Measuring Cost Of Poor Quality
How to maximize net profit? Increase selling or reduce COPQ (cost of poor quality). Reducing COPQ is actually more important than increasing selling because there are cases in which some companies have negative net profit although the selling grows. Juran described COPQ as the gold in the mine.

After Industrial Revolution, the chance of producing nonconforming product increases drastically when more people are involved in production process steps. When one of them does not perform well, no matter how well others peform, the product will still have poor quality. Thus COPQ comes into picture. Before Industrial Revolution, COPQ was of minimal concern because usually product was produced by one artisan.

Because COPQ is presented in term of dollar and cent, it is easier to convince top management to put more emphasis on quality.

COPQ is cost of waste:
a) Any product or process nonconformity regardless of whether there is still budget left from the precal to cover it. Waste is waste.
b) Labor to solve the nonconformity. Again it is regardless whether there is budget left.
c) Any cost that exceeds the precal. Precal is computed based on the quotation that has been used to win the tender.

Capturing COPQ by categorizing which stage it occurs will help the company prioritize the area for improvement. If the cost occurs high at a certain stage, it does not mean the people at that stage are to be blamed because the nonconformity may originate from the previous stage. The COPQ figure collected at the later stage of project execution for example customer complaint resolution (such cost like traveling is tangible) can be expected to be bigger and is especially important to show that if a nonconformity is compromised and pushed to the later stage, the cost to resolve it will increase.

All requisitions to withdraw company's fund or material
a) to rectify mistake or
b) for matters that are not costed in project precal or
c) after the project precal limit is achieved
will need to be recorded in COPQ account prior to approval. The approver acts as a checkpoint to ask for written proof that it has been recorded before putting down the signature. This means awareness cultivation to capture COPQ starts from managers.

At what stage of the project should COPQ be calculated? It is after project account closing. The data should be captured along the project process from start to end so that there is input for the calculation. If you want to implement this now and there are some projects runnining, you do not have to wait for those projects to end or work backward to the beginning of the projects. Just implement this from the current project stage.

If the company feels difficult to measure intangible COPQ (man hours etc), then start with tangible COPQ first.

COPQ figure should be in monetary value, not in percentage. For example, take the scenario of reporting COPQ as a percentage of sales. When sales increase, although the percentage decreases, it does not mean quality has improved. When sales decrease, although the percentage increases, it does not mean quality has reclined.

Theoretically, "after sale service" is COPQ because it is not needed if the product has no defect. In reality, the customer service is important as it is the channel for valuable feedback from customers. Initially, customer service can have a lot of manpower, but after collecting feedbacks to work on to eliminate recurrence, the manpower can decrease over time. Excellent customer service may quench customer dissatisfaction. However, if customers have a choice, they will choose product that does not make them go through the hassle of claiming the warranty. Thus the company which invest to prevent failure as early as possible in the production process will gain the competitive ground.
Posted: 2007-02-05; updated: 2013-02-09 by Ong Seng Aun.
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