Cost of Poor Quality (COPQ)

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SEF Reference Guide G25  |  Manufacturing OpEx Maturity Assessment

What it is

Cost of Poor Quality (COPQ) is the money an operation loses because things are not done right the first time: scrap, rework, re-inspection, warranty, returns, credits, premium freight, and the engineering and management time spent chasing problems. It puts quality problems in the one language every leader reads: money.

SEF uses the Prevention, Appraisal, Failure (PAF) model, first set out by Armand Feigenbaum in the Harvard Business Review in 1956 and later adopted by ASQ. It sorts quality-related costs into four groups. Prevention and appraisal are what you spend to get quality right (the cost of good quality). Internal and external failure are what you lose when you do not (the cost of poor quality). SEF tracks all four, reports internal plus external failure as the COPQ headline, and watches appraisal closely, because heavy inspection usually signals a process that cannot be trusted.

Plants that measure COPQ properly for the first time often find it is much larger than the scrap figure they already knew. Joseph Juran called these losses “gold in the mine”: money that can be recovered by improvement rather than by cutting.

Why it matters

• Profit. A dollar of COPQ removed goes straight to the bottom line. Example: if a product costs $100 to make and 2% is scrapped, COPQ is $2 per unit before rework, freight, and complaint costs are counted.
• Priorities. COPQ by category shows where quality problems cost the most, so improvement effort goes to the largest losses first.
• Customer. External failure costs (returns, warranty, credits) track closely with customer pain (see G21).
• Capacity. Scrap and rework use machine and labor hours that could have made good product for sale.

Key terms

Term	Meaning
COPQ	Cost of Poor Quality. The total cost of not getting it right the first time: scrap, rework, re-inspection, warranty, returns, expediting, and lost customers.
KPI	Key Performance Indicator. A measure tied to a business objective, with a defined formula, owner, target, and review frequency.
Cost of quality (COQ)	All four PAF groups together: prevention + appraisal + internal failure + external failure.
Prevention costs	Spending to stop defects from happening: quality planning, PFMEA, training, supplier development, error proofing.
Appraisal costs	Spending to find defects: inspection, testing, calibration, audits.
Internal failure costs	Losses from defects found before the product reaches the customer: scrap, rework, re-inspection, downgrading, failure analysis.
External failure costs	Losses from defects found by the customer: warranty, returns, credits, field repairs, complaint handling, recalls.
Hidden costs	Real losses that are hard to book: lost orders, lost customers, damaged reputation, management time. Note them, but do not force them into the monthly numbers.
COPQ category	One defined line in the COPQ worksheet, with a data source and owner (see Template).
% of categories measured	Categories with a monthly value in the KPI system / applicable categories x 100. The basis for the 30% and 50% thresholds.

How to do it

1. Adopt the SEF category list. Use the 24 categories in the Template. Mark any that truly do not apply (for example, no field service) as not applicable, with a one-line reason. Do not add or split categories to inflate the count.
2. Define each category. For every applicable category, write: what is included, the data source (ledger account, scrap report, time booking, warranty system), the calculation, and the owner. Estimates are acceptable when the method is written and used the same way every month. Example: rework cost = rework hours booked x loaded labor rate + replacement material.
3. Start with the biggest. Measure scrap, rework, customer returns and credits, warranty, and premium freight first. These are usually the largest and have the best data.
4. Put it in a KPI system. Any system works: an ERP report, a BI dashboard, or a controlled spreadsheet. Each category gets a monthly value in currency. COPQ becomes a KPI with a formula, owner, target, and review frequency.
5. Normalize. Report COPQ in currency and as a percentage of sales (or of cost of goods sold), so the trend is not distorted by volume changes.
6. Review monthly with leadership. Show the total, the four groups, a Pareto of categories, and the trend. Set an improvement target (for example, reduce failure costs by a set percentage over 12 months).
7. Attack the top categories with structured projects. Use A3, 8D, or DMAIC on the largest categories (see G05 and G21). Book validated reductions in the savings register (see G23).
8. Widen coverage. Each quarter add categories until more than 30%, then more than 50%, of applicable categories are measured.
9. Watch the balance. As prevention spending rises, failure costs should fall. If appraisal rises and failure does not fall, you are inspecting instead of fixing.

The “% of categories measured” idea

PF-5 Levels 4 and 5 ask how much of the COPQ picture you can actually see. A plant that only measures scrap sees one category out of many and will badly underestimate its losses.

% measured = categories with a monthly value in the KPI system / applicable categories x 100

A category counts as measured only if it has a written definition, a data source, an owner, and a currency value recorded every month for at least the last 3 months. With all 24 SEF categories applicable, Level 4 (more than 30%) needs at least 8 categories measured, and Level 5 (more than 50%) needs at least 13.

What each maturity level looks like

PF-5 Cost of Poor Quality (COPQ)

Level	Assessment wording	What it looks like on the floor	How to move up
1	No information on COPQ.	Scrap is thrown away without being counted in money. Warranty and credits sit in sales or finance accounts nobody links to quality.	Adopt the category list. Measure scrap, rework, and returns in currency for the last 3 months.
2	COPQ is tracked by category in a KPI system.	A monthly COPQ report exists with several categories in currency, owners named, and a total.	Take COPQ to the monthly leadership review and set a reduction target.
3	As Level 2, plus leadership reviews performance and sets improvement targets.	Leaders review the COPQ Pareto monthly, ask about the top categories, and hold a written target.	Charter structured projects on the top categories. Keep adding categories.
4	As Level 3, plus structured problem solving projects focus on COPQ, with more than 30% of COPQ categories measured.	Projects target named COPQ categories with baselines in currency. At least 8 of 24 applicable categories are measured monthly.	Extend measurement past 50%, especially external failure and appraisal. Sustain project gains.
5	As Level 4, plus trends are good and stable or improving, with more than 50% of COPQ categories measured.	At least 13 of 24 applicable categories measured. COPQ as % of sales stable at a good level or falling for 12 months or more.	Shift spend toward prevention. Share the method with suppliers and other sites.

Evidence to look for

Document

• Written category definitions with data sources, calculations, and owners.
• Monthly COPQ report for the last 12 months.
• The list of applicable and not-applicable categories, with reasons.
• Project charters or A3s tied to specific COPQ categories.

Observation

• COPQ Pareto and trend on an information board or in the leadership pack.
• Scrap bins, rework areas, and quarantine: check that what you see is being counted. Weigh or count a scrap bin and trace it to the report.
• Inspection stations: ask how much time they take and whether that time is in appraisal cost.

Statement (questions to ask and who to ask)

• Controller: “Where do warranty, credits, and premium freight get booked? Are they in the COPQ report?”
• Quality manager: “How is rework cost calculated? Which categories are estimates?”
• Production supervisor: “How is scrap recorded on your shift? What happens if it is not?”
• Plant manager: “What is COPQ as a percentage of sales, and what is your target?”

Management report

• Monthly COPQ by category and group, in currency and as % of sales.
• % of categories measured.
• Trend for at least 12 months (needed to judge Level 5).
• Project results linked to category reductions.

Common pitfalls

• Scrap only. Scrap is visible and easy. Rework, re-inspection, premium freight, and complaint handling are often larger. Measure them.
• Material cost only. A scrapped part also carries the labor, machine time, and overhead already spent on it. Use a consistent cost basis (standard cost at the point of scrap is a good default).
• Arguing about precision. A consistent estimate this month beats a perfect number next year. Write the method, then improve it.
• Booking supplier recoveries as zero cost. Record the gross cost, then the supplier recovery separately. Recoveries rarely cover your full cost.
• No link to action. A COPQ report that is not reviewed and does not drive projects is just accounting.

Template

SEF COPQ Category Worksheet

(one row per category, monthly values in currency)

ID	Group	Category	Typical data source	Applicable (Y/N)	Measured (Y/N)	Owner	Month value
P1	Prevention	Quality planning (PFMEA, control plans, APQP)	Engineering time bookings
P2	Prevention	Quality and problem solving training	Training records x rate
P3	Prevention	Supplier qualification and development	Supplier quality time, travel
P4	Prevention	Error proofing and capability studies	Project costs
A1	Appraisal	Incoming inspection	Receiving inspection hours
A2	Appraisal	In-process inspection and test	Inspection hours, test equipment
A3	Appraisal	Final inspection and test	Inspection hours
A4	Appraisal	Calibration and gauge upkeep	Calibration costs, lab time
A5	Appraisal	Quality audits (product, process, system)	Audit hours, registrar fees
A6	Appraisal	External lab and certification testing	Invoices
I1	Internal failure	Scrap (material, labor, overhead)	Scrap transactions at standard cost
I2	Internal failure	Rework and repair	Rework hours x rate + material
I3	Internal failure	Re-inspection and retest	Hours x rate
I4	Internal failure	Downgrading and seconds	Price difference x quantity
I5	Internal failure	Failure analysis and material review	Engineering and quality hours
I6	Internal failure	Downtime caused by quality problems	Downtime log x hourly cost
I7	Internal failure	Supplier-caused failures (gross, before recovery)	Supplier rejects, sorting
E1	External failure	Warranty claims	Warranty system, ledger
E2	External failure	Customer returns and replacements	Returns log, replacement cost
E3	External failure	Credits, penalties, and chargebacks	Sales credit notes
E4	External failure	Complaint handling (8D time, sorting at customer)	Hours x rate, sorting invoices
E5	External failure	Field service and repairs	Service reports
E6	External failure	Premium freight and expediting due to quality	Freight invoices with reason
E7	External failure	Recalls and product liability	Ledger, legal

Summary block

Line	Value
Prevention total
Appraisal total
Internal failure total
External failure total
COPQ (internal + external failure)
Sales for the month
COPQ % of sales
Applicable categories
Measured categories
% of categories measured
Supplier recoveries (reported separately)

First 30 days

Week 1: Meet the controller and quality manager. Copy the category worksheet. Mark categories as applicable or not, with reasons. Find the data source for each.

Week 2: Calculate the last 3 months for scrap, rework, returns and credits, warranty, and premium freight. Write the method for each.

Week 3: Add as many more categories as have usable data. Build the monthly report in your KPI system or spreadsheet. Calculate COPQ as % of sales and % of categories measured.

Week 4: Present the first COPQ Pareto at the leadership meeting. Set a target. Pick the largest category for the first structured project.

Further reading

• ASQ, “What is Cost of Quality (COQ)?” https://asq.org/quality-resources/cost-of-quality
• Wood, D. (editor). Principles of Quality Costs, 4th edition. ASQ Quality Press (2013).
• Feigenbaum, A. “Total Quality Control.” Harvard Business Review (1956). The origin of the prevention, appraisal, and failure categories.
• Crosby, P. Quality Is Free (1979). The case that the cost of nonconformance pays for prevention.
• De Feo, J. (editor). Juran’s Quality Handbook, 7th edition. McGraw-Hill (2016). Includes the cost of poor quality and the “gold in the mine” idea.