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).

What are the roles of an Operations Manager in addressing the major aspects of quality?

OperationsManager.com (2010) explain the roles of an operations manager to “ensures smooth operation of various processes that contribute to the production of goods and services of an organization”. The following tasks, centred on managing the quality of the service the organisation is providing, are those that are required of an Operations Manager:

  • Ensuring that the tools used to produce goods and/or services are acceptable and are capable of delivering the required quality of service that is acceptable.
  • Liaising with the Quality Assurance personnel to maintain positive feedback on the quality of the produced service or goods from the clients.
  • Assuring that quality tools and equipment are bought/maintained according with the allocated budgets.
  • Managing the support services of the organisation to ensure the most efficient management of support. For example; making sure high quality servers are purchased to store large amounts of confidential data in the most secure manner.
  • Management of any third party relationships the organisation has. Making sure that the agreements with the third parties are sound and that the third parties are performing their duties to the quality expected, as well as keeping to the required procedure standards of the organisation to maintain the highest quality possible.

The Open University (n.d.) explains that “decision making is a central role of all operations managers”. The decisions that the operations manager are involved in are in the design, management and improvement of the operations of the organisation; all of these are directly related to the quality of the service or goods that the organisation provide. If the ops manager makes a poor decision on improving services – the quality that was attained prior to improvements could fall and potentially drive away potential and existing customers, the same goes for the design of a new product/service. If the management of operations are lacking then this could also result in poor service delivery (lower quality).

Heizer & Render (2009) explain the importance of forecasting by the use of forecasting metrics. An operations manager may use the forecasting tools to predict future patterns in service delivery requirements by using trend projections based on historical data (Heizer & Render, 2009). With these forecasting models the operations manager can pre-empt quiet or busy periods (for example: shopping spikes during Christmas holidays) thus ensuring the required resources are available to cope with the demand or lack thereof while maintaining a profitable operation.  Heizer & Render (2009) also point out that these forecast methodologies are not perfect and should always be monitored and maintained according with “new” historical data.

In summary and conclusion the roles that an operations manager play in addressing the major aspects of quality is comparable with their job function as a whole; they must ensure processes are kept to the required quality for the organisation while maintaining a profitable and manageable operation.

References

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

OperationsManager.com (2010) Operations Manager job description: daily tasks, roles, duties and responsibilities [Online]. Available from: http://www.operationsmanager.com/operations-manager-roles-in-the-company/jobs-roles-duties-and-responsibilities/ (Accessed: 21 May 2011).

The Open University (n.d.) The role of the operations manager [Online]. Available from: http://openlearn.open.ac.uk/mod/oucontent/view.php?id=397333&section=2.3 (Accessed: 21 May 2011).