What is COPQ and how to calculate COPQ

COPQ & Its Calculation

COPQ stand for cost of poor quality. Every industries calculate the COPQ and check whether it is meeting industries decided target line.

Industries want to reduce wastes and defects and increase profit. Without defect and process variation, cost will be reduce and profit will increase, but process variation will be there, it can not be eliminate, similarly there will be some loss, which we need to study and has to be in control.

Sometime this cost increases, we don’t identify some cost associated with quality. Example like-Rework, customer complaint handling, customer visit, re-inspection, etc.

So we need to do study for COPQ and reduce as much as we can as per decided improvement action plan.

With this article will understand Quality, cost of quality, Cost of poor quality and How we calculate COPQ.

What is Quality?

1. Quality is customer satisfaction
2. Quality is fitness for use
3. The totality of features and characteristics of a product or service that bears on its ability to satisfy given needs.

What is good Quality in manufacturing?

In manufacturing good quality mean “No process variation”. But we can not completely eliminate variation, we can only reduce it. So we can say “Less variation” could be good quality.

Less variation = Better Process

99% Good quality mean…. 

From the above statements we can not consider this 99% good quality. You see 1 wrong transection per day could be great loss one day for bank. 1 short or long landing at airport could create huge suspension in passengers over landing system which could lead airport industry to great loss. 1 single incorrect operation in week could also close hospital due to loss of customer satisfaction.

So we quality has no bar, limit, it is without cost and infinite as much as good one can create.

What is cost of Quality?

Cost of Quality is summation of “cost of conformance” & “Cost of Non-Conformance”.

Cost of Quality (COQ) = Cost of Conformance + Cost of Non-Conformance. 

Cost of Conformance is cost of providing products or services as per the required standards. This can be termed as good amount spent (Prevention & Appraisal costs). 

Cost of Non Conformance is the failure cost associated with a process not being operated to the requirements. This can be termed as unnecessary amount spent ( Internal & External failure costs). 

See below picture _ structure for quality cost:

Note:– Cost of Non Conformance is “Cost of Poor Quality”.

What is cost of Poor Quality?

“The Cost of poor quality is … the expense of nonconformance – the cost of doing things wrong.” The “cost of poor quality” is all those costs which are incurred in any company for not producing the product first time right.

Cost of Poor Quality (COPQ)= External Failure + Internal Failure

Why Cost of poor quality is discussed?

In most of organization, lower level staff person talk about daily work activities, daily tasks, product specification, process specification, defects, failures, dispatch and customer talks, etc… 

But top management talk about money, profit and growth, business expenses, etc…

But ultimately everyone understand language or Ruppe, (INR Money). Less COPQ mean improved profit, which will help to improve Quality management system. Also COPQ indicate to improve some area of Quality and decide action for improvement. 

The Language of Money is essential, Without quality cost figures the communication of information to the upper managers is slow & less effective.  Quality cost measurement and Publication does not solve quality problem: There should be establishment of clear responsibilities, providing resources for removing cause of the problem and identifying projects. For efficient working, structured scoreboard must be supplemented for improvement program. 

Scope of Quality Costs is too limited. Apart from measuring quality costs for non-conformities (i.e., defects in goods and services), focus should also be on “hidden costs” of lost sales due to poor quality and omitted cost of inefficient products.

While calculating COPQ we have to consider only Internal failure cost and External failure Cost.

Internal Failure cost

Internal failure costs occurs when results of work fail to reach designated quality standards , and are detected before transfer to the customer takes place.

These costs occur when products, components and materials fail to meet quality requirements prior to transfer of ownership to the customer.

Some example of internal failure cost:-

Scrap:- When we scrap any product, here we loss labour cost + material cost + Process cost. Now this product can not used and repaired. Scrap cost will cost of product.

Rework:- This is the cost of correcting the defective product. It will include material consumed for rework + Labour per hour cost.

Failure Analysis:- Cost incurred to determine cause of failure. 

Re-inspection:- Cost of reinspection and Retesting. 

Supplier Rejection Cost:- Cost due to wrong part supplied by supplier. 

These the all failure cost incurred within the plant. Other internal failure cost could be process variation, inventory, Not following the standard, Non value added activities. 

External Failure cost

External failure costs occur when the product or service from a process fails to reach designated quality standards, and is not detected until after transfer to the customer.

We can say, “All those failure costs which are incurred once the product leaves the plant”. 

External failure cost occur when product doesn’t perform satisfactorily after transferring ownership to the customer. 

Some example of external failure cost are:-

1. Warranty Charges
2. Complaint adjustment
3. Customer return material
4. Penalties due to poor quality
5. Rework on support operation
6. Revenue losses due to support operations

How to compute COPQ?

Simple-Just add total cost of Internal failure and External failure. See below picture for understanding.

What will be benefits of reducing COPQ?

By reducing COPQ industry can reduce rejection and rework, can improve Quality, can reduce cost, can increase customer satisfaction.  By implementing COPQ Model we can create pleasant workplace, motivate employees, Improve profits. 

To calculate Cost of Quality we must have to understand “Appraisal Cost, Prevention Cost”.

What is Appraisal Cost in COPQ?

Appraisal Costs “Appraisal costs are all those costs incurred to ensure/appraise that the processes are right as per standards.”

APPRAISAL Cost associated with measuring, evaluating or auditing products and purchased materials to assure quality standards and performance requirements.

Appraisal Cost Example:-

1. Incoming inspection and test
2. In-process inspection and test
3. Final inspection and test
4. Document review
5. Product quality audits
6. Equipment Calibration
7. Testing of incoming material 

What is Prevention Cost in COPQ?

Prevention Costs “Prevention costs support activities whose purpose is to reduce/eliminate the number of defects.”
It is a measure of investment made prior to producing a product and is associated with personnel engaged with design, implementing and maintaining the quality system.

All of us know that Prevention is better than cure. Then how to achieve this? Who is responsible for ensuring that everyone in the organization starts thinking in this direction?

The most effective way to manage the business in such a way those defects/abnormalities do not occur at all. All those costs incurred that focus on prevention rather than correction.

3 Objective of Mistake Proofing:-

• Can’t receive bad product
• Can’t make bad product
• Can’t ship bad product

Preventive cost example:-

1. Quality planning
2. New-product review
3. Process planning
4. Process control –SPC, FMEA
5. Supplier up gradation
6. Training on Kaizen 

What is Hidden cost in Industries?

Hidden cost is part of COPQ. Sometime we see its not failure but we taking action for improvement after establishing complete process of manufacturing. The cost which are difficult to estimate and occurs in both manufacturing and service industries which include:

1. Potential lost sales
2. Cost of redesign of products due to poor quality
3. Cost of changing process
4. Cost of software changes
5. Cost of equipment downtime
6. Cost of extra material purchased & Allowances for scrap & rework
7. Extra indirect cost due to defects and errors
8. Scrap and errors not reported
9. Cost of errors made in support operations eg., shipping, billing, customer service
10. Cost of poor quality within a supplier’s company 

How to Calculate COPQ?

For COPQ calculation in excel we have to follow some steps:-

1. Data Collection
2. Data Evaluation
3. Do trend analysis

For COPQ calculation we collect cost from different area, see below picture for understanding.

We can also make Cost of Quality worksheet for analysis of cost/Evaluation of cost.

First we make cost calculation sheet. Then we have to calculate COPQ% of sales. Which should be as per decided target. Companies use sales as the measurement base which makes comparison easier. 

Complex highly reliable products are involved quality costs may be as high as 20% of sales and industries which produce simple low tolerance products, quality cost less than 2% of sales may be a realistic level. 

See below picture of simple COPQ calculation:-

Here every company set a target that COPQ should not be more than some specific %. Say 0.25%, 3%. Here we see trend analysis for month April to August, if COPQ increasing or decreasing or meeting target value. 

Graph of COPQ is drawn below, see below picture:-

So what we do for COPQ, we collect sales value for a month (month for which we are calculating COPQ) and we calculate cumulative value for Poor cost (That is Rejection cost + Scrap cost + Rework cost). We will divide COPQ to sales value and multiply by 100 for %. 

You can use excel sheet for COPQ calculation and graphical analysis. 

Excel sheet for COPQ. 

Click here for access excel sheet for COPQ. With this excel sheet you can calculate Value quality cost. Do analysis and check trend. 

This excel sheet is complete solution for COPQ understanding.

Click here for Excel sheet of COPQ

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