Reducing the Cost of Poor Quality (COPQ) in Business

Understanding the Cost of Poor Quality (COPQ)

The Cost of Poor Quality (COPQ) represents the costs that would disappear if each task were always performed without shortcomings. These are divided into controllable costs, direct costs, and indirect costs.

Direct and Indirect Costs of Quality

Direct costs can be easily traced in the ledger of the company. These include:

• Controllable costs (costs of poor quality controls): Named so because management decides how much money is spent on them and has direct control over them. These consist of prevention costs and appraisal (assessment) costs.
• Costs resulting from poor quality: These are error costs, which are divided into internal error costs and external error costs.

Indirect costs are those that are not reflected directly in the income statement of the company, but they are a financial scourge that in some cases can exceed direct costs. These include the cost of customer dissatisfaction and the cost of lost reputation.

Prevention Costs

Prevention costs are the expenses incurred by the company to prevent the appearance of errors and to ensure that machines, people, and workflows function well all the time. Principally, these include:

• Employee training
• Study and revision of suppliers
• Design maintenance planning
• Analysis of equipment capacity

Costs Resulting from Errors

The cost of poor quality resulting from errors includes all disbursements made by an undertaking as a result of mistakes. These are categorized as:

• Internal Error Costs: Costs the company incurs as a result of errors detected before the product reaches the customer.
• External Error Costs: Costs the company incurs due to shipping defective products to the customer. These include:
  • Litigation
  • Handling customer complaints (technical service)
  • Market product recalls

COPQ Impact on the Client and Dissatisfaction

The cost of poor quality that rests on the client is the burden the customer must endure due to defects in materials provided by suppliers. Although suppliers may replenish the defective material for free, the customer still suffers losses from assembly line stoppages, lost travel time, and other disruptions.

Costs of poor quality from customer dissatisfaction represent the revenue lost when a customer is not satisfied with the quality of the product and decides not to buy it.

Assessment and Appraisal Costs

Assessment costs (or appraisal costs) refer to the money spent to evaluate the outcome of the production. These are justified because production is rarely perfect, and despite prevention efforts, errors will still appear. The main assessment costs include:

• Inspection and testing of finished designs
• Revision and review of errors in documents
• Invoice and billing revision