Cost of poor quality in manufacturing: how to cut out the losses
Cost of poor quality (COPQ) is an essential accounting formula for calculating losses from poor quality products and services.
The manufacturing sector has companies that deal with food and beverages, oil and gas, medical devices, and many more.
Ultimately, the primary goal of every business is to make money. Nowadays, making reasonable returns involves adopting advanced manufacturing approaches that prevent poor quality products from tainting the overall customer experience. However, good quality, as well as poor quality, comes at a cost.
Understanding the cost of quality (COQ) and how to minimize poor quality would be instrumental in boosting many companies’ reputations. While it is greatly beneficial to have a speedy and seamless manufacturing process, one cannot ignore the impact of the cost of poor quality in manufacturing.
With all that said, what are the cost of poor quality in manufacturing?
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Cost of poor quality (COPQ) is the quality-related cost that is associated with providing products or services that are of poor-quality products to target clients or customers. These costs could be direct or indirect, such as repair, labor, warranty failure, and returns.
The 4 costs of quality
In evaluating the cost of quality (COQ), there are four quality-related activities that incur costs.
1. Prevention costs
These costs are incurred to prevent the occurrence of problems. This includes:
Competent management solutions.
2. Appraisal costs
These are the costs incurred to ensure the product conforms to the required quality. Examples include things such as:
3. Internal failure costs
These are costs that are incurred to fix problems that are noticed before delivery, such as:
4. External failure costs
These are costs incurred to fix defects or problems discovered by the end users after the product has been delivered, like:
Servicing and repair
What is the cause of the cost of poor quality?
Looking into the cost of poor quality, managers and manufacturers can identify the causes of poor quality in both the production line and supply chain.
A breakdown of the values can pinpoint the areas where problems arise. The cost of poor quality usually comes from the following areas:
Improper handling of production materials
Wrong content input on both product and product package
Improper assembly of parts during production
Defective parts being used in the manufacturing process
Misidentified parts being mislabeled and used in production
Why is understanding the cost of poor quality (COPQ) important?
COPQ is crucial to manufacturers who want to stay on top of the production process and product quality. It has proved useful over the years and has the following benefits:
COPQ explains the effect of quality on the profitability of the company
It helps management understand what goes on within the production and helps them identify issues
It helps to push and prioritize improvement actions
It leads to resource optimization and identification of waste in the system
It promotes healthy and continuous improvement culture
With an increase in advanced manufacturing, companies are using artificial intelligence (AI) and augmented reality (AR). Even with these developments, COPQ remains very important. This is why there are many ERP packages and software that help in calculating COPQ.
They can calculate and publish results while utilizing the COPQ to use business solutions effectively.
How do you calculate the cost of poor quality in manufacturing?
The cost of poor-quality calculation formula is derived from the definition of COPQ.
A manufacturing company’s COPQ is the total sum of all associated costs incurred as a result of failure — it could be external or internal. Hence, the poor-quality formula is:
Thus, in Calculating COPQ, you need to determine the time period of evaluation to keep your data streamlined.
Then sum up the total variation/waste and multiply your total by the time spent resolving the issue. The result should be the cost of poor quality incurred by your manufacturing company:
COPQ = (Waste + Defects ) * Time Spent Fixing
An example of the cost of poor quality (COPQ)
If you’re running a project and you need to determine the COPQ, you’ll need to define what your company identifies as a defect.
You will also measure how many defects you produce along your production process.
For example, imagine your company is producing electric kettles. For every 1 million kettles produced, about 4% come out damaged — based on your definition of damage. That makes 40,000 kettles. If these kettles are not repairable, producing one unit costs about $50.
This means it cost your company 40,000 * $50 = $2 million.
The quality cost is $5 per unit to determine if a kettle is defective. With 40,000 units, that means another $200,000 is spent in total.
Then the total COPQ is:
COPQ = $2 million + $200k = $2.2 million
This is the total cost of poor quality on your company.
Regardless of the markup, that is a huge chunk of the capital and possible revenue that cannot be recovered. This could have been avoided if the quality had been followed from the beginning of the production process.
6 disadvantages of cost of poor quality (COPQ)
What happens when the manufacturing approach has little to no quality assurance?
Discovering quality issues early helps reduce the cost of poor quality and avoid further complications. The following are disadvantages of COPQ.
1. Financial loss
When a large part of the proposed revenue goes into inspection, investigation, and repair of damaged poor, quality products, the manufacturing company can face a financial loss.
2. Schedule delay
When the manufacturing process slows down, it has a ripple effect because the supply chain depends on the producers, and there is a delay in the supply schedule.
The cost of poor quality in manufacturing is something that many prominent companies are striving to reduce daily.
It’s in their own interest to identify the issues early and reduce the costs. Having a low COPQ shows your business is healthy and sustainable. Every company should invest in calculating their COPQ and effectively reducing it with quality management solutions.
Do not leave COPQ unaddressed, as it can be detrimental to your company’s bottom line and deter customer loyalty.
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