COST OF POOR QUALITY

1. What is Cost of Poor Quality?

Cost of Poor Quality (CPQ) is defined as sum spent on 
- Preventive Costs.
- Appraisal Costs.
- Failure Costs (Internal and External Failure)

2. Cost of failures to be considered in manufacturing process.

- Internal: (1) Scrap, (2) Waste, (3) Repair/rework, (4) Down grading.
- External: (1) Claim / Replacement, (2) Concession. (3) Reshipment.

3. Calculations
- Cost of poor quality is calculated as a sum of all items.

4. Internal / External Failures and Definition.

5. 1. Scrap: Total cost to produce a product which must be scrapped.

2. Waste: Cost of material that is left over and cannot be used after completion of an
order.
3. Repair/rework: Cost to make a product usable.
4. Down Grading: Cost of material made from standard input but fails to meet quality
requirement’s at output stage. Or cost of salvaging (cost of unusable output, while
processing inputs with suspected quality deviations)

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5. Claim / Replacement: Adjustments made to compensate for returned goods.

6. Concessions: Adjustment made to compensate for quality problem.
7. Reshipment: Repacking and reshipment costs for customer returned  goods.

Cost of poor quality = (cost of total resources in a category) × (percentage of

resources in category
used for activities related to poor quality)

Companies estimate the size of the quality problem in the language of money improves
communication between middle managers and upper managers. In some companies the need
to improve communication on quality related matters has become major objective for
embarking on a study of the costs of poor quality. Some managers say” we don’t need to spend
time to translate the defects in money. We realize quality is important and we already know
what are the major problems are but typically when a study is done, these managers are
surprised by two results:
(a) The quality costs turn out to be higher than the managers have thought – in many
places in excess of 20 %.
(b) The distribution of quality costs some of the known problem areas, it also reveals other
problem areas that were not previously recognized.

Categories of Quality Costs: Costs with quality is categorized mainly in four categories
1. Internal failures
2. External failures
3. Appraisal
4. Prevention
 Internal failure cost: It is the cost of deficiencies discovered before delivery that are
associated with failure to meet explicit requirements or implicit needs of customers. Also
included are avoidable process losses and inefficiencies that occur even when requirement
and needs are met.
a) The cost would disappear if no deficiencies existed
b) The cost of failure to meet customer requirements and needs
c) The cost of inefficient processes

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Cost of Poor
Quality

Cost of cost of lost

Cost of Non
Insufficient oportunities for
confirmities
processes sales revunue

i) Failure to meet customer requirements and needs

a) Scrap, the labour, material overhead on defective product that cannot be repaired
economically. The Tittles are numerous- scrap, spoilage, defectives etc
b) Rework-Correcting defects in physical products or errors in service
products/processes such as lost or missing information, retrieving information takes
longer /should have been supplied but not done in the first place.
c) Failure Analysis- analyzing non confirming goods or services to determine causes
d) Scrap

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