Cost of poor quality or poor quality costs (PQC), are defined as costs that would disappear if systems, processes, and products were perfect.

COPQ was popularized by IBM

IBM

International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...

 quality expert H. James Harrington in his 1987 book Poor Quality Costs.
COPQ is a refinement of the concept of quality costs

Quality costs

The concept of quality costs is a means to quantify the total cost of quality-related efforts and deficiencies. It was first described by Armand V. Feigenbaum in a 1956 Harvard Business Review article....

. In the 1960s, IBM undertook an effort to study its own quality costs and tailored the concept for its own use.. While Feigenbaum's term "quality costs" is technically accurate, it's easy for the uninitiated to jump to the conclusion that better quality products cost more to produce. Harrington adopted the name "poor quality costs" to emphasize the belief that investment in detection and prevention of product failures is more than offset by the savings in reductions in product failures.

COPQ decomposes COPQ into the following elements:

Cost	Description
Direct poor-quality costs Controllable poor-quality cost Prevention cost Appraisal cost Resultant poor-quality cost Internal error cost External error cost Equipment poor-quality cost	Direct COPQ can be directly derived from entries in the company ledger Ledger A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which... . Controllable COPQ is directly controllable costs to ensure that only acceptable products and services reach the customer. Resultant COPQ are costs incurred because unacceptable products and services were delivered to the customer, resulting from earlier decisions about how much to invest in controllable COPQ. Equipment COPQ are costs to invest in equipment to measure, accept, or control a product or service. It is treated separately from controllable costs to accommodate the effects of depreciation Depreciation Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used .... .
Indirect poor-quality costs Customer-incurred cost Customer-dissatisfaction cost Loss-of-reputation cost	Indirect COPQ is difficult to measure because it is a delayed result of time, effort, and financial costs incurred by the customer. These customer costs add up to lost sales and therefore do not appear in the company's ledger.

Examples

Cost element			Examples
Direct poor-quality costs	Controllable poor-quality cost	Prevention cost	Quality planning Quality management The term Quality management has a specific meaning within many business sectors. This specific definition, which does not aim to assure 'good quality' by the more general definition , can be considered to have four main components: quality planning, quality control, quality assurance and quality...  (for test, inspection, audits, process control) Education and training Performing capability analyses Process capability A process is a unique combination of tools, materials, methods, and people engaged in producing a measurable output; for example a manufacturing line for machine parts... Conducting design reviews
		Appraisal cost	Test and inspection Supplier acceptance sampling Auditing processes
	Resultant poor-quality cost	Internal error cost	In-process scrap Scrap Scrap is a term used to describe recyclable and other materials left over from every manner of product consumption, such as parts of vehicles, building supplies, and surplus materials. Unlike waste, scrap has significant monetary value...  and rework Rework Rework is the term for the refinishing operation or repair of an electronic printed circuit board assembly. Mass processing techniques are not applicable to single device repair and/or replacement, so specialized techniques are required to replace defective components – most notably area array... Troubleshooting and repairing Design changes Additional inventory required to support poor process yields and rejected lots Reinspection and retest of reworked items Downgrading
		External error cost	Sales returns and allowances Sales (accounting) In bookkeeping, accounting, and finance, Net sales are operating revenues earned by a company when it sells its products. Revenue are reported directly on the income statement as Sales or Net sales.... Service level agreement Service Level Agreement A service-level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance...  penalties Complaint handling Field service labor and parts costs incurred due to warranty Warranty In business and legal transactions, a warranty is an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.In real estate transactions, a...  obligations
	Equipment poor-quality cost		Micrometers, voltmeters, automated test equipment (but not equipment used to make the product)
Indirect poor-quality costs	Customer-incurred cost		Loss of productivity due to product or service downtime Travel costs and time spent to return defective product Repair costs after warranty Warranty In business and legal transactions, a warranty is an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.In real estate transactions, a... period Backup product or service to cover failure periods
	Customer-dissatisfaction cost		Dissatisfaction shared by word of mouth
	Loss-of-reputation cost		Customer perception of firm

White collar COPQ

Harrington noted that expanding cost analyses to management and clerical workers could also make a significant dent in waste. He defined the following costs by functional area:

Functional area	Controllable COPQ	Resultant COPQ
Controller COPQ	Timecard reviews Capital equipment reviews Invoicing reviews	Billing errors Incorrect accounting entries Payroll errors
Software COPQ	Design reviews Code reviews	Crashes Deadlocks Incorrect outputs
Plant administration COPQ	Security Facility inspection and testing Machine maintenance training	Disclosure of trade secrets Facilities redesign Overstaffing/understaffing Equipment downtime/idle time
Purchasing COPQ	Vendor reviews Periodic vendor surveys Follow-up on delivery dates Strike built-in costs	Line-down cost Excessive inventory due to suppliers Premium freight cost
Marketing COPQ	Sales material review Marketing forecast Customer surveys Sales training	Overstock Loss of market share Incorrect order entry
Personnel COPQ	Prescreening applications Appraisal reviews Exit interviews Attendance tracking	Absenteeism Turnover Grievances
Industrial engineering COPQ	Packaging evaluations Layout reviews OSHA reports Inspection of contract work	OSHA fines Shipping damage Redoing layout Paying contractors for poor work

Cost of poor quality by inception point

The damages of poor quality augment as the inception point is farther down the supply chain:

TCFP [Total Cost of Faulty Part] =

Direct Cost (manufacturing cost)

➔ failure at supplier's site (bad)

+ Labor Cost (assembly and testing)

+ Overhead Cost (Inventory, handling, shipping costs)

+ Scrapping Cost (of part and attached parts assemblies: Sometimes assemblies cannot be disassembled and have to be scrapped altogether)

+ Rework (applying a new part instead)

➔ failure at manufacturer's site (worse)

+ Repair / Recall Costs (these are costs associated with repairing or replacing a new part / assembly under warranty)

+ Product Liability Costs (These are costs resulting from damages caused by the faulty part to 3rd parties)

➔ failure at customers' site (worst)