All industries are on look out of controling and reducing cost at all levels. Cost of poor quality (COPQ) becomes very relevant and substantial in this scenario, especially in manufacturing companies where the scope for reducing COPQ is very high.Controling COPQ can have a good impact on the bottom level and can bring visibility on company’s efficiency. But there has been lot of apprehensions and discussions how to capture and what costs needs to be considered as COPQ costs. Having a SAP framework gives the opportunities to capture all the cost relevant through cost elements, orders etc .  Here are my views on COPQ ,what components can be considered and what are the costs that are readily available in the system that can be taken for reporting.

According to me COPQ cost can be divided in three segments based on supply chain – Supplier related, Production related & Customer related.

Supplier Related COPQ

Suppliers are an integral part of the supply chain. Efficiency of the production also depends on the quality and on time delivery of the materials by the supplier. Rejection of the supplier material is one of the direct COPQ costs incurred by a company. Added to that the resources and money spent on testing the material, shortages caused due to rejections, handling costs of the rejected goods, space occupied till the vendor takes back the rejected material etc contributes to COPQ indirectly. To resolve such issues vendor audits will be carried to stop any recurrence and cost incurred for this is again a COPQ. Handling and space occupied can be calculated on a percentage of the cost of the actual rejected goods. QM notifications can be used to capture the cost where proper business mapping is not available for capturing the costs.

Production Related COPQ

Production related COPQ costs are many. Some of the direct measurable costs are

1.Scrap- Scrapping of Inprocess material will be a daily activity in the shop floor. This will also have other factors getting added to it like the scrap handling costs, space occupied
2.Production order variances- This will include all the variance incurred in the production of the material for eg If more quantity is used than that defined in the bill of materials leading to quantity variance, Rework order costs, Resource usage variance, downgrading of material etc.
3.Overtime costs -can be considered as COPQ if overtime is been done because production dept is not able to meet the deadline for reason like absenteeism, poor workmanship, machine breakdown etc.
4.Break down costs – cost captured against a break down orders can be taken as COPQ.
5.Excess and obsolete stocks -Excesss and Obsolete stock lying the stores is a COPQ as it indicates the inefficiency in planning and material utilization
6.Safety costs – can include incident cost, hospital charges, compensation paid for the employee if any can be considered

Customer related COPQ

Customer related COPQ are perhaps the major contributors to the COPQ. The main cost component being the warranty cost. This includes the cost for Return goods processing, Return Material advice (RMA cost), Repair costs, transporting the material back to customer etc. Other COPQ cost can be the liquidated damages / penalties for non adherence to the delivery dates, overdue receivables from the customer.
If a proper business process is defined to capture all the components then reporting of the all costs becomes easy. Today companies are more focused on this area as lot of expenses can be saved.