LETS LOOK AT COST OF QUALITY

            Cost of Poor Quality

A manufacturing company had annual sales of Rs.2500 Crores . Its quality department calculated the total cost of repair, rework, scrap, service calls, warranty claims and write-offs from obsolete finished goods. This aggregated cost, called Cost of Poor Quality (COPQ), amounted to 20% of their annual sales. A 20% COPQ implied that during one day of each five-day workweek, the entire company spent its time and effort making scrap, which represented a loss of approximately Rs 10,00,000 per day.

Experts have estimated that Cost of Poor Quality typically amounts to 5-30% of gross sales for manufacturing and service companies. Independent studies reveal that COPQ is costing companies Millions of Rupees each year and its reduction can transform marginally successful companies into profitable ones. Yet most executives believe that their company's COPQ is less than 5%, or just do not know what it is. All levels of executives recognize that quality is an absolute necessity to survive and succeed in today's business environment. The diagram below provides a framework for calculating COPQ as a percentage of sales.

 

In a recently published book "Success through Quality", the author estimates that COPQ for an average company is about 20% of sales, with a range as wide as under 1% for companies who have achieved "six sigma", about 15%-25% for companies who are at "four sigma" level and about 25% to 40% of revenue for companies who are at "three sigma" levels. A large fortune 500 communications company calculated its COPQ at 8.6% of sales in 2002 and has set a goal of 5.4% for 2005, which will result in a savings  Billion per year!

VIDYUT CHANDRA PATANGE-

MTech(Ind Engg and Mgt)

FOUNDER & CEO

SRH MANAGEMENT CONSULTANTS AND TRAINERS

www.srhmc.wordpress.com 

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