Cost

of Poor Quality
(COPQ)
Basic Concepts

Leaning Client Strategy Forward

Copyright 2012, Cedar Root, 6 Inc. All rights reserved

Topic
Measuring Success
Cost of Poor Quality (COPQ)
Internal Failure Costs
External Failure Costs

Deployment Guidelines
Example Calculations
References

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Measuring Success

$ Revenue

Product

Material

Defects

Waste

Down?me

Lost Opportunity
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$ COPQ

= Lost $ Prot
= Lost Capacity
3

Measuring Success
There are (3) key measures that can measure any
process.

Rolled Throughput Yield (RTY)

(First Quality/First Time or Good Units/Total Units)

Capacity ProducAvity (C-P)

(Cycle Ame to produce good units)

Cost of Poor Quality (COPQ)

(Cost increase due to poor RTY and C-P)

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Measuring Success
If RTY, C-P or COPQ is your primary metric,
the other two can be your secondary metric as
a check & balance. For Example:

Primary: RTY (Improving Quality Units)

Secondary:
C-P (Units/Time) to assure added time is not required
to produce quality units
COPQ (increased cost due to higher cycle time and/or
inspection)

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Measuring Success
Other Examples:
Primary: C-P (Units per time)
Secondary:
RTY (Quality Units) to assure quality is not
compromised as a result of reducing cycle time.
COPQ (increased cost due to scrap or rework
associated with poor quality units or other costs
associated with reducing cycle time such as
unnecessary capital equipment.

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Measuring Success
Other Examples:

Primary COPQ (Failure Costs) Wrong! Go back to

the other primary metrics.
RTY (Quality Units) to assure quality is not compromised
as a result of reducing non-value added processes such
as the (7) categories of MUDA.
C-P (Capacity Produc?vity) to assure cycle ?me is not
increased due to phantom cost reduc?ons.

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Measuring Success
Other Examples:
Primary: Other Metrics (i.e Reduce Down Time)
Secondary:
C-P (Units/Time) to assure total cycle ?me is not
compromised to address local down?me issue, example
maintenance.
RTY (Quality Units) to assure quality is not compromised as
a result of reducing down?me.
COPQ (increased cost due to scrap or rework associated
with poor quality units or other costs associated with
reducing down?me.

Copyright 2012, Cedar Root, 6 Inc. All rights reserved

Cost of Poor Quality (COPQ)

The costs of not producing 100% 1st Quality/1st Time for your

Customer(s)
These costs can be categorized into the following components..
Internal Failure Costs
RTY (Quality Units)
C-P (Good Units/Time)
External Failure Costs
RTY (Quality Units)
C-P (Good Units/Time)

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Internal Failure Costs

Failure or waste costs that occur prior to delivery or
shipment of units to the customer.
RTY Categories:
- scrap, rework, inspec?on/tes?ng, material review, seconds, supplier
quality, trim, mee?ngs, quality reports, etc.

C-P Categories:
- down?me, setup ?me, startup ?me, expedi?ng, rerunning replacement
product, etc.

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10

External Failure Costs

Failure or waste costs that occur aKer delivery or
shipment of units to the customer.
RTY Categories:
- scrap, rework, inspec?on/tes?ng, material review, seconds, correc?ve
ac?on reports, premium freight, mee?ngs, quality reports, recall,
warranty claims, goodwill, lost sales, etc.

C-P Categories:
- down?me, setup ?me, startup ?me, expedi?ng, rerunning replacement
product, etc.

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11

The Real COPQ

Most rms only account for about 5% of the waste that occurs in
an organiza?on.

4-6% of
Sales

TradiAonal Quality Costs

Rejects Inspec?on
Scrap

Rework

AddiAonal
costs of
poor quality

Lost customer loyalty

Rescheduling

Long cycle ?mes

25-35% of
Sales

Lost Opportunity
Excess inventory
Mee?ngs

Expedi?ng
costs

Lost sales
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Late delivery
12

Deployment Guidelines
You may have to establish a data collec?on process to obtain
necessary cost of poor quality informa?on for your project.
Step 1: Iden?fy the major internal and external categories that need to be

captured (use guidelines above).

Step 2: Establish a method to collect data for each category to be measured

(solicit team par?cipa?on and Accoun?ng help)

Step 3: Establish cost opportunity for categories being tracked. Obtain help

from Accoun?ng.

Step 4: Establish repor?ng format that can easily calculate COPQ, preferably

an automated repor?ng system that is very accessible.

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13

Example Calcula?ons
The following are example categories of waste that will leak prot
down the drain and (metrics they drive).
Scrap/Waste (RTY)
Customer Returns (RTY)
Rework (C-P)
Down?me (C-P)
Complaint Inves?ga?on Time (SG&A)
Disposal Costs (RTY)

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14

Scrap/Waste (RTY)
Material scrapped due to setup/startup, edge trim, quality, etc.
Process waste/units may be measured in square feet, cubic feet or
weight or a discrete quan?ty.
Example CalculaAons (see accounAng for help)
Opportunity $ = (sales $) - (cost to make)
Example ($100 sales - $90 to make) / 10 units = $10 prot margin or

$1 per unit margin.

Waste (COPQ) = (sales $) - 2(cost to make) / units sold
($100 sales - $180 to make) / 10 units = -$90 from the bofom or -
$9 /unit from the bofom line.
If sales $ are the same for replacement product, then the cost to
make can be used for COPQ and normalized by units produced.

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15

Customer Returns (RTY)

Material returned for warranty or goodwill
Includes scrap, inves?ga?on, premium freight, etc.
Example CalculaAons (see accounAng for help) If returned
material has to be scrapped add the costs on the previous slide.
Otherwise subtract the following costs from sales $ for COPQ.
freight cost to return product
freight cost to replace product
inves?ga?on ?me and repor?ng (see next slide)
Warranty or legal costs cost as applicable
Rework cost (see slide explaining rework)
Lost sales when assigned

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16

Rework (C-P)
Labor & materials to make product salable.
Example Calcula?ons (see accoun?ng for help)
Cost factor = labor & materials/units sold
COPQ = (Sales $) - (cost to make + rework)

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17

Down?me (unscheduled) (C-P)

Measured in hours of capacity
Example Calcula?ons (see accoun?ng for help)
Cost factor = gross margin/total hrs consumed
COPQ = (down?me) X cost factor

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18

Inves?ga?on Time (Overhead)

Hours tracking and repor?ng complaint
Example Calcula?ons (see accoun?ng for help)
Cost factor = Average wage (hourly + benets)

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19

Disposal Cost (RTY)

Cost associated with material waste disposal, recycle, landll,
regulatory, etc.

Example Calcula?ons (see accoun?ng for help)

COPQ =

Transporta?on
Landll
Hazardous waste
Regulatory

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20

References
Campenella, Jack. ASQ Quality Press
Principles of quality costs/ Jack Campenella. 2nd ed.
ISBN 0-87389-019-1

Jurans quality control handbook / J.M. Juran - 4th e.

ISBN 0-07-033176-6

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21

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depicted (the "Manual") are the sole and exclusive property of
The contents hereof contain proprietary trade secrets that are the private and
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such law will supersede the conic?ng or inconsistent provision(s) of this Manual in all
proper?es subject to that law.
2012 by Cedar Root. All Rights Reserved.

Copyright 2012, Cedar Root, 6 Inc. All rights reserved