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Why Higher Quality Means Lower Costs

Why Higher Quality Means Lower Costs

It may sound like a controversy, but indeed, higher quality leads to lower costs. According to Heizer & Render (2011), Cost of Quality (CQS) is the cost of delivering low quality product or service. Lets take a look at the logical background of these assumptions. We all know that quality means cost. Products or services with higher quality usually have higher price. But if we look closer from the point of view of producer, high quality may have some associated justified costs (materials, production process, employees, etc.) but these costs are significantly lower in long term if the product or service embody expected quality. It may be cheaper to produce low quality engine or household appliance, still, in long run, the opportunity cost of investing in high quality standards may be less expensive than loss of customers’ trust, frequent returns of malfunctioning product, costs associated in fixing or redesigning product or service, and so on.

According to Heizer and Render (2011) four cost categories (also known as PAF model) are tightly related to Cost of Quality:

  1. Prevention cost - the cost of all actions and measures taken in order to prevent defective and poor quality products or service.
  2. Appraisal costs - costs derived by product or service evaluation and inspection.
  3. Internal Failure - costs of producing defective parts, products or service before they are delivered to customers. These include cost of scrap materials, service downtime, and redundant production processes.
  4. External Failure - costs of poor quality occurring after delivery to customers. These are costs resulting from non-conformity of product or services with customers’ demands and expectations (returns, lost customer trust, bad public image, etc.)

It is much easier to determine and plan first three costs. External costs, on the other hand, cannot be easily quantified and are frequently underestimated. Furthermore, it is believed by authorities in the field that designing and creating high quality products represents only small portion of benefits. According to Crosby (1979) as cited by Heizer and Render (2011) “What costs money are the unquality things - all the action that involve not doing it rightthe first time” (Crosby, 1979:119)Crosby also believed that there is no real reason that could justify defects and malfunctions in any of products or services, thus he coined a syntagm “zero defects”. The idea for “zero defects” came in 1961. as a result of frustration created by common belief of that time, namely “economics of quality”. It is a conventional and traditional idea that “being to good”, or producing quality products cannot be afforded, and that quality trade off’s are part of unavoidable reality. Today, it is obvious that quality pays itself and that low quality is not affordable. According to Sower & Quarles (2007) “Evaluation of the effectiveness of a quality system and a COQ program should be measured in terms of the improvements that result from their implementation and use.”Sower & Quarles ,2007:123)

Another interesting concept in quality management is Taguchi Concept and Quality Loss Function (QLF). The function analyses costs related to low quality products or services and points out that these costs have increasing tendency “as the product moves away from being exactly what customer wants” (Heizer and Render, 2011:231).

Quality Loss Function

Figure1 - Quality Loss Function (Design For Excellence, 2012)

Reference

  • Crosby, P.B. (1979) Quality is Free. 1st ed. New York: McGraw-Hill.
  • Design For Excellence (2012) Quality Loss Function [online]. Available from: http://www.design4excellence.com.au/kcds.htm
  • Heizer, J. & Render, B. (2011) Operations Management. 10th ed. New Jersey: Pearson Education Inc.
  • Sower, V.E. & Quarles, R. (2007) Cost of quality usage and its relationship to quality system maturity.International Journal of Quality & Reliability Management, Vol. 24 No. 2, p121-140.

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