The cost of poor quality (COPQ) is the total cost impact of defects produced by the process. There have been many discussions, some heated, about what categories of costs should be considered in this important  process metric. Many organizations make the mistake of only counting the COPQ that they can see. The problem is that this is only the tip of the iceberg. One way to see these costs is to look at what expense types in the process’ operating budget will decrease if the process operates defect free. With this point of view, the cost of poor quality becomes the difference between the as-is cost of producing a product or service, minus the cost of production with no defects.

 The COPQ of a process appears in three categories: prevention costs, appraisal costs, and failure costs. Failure costs can be broken down further into internal failure costs and external failure costs.

 Prevention costs are associated with any activity designed to prevent defects. This includes quality improvement efforts, re-engineering, and new process design. These activities are non-value added in the eyes of the customer.

 Appraisal costs are associated with inspection activities. These activities are designed to prevent existing defects from getting to the customer. Referring back to the Define Phase, remember that any activity associated with finding defects after they occur is non-value-added. Even though the customer may be glad that the defects were caught before the delivery of the product or service, they do not want to pay for the cost of removing bad outputs.

 Failure costs are associated with the mitigation or correction of defects. All internal and external failure activities are non-value added. Internal failure costs are incurred before the defective product or service is delivered to the customer. Examples are scrap and rework. External failure costs are incurred after the defective product or service is delivered to the customer. Examples are warrantee costs, customer returns, customer complaints, and lawsuits.

 An improvement team needs to investigate all potential cost categories in order to capture all of the costs of poor quality. The advantage for the improvement team is more than just a set of data. An understanding of the cost structure surrounding a process will prove extremely valuable when analyzing the process’ performance and when trying to determine which process problem areas to focus on.