The Cost of Poor Quality (CoPQ)
Welcome back to our conversation on the Cost of Quality. In Part 1, we provided a general overview of the Cost of Quality. This article will delve deeper into the Cost of Poor Quality (CoPQ).
What is the Cost of Poor Quality?
The American Society for Quality (ASQ) defines the Cost of Poor Quality as the costs associated with providing poor-quality products or services. Six Sigma describes it as the costs generated from producing defective materials. However, LNS Research suggests that these methods are challenging to calculate accurately and proposes an alternative approach: calculating the Unplanned Cost of Quality. The Unplanned Cost of Quality accounts for all costs related to tasks and events that were not planned or budgeted for.
Internal Failure Costs
Internal failure costs are incurred before the product or service is delivered to the customer. These costs arise from breakdowns in production processes that result in a failure to meet established quality standards. Internal failure costs include issues like scraps, reworks, re-testing, defects, downtime, or overproduction of products. For instance, if nutrient burn occurs during the cultivation process, leading to unusable crops, the cost associated with this failure would fall under internal failure costs. Capturing and analyzing this data effectively can highlight areas where investing in Good Production Practices (GPP) or following Cannabis SOP guidelines could help reduce these costs and improve overall quality.
External Failure Costs
External failure costs occur after the product or service has been delivered to the customer. These costs are associated with efforts to remediate the situation with the customer due to the poor quality of the product or service received. Examples of external failure costs include product returns, recalls, costs related to lawsuits, and inventory impairment charges. There are also intangible costs in this category, such as damage to the company’s reputation for delivering sub-par quality products. This negative reputation can lead to further issues, such as difficulty in hiring or retaining talent, vendor hesitancy, or outright lack of cooperation. Poor quality can severely impact your cost of good quality, making it essential to address these issues proactively.
Unplanned Costs of Quality
The Unplanned Costs of Quality account for time and materials that were not included in the budget. For example, if your bottling line is scheduled to run from 10 am to 8 pm, but it breaks down at 3 pm and cannot be repaired until the next day, the costs incurred from this disruption would be classified as Unplanned Costs of Quality. However, if your bottling line is idle due to no scheduled production, this is not considered an Unplanned Cost of Quality. This metric is valuable as it allows you to identify where there are opportunities for improvement in your processes, focusing on reducing unexpected costs without necessarily indicating whether your machine is profitable—that’s a different metric for another discussion.
Managing the Cost of Poor Quality
The Cost of Poor Quality is unavoidable, but the goal should not be to eliminate it completely. Instead, the focus should be on maintaining it at sustainable levels. The first step in achieving this goal is to understand where the points of failure exist and define them within your processes. By capturing the necessary data, such as through seed-to-sale cannabis software or utilizing cultivation SOP templates, you can make informed investment decisions to enhance your Good Quality. We’ll explore this further in Part 3!
By carefully managing the Cost of Poor Quality, companies can not only mitigate the risks associated with poor performance but also create opportunities for improving quality, reducing waste, and enhancing customer satisfaction—all of which contribute to long-term success in the cannabis industry.
