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06 November 2019

The Cost of Poor Quality – The Hidden Truth in Quality Management?

By Greig Duncan

Managing quality with full control and complete visibility is a challenge at the best of times, particularly when manual collection and analysis is involved. The hurdle of gathering and manually collating data often means that more minute details, such as the cost of poor quality (COPQ), can sometimes be seen as a bonus. There are a number of benefits for companies looking to proactively assess the COPQ.

According to Quality Digest, industry authorities estimate that the true COPQ can range from 5% to 30% of gross sales for manufacturing and service companies. Within some industries, such as aerospace, aviation and defence, the average is 10%. COPQ is often analysed by a simple calculation of “Prevention + Appraisal + Failure”, however; this does not take into account the loss in reputation, unretained contracts or failed production maximisation

Anyone who is aware of Six Sigma will know that the COPQ is used as a tool to evaluate and give priority to certain aspects within projects and business initiatives. This can often lead to improved client retention, streamlined processes, and increased output due to reduced process bottlenecks.

The four key aspects that the COPQ can be pulled into are defined below,  incorporating the assessment of both hidden and visible costs and the risk of not taking any action.

  1. Internal Failure Costs
    Internal failure costs are outlays that can lead to scrap costs. These are goods, products or equipment which are no longer fit for purpose and do not meet quality control standards. This means they cannot be distributed to the customer and therefore must be scrapped.  Rework Costs are outgoings that lead to products being tweaked to fix defects or out of tolerance parts. The main impacts here are that more raw materials and labour time are needed to get the work done, adding to the project costs and delaying further output or production.  Throughout this process, a company may need to undertake a root cause analysis in order to realise where the problem(s) stem from. This analysis time also adds time to the process and may sometimes result in ceased production.

  2. External Failure Costs
    The costs of external failure are significantly more damaging to brand and reputation, as it is basically “closing the stable door after the horse has bolted.” This essentially involves rectifying product issues once they have gone to market.  Replacement, repair, and returns are all costly impacts here. A recent example of this in the consumer market is the recent Whirlpool recalls, or more tragically the Boeing 737 Max groundings. Warranties and guarantees will act as insurance to the buyer, but the costs of repairs can also lead to significant costs to vendors.

  3. Prevention Costs
    There is a reason why the cliché ‘prevention is better than cure’ is used in our everyday speech and it is never more relevant than to quality management. Prevention costs are a positive process and are often linked to continuous improvement initiatives and robust quality control processes. Strict design and engineering act as a strong method of ensuring quality, which can be underpinned by clear standard operating procedures (SOPs). Training and development courses can ensure that strict standards are met and ensure the competence of front-line production and engineering staff.

  4. Appraisal Costs
    These costs are allocated to the provision of various checks and audits throughout the manufacturing and production phases. This has added importance within high-consequence industries such as aviation, aerospace, and defence. This can also involve processes such as NDT (Non-Destructive Testing) and other methods of inspecting and testing product suitability and properties.

Overall, there are a number of visible and hidden costs associated with the Cost of Poor Quality and not all of these can be collected with complete accuracy.  Only seeing the tip of the iceberg should not discourage companies from pulling together enough results to provide a reliable view of the landscape; maximising efficiency and profitability through professional quality management.

For more information on how Ideagen’s quality management software solutions can improve control and visibility, give oversight of the COPQ, and enhance your prevention costs, visit: https://www.ideagen.com/solutions/quality-management-software

 

 

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