CONSTANTIN MAGDALINA

  |  2017-06-14

How do you manage the cost of poor quality?

It is relevant for companies to use the Cost of Poor Quality (COPQ) tool in estimating the value of a product / service, as is known in the Six Sigma methodology.

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Many of us are involved or carry out processes without even thinking that we are doing this. We simply do our business. Based on the use of resources, we expect some results. In business, examples of such processes include: recruiting staff, billing, research, reconciling accounts.


A process is a repetitive and systematic series of activities where inputs (resources used) are modified for a result of value for the company. The value of the result is given, among other things, by the costs incurred to achieve it.


Therefore, it is relevant for companies to use the Cost of Poor Quality (COPQ) tool in estimating the value of a product / service, as is known in the Six Sigma methodology. This tool is an opportunity for financial optimization by reducing tangible or intangible costs. COPQ measures revenue reduction due to errors / defects or other inefficiencies of the process that we want to eliminate.


4 elements compose COPQ


1. External costs – costs associated with the final product relevant to the consumer. For example: warranty, customer complaint-related travel and customer charge-back costs.


2. Internal costs – generated by the possibilities of error identified in a process within the company. For example: error proofing devices.


3. Prevention costs – costs associated with product quality, seen as an investment that companies do to ensure product quality. For example: certification of suppliers.


4. Detection costs – costs associated with inspections and auditing of products / services. For example: vendor auditing, sorting of incoming components.


Since COPQ (cost of por quality) is an instrument that represents an opportunity to reduce tangible or intangible costs, its image is similar to that of an iceberg.
On the surface are the visible / tangible costs: rejects, rework, inspection, warranty. Below are the invisible / intangible costs: loss of sales opportunities, delays in delivery, excess inventory, time value of money, lost customers loyalty. Companies can easily see tangible costs. More challenging is to identify and eliminate those that are hidden.
COPQ is an indicator calculated as a percentage of earnings. In this respect, it has been estimated that tangible costs such as warranty, inspection, rework are between 4% and 10% of each RON from sale.
In the case of intangible costs, they represent between 20% and 35% of sales. If we make an average of tangible and intangible costs, it appears that about 20% of a company's revenue is the cost of poor quality, so losses.

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