensive approach that oversees a product's entire journey, from conception to end-of-life. It plays a pivotal role in efficient product development and informed decision-making. By implementing PLM, organizations can directly lower their COPQ numbers.

Change management

Managing changes when using insufficient product definitions is tedious, error-prone, and must be iterated across different disciplines (e.g., engineering BOMs, manufacturing BOMs, and service BOMs). This impacts the COPQ because of the extra time and effort spent on corrections and adjustments. PLM offers a purpose-built digital product definition, where all relevant parts information can be found easily and within a single system. With PLM, change management is a simple, streamlined process that won’t inflate your COPQ.

Enterprise collaboration

Manufacturers often struggle with fragmented systems that hinder global collaboration and discourage active participation in cross-discipline partnerships. PLM solutions can address these challenges by providing access to product data across the enterprise. This lowers COPQ by ultimately improving quality, optimizing operations, and reducing rework.

Manufacturing data management

The collaboration between engineering and manufacturing teams is a key benefit of a PLM solution. With synchronized engineering data (by way of manufacturing BOMs), manufacturing can align with engineering throughout the product lifecycle. By implementing effective process plans and work instructions, plants can mitigate poor quality impacts and accelerate time to market—which lowers COPQ.