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
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