How does higher quality lead to lower costs?

The answer to how higher quality can lead to lowered costs may seem fairly obvious. To explain the details behind this idea we should look at the details behind quality. Heizer & Render (2009) outline the costs of quality, or rather the costs that can occur if you have poor quality, as follows:

  • Prevention costs – training your staff to perform their tasks better and having programs to educate staff on improving quality.
  • Appraisal costs – the costs of “quality testing” the products produced. These appraisals can include, but aren’t limited to: product testing, product/service inspectors, quality assurance labs etc.
  • Internal failure – this is when a product or service is produced and fails or is defective. The internal aspect is that this is when the defective/failed product is detected before delivery to the customers. The product/service then needs to be scrapped or reworked.
  • External costs – similar to the situation above, usually a defective product or part of a product which occurs after the sale of the product or service. The costs involved in recalling, refunding and/or replacing the product or service.

Heizer & Render (2009) go on to show an example of General Electric’s recall of 3.1 million dishwashers due to a defective part, this recall ended up costing GE more than the value of all the washing machines. Another example provided by Heizer & Render (2009) show how Mercedes Benz’ lack of focus on quality led to a $600 million cost to company spent on warranties for faulty parts in their vehicles in a single year.

Fortunate to the consumer and perhaps not so fortunate to the organisation is that products and services can and generally are required to carry some sort of warranty or guarantee (such as the Consumer Protection Acts in many different countries – Wikipedia, 2011). If products are faulty or defective then consumers will return products which need to be repaired or replaced. In the cases where a warranty/guarantee is not available the lower quality will potentially damage the reputation of the organisation, which can end up in lost return and future customers. Heizer & Render also point out that poor quality delivery can also result in injuries, lawsuits, and increasing government legislation (which can be costly if processes are required by law).

One of the popular methodologies behind quality management is Six Sigma, which has the goal of “flawless performance” (TechRepublic, 2003). Six Sigma was developed by Motorola in the 1980s to deal with consumer complaints and increasing competition. To outline the processes behind Six Sigma, very broadly, we can consider them as follows (Heizer & Render, 2009)

  • Define the purpose, scope and outputs and required processes. Maintaining the idea of the customers definition of quality
  • Measure processes and collect data on the processes.
  • Analyse the collected data and ensure the results are repeatable as well as reproducible.
  • Improve the processes by modifying and/or redesigning them
  • Control the new processes and maintain performance and quality levels.

–        DMAIC

Another popular quality assurance protocol is HACCP (Hazard Analysis & Critical Control Points) used in food safety (FDA, 2011) in countries like the US, UK and for certain food stores here in South Africa (eg: Woolworths). HACCP can be summarised as food quality management “through the analysis and control of biological, chemical and physical hazards from raw material production” (FDA, 2011). My personal experiences dealing with food stores using HACCP and food stores that don’t use HACCP are like night and day. The quality is unrivalled and I feel quite safe that I’m practically guaranteed (term is used lightly) good quality, unspoiled and unmarked foods when using a HACCP controlled food store. The benefits of this can be equated to those mentioned above – lower returns (of items), lawsuits and health hazards.

References

FDA (2011) Hazard Analysis & Critical Control Points (HACCP) [Online]. Available from: http://www.fda.gov/food/foodsafety/hazardanalysiscriticalcontrolpointshaccp/default.htm (Accessed: 21 May 2011).

Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

TechRepublic (2003) Six Sigma: High Quality can lower costs and raise customer satisfaction [Online]. Available from: http://www.techrepublic.com/whitepapers/six-sigma-high-quality-can-lower-costs-and-raise-customer-satisfaction/95607 (Accessed: 21 May 2011).

Wikipedia (2011) Consumer protection [Online]. Available from: http://en.wikipedia.org/wiki/Consumer_protection (Accessed: 21 May 2011).