Cost of Poor Quality
A manufacturing unit in US had annual sales
of $100 million. Its quality department worked the total
sum of the cost of repair, rework, scrap, service calls,
warranty claims, lost sales, and other non-value added activities.
This sum was called Cost of Poor Quality (COPQ) and it amounted
to 20% of the annual sales. (Cost Of Quality was being accurately
described as the Cost Of Poor Quality (COPQ) to receive
more attention). A 20% COPQ implied that during one day
of each five-day workweek, the entire company spent its
time and effort making scrap, which represented a loss of
approximately $ 80,000 per day.
US experts have estimated that COPQ amounts
to 20-40% of gross sales for manufacturing and service companies.
Independent studies reveal that COPQ is costing industry
millions each year and its reduction can transform marginally
successful companies into profitable ones. Yet, most executives
believe that their company COPQ is less than 5%, or just
do not know what it is. All levels of executives recognize
that quality is an absolute necessity to survive and succeed
in today’s world.
Expressing the loss only in percentage makes
COPQ easier to ignore. When identified as money, facilities,
material, equipment, inventory, and human effort wasted,
the company wide impact of its reduction can be demonstrated
quickly. Measurable improvements are achievable within the
first six months by identifying internal and external nonconformance
costs and subjecting them to a Pareto analysis. These costs
almost invariably represent most of the money lost due to
poor quality.
Today’s archaic cost accounting system is
a major obstacle for companies attempting to reduce COPQ.
Most of the accountants admit that their detailed product
cost data does not show true costs. To overcome this, the
quality assessment members should do the initial task of
developing non-conformance costs. Costing each reject at
sales price is sensible, since a replacement must be manufactured.
After the company COPQ report is established,
it should be verified by the cost accountants and then accepted
within the company. The initial costs will provide a benchmark
against which improvements or temporary setbacks can be
measured. Monthly, high visibility COPQ report, with recommended
action should be tabled on the meeting agenda of top management.
If results are not measured and expressed in rupees and
in writing, its reduction simply will not happen.
The current practice to bury everyday problems
of rejects, rework, scrap, waste, returns, and poor-quality
discounts as non-value-activity means, “continuing to lose
money”.
Reduction of COPQ can improve productivity,
profit, sales, product quality, service quality and overall
company results-all with little or no investment.
Further Reading: Manufacturing Engineering;
Vol 124 No 5 By Norman L Naidish.
Introduction | Contents | Top
