Calculating the Cost of Poor Quality (COPQ)

A conversation with Eugene Tsui, Head of Supplier Management at Pro QC

A valuable business metric, Cost of Poor Quality (COPQ), is important in the context of achieving an efficient and profitable business. Being able to quantify the cost of failures enables businesses to reduce costs and become healthier in the long term.

We spoke with Eugene Tsui, who leads Supplier Management at Pro QC and works specifically with assisting the global team in reducing COPQ for clients. He explained the value of utilizing COPQ calculations in detail.

Tell us briefly about your background?

My background is in design, product development, R&D, and general management – where I have worked as a plant manager. I have a black belt in Six Sigma, and also have experience working as a business process consultant.

I’m currently heading the Supplier Management unit for Pro QC. My role is to lead and assist the global team in reducing the Cost of Risk and Cost of Poor Quality (COPQ) for our clients.

Why is calculating the Cost of Poor Quality (COPQ) so important?

The COPQ is essentially a calculation that enables us to measure and quantify, in dollar terms, the severity of a given problem, or excessive waste of resources within an organization. As they say, “if you can’t measure it, you can’t improve it”.

By understanding the magnitude of each of your business problems, and where they come from, you can then make an informed decision to prioritize and put clear initiatives in place to resolve these issues.

When does a business utilize COPQ?

COPQ comes into action when managers need to articulate their business problems and measure them before assigning resources. The COPQ is typically used to measure the cost of the issue, and then to justify the investment and resources required in order to make certain business cases. This is a way to ensure the business does not spend $5,000 on an initiative that fixes a problem that only costs $1,000 in the first place.

How do we calculate COPQ?

COPQ calculations can come from many areas of the business. The two parts that make up the calculation are tangible costs and intangible costs.

The tangible costs are often straightforward– they include things like scraps, wastage, rework material, rework time, expedited shipping, and so forth.

Intangible costs are usually hidden, or less obvious to most managers. These include the likes of administrative headaches, client dissatisfaction, and can extend beyond operations to issues with brand reputation and campaign failures.

Once you add up the costs associated with a given problem and the frequency of occurrence, businesses are often surprised by how expensive they are. In many cases, any noteworthy quality issues can cost the business tens of thousands of dollars.

What is your advice for companies looking to apply COPQ?

Don’t underestimate or ignore hidden costs, and make sure you always assign a dollar amount to those costs – for example, you can use man-hours as a way to track the costs.

By understanding COPQ and the Cost of Risk in your factory units, you will help supply chain professionals to decide on the level of quality resources assigned to each of the units.

The cost of reworking a few small components may not seem significant at first, but when a company produces hundreds of thousands of components, the costs really add up.

The COPQ increases exponentially as you go further down the supply chain, therefore the further upstream the preventative measures are, the higher the potential cost savings.

I’d also advise that prevention is better than going back to try to cure the wound when it has already been cut deep. Don’t wait until a critical failure happens, or the loss of a client contract, before you react – make sure you act before these events play out.

Write us at info@proqc.com or contact me directly if you would like to identify opportunities to reduce COPQ.