Cost of Quality Defects and Hidden Factory in Six Sigma

What is cost of quality defects?

Cost of quality defects is the cost incurred due to poor quality. The cost can be measured as a percentage of lost sales. For many companies, the costs for quality defects amounts up to 40% of total sales turnover. In other words, you can improve your sales by up to 40% by simply improving your quality.

It is difficult to increase sales turnover in bad economic conditions, recession etc but one can increase the company’s profit by reducing the company’s unnecessary costs for deficient product and/or information quality.


What is Hidden factory ? The visible costs of quality versus hidden costs of quality

The cost of quality can be divided into the visible costs of quality and hidden or unmeasured costs of quality.

The visible costs of quality is a small percentage of the total costs of quality, and include:

  • Scrap
  • Returns
  • Re-working
  • Refurbishing

The hidden cost of quality

Most of the costs of poor quality are hidden from our normal quality measures. These costs of quality are often referred to as the Hidden Factory. This includes:

  • Unhappy customers
  • Schedule interruptions
  • Fire Fighting
  • Unnecessary Procedures
  • Equipment Failures
  • Extra Operations such as touch ups and trimming
  • Distracted Engineers
  • Expediting time
  • Poorly performing product
  • Extra inspection and testing
  • Wasted materials and energy
  • Sorting
  • Extra inventory
  • Unexplained budget variations
  • Missed shipments
  • Complaint Investigation Cost

Many companies only work on eliminating the visible costs. They usually miss the hidden ones. The hidden costs of quality defects are often hidden as an overhead cost which is smoothed over or thrown together with other costs, which means that the cost of the quality defect is difficult to identify. In 1977, the quality guru Armand Feigenbaum estimated the cost within the hidden factory can be 10% to 40% of total company effort. Many companies do not know where quality defects originate, nor how to identify them. Systematically focusing on identifying and eliminating visible as well as hidden costs for quality defects can give big results for relatively little effort.

What is COPQ

The term Cost Of Poor Quality (COPQ) is also used to represent the above two costs. The COPQ can be estimated by multiplying the number of defects per period of time by the average unit cost to fix a defect (labour and materials). Such a benign calculation however omits costs such as loss of goodwill and loss of competitiveness, and other matters such as warranty costs and legal damages.

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