How do you measure the cost of poor quality suppliers?

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If you work in supplier quality management, you know how important it is to ensure that your suppliers deliver high-quality products and services that meet your specifications and expectations. But how do you quantify the impact of poor quality suppliers on your business performance and profitability? In this article, we will explain how to measure the cost of poor quality suppliers and why it matters for your supplier quality management strategy.

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Manuel Landaverde

Head of Aviation Safety & Quality
Er. Ram Teja Ganta

Senior QA/QC (Mech) Professional > Manufacturing | Metal Fabrication | Machinery | Farm Equipment | Energy
AKSHAY PRATAP SINGH

Manager-Quality at PTC Industries | Aerospace & Defence Manufacturing | Metallurgist | Failure Analyst | Project…

1 What is the cost of poor quality?

The cost of poor quality (COPQ) is the total amount of money that is wasted or lost due to defects, errors, rework, scrap, warranty claims, customer complaints, and other quality issues that arise from poor supplier performance. COPQ can be divided into two categories: internal and external. Internal COPQ refers to the costs that are incurred within your organization, such as inspection, testing, correction, and prevention activities. External COPQ refers to the costs that are incurred outside your organization, such as customer returns, refunds, penalties, lawsuits, and reputation damage.

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AKSHAY PRATAP SINGH

Manager-Quality at PTC Industries | Aerospace & Defence Manufacturing | Metallurgist | Failure Analyst | Project Management | Quality Assurance | Lead Verifier ISO 14064 | CQI -9 | AS9100 Rev. D | IATF 16949
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???? Measuring the Cost of Poor Quality Suppliers: 1?? Financial Impact: Quantify expenses from defects, rework, and warranty claims. 2?? Reputation Damage: Assess loss of customer trust and brand credibility. 3?? Time Wastage: Calculate delays and disruptions in production schedules. 4?? Opportunity Cost: Evaluate missed opportunities and market share loss.

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Karthik Raj

Six Sigma Project Manager driving manufacturing process excellence and supplier management.
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Cost of Poor Quality (COPQ) is way to recoup the cost of lost hours/ downtime for a manufacturing facility due to a supplier non-conformance. Usually they will be charged in tandem with a PPM hit to the supplier, which will negatively impact their rating as a supplier. In automotive industries, which consist of high speed assembly lines, the COPQ can be charged by the minute since the moment line is down due to supplier non-conformance. But a more standard approach is by the hour for every time the assembly line is down due to rework, scrap, non-fit up all of which are caused by the supplier. This will fall under the external COPQ.

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2 Why is measuring COPQ important?

Measuring COPQ is important for several reasons. First, it helps you identify and prioritize the root causes of poor supplier quality and implement corrective and preventive actions to eliminate or reduce them. Second, it helps you evaluate and compare the performance of different suppliers and select the best ones for your business needs. Third, it helps you communicate and negotiate with your suppliers and hold them accountable for their quality standards and improvement goals. Fourth, it helps you demonstrate the value and return on investment of your supplier quality management efforts and justify your budget and resources.

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Er. Ram Teja Ganta

Senior QA/QC (Mech) Professional > Manufacturing | Metal Fabrication | Machinery | Farm Equipment | Energy
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The importance of measuring COPQ is to lower the below impacts, I extract this points from my past experience when management asked me to compile report on project failure; - Profitability: Reducing COPQ improves overall financial performance. - Competitive Advantage: High quality enhances reputation and gives a competitive edge. - Customer Satisfaction: Minimizing COPQ leads to satisfied customers. - Process Improvement: COPQ analysis identifies areas for process optimization. - Risk Management: It helps identify and mitigate risks associated with poor quality. - Continuous Improvement: Monitoring COPQ is integral to ongoing quality enhancement.

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3 How do you measure COPQ?

There are different methods and tools to measure COPQ, depending on your industry, business model, and quality objectives. However, a common approach is to use a COPQ formula that calculates the percentage of COPQ over the total cost of goods sold (COGS) or revenue. For example, if your COGS is $10 million and your COPQ is $1 million, your COPQ percentage is 10%. Alternatively, you can use a COPQ matrix that breaks down the COPQ components into categories and subcategories and assigns values to each of them. For example, you can use the four main categories of appraisal, prevention, internal failure, and external failure, and then subdivide them into specific activities and costs.

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Er. Ram Teja Ganta

Senior QA/QC (Mech) Professional > Manufacturing | Metal Fabrication | Machinery | Farm Equipment | Energy
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The cost of poor quality will be calculated by capturing various costs associated with internal and external failure costs. COPQ will normally represent as % age of sale. COPQ% = (Total cost of Poor Quality/ Net sale of the month) x 100 where total cost includes internal failure costs and external failure costs.

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4 How do you benchmark COPQ?

To benchmark COPQ, you need to compare your COPQ results with those of your competitors, industry standards, or best practices. This will help you understand how well you are performing in terms of supplier quality management and where you have room for improvement. You can use various sources of data and information to benchmark COPQ, such as industry reports, surveys, publications, associations, consultants, or peer networks. However, you should also consider the differences and nuances of your business context and goals when benchmarking COPQ, as not all COPQ metrics are applicable or relevant to your situation.

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5 How do you reduce COPQ?

In order to reduce COPQ, a systematic and continuous supplier quality management process must be implemented. This process should involve planning, executing, monitoring, and improving supplier quality activities. To achieve this, it is necessary to define and communicate supplier quality requirements and expectations to suppliers. Furthermore, suppliers should be selected based on their quality capabilities and track records. Regular audits and assessments should be conducted to verify their compliance and performance. Additionally, clear and measurable supplier quality indicators and goals should be established and monitored regularly using data and feedback. Collaboration with suppliers is also essential in order to identify and resolve quality issues as well as implement corrective and preventive actions. Finally, recognition and reward of suppliers for their quality achievements should be encouraged in order to promote continuous improvement.

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6 How do you report COPQ?

To report COPQ, you should utilize clear and concise formats and methods that effectively communicate the relevant information and insights to your stakeholders. Charts and graphs can be used to visualize trends, patterns, and comparisons over time, across suppliers, or by categories. Dashboards and scorecards can summarize the COPQ results, indicators, and goals while highlighting any gaps or opportunities for improvement. Reports and presentations can explain the COPQ analysis, findings, and recommendations as well as provide evidence and examples to back up arguments. Stories and testimonials can also illustrate the impact of reducing COPQ and display success stories or best practices.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Manuel Landaverde

Head of Aviation Safety & Quality
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La gestion de COPQ (Cost Of Poor Quality) de los proveedores es un tema interesante; si planeas medir a tus proveedores de esta manera hay un par de cosas que sugiero tomar en cuenta. - Trata de incluir este KPI, su objetivo y repercusiones en el contrato con el proveedor. - Las reglas de que es y que no es COPQ deben estar claras. - Asegura que cuentas con un sistema de análisis de causa raíz robusto y que las evidencias de la desviación se documentan adecuadamente.

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Akshay Ramanath Hegde

Lead auditor |New Product Development & Quality Assurance | Supplier Development Expert |IRCA Approved Lead Auditor | ISO 9001 | 14001 | 45001 | IATF 16949 | VDA6.3 | LSSGB Certified
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Measuring the cost of poor-quality suppliers involves a comprehensive analysis of various tangible and intangible factors that impact the overall performance and reliability of a supply chain. Direct costs may include expenses related to defective products, rework, and scrap, as well as the costs associated with managing and resolving quality issues. Indirect costs encompass damage to brand reputation, customer dissatisfaction, and potential legal ramifications. Additionally, the expenses incurred in conducting audits, inspections, and implementing corrective actions contribute to the overall cost assessment. Assessing immediate and long-term impacts on customer loyalty and market share is crucial for optimizing supplier relationships.

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How do you measure the cost of poor quality suppliers?

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1 What is the cost of poor quality?

2 Why is measuring COPQ important?

3 How do you measure COPQ?

4 How do you benchmark COPQ?

5 How do you reduce COPQ?

6 How do you report COPQ?

7 Here’s what else to consider

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