The Cost of Poor Quality (COPQ) and its consequences can be difficult for organizations to measure, and it can be a struggle to convince executive stakeholders that Quality improvement projects to mitigate COPQ have real value and are not simply cost centers. The primary consequences of COPQ are the most obvious. Costs associated with process failures inside the organization include:
- Excess scrap and waste material created by inefficient manufacturing processes,
- Rework on defective or damaged products before they ship to market, and
- Retesting and analyzing processes and procedures to determine point of failure.
If poor Quality is not caught before products or services make their way to end customers, the external costs can include those associated with:
- Repairs, and
- Field support.
The traditional cost of poor Quality has usually been assumed to be between four percent and five percent of an organization’s annual revenue.[i] In other words, a business with $100 million in annual revenue is throwing away between $4 million and $5 million by failing to mitigate the impact of preventable process failures.
Yet, like an iceberg, the visible surface of the problem masks something far deeper.[ii] Hidden costs associated with COPQ can include:
- Decreased employee engagement,
- Higher employee turnover and attrition,
- Employees addressing Quality failures instead of focusing on Quality improvement through innovation,
- Overtime costs,
- Machine downtime,
- Long-term customer dissatisfaction,
- Brand damage,
- Poor inventory turnover, and
- Decreased customer lifetime value.
When we account for these hidden and long-term costs, COPQ is more like 10 percent to 25 percent of an organization’s annual revenue. To put that into perspective again, that would mean a company with $10 million in annual revenue is throwing away $1 million to $2.5 million every year on failures that are predictable and preventable. These costs are often passed on to customers in the form of a higher price tag, which leads to additional customer dissatisfaction and brand damage. Investing in Quality is therefore the most effective way of reducing these staggering costs.
Learn more about Quality Management in our Insight Report, What is Quality Management and Why Does it Matter?
[i] Joseph A. DeFeo, “The Tip of the Iceberg,” Quality Progress Vol. 34, No. 5 (May 2001): 31-32, accessed March 13, 2018, http://asq.org/data/subscriptions/qp/2001/0501/qp0501defeo.pdf.
[ii] Suresh Kumar Krishnan, “Increasing the visibility of hidden failure costs,” Measuring Business Excellence, Vol. 10, No. 4 (2006): 84, accessed March 12, 2018, https://doi.org/10.1108/13683040610719290.