Quality at What Cost?

The cost of quality is defined by some as the costs incurred in producing a quality product or service.  There is another way to look at it.  The cost of quality can refer to costs related to failure to produce a quality product or service.

In the book, “Principles of Quality Costs: Principles, Implementation, and Use” published by the American Society for Quality, the following are the costs associated with quality:

• Prevention Costs—The costs of activities specifically designed to prevent poor quality in products or services.
• Appraisal Costs—The costs associated with measuring, evaluating, or auditing products or services to ensure conformance to quality standards and performance requirements.
• Failure Costs—The costs resulting from products or services not conforming to requirements or customer/user needs. Failure costs are divided into internal and external failure categories.
• Internal Failure Costs—Failure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer.
• External Failure Costs—Failure costs occurring after delivery or shipment of the product —and during or after furnishing of a service—to the customer.
• Total Quality Costs—The sum of the above costs. This represents the difference between the actual cost of a product or service and what the reduced cost would be if there were no possibility of substandard service, failure of products, or defects in their manufacture.

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Any reputable company associated with the Mobility Services Industry is focused on quality improvement. As an industry, we continue to makes strides in understanding how to set reasonable customer expectations and how to consistently deliver on those expectations.

This article explores one important aspect of the numerous issues surrounding quality: how each business balances the costs of quality versus the needs to remain competitive, produce a reasonable profit for the stakeholders and allow for reinvestment to sustain and grow the business.

It may help to define the extremes.  One side of the scale may be a company that values quality above any cost consideration.  In other words, if the company cannot produce a result that is consistent with their definition of a quality transaction, they simply do not engage in that transaction or service line.  They only accept business when they know they can deliver on their quality promise, period.

This type of strategy may limit the growth prospects of the business and, in our industry, if applied to the extreme may affect the sustainability of the business.  The fact is that there is another balancing mechanism which applies to the cost of producing a quality service versus the price that customers are willing to pay.  Just look at the size of the First Class cabin on most flights.  The service is better up front but only a few are willing to pay the price.

If asked, most of us would say that we could redesign and staff our services to drastically reduce the risk of service failures but most of us would also say that the associated costs could not be passed on through price increases.  We can add one very critical element to this discussion and that is the seasonality of our business.

We may be properly staffed, equipped and resourced to deliver a quality service but what happens when the floodgates of customer demand literally open up during an ever increasingly compressed period of the year?  Is it as simple as understanding that we can only handle X number of transactions before we clearly know that we are increasing the risks of service failures with each and every transaction we continue to accept?  Is it as simple as facing soberly what level of increased risk and associated consequences are acceptable to the business?

Let’s define the other end of the quality scale spectrum.  A company may be willing to take on additional business and new service lines without regard to cost of quality.  Certainly, this is not a sustainable business model but we can all think of companies that have survived way too long and caused significant hardship to customers and damage to the reputation of our industry in the process.  I once heard an anecdote relating to a company principal that said in jest, “I don’t need repeat business.  In the US, 15 million families move a year, I don’t even need one tenth of one percent to have a great business.  I don’t want to move my customers more than once, so why invest in quality?”

Think of the two ends of the quality cost spectrum that we have defined here as a slider mechanism.  Move the slider too far one way or the other and the respective impacts on your business will be felt.  I believe responsible companies in our industry are very aware of this need to balance the costs of quality and we are constantly fine-tuning those controls to achieve quality improvement.  Some industry members are becoming quite sophisticated in developing the mechanisms that measure and control performance which opens up a topic that we will discuss in a follow-up to this post.

This sophistication extends to managing and perhaps even manipulating the mechanisms that measure customer satisfaction.  The question is whether these methods actually improve quality and customer satisfaction or just the perception of quality as measured in those quality indexes.  Or is that one and the same thing?