Cost of poor quality (COPQ) or poor quality costs (PQC), are defined as costs that would disappear if systems, processes, and products were perfect.
COPQ was popularized by IBM quality expert H. James Harrington in his 1987 book Poor Quality Costs. COPQ is a refinement of the concept of quality costs. In the 1960s, IBM undertook an effort to study its own quality costs and tailored the concept for its own use. While Feigenbaum's term "quality costs" is technically accurate, it's easy for the uninitiated to jump to the conclusion that better quality products cost more to produce. Harrington adopted the name "poor quality costs" to emphasize the belief that investment in detection and prevention of product failures is more than offset by the savings in reductions in product failures.
Harrington decomposes COPQ into the following elements:
Direct poor-quality costs
Controllable poor-quality cost
Resultant poor-quality cost
Internal error cost
External error cost
Equipment poor-quality cost
Direct COPQ can be directly derived from entries in the company ledger.
Controllable COPQ is directly controllable costs to ensure that only acceptable products and services reach the customer.
Resultant COPQ are costs incurred because unacceptable products and services were delivered to the customer, resulting from earlier decisions about how much to invest in controllable COPQ.
Equipment COPQ are costs to invest in equipment to measure, accept, or control a product or service. It is treated separately from controllable costs to accommodate the effects of depreciation.
Indirect poor-quality costs
Indirect COPQ is difficult to measure because it is a delayed result of time, effort, and financial costs incurred by the customer. These customer costs add up to lost sales and therefore do not appear in the company's ledger.
The damages of poor quality augment as the inception point is farther down the supply chain:
TCFP [Total Cost of Faulty Part] =
Direct Cost (manufacturing cost)
➔ failure at supplier's site (bad)
+ Labor Cost (assembly and testing)
+ Overhead Cost (Inventory, handling, shipping costs)
+ Scrapping Cost (of part and attached parts assemblies: Sometimes assemblies cannot be disassembled and have to be scrapped altogether)
+ Rework (applying a new part instead)
➔ failure at manufacturer's site (worse)
+ Repair / Recall Costs (these are costs associated with repairing or replacing a new part / assembly under warranty)
+ Product Liability Costs (These are costs resulting from damages caused by the faulty part to 3rd parties)
➔ failure at customers' site (worst)