Quality Does Not Cost More

The word ‘quality’ has been subject to much abuse because of the different perceptions of individuals.  And worse, certain myths have been built around this phrase.  Take the well-known myth that “higher quality costs more”.  Senior managers are under the impression that very large inputs, both in terms of personnel and technology are required to improve quality.  This is not the case.  In fact, significant quality improvements can take place with existing technology and personnel.

Higher quality in the sense of grade (Rolls Royce vs Volkswagen) usually does cost more.  But higher quality that arises out of better conformance (eg. a low level of scrap, instead of a high level of wastage) does not.

Poor quality is the measure of chronic waste generated by a company.  The analogy could be to a hidden factory that produces waste amounting to as much as 25 to 30 per cent of sales.  Our top managers are so used to this chronic waste that we have accordingly adjusted our standards.

Range of costs
In order to appreciate the fact that “higher quality costs less” one should understand the different costs that could be attributed to poor quality.  The first is internal failure costs.  These are costs associated with defects that are found prior to transferring the product to the customer.  Costs due to scrap, rework, failure analysis, reinspection and re-test.

External failure costs are those associated with defects found after the product is shipped to the customer.  These include warranty charges, complaint adjustment, returned material and allowances.  Appraisal costs, on the other hand, are incurred to determine the degree of conformance to quality requirements.  Finally, there are prevention costs which are incurred to keep failure and appraisal costs to the minimum.

The Japanese were the first to understand the significance of poor quality vis-à-vis costs.  The Americans were saying “quality costs money” while the Japanese believed that “quality makes money”.  There was a basic difference in approach which was later to manifest itself in Japan’s supremacy in manufacturing.

In the US, the realization about costs relating to poor quality came in the early eighties.  John Akers, past president of IBM Corporation stated: “We believe quality improvement will reduce quality costs by 50 per cent over the coming years.  For us, this translates into billions of dollars of added potential profit and quality leadership in our industry”.

James E Preston, president of Avon reported that his company spent $300,000 on education and implementation of Quality and Productivity Improvement Process (QPIP), but recorded total savings of more than $10 million, all directly attributable to QPIP.  When Preston was asked what prompted Avon to the improvement process, he said, “It was a question of dollars and sense.  Money was being spent that should have been saved.  Lapses in quality were costing us money and customers”.

Realization dawning

In the past, the cost of poor quality has been associated with costs that directly involve the product, for example, scrap, inspection, etc.  However, poor quality is now being increasingly viewed as applying to any process be it manufacturing, non-manufacturing or business.  This is popularly known as the concept of the Big Q or total quality.  Thus, any work that must be discarded or repeated is viewed as a cost of poor quality.

In India, companies are slowly realizing that the cost of poor quality is high, and that it can be reduced.  The cost of poor quality in well-managed companies is a conservative 20 to 25 per cent of sales.  Even very well-managed companies like Mukand and Bombay Dyeing have been saving lakhs of rupees every year by reducing quality-related costs.  In most companies, internal failure costs and appraisal costs would account for the bulk of the drain.  For instance, at the tractor division of Mahindra and Mahindra, internal failure costs accounted for 49 per cent of the total, appraisal costs 43 per cent and external failure costs averaged 8 per cent.

In evaluating these costs, one should take into account the hidden costs which do not come within the ambit of traditional costing.  Take the cost of redesign, or of changing manufacturing processes due to inability to meet quality requirements.  These hidden costs can add up to a large amount; an estimated three to four times that of the reported failure costs.

Hidden costs are difficult to pin down.  A large company in western India employed 80 professional draftsmen in its engineering drawing department.  The company believed that it had a very advanced engineering drawing set-up.  Remedial action on several quality problems, however, pointed to faulty drawings.  On investigation it was found that in the drawing department, 59 of the 80 draftsmen were doing nothing but re-drawing earlier drawings.  Here the cost of poor quality encompassed not only salaries paid, but also rent on valuable office and storage space.  In this case, the hidden costs pertained to a non-manufacturing activity.

Pedestrian pace
But one should be careful and not go overboard on this issue.  This is because there are certain costs that are part of normal operating expenses and therefore should not be included.  They include unavoidable manufacturing waste, profit lost on scrapped products, product liability costs and preventive maintenance.  If India is to catch up in the field of quality it will have to improve on the pedestrian pace set by its managers.  If the cost of poor quality has to be reduced, then companies would have to set stretch goals such as a ten-fold quality improvement in four years or a four-fold improvement in reliability or to reduce the product development cycle by 12 months.

The typical reaction by managers to such stretch goals is that they cannot be met.  One way to deal with this reaction is to use the concept of benchmarking.  This means setting goals based on results already achieved by other companies.  Given the enormous scope for improvement, managers should first overcome the notion that higher quality costs more.