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Cost of Poor Quality (COPQ)
Lean Six Sigma is a problem solving methodology. As such, one of the ways of quantifying the opportunity for improvement is through an aggregation of the costs associated with that problem. This is known as the Cost of Poor Quality and provides insight on the project benefit.
When to use
Cost of Quality is most commonly used in the Define and Control phases, although the work of the other phases will affect it. During the Define phase, it is used to explain to stakeholders the business impact of the process problems. During the Control phase, it is often used to explain the impact of the changes that are being implemented.
Cost of Quality (COQ) is a construct for translating the impact of doing and not doing process improvement activities in the business. COQ is expressed using monetary units because money is the universal language of business. COQ is normally divided into the Cost of Poor Quality (COPQ) and the Cost of Good Quality (COGQ).
Cost of Poor Quality
COPQ is the cost of fixing quality problems. Those problems may have been found internally by your business processes or associates – which is considered internal costs. Or the problems may have reached your customers, which would then be classified as external costs.
Examples of internal costs are: Scrap, Rework, Downtime, Delays, Shortages, and Failure testing. Examples of external costs are: Complaints, Repairs, Warranties, Sales reductions, Bad will, and Environmental compliance problems.
All of these require that effort be spent on finding and fixing a known existing problem. If the problem had not been created, no effort would be required. Lean Six Sigma projects are chartered to resolve COPQ problems, since in these cases, the problem is already known to exist.
Cost of Good Quality
COGQ is the cost of preventing problems, or of finding them early in the process so that they can be fixed before additional effort is spent on the item. These costs are classified either as appraisal costs or prevention costs. The appraisal costs are the costs of checking your process activities to be certain no errors have been introduced. The prevention costs are the cost of the activities that are done to eliminate the generation of errors.
The categories of appraisal costs are: Inspection, In-process testing, Final testing, Field testing, Quality audits of a process, and Calibration of equipment. The typical prevention costs are: Quality planning, Supplier evaluation audits, Error proofing design activity, Process capability studies and Quality training.
All of these require effort that carries a “promise” with it. If done well, they should result in the process creating very few errors. The solutions developed in the Improve phase of a Lean Six Sigma project and implemented in the Control phase will often require COGQ expenses.
Hints & tips
- At the Define phase we are concentrating on COPQ because we want our project to fix a known problem.
- The costs are often buried in multiple departments, not just where the process is normally conducted. If quantifying the COPQ, look both upstream and downstream from the process to see what other costs are occurring due to problems within the process.
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