Cost of Poor Quality Definition

Creating a system of metrics that can be monitored, analyzed, and improved upon over time should be on the short list for any Operational Excellence model. Because there are so many metrics to choose from, it's understandable that decision-makers focus more on the final numbers than on how they were derived. In our Executive Dashboard series, we aim to break this habit, drilling down on the variables of the most important metrics to provide an additional level of granularity for top decision-makers. This week we discuss the Cost of Quality model.

cost of quality formulaThe Cost of Quality metric is one of the most important measurements a quality executive can monitor and improve on over time. It calculates the ratio of costs incurred in delivering high quality products relative to total revenue. Depending on the source, this formula may be calculated and used in different ways, but it generally has two main components: the cost of good quality and the cost of poor quality. 

CoQ = CoGQ + CoPQ

Essentially, the CoGQ relates to costs incurred to assure quality in products and prevent poor quality. The CoPQ is a measurement of the failure costs incurred in producing the product. In the following sections, we’ll take a deeper look into the CoPQ and dissect its drivers.

Cost of quality report

Cost of Poor Quality Calculation

The Cost of Poor Quality (CoPQ) helps companies analyze traditionally measured quality costs. These include scrap, rework, and returned materials. As these costs emerge from production line issues as well as external services employed by companies, such as the use of the supply-chain, it's important to identify their origin in the calculation.

The CoPQ formula can be extended to show Internal Failure Costs (IFC) and External Failure Costs (EFC), giving us the following:

CoPQ = IFC + EXC, where:

IFC = Scrap Costs + Rework Costs

EFC = Returned Product Costs + Warranty Costs + Product Recall Costs

Costs incurred internally and externally are caused not only by defects in products, but also by inefficiencies in production and processes. A more in-depth list of factors affecting IFC and EFC is below.

Factors Affecting Internal Failure Costs

  • Weaknesses in quality resolution (CAPA/FMEA)
  • Delayed work schedules
  • Poor Materials Planning
  • Materials shortages
  • Equipment downtime
  • Materials review
  • Reengineering/redesigning products

Factors Affecting External Failure Costs

  • Poor service management
  • Unresolved customer complaints
  • Weak enterprise communication
  • Environmental/sustainability nonconformances
  • Adverse reputation events

Improving the Cost of Poor Quality

Small improvements in IFC and EFC can translate into aggregate CoPQ improvements very quickly. Tools such as Enterprise Quality Management Software (EQMS) have packaged functionalities to facilitate CoPQ gains. For instance, within the EQMS system, CAPA and FMEA applications are automated and stored in a centralized database. These processes can be used and ameliorated over time with enterprise knowledge, rather than just plant-specific knowledge.

Similarly, the CoPQ can be decreased with Supplier Quality Management (SQM) applications, which deliver functionalities that enhance upstream visibility. SQM has made notable impacts in reducing materials needing review and scrap rates as well as in customer complaints and warranty reserves. For more information on manufacturing software and automation, LNS Research recently published an EQMS Best Practices Guide.

Assessing the Cost of Quality Model over Time

Despite there being numerous methods for calculating the Cost of Quality and its variables, a best practice should be created internally to measure it in a standard way each time. By standardizing and centralizing the Cost of Quality calculation across the enterprise, companies can identify trends, prioritize issues, and effectively improve operations. A more in-depth analysis of the topic can be found in our research paper, Cost of Quality as a Holistic Business Measure.

cost of quality metric
You might also be interested in:

Quality Management System: Building a Better Culture

Top 5 Quality Management Mistakes Affecting Operational Excellence

Top 5 Must Have Quality Management Metrics for the Executive Dashboard

For thought leadership sent directly to you, click to subscribe to our blog  today.For thought leadership sent directly to you, click to subscribe to our blog today.

All entries in this Industrial Transformation blog represent the opinions of the authors based on their industry experience and their view of the information collected using the methods described in our Research Integrity. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.

Subscribe Now

Become an LNS Research Member!

As a member-level partner of LNS Research, you will receive our expert and proven Advisory Services. These exclusive benefits give your team:

  • Regular advisory sessions with our highly experienced LNS Research Analysts
  • Access to the complete LNS Research Library
  • Participation in members-only executive Roundtable events
  • Important, continuous knowledge of Industrial Transformation (IX)

Let us help you with key decisions based on our solid research methodology and vast industrial experience. 


Similar posts


Stay on top of the latest industrial transformation insights from our expert analysts

The Industrial Transformation and Operational Excellence Blog is an informal environment for our analysts to share thoughts and insights on a range of technology and business topics.