Self Improvement

Cost Of Poor Quality

By : Harish Yadav	Previous \| Next
Posted on : 16 Jun, 2007	Total Views : 338

A manufacturing unit in US had annual sales of $100 million. Its quality department worked the total sum of the cost of repair, rework, scrap, service calls, warranty claims, lost sales, and other non-value added activities. This sum was called Cost of Poor Quality (COPQ) and it amounted to 20% of the annual sales. (Cost Of Quality was being accurately described as the Cost Of Poor Quality (COPQ) to receive more attention). A 20% COPQ implied that during one day of each five-day workweek, the entire company spent its time and effort making scrap, which represented a loss of approximately $ 80,000 per day.

US experts have estimated that COPQ amounts to 20-40% of gross sales for manufacturing and service companies. Independent studies reveal that COPQ is costing industry millions each year and its reduction can transform marginally successful companies into profitable ones. Yet, most executives believe that their company COPQ is less than 5%, or just do not know what it is. All levels of executives recognize that quality is an absolute necessity to survive and succeed in today�s world.

Expressing the loss only in percentage makes COPQ easier to ignore. When identified as money, facilities, material, equipment, inventory, and human effort wasted, the company wide impact of its reduction can be demonstrated quickly. Measurable improvements are achievable within the first six months by identifying internal and external nonconformance costs and subjecting them to a Pareto analysis. These costs almost invariably represent most of the money lost due to poor quality.

Today�s archaic cost accounting system is a major obstacle for companies attempting to reduce COPQ. Most of the accountants admit that their detailed product cost data does not show true costs. To overcome this, the quality assessment members should do the initial task of developing non-conformance costs. Costing each reject at sales price is sensible, since a replacement must be manufactured.

After the company COPQ report is established, it should be verified by the cost accountants and then accepted within the company. The initial costs will provide a benchmark against which improvements or temporary setbacks can be measured. Monthly, high visibility COPQ report, with recommended action should be tabled on the meeting agenda of top management. If results are not measured and expressed in rupees and in writing, its reduction simply will not happen.

The current practice to bury everyday problems of rejects, rework, scrap, waste, returns, and poor-quality discounts as non-value-activity means, �continuing to lose money�.

Reduction of COPQ can improve productivity, profit, sales, product quality, service quality and overall company results-all with little or no investment.

Written By : Harish Yadav

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