Key points
- Cost of poor quality is what defective product costs: internal failures found before delivery and external failures found by the customer.
- Count it in rand from records you already keep: scrap reports, rework hours, credit notes, downtime logs.
- Link every cost to a fault, so you know which part an inspection could actually prevent.
- A station moves failures from external to internal and adds its own running and false-reject costs; both belong in the case.
- Weigh a rare recall separately; do not add it to every year.
What cost of poor quality is
Cost of poor quality (COPQ) is what defective product costs a business. The usual model splits it into two parts. Internal failure costs arise when a defect is found inside the plant, before the product is delivered: rework and scrap. External failure costs arise when a defective product reaches the customer: replacements, recalls, possible liability and the damage to customer satisfaction and future business (Faramarzi and Drane, Fundamentals of Operations Management).
Cost of quality vs cost of poor quality
Cost of quality is the wider figure. It adds two categories spent on getting quality right: prevention costs, which avoid defects in the first place, and appraisal costs, which pay for inspecting, testing and evaluating product during production (Faramarzi and Drane, Fundamentals of Operations Management). Prevention and appraisal are the cost of good quality; internal and external failures are the cost of poor quality.
| Category | What it covers | Packaging-line examples | Part of |
|---|---|---|---|
| Prevention | Avoiding defects before they happen | Training, artwork and changeover procedures, preventive maintenance of coders and fillers. | Cost of good quality |
| Appraisal | Inspecting, testing and evaluating | Manual label and code checks, lab tests, checkweighers, running cost of a vision station. | Cost of good quality |
| Internal failure | Defects found before the product leaves | Scrap, rework, re-labelling, sorting and re-inspection, line stops for quality, product given away by overfilling. | Cost of poor quality |
| External failure | Defects found by the customer | Returns, credit notes and claims, rejected deliveries, complaint handling, recalls, lost business. | Cost of poor quality |
COPQ items on a packaging line, and where to find the figures
Use figures you can trace. Most of them already exist in production, quality and finance records; what is usually missing is the link from each cost to the fault that caused it.
| Cost item | What it is | Where the figure comes from |
|---|---|---|
| Scrap | Material, packaging and product thrown away because of a fault | Scrap reports, stock adjustments |
| Rework and re-labelling | Labour and material to fix faulty product | Rework orders, labour hours |
| Sorting and re-inspection | Checking held stock after a fault is found | Hours on hold-and-sort, contractor invoices |
| Line stops for quality | Production lost while a quality fault is fixed | Downtime log with a quality reason code |
| Overfill (giveaway) | Product given away above the declared quantity | Checkweigher or fill-weight records |
| Returns and credit notes | Product returned or credited by customers | Credit notes with a fault reason |
| Chargebacks and deductions | Amounts a customer or retailer deducts for non-compliant labels, codes or deliveries, where the supply agreement allows it | Remittance advices and deduction statements |
| Rejected deliveries | Deliveries refused at a customer’s distribution centre | Delivery rejections, re-delivery freight |
| Complaint handling | Time spent investigating and answering each customer complaint | Complaint register, hours |
| Recalls | Retrieval, destruction, communication, lost sales | Recall records (weigh separately) |
The COPQ formula and a spreadsheet layout
COPQ per year = internal failure costs + external failure costs. Each line item is a quantity from your records multiplied by a cost per unit. The layout below adds the two columns a business case needs: whether inspection could catch the fault, and how much of that cost you realistically expect to avoid.
| Column | Heading | Content |
|---|---|---|
| A | Cost item | For example: re-labelling after wrong-label runs |
| B | Fault it comes from | Wrong label after changeover |
| C | Unit | Hours, packs, credit notes, stops |
| D | Quantity per year | From your records |
| E | Cost per unit (R) | Labour rate, material cost, credit value |
| F | Annual cost (R) | = D × E |
| G | Could inspection catch this fault? | Yes / partly / no |
| H | Share you expect to avoid | Conservative, agreed with quality and finance |
| I | Avoidable cost (R) | = F × H |
Visible and hidden costs
COPQ is often drawn as an iceberg: scrap, rework and credit notes are visible in the accounts; management time, overtime, lost capacity, extra checks and lost goodwill sit below the waterline. Hidden costs are real, but count them only where you can measure them. A business case built on estimates nobody can check will not survive finance review.
What an inspection station changes
- It moves failures earlier. A wrong label found at the line becomes a rejected pack instead of a returned delivery or a recall: an external failure becomes a smaller internal one.
- It adds appraisal cost. The station has running costs: support, spares, cleaning and reference checks.
- It adds false rejects. Good product rejected by mistake is a new internal cost; the false reject rate agreed at acceptance sets its size.
- It may replace manual checks. Only where that labour cost really stops, not where people move to other work.
The net effect, avoidable failure cost minus running and false reject cost, is what the payback calculator works with. What the station itself costs is in the cost guide.
Common mistakes
- Counting the same faulty batch as scrap, rework and a return.
- Counting redeployed people as a cash saving.
- Adding a rare worst-case recall to every year instead of weighing it as a risk.
- Assuming inspection removes every cost, including faults a camera cannot see.
- Using figures from one bad month as the annual rate.