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    Cost of Poor Quality

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    lugarx
    Cost of Poor Quality (COPQ) refers to costs that arise due to systems, processes, and products not being perfect. COPQ was popularized by Harrington in 1987 and refined the concept of quality costs. COPQ decomposes costs into direct and indirect categories. Direct COPQ includes prevention, appraisal, internal error, external error, and equipment costs. Indirect COPQ includes customer-incurred, customer dissatisfaction, and loss of reputation costs. COPQ can also arise in functional areas like personnel, purchasing, and marketing. The damages of poor quality increase the farther down the supply chain a failure occurs.

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    Cost of Poor Quality

    Uploaded by

    lugarx
    457 views4 pages
    Cost of Poor Quality (COPQ) refers to costs that arise due to systems, processes, and products not being perfect. COPQ was popularized by Harrington in 1987 and refined the concept of quality costs. COPQ decomposes costs into direct and indirect categories. Direct COPQ includes prevention, appraisal, internal error, external error, and equipment costs. Indirect COPQ includes customer-incurred, customer dissatisfaction, and loss of reputation costs. COPQ can also arise in functional areas like personnel, purchasing, and marketing. The damages of poor quality increase the farther down the supply chain a failure occurs.

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    Definition of Cost of Poor Quality

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    Cost of Poor Quality (COPQ) refers to costs that arise due to systems, processes, and products not being perfect. COPQ was popularized by Harrington in 1987 and refined the concept of quality costs. COPQ decomposes costs into direct and indirect categories. Direct COPQ includes prevention, appraisal, internal error, external error, and equipment costs. Indirect COPQ includes customer-incurred, customer dissatisfaction, and loss of reputation costs. COPQ can also arise in functional areas like personnel, purchasing, and marketing. The damages of poor quality increase the farther down the supply chain a failure occurs.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    457 views4 pages

    Cost of Poor Quality

    Uploaded by

    lugarx
    Cost of Poor Quality (COPQ) refers to costs that arise due to systems, processes, and products not being perfect. COPQ was popularized by Harrington in 1987 and refined the concept of quality costs. COPQ decomposes costs into direct and indirect categories. Direct COPQ includes prevention, appraisal, internal error, external error, and equipment costs. Indirect COPQ includes customer-incurred, customer dissatisfaction, and loss of reputation costs. COPQ can also arise in functional areas like personnel, purchasing, and marketing. The damages of poor quality increase the farther down the supply chain a failure occurs.

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    of 4

    Cost of Poor Quality

    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. 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. 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 into the following elements:

    Cost

    Description
    Direct COPQ can be directly derived from entries in the
    company ledger.

    Direct poor-quality costs


    Controllable poor-quality cost
    Prevention cost
    Appraisal cost
    Resultant poor-quality cost
    Internal error cost
    External error cost
    Equipment poor-quality cost

    Indirect poor-quality costs

    Controllable COPQ is directly controllable costs to


    ensure that only acceptable products and services
    reach the customer.
    Resultant COPQ are costs incurred because
    unacceptable products and services were delivered to
    the customer, resulting from earlier decisions about
    how much to invest in controllable COPQ.
    Equipment COPQ are costs to invest in equipment to
    measure, accept, or control a product or service. It is
    treated separately from controllable costs to
    accommodate the effects of depreciation.

    Indirect COPQ is difficult to measure because it is a delayed


    result of time, effort, and financial costs incurred by the
    Customer-incurred cost
    customer. These customer costs add up to lost sales and
    Customer-dissatisfaction cost
    therefore do not appear in the company's ledger.[7]
    Loss-of-reputation cost

    Examples

    Cost element

    Examples

    Prevention
    cost
    Controllable
    poor-quality cost

    Direct poorquality costs

    Quality planning (for test, inspection, audits,


    process control)
    Education and training
    Performing capability analyses
    Conducting design reviews

    Appraisal
    cost

    Test and inspection


    Supplier acceptance sampling
    Auditing processes

    Internal
    error cost

    In-process scrap and rework


    Troubleshooting and repairing
    Design changes
    Additional inventory required to support poor
    process yields and rejected lots
    Reinspection and retest of reworked items
    Downgrading

    External
    error cost

    Sales returns and allowances


    Service level agreement penalties
    Complaint handling
    Field service labor and parts costs incurred
    due to warranty obligations

    Resultant poorquality cost

    Equipment poor-quality cost

    Customer-incurred cost
    Indirect
    poor-quality
    costs

    Micrometers, voltmeters, automated test equipment


    (but not equipment used to make the product)
    Loss of productivity due to product or service
    downtime
    Travel costs and time spent to return
    defective product
    Repair costs after warranty period
    Backup product or service to cover failure
    periods

    Customer-dissatisfaction cost

    Dissatisfaction shared by word of mouth

    Loss-of-reputation cost

    Customer perception of firm

    White collar COPQ


    Harrington noted that expanding cost analyses to management and clerical workers could also
    make a significant dent in waste. He defined the following costs by functional area:

    Functional area

    Controllable COPQ

    Resultant COPQ

    Timecard reviews
    Capital equipment
    reviews
    Invoicing reviews

    Billing errors
    Incorrect accounting entries
    Payroll errors

    Software COPQ

    Design reviews
    Code reviews

    Crashes
    Deadlocks
    Incorrect outputs

    Plant administration
    COPQ

    Security
    Facility inspection and
    testing
    Machine maintenance
    training

    Disclosure of trade secrets


    Facilities redesign
    Overstaffing/understaffing
    Equipment downtime/idle time

    Purchasing COPQ

    Vendor reviews
    Periodic vendor surveys
    Follow-up on delivery
    dates
    Strike built-in costs

    Line-down cost
    Excessive inventory due to
    suppliers
    Premium freight cost

    Marketing COPQ

    Sales material review


    Marketing forecast
    Customer surveys
    Sales training

    Overstock
    Loss of market share
    Incorrect order entry

    Personnel COPQ

    Prescreening applications
    Appraisal reviews
    Exit interviews
    Attendance tracking

    Absenteeism
    Turnover
    Grievances

    Industrial engineering
    COPQ

    Packaging evaluations
    Layout reviews
    OSHA reports
    Inspection of contract
    work

    OSHA fines
    Shipping damage
    Redoing layout
    Paying contractors for poor work

    Controller COPQ

    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)

    Ref: [Harrington, H. James] (1987), Poor-Quality Cost, American Society for Quality, ISBN 978-08247-7743-2, OCLC 14965331
    eof

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