Which is more profitable, to improve Quality or to cut Costs?

Look after the quality and the profit will take care of itself. A practical illustration of the management philosophy of Dr. W. Edwards Deming.

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
Profit		$  5

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

Revenue: $1 x 100		$100
Less cost of production: $90 per 100		$ 90
Profit		$ 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		$100.00
Less cost of production: $94.50 per 100		$  94.50
Profit		$    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

ISO 9001 Training Videos

I have published three training videos to assist people become acquainted with the ISO 9001:2008 international standard.

The first is a very basic introduction to the ISO organization and the ISO 9001 standard. It tells the viewer what the ISO organization is and then goes on to give an outline of ISO 9001:2008 in an animated format using Moovly that is very easy to follow. Length, 5:43.

You can get it here:

What Is ISO 9001 ?

Then there is a pair of training videos covering the essentials of ISO 9001:2008 in a lot more detail. These are presented using a regular slide show format.

The first is about 9:30 if you skip the self-assessment slides, which I do not recommend. The self-assessment ensures that the viewer gets a grasp on most of the essential concepts and elements.

The second is longer, about 16 minutes if you skip the self-assessment.

Viewer feedback on these videos, positive or negative, will be welcomed.

You can access a FREE PDF version of the self-assessment questions here:
ISO 9001 Essentials Self-Assessment

ISO 9001 Essentials Part 1

Training on the essentials of ISO 9001:2008. Includes self-assessment quiz. Part 1 of 2, Clauses 0 - 6. 

ISO 9001 Essentials Part 2

Training on the essentials of ISO 9001. Includes self-assessment quiz. Part 2 of 2, Clauses 7 - 8 

You can access a FREE PDF version of the self-assessment questions here:
ISO 9001 Essentials Self-Assessment

What is ISO? What is ISO 9001?

What is ISO ?
What is ISO 9001?
What is a Quality Management System?

Here is a short, simple, high-level explanation in less than 6 minutes.

What frequency does ISO 9001 require for measuring customer satisfaction?

Actually, ISO 9001:2008 doesn't require a frequency. All the ISO 9001 Standard stipulates is, "The organization shall monitor information relating to customer perception as to whether the organization has met customer requirements. The methods for obtaining and using this information shall be determined. (8.2.1)." This is an interesting case where aiming to meet the letter of the standard can get in the way of meeting the Standard because you are shooting for the wrong target. It's a bit like the question, "What is the minimum level of quality necessary to satisfy the customer?"

Enhanced customer satisfaction

My suggestion is, put the Standard aside. Decide, and I mean seriously decide, whether you are or want to be an organization that continually enhances customer satisfaction through the way you meet customer requirements. Assuming the answer is yes, what measures or criteria of success or failure in meeting this aim are you using, and are you monitoring them with sufficient frequency to give you sufficient information to know what to improve? ISO 9001 (8.2.1) offers a list of example tools: customer satisfaction surveys, customer data on delivered product quality, user opinion surveys, repeat/lost business analysis, compliments, warranty claims and dealer reports. (Ultimately, the most important criteria are:
1) Have you done business with them more than once and would you do business with them again?
2) Have you ever recommended them and would you recommend them to a friend?)

Don't do this in order to meet a standard. Do it to be a more successful company and you will not only meet the ISO 9001 Standard but you will also be a more successful company.

Voila!

ISO 9001:2015 - Where will you document "Context of the Organization"?

Whether or not they have any kind of ISO certification, there cannot be many mature organizations with sustained success which have not taken the trouble to identify and document in some manner the external and internal issues relevant to their purpose prior to formulating or reviewing their strategies and objectives. How else can you develop a strategy? The same motivation applies to identifying "interested parties". For such organizations, meeting the requirements of 4.1 and 4.2 will be a piece of cake: they will already have the evidence documented somehow, somewhere - probably in their business plan.

Issues and Interests

For organizations with less mature strategic plans this will be an opportunity to develop their business strategy. The prior question to ask is, "What information do we need as input to develop a three or five year strategy?" It is up to the organization to decide who the parties are with an interest in their product or service and what the issues are that need to be taken into account. It doesn't matter where and how they retain the evidence that they weighed and decided these things, just so long as they can show the evidence when asked. The Standard does not stipulate. Do it in the most effective and efficient manner to the degree it has value for the organization, not because it is an ISO requirement. Then the requirement will be met. Voila!