Google Analystics

Thursday, 18 December 2014

Look after the quality and the profit will take care of itself

Why is it more profitable to improve Quality than cut Costs?

Let me begin by saying that I am no more against looking for a reduction in costs than looking for "peace of mind".  But just as peace of mind cannot be pursued as an end in itself but is rather the by-product of a certain way of living with others in the world, so reduction in costs is the result of increased efficiency and effectiveness in the processes of production, i.e. a by-product. If you aim for an efficient and effective process for producing a quality product or service then you should get a certain reduction in cost as a by-product. If you simply look to cut costs in whatever way seems quickest and easiest then your aim will be off, and so will your focus. You thereby run the risk of a lot of "collateral damage", shooting whatever gets between you and your target.

In 1990 Rafael Aguayo wrote a book laying out the management philosophy and principles of Dr. W. Edwards Deming (Dr. Deming. The American Who Taught the Japanese About Quality). That was twenty-four years ago. Reading it today I am amazed at how relevant and apposite those principles still are. In that book (p. 33) Aguayo uses a simple example to illustrate one way that quality increases profit. In this example it is because of less rework.

If you run a plant with a defect rate of 5 per 100, your revenue is limited to 95 saleable items per hundred but your costs are still for 100 items. Let's say selling price is $1.00 per item; production cost is $90.00 per batch of 100 items.

Revenue: $1 x 95

$ 95
Less cost of production: $90 per 100

$ 90

$  5

If you improve production quality by about 5% such that there are zero defects, then…

Revenue: $1 x 100

Less cost of production: $90 per 100

$ 90

$ 10

So, a quality improvement of 5% in the production process has resulted in a 100% increase in profits. Not too shabby. Ah, but you say that there is an additional cost for improving the quality and reliability of production. Even if we increase the cost of production by 5% to $94.50, that would still give us a 10% increase in profits:

Revenue: $1 x 100

Less cost of production: $94.50 per 100

$  94.50

$    5.50

The other side of this coin is that a quality improvement in production can be expected to translate into an improvement in the reliability and other quality attributes of the finished product. That should have a knock-on effect on enhanced customer satisfaction which, in turn, creates returning customers out of once-off customers.

The moral of the story?
"Look after the quality and the profit will take care of itself" - W. E. Deming. These are not Deming's actual words but the philosophy is his. This is similar to…

Look after the customer and the business will take care of itself” – attributed to Ray Kroc, founder of McDonald’s

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