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The true cost of quality: how to weigh the expense and benefits to determine profit and price.

In today's world of economic uncertainty combined with cost-cutting initiatives, where does quality fit in? How can a company remain competitive yet not compromise quality? What does your customer base say about your product or service?

Or simply put, what is the true cost of quality?

Consider this thought ... when shopping, how often do you choose a particular brand? Why? Could it be due to a positive experience with that product, brand loyalty, price, looks, gimmick?

I asked just that of children when choosing breakfast cereal. The next generation of science-savvy kids attended a Kids Techfest at a local community college. Representatives presented booths with a range of disciplines from biology to electronics with everything in between.

The American Society of Quality (ASQ) booth offered cereal and a survey. (This did attract hungry children.) We measured out 1 cup of cereal for each child offering a name brand and store brand cereal to look at, compare, and even taste.

I asked which brand of cereal the children preferred and why. The results were interesting. As one might expect, it was not always the amount of cereal in the box or the price of the box. It was not how the cereal looked or the pictures on the box--it was the taste!

Kids chose quality of taste as the foremost reason for picking their favorite name-brand cereal over the store-brand cereal. (Parents, on the other hand, looked at nutrition and cost.)

Quality matters

Why does quality matter? It matters because regardless of the price of the product, if its quality is poor, people will not buy it. Likewise, if the price is too high, regardless of quality, people will not buy it. The consumer demands the "right price" for the "right quality" product.

So how does a company weigh the cost and benefit of quality costs to determine profit and price? In order to stay in business, a company has to offer the "right quality" product for the "right price."

Profit is necessary for a company to stay in business. That profit turns into reinvestment, profit sharing for employees and stakeholders, and continued operations. There must be a balance in order to manage business costs with sustainable profit. Managing product or service quality is essential to business sustainability.

Managing quality ... you might ask how that fits in with my business. Consider that managing quality is the way to minimize defects or mistakes that waste time and materials and resources.

Wasted time, materials, and resources cut into productivity and profit. Waste jeopardizes company sustainability. Waste must be measured and managed.

What is the cost?

How do I measure this waste or manage quality costs? The cost of quality can be broken down into four categories:

* Preventive costs

* Appraisal costs

* Internal defect costs

* External defect costs.

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If one asked which of these is most costly, the resounding answer would be external defect costs. Nothing is more taxing than irate customers. Just ask any return clerk. Dealing with rejects, defects, warranty claims, or upset people is a non-value added component to a businesses. The cost of returns, replacement product, service calls, and on-site visits drive up costs and the blood pressure of all concerned parties.

I remember the old phrase, "An ounce of prevention is worth a pound of cure." Our elders knew what they were talking about. Which of the costs of quality are least costly? The answer is prevention.

Sometimes this is in the form of up-front procedural training. Sometimes prevention is addressed as an engineered solution. Regardless, preventing the creation of defects is the key. Once defects are created, it requires time and personnel to sort out defects by checking product against specifications. Lost product is equal to lost time and material.

Not only is lost time and materials the problem, but defects or specification failures must be managed. In order to address defects, it requires layers of administration, troubleshooting, root cause determination, and corrective actions. Certainly the ounce of prevention is worth the pound of cure.

What is the pound of cure worth to your organization? How much time is spent in rework time and materials? How much is spent in destructive testing? What about administrative costs? What is the cost to the company reputation? What are the return, replacement, or warranty costs?

If you needed to calculate the cost of quality, it can be boiled down to this equation: Cost of quality = prevention costs + appraisal costs + internal defect costs + external defect costs.

The next time you shop for that name-brand anything, think about why you choose that product. The next time you produce a product or service for your customer, consider why your customer might choose your company again. Brand loyalty and cost competitive quality is what will keep your company in business.

Elizabeth Maze-Emery is a quality professional from Dayton, Ohio. Ear more information about these quality tools, she can be reached at emazeemery@jiu.edu.
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Title Annotation:quality
Author:Maze-Emery, Elizabeth
Publication:Tooling & Production
Date:May 1, 2009
Words:820
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