Cost and quality
Productivity has, of course, a direct influence on profitability. This is made clear from the following equation:
Profit = revenue - cost
When cost is low, profit is high for the given revenue. If the cost can be kept low, or made lower through the discipline of quality, then profits will increase.
Too tight a focus on productivity has also been seen to result in a neglect of quality. There are many examples of this happening in many industries and organisations around the world. Gale (1992) gives the example of Schlitz, a beer brewer, reducing the brewing time by half and switching from high quality ingredients to those of lesser quality. In the short term, the company made profits but in less than 10 years, the company had lost market share and had to be sold.
Activity 3.2
Distinguish by definition: cost to organisation and price to customer.
The implementing of a quality system allows protection from this type of cost to the firm. When properly implemented, quality systems may well lead to lower costs and higher productivity, by reducing rework, wastage, lost or dissatisfied customers, and opportunity costs. Evans (1997) uses the term "hidden factory" to denote that part of the production effort which is used to rework unsatisfactory parts, retest and re-inspect rejected output; this can be as high as 40 per cent of the total production capacity.
Some of the elements of cost of poor quality can be listed as:
- loss of profit through supplying sub-standard service/product;
- labour involved in putting right the sub-standard service/product;
- cost of administration time and effort spent in the same;
- capital involved in putting right the sub-standard service/product;
- energy costs (human, fuel, mechanical) spent in the same;
- resources spent, which could have been used elsewhere productively.
Many prominent companies - like Motorola, Xerox and Ford - which have developed their own quality systems that are then taken on by others in the industry, learnt their lessons the hard way during the 1980s. High productivity was not resulting in business success for them and they turned their efforts to meeting customer expectations, with an emphasis on trying to exceed them. The principles of Deming, Crosby and Juran, among others, became important in designing competitive success for many organisations.
Reading 3.1
Extracted pages from Ford Motor Company's, Annual Report , 2000.
In this reading, you will see the high level of attention the company gives its customers and the society that it operates within, aligning itself to their needs and expectations of a leading producer of automobiles and a major employer. This focus allows the chairman of the board, William Ford, Jr, to close his message with the line "Our greatest achievements are yet to come."
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