Quality and Profit

Higher Quality and Lower Costs

A Rolex watch costs more than a Titan watch just as a Rolls Royce automobile costs more than a Maruti 800 automobile. In these examples, higher quality, as embedded in the product’s specifications, does cost more. The more exaggerated the comparison, the greater the cost difference. The products that are compared, possess different features and functions, and satisfy different customer requirements.

The misconception that is most damaging occurs when a company does not understand the impact that non conforming products have on the cost structure of the entire business. The visible evidence of non conformance is the excess assets and inventory required to support operating inefficiencies, the extra people required to fix the errors, and the additional expenses required for rework, scrap, and rejects in every aspect of business.

The penalty for not recognizing the relationship between higher quality (that is, higher conformance) and lower cost is a decline in competitiveness that costs a business sales, jobs, and profitability. This is my message. I have repeated this message again and again over the past decade. Businesses that do not understand this higher conformance-lower cost relationship “are missing a significant opportunity to lower costs and increase financial performance through quality improvement”, according to Chandra Mohan, Vice Chairman and Managing Director (Retired), Punjab Tractors.

The lack of understanding is so widespread, that most companies badly understand the true costs of poor quality, often by as much as 1000 percent. It took a brave Ishaat Hussain, Finance Director, Tata Steel to confess in 1989 that the cost of poor quality at the blue chip was 25 per cent of total costs. Since most companies are unable to quantify the full financial impact of poor quality, the notion that quality and cost are not complementary will continue to persist until a structural approach is developed to initiate improvement projects using financial criteria in addition to non financial selection factors, such as failure rates, cycle time and so on.

Customer Satisfaction is Related to Value
If two companies are selling identical products in the marketplace, the largest market share will go to the company that is the most price competitive and offers its customers the superior value. The logic is simple: The less a company charges for an equivalent product, the greater the value to its customers. Unaware of the changes in customer expectations that occured over the past decade, companies often dismiss the notion that customer satisfaction can be, or should be, related to equivalent or higher quality at a lower price.

The misconception that customer satisfaction and value are unrelated is perpetuated by managers who are committed to outdated competitive strategies, which assume that either availability or reliability provides the basis for satisfying customers. Following independence, consumer demand in India was high and companies were able to succeed by simply having a product available for consumers to purchase. Post liberalization, as more manufacturers entered the market and the availability of products increased, competitors have begun to compete on the basis of price. Consumers have also become better educated through STAR, BBC and ZEE television channels. The basis for competition has radically shifted, in some segments, toward greater reliability, as consumers have learned that more reliable products are less expensive in the long run. They are even willing to pay a premium for a product with greater reliability.

The experience of Indian consumers with foreign products such as automobiles and entertainment electronics has taught them it is possible to buy products that possess the combination of high reliability and competitive pricing. Even in the face of declining market share and lower profits, companies experience great difficulty in adapting their management style and corporate culture to a market place where customer satisfaction is a function of both reliability and price. Many have not yet realized that competing on the basis of superior value is the dominant strategy of successful companies even in India. Three cheers to quality leaders such as Suresh Krishna, Chairman, Sundaram Fasteners and Dr Parvinder Singh, Chairman, Ranbaxy Laboratories.