What is the cost of poor quality?
The cost of poor quality (COPQ) is the money lost because things are not done right the first time. Scrap and warranty claims are easy to see. The time engineers spend investigating, the overtime to make up for lost output, the freight to rush a replacement and the customer who quietly orders elsewhere are not, but they are just as real. COPQ makes all of them visible in one number, so you can see what poor quality really costs and where improvement pays most.
The COPQ iceberg
| Above the waterline (visible) | Below the waterline (hidden) |
|---|---|
| Scrap | Extra inspection and checks |
| Rework | Investigations, meetings and reports |
| Returns and replacements | Expedited freight and overtime |
| Warranty claims | Lost capacity and downtime |
| Penalties | Extra inventory, lost sales and reputation |
Cost of poor quality example
A packaging plant with $36 million annual revenue lists ten failure costs from one month of data. Annualised, poor quality costs $1.83 million a year, 5.1% of revenue. Only a third of it ($604,000) is visible as scrap, rework, returns and warranty. The other $1.23 million is hidden: the largest single item is lost capacity from quality stops ($389,000), followed by deviation and complaint investigations ($317,000). Halving the cost of poor quality would save about $916,000 a year, which justifies a dedicated improvement team.
Tips
- Write down the basis of every estimate (rates, hours, sources) so finance can check and agree it.
- Be conservative with hidden costs such as lost sales; a credible number gets more support than a big one.
- Attack the largest items first, with a DMAIC project or a kaizen event.
- Track the savings of each project with benefits tracking.
How to use this Cost of Poor Quality tool
- Set the basis. Choose the currency, whether your quantities are per week, month, quarter or year, the annual revenue and your reduction goal.
- List the failure costs. Add each cost with its quantity, unit and cost per unit, for example 1,850 scrapped units × $4.20.
- Mark hidden costs. Set each cost as visible (in the accounts) or hidden, and as an internal or external failure.
- Read the iceberg. Bar widths show the annual cost; the waterline separates the visible from the hidden costs.
- Build the business case. Use the annual total, % of revenue and savings at your reduction goal to justify improvement projects.
- Export. Export the iceberg and the cost table to PDF, PNG or Excel.
Frequently asked questions
What is the cost of poor quality (COPQ)?
The cost of poor quality is the cost of everything that goes wrong: defects, failures and the waste they cause. It includes internal failures (scrap, rework, investigations, downtime) and external failures (complaints, returns, warranty, lost customers). It would disappear if every product and process were perfect.
What are hidden costs of poor quality?
Costs that do not appear as a quality line in the accounts: extra inspection added after problems, time spent on investigations and meetings, expedited freight, lost production capacity, extra inventory held as a buffer, and sales lost to dissatisfied customers. They are often larger than the visible costs, which is why COPQ is drawn as an iceberg.
How do I calculate COPQ?
For each failure cost, multiply how often it happens by what it costs each time: scrapped units × cost per unit, rework hours × labour rate, investigations × hours × rate. Convert to a year, add up the items, and compare with revenue. Estimates are fine to start with; write down the basis of each.
How big is the cost of poor quality?
Estimates of 10% to 20% of sales are often quoted for organizations without a mature quality system, and leading organizations aim for 2% or less. The first calculation is often a surprise because of the hidden costs.
How does COPQ help an improvement programme?
It turns quality problems into money, which makes them comparable and gets management attention. Ranking the items shows where projects pay off most, and the savings at your reduction goal give a business case for improvement.
What is the difference between COPQ and the cost of quality?
The cost of quality also includes the cost of good quality: prevention and appraisal. COPQ is only the failure part. Use the cost of quality calculator to see the full picture.