What Is Your Company's Cost of Poor Quality (CoPQ) - Tools For Calculating and Reducing It

Overview: Experts have estimated that Cost of Poor Quality typically amounts to 5-30%
of gross sales for manufacturing and service companies. ndependent studies reveal that
C!PQ is costing companies millions of dollars each year and its reduction can transform
marginally successful companies into profita"le ones. #et most executives "elieve that
their company$s C!PQ is less than 5%% or &ust do not 'no( (hat it is. )ll levels of
executives recogni*e that +uality is an a"solute necessity to survive and succeed in
today$s "usiness environment.
What is Your Company's Cost of Poor Quality (CoPQ) - Tools for calculating
and reducing it
"Quality is never an accident, it is always the result of an intelligent effort"
A manufacturing company had annual sales of $250 million. Its quality department calculated the
total cost of repair, rework, scrap, service calls, warranty claims and writeoffs from o!solete
finished goods. "his aggregated cost, called #ost of $oor %uality &#'$%( amounted to 20) of their
annual sales. A 20) #'$% implied that during one day of each fiveday workweek, the entire
company spent its time and effort making scrap, which represented a loss of appro*imately $
+00,000 per day.
,*perts have estimated that #ost of $oor %uality typically amounts to 5-0) of gross sales for
manufacturing and service companies. Independent studies reveal that #'$% is costing companies
millions of dollars each year and its reduction can transform marginally successful companies into
profita!le ones. .et most e*ecutives !elieve that their company/s #'$% is less than 5), or 0ust do
not know what it is. All levels of e*ecutives recogni1e that quality is an a!solute necessity to survive
and succeed in today/s !usiness environment. "he diagram !elow provides a framework for
calculating #'$% as a percentage of sales.
In a recently pu!lished !ook 23uccess through %uality2, the author estimates that #'$% for an
average company is a!out 20) of sales, with a range as wide as under +) for companies who have
achieved 2si* sigma2, a!out +5)25) for companies who are at 2four sigma2 level and a!out 25)
to 40) of revenue for companies who are at 2three sigma2 levels. A large fortune 500
communications company calculated its #'$% at 5.6) of sales in 2002 and has set a goal of 5.4)
for 2005, which will result in a savings of a little less than $+ 7illion per year8
COPQ in a Supply Chain
"he #ost of $oor %uality of individual suppliers participating within a supply chain has a cumulative
effect on the #'$% of the ',9 shipping the end product see figure !elow. As a result, companies
are working very proactively with their suppliers to reduce their #'$%. 9any ',9s are also
implementing supplier charge!acks &also called cost recovery(, where a supplier is charged for the
additional cost incurred !y the ',9 due to nonconforming components and materials and late
deliveries from suppliers. A charge!ack system is an effective way to introduce !usiness discipline
and accounta!ility into the supply chain. ',9s use it as a 2stick2 for their suppliers to drive them to
colla!oratively identify the root cause of quality pro!lems and to implement corrective actions.
educing Cost of Poor Quality
3ystematic reductions in the #ost of $oor quality can !e attained !y implementing a %uality
9anagement 3ystem &%93( that provides an integrated and closed loop corrective action process.
In a manufacturing organi1ation, when deviations, nonconformance, out of specifications, quality
incidents or customer complaints occur, corrective and preventive actions need to !e initiated to
remedy the pro!lems.
'nce a quality pro!lem has !een identified, the first step is to initiate an investigation and to
properly identify the root cause of the pro!lem. After the root cause has !een identified, #orrective
Action &#A$A( items are created and routed for approval. :hen approved, appropriate changes are
implemented in the environment and then the #A$A is closed out. "hese changes may include
amendments to a documented procedure, upgrading the skill set of an employee through a training
and certification process, or recali!rating the manufacturing equipment. In addition, the system
may capture #'$% associated with that nonconformance and use that information to initiate and
complete a cost recovery process with a supplier.
It is critical to deploy a closedloop, integrated quality management system, rather than a set of
loosely connected modules from one or more vendors. Integration ensures that the information
flows out the corrective action process with a high degree of accuracy and velocity without falling
through the cracks. It also ensures that the entire change control process is audita!le from endto
end a critical requirement to support ;<A 2+#;= part ++ and the 3ar!anes'*ley 3ection 404
audit criteria.
"he %93 system should also !e we!!ased, so that the suppliers can easily participate in the quality
management process. "he suppliers often use the same plant to manufacture products for multiple
',9s. As a result, they cannot !e forced to install different systems for different ',9s at the same
plant to support their respective quality needs. >ence the ',9 has to rely on process and product
quality information from the supplier/s quality system. "hat information usually does not integrate
well with the ',9/s own systems and is frequently not availa!le in a timely manner. A :e!!ased
%93 allows the ',9 to make the application availa!le to the supplier without requiring the supplier
to implement the system at their site. As a result, the supplier can provide relevant quality
information a!out the shipment to the ',9 even !efore it ships from the supplier/s dock. If there
are quality issues with any supplier component, manufacturers can take appropriate preventive
action even !efore it arrives or take it out of the supply chain to reduce their own #'$%. %93
systems that do not support we! architecture make it difficult for an ',9, participating in a supply
chain, to reduce its effective #'$%.
!"out #etricStream
9etric3tream, a market leader in #ompliance and %uality 9anagement 3ystems, allows its
customers to dramatically reduce #'$% through its integrated and comprehensive quality
management solution. 9arket leaders in industries as diverse as Automotive, >igh "echnology,
#onsumer ?oods, 9anufacturing, $harmaceutical, ;ood 3ervices and ?overnment use the
company/s solution. <eveloped from the ground up using we! architecture, 9etric3tream provides
an integrated set of the following modules to drive closed loop corrective actions and reduce #'$%
Audit 9anagement
Inspection 9anagement
@on#onformance 9anagement
#A$A
#hange #ontrol
<ocument 9anagement
"raining 9anagement
,quipment 9anagement
#ost =ecovery

What Is Your Company's Cost of Poor Quality (CoPQ) - Tools For Calculating and Reducing It

Uploaded by

Copyright:

Available Formats

What Is Your Company's Cost of Poor Quality (CoPQ) - Tools For Calculating and Reducing It

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

What Is Your Company's Cost of Poor Quality (CoPQ) - Tools For Calculating and Reducing It

Uploaded by

Copyright:

Available Formats

Overview: Experts have estimated that Cost of Poor Quality typically amounts to 5-30%

You might also like