The total cost of poor quality is often depicted as an iceberg with some of the costs visible above the water, but most of the costs hidden beneath the surface. This image is an excellent way to illustrate how poor quality management issues in manufacturing likely cost more than you realize. Although many costs are directly attributable to the quality issue itself, many other costs are incidental or secondary and may be hidden and unrecognized.
As you analyze your supply chain and list of original equipment manufacturer (OEM) suppliers, here are some of the top things you need to keep in mind regarding quality and what it really means for your bottom line.
What Constitutes Quality Management Issues in Manufacturing?
Quality issues can arise from a variety of circumstances. However, some of the most common include the following.
Poor Parts Quality
When parts are not manufactured to the exact purchaser specification, these show as defects in the parts themselves. These poor-quality defects include:
- Surface defects, such as scratches or improper finishes
- Incorrect or substandard materials
- The wrong mix of parts or parts missing
- Failure to adhere to quality specifications
- Misidentified parts or incorrect labeling
- Improper or incorrect assembly
Poor Supplier Performance Quality
Poor vendor performance also represents a failure in supplier quality. It can include the following:
- Lack of complete and clear communications
- Failure to comply with purchase agreement terms, such as late or irregular deliveries
- Failure to satisfy regulatory requirements
- Incorrect shipping paperwork or packaging methods
Calculating the True Costs of Poor Quality
Calculating true costs of poor quality can be tricky because many of the expenses are ancillary or indirectly generated. Also, some costs of poor quality may not be incurred immediately, such as loss of customer goodwill. Many costs can also be buried in general overhead or indirect expenses, and they are difficult to identify and quantify. Quality professionals estimate that quality management issues in manufacturing for many organizations result in losses averaging around 15%-20% of sales revenue, with some companies experiencing costs as high as 40% of revenues.
Quality engineers have developed methods of calculating the total cost of poor quality using a methodology called the COPQ method, or the cost of poor-quality formula. This formula is expressed as follows:
COPQ = Internal Failure Costs + External Failure Costs
Internal failure costs include costs associated with scrap, product rework, incorrect processes and lack of equipment maintenance. External failure costs are those costs external to the production process, such as handling customer complaints, managing product returns and damage during shipping.
Adding these two factors — and any other internal and external failure costs — gives the actual costs of poor quality.
Poor Supplier Quality Costs More Than You Think
Suppliers with established, effective quality management systems will have lower COPQ than suppliers that have not installed these systems. Not having a good quality control program means that these suppliers will have high COPQs and experience more rework, scrap, and other wastes.
Inevitably these costs find their way into parts pricing and are passed on to customers. As a result, parts purchased from a supplier with quality management issues in manufacturing will likely have higher costs and, therefore, higher purchase prices across their product lines. On the other hand, good internal quality control programs help eliminate many internal and external failures that lead to higher costs.
But the costs caused by poor-quality suppliers doesn’t stop with higher parts prices. Many of the problems a supplier has with quality will only show up once the parts reach the buyer.
For example, parts from these suppliers will likely have defects that will impact the buyer's entire organization, such as incorrect inventories or last-minute changes in production schedules. In other cases, incorrect or irregular parts deliveries can cause line stoppages, interrupt production processes or jeopardize customer commitments.
Using inferior-quality parts will, in effect, raise the buyer’s production costs and create production and order fulfillment issues. From the buyer's point of view, the actual cost of buying from a supplier with quality issues is the sum of the supplier’s poor-quality costs plus the additional costs the buyer incurs due to the supplier's quality issues.
Understand COPQ When Evaluating Possible Suppliers
Because of the compound effect of poor-quality costs across the supplier-buyer supply chain, it makes sense to evaluate each potential vendor's quality program carefully. Although it might not be possible to quantify each vendor's COPQ, a vendor with a solid quality management system (QMS) indicates that vendor’s commitment to high quality.
Locating and establishing purchasing relationships with low-CPOQ suppliers aligns material acquisition and vendor management with overall company goals. Acquiring high-quality parts contributes to overall company success.
Keeping production lines running and maintaining low COPQ are goals for every company. Connect with VPIC to find out how our QMS ensures the highest-quality parts, and how we can partner with you to help your bottom line.
