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When calculating the business case for a Six Sigma project, the cost of poor quality (COPQ), which is the cost caused through producing defects, is a commonly used concept.
Within the total amount of quality cost, however, COPQ represents only a certain proportion. Costs do not result from only producing and fixing failures; a high amount of costs
comes from ensuring that good products are produced. This article explains the cost of quality as a more comprehensive concept covering the cost of poor quality and the cost of
good quality. In short, any cost that would not have been expended if quality were perfect contributes to the cost of quality.
Cost of Quality
As defined by Philip B. Crosby in his book Quality Is Free, the cost of quality has two main components: the cost of good quality (or the cost of conformance) and the cost of poor
quality (or the cost of non-conformance). As Figure 1 shows:
Rework
Delays
Re-designing
Shortages
Failure analysis
Re-testing
Downgrading
Downtime
Lack of flexibility and adaptability
Complaints
Repairing goods and redoing services
Warranties
Customers’ bad will
Losses due to sales reductions
Environmental costs
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Quality planning
Supplier evaluation
New product review
Error proofing
Capability evaluations
Quality improvement team meetings
Quality improvement projects
Quality education and training
The total quality costs are then the sum of these costs. They represent the difference between the actual cost of a product or service and the potential (reduced) cost given no
substandard service or no defective products.
Many of the costs of quality are hidden and difficult to identify by formal measurement systems. The iceberg model is very often used to illustrate this matter: Only a minority of the
costs of poor and good quality are obvious – appear above the surface of the water. But there is a huge potential for reducing costs under the water. Identifying and improving these
costs will significantly reduce the costs of doing business.
As Figure 3 shows, business processes with better process sigma will have significantly lower prevention and appraisal costs. Although you will never fully eliminate appraisal and
prevention costs (as opposed to failure costs that in an ideal zero defect world would also be zero), their reduction due to better process performance will be significant.
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Table 1 shows how dramatically the cost of quality as a percentage of sales decreases if the process sigma improves.
3 67,000 25-40%
4 6,000 15-25%
5 233 5-15%
Assuming that the average performance of a company is 3 sigma, 25 percent to 40 percent of its annual revenue gets chewed up by the cost of quality. Thus, if this company can
improve its quality by 1 sigma level, its net income will increase hugely.
See Also
Comments
Michelle Baker
Is your DPMO (shown in your Cost of Quality table), equal to the sum of all the internal and external failures?
Thanks,
Reply
Akmal
yes . its the total Defects Per Million Opportunities
Reply
zizu
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Reply
Daryl
Marketing Costs can be included as a response to external failures.
Companies may increase marketing to rebuild reputation damage and negative brand image caused by external failures such as litigation or product recall.
Reply
philip
I’d say in general not zizu, marketing is a normal activity of finding out what customers want, making sure your service or products are aligned to that and then
ensuring the customers know about that, this will go on even if your products and services are defect free, right the first time. However if you had to rebrand a product
or launch a marketing campaign especially due to poor products or services then I think it would be.
Reply
Carlos
Are internal failure cost more or less important thatn external failure cost regarding the cost of quality?
Reply
Robert Reid
Everything is relative to magnitude; however, cost of a failure making it to the customer is regarded as the ultimate failure and those cost cannot be
accurately assessed due to the wide range of implications (E.g. confidence loss impact is hard to gauge because bad news travels fast when someone is
dissatisfied).
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Pradeep Chellakani
The prevention cost will increase first reducing the appraisal cost (Meaning moving from Inspection to automation and prevention through right design). This will
increase the yield from RTY instead of the FPY or classical yield.
Reply
R.Chakrapani
Loss of sales due to poor Product image/Brand Image/poor marketing /poor supplier chain bottlenecks,in relation to competition in the same industry needs to be
accounted in COQ.
RC
Reply
Mohd. Haneef
what is the relation b/w scrap & COQ.
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Pam
If there is a planned evolution, such as trimming an impeller blade, that occurs because of data obtained from the first pump test, is that considered a cost of poor
quality?
My position is that this is NOT COPQ because the first test, the trim, and the second test are planned into the decision on trimming and are planned into the process.
Reply
DanJ
Hi, great summary. Question – are the Sigma Levels and Cost of Quality equal for services vs. manufacturing companies? Our service centers do a lot ITIL incident,
problem, change, and service management and I am interested in being able to measure COPQ for failed changes, incidents, etc.
thanks in advance,
-Dan
Reply
Makary
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Reply
Saji
Is there any example for The cost of poor quality that incurred high internal or external costs ???
Reply
Arun sathish RS
Useful
Reply
Jonathan (JT)
This was very useful and help me to understand the Cost of Quality and the potential cost reduction of the items list below water.
Reply
Ryan
Hi, what is the source or source data for Table 1 – is it also from Crosby?
And do you find the cost of quality as a percentage sales changes by industry (i.e., software vs. auto manufacturing)? Thanks!
Reply
Ashok Yadav
Obsolete inventory due to production phaseout should comes under which category?
Reply
Arjan Busch
Hi Ashok, given production phase out of a product or service is due to change in customer need resulting in sales drop and given inventory cannot be reused
in other products or services this should be regarded as COPQ.
Reply
Brdurais
What should be the % distribution of the COQs in a software industry. Should CoQ prevention be higher than CoQ-Appraisal? I have always evidenced that the
appraisal cost is more than the prevention
Reply
Serien Nowailati
Hi,
Thanks
Reply
Nick
I am just starting the Six Sigma process and learning about COQ and DPMO but my question is related to Table 1. How do those numbers get populated? How do you
assume that a company that is performing at 3 sigma is between 25-40% with 67,000 DPMO?
Reply
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