When you think about good quality products like a Rolls Royce car or Rolex watches, there is an inherent feeling that good quality comes at a high price. And right fully so. To produce such a product is an expensive process that requires state of the art technology, expensive labour, a large quality control department and high quality raw materials.
Take a look at this video on production of a Rolls-Royce Sweptail:
Cost of quality can be divided into two distinct groups. The costs of control, Prevention and Appraisal Costs, and the cost of failure, Failure Costs. In the next section, we are going to define both costs with respect to quality and lastly see how we can combine the two and understand the best place for maximising profits.
Prevention and Appraisal Costs
These costs increase exponentially as you improve the production and quality of the product. The higher the quality, the greater the cost. We increase these costs by buying better quality raw materials, increasing the quality of personnel on the production floor, buying better machinery, investing in better systems, training, inspections, audits etc. Every additional cost will be matched with a quality benefit. Top management should be obsessed with quality as it brings sales and attracts new users. But should also be aware that higher costs reduce margin.
On the other side of the graph is the cost of non-conformance or failure. The worse your product or service, the higher the failure costs. By using inadequate machinery, employing less skilled people or even paying your people less causes the quality to drop which will cost you. These failure costs usually come in the form of re-work, cost of scrapping, defects, legal costs from lawsuits, complaint handling, recalls etc.
The graph from these costs looks a little bit like this:
So how do we set out the best quality point?
By combining the two graphs and plotting the sum of the two costs against the quality level leads us to understand where the best quality level is when producing a product or service. Have a look at the graph below:
The point of lowest costs in this scenario is a Quality level of 5. As the data we have used in this example is symmetric the mid point is the lowest point. However, in real life, the point of lowest cost can shift with right or left. This lowest point is where most companies like to sit. But it’s not the right place to be. Firstly, it is difficult to measure the true cost of failure. Unhappy customers will sometimes just remain in place until their cost of moving is low enough.
We believe the best place to sit is at about 6.5 to 7.0. At this point, the costs only marginally goes up but there is a 40% increase in quality from the lowest point. This creates a better product, improves reputation, improves customer satisfaction and creates better production (people and machines). More importantly, it reduces failure costs. This eventually leads to greater profits.
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