Higher quality can lead to increase of business performance and attaining of lower cost. Business operation results are more concerned on final profit and loss and whatever functional or support business activities must be justified financially. There are few impacts of improvement in quality improvement towards overall effective cost achievement.
Failure cost is significant because it will give considerably financial impact to the company. First, higher quality standard means lower defect rate and rework activities that will influence company financially. By having higher quality there will be less cost due to mishandling, unstable process and poor yield. Usually defects need to rework and potential substitution of parts, materials and components, which will affect those products with low profit margin and high composition of material cost. For low value products such as electronic watch, it may not be a significant concern to manufacturer, but imagine rework cost for a batch of automobiles from an assembly line? One of example is the replacement of Nokia mobile phones battery (BL-5C) worldwide which manufactured by Matshushita. The defective batteries have overheating issues and global replacement may involve more than 46 million units, which is significant replacement cost.
Second, higher quality can lower cost by reducing the scrap and waste and improvement of yield or process. A quality product that is durable and robust can withstand impact of handling. It must use a high quality raw material with generally does not cause failure or defect internally until it is needed to be scrap. Latent failure may cost manufacturer but if the failure reach customers not only there is replacement cost, the customers confidence will erode eventually. One of the ways is to control the incoming material quality as deter any quality issues that will cost manufacturer. For example, Ford Customer Driven Six-Sigma program is driving supplier to set a stricter internal control that will contribute to Ford’s cost saving efforts.
Third, without quality issue we will not having related cost in managing the defect products from customers. When there is defect return or return material authorization, business must bear the cost of rework, claims, warranty, reshipment, and reverse logistic. Higher quality product also prevents spillover effect cost such as budget for promotional and public relation activities to rebuild back customers’ confidence after any quality incidence.
Fourth, if there is higher quality product there will be less potential holding cost. For a big company which reputation matters, any quality issue arises there must be responsibility to stop the production and sale of the product. Sometimes there is law or government intervention to stop the sale. Delay in moving goods or shipment can generate potential high holding cost to business such as cost in keeping inventory in third party warehouse, transportation cost etc. When there is high quality associated with a product, the customer’s confidence will be higher and there are likely to turn over the inventory much faster. For example is the Toyota Aurion delay in sale and production due to engine failure in 2007.
Fifth, reduction of none value added activities and improvement in productivity because all human resources, machinery, equipment can be utilized fully utilized for production to achieve optimum efficiency. If the needs for rework, retest or reassemble arise from poor quality, these resources must be separated to both activities. High cost such as overtime, labor hour’s usage, electricity etc that must be committed to solve the problem. In addition, there are costs associated in retraining the human resources for quality issues, over inspection, new procedures, and addition of quality control process or gate if the quality not built in the first place. Wastage of financial resources for these activities is a cost that we can eliminate by building quality in the first place. Inspection headcounts in traditional quality control is a poor quality strategy because it does not eliminate quality but only prevent it from getting out from the factory. Factory that has poor quality product or process will invest considerably in inspection gates. However, there are potential human errors escapees to consider compare to having a set of high quality assurance standard.
Sixth, there will be loss of business revenues opportunities resulted from poor quality impact. Customers will only be delighted with high quality product, which will not giving negative impact to them or their business operation. Higher quality products will minimize potential financial impact such as cost of losing market share and customers, profit margin and brand equity.
In conclusion, the losses due to poor quality can be significant if the business neglect the importance of providing quality in the first place. Cost of Poor Quality such as labor cost, material cost for rework, loss of opportunities, underutilization of resources, loss of sales and poor customer satisfaction will persist and giving financial impact to bottom-line company’s performance – cost. However, there must be a balance in building the quality in products, as there is law of diminishing marginal returns for investment in quality. There must be equilibrium between cost of losses due to poor quality and cost of improving quality. This is because after a certain level any increase in investment for quality will not yield any return to the business anymore.
Failure cost is significant because it will give considerably financial impact to the company. First, higher quality standard means lower defect rate and rework activities that will influence company financially. By having higher quality there will be less cost due to mishandling, unstable process and poor yield. Usually defects need to rework and potential substitution of parts, materials and components, which will affect those products with low profit margin and high composition of material cost. For low value products such as electronic watch, it may not be a significant concern to manufacturer, but imagine rework cost for a batch of automobiles from an assembly line? One of example is the replacement of Nokia mobile phones battery (BL-5C) worldwide which manufactured by Matshushita. The defective batteries have overheating issues and global replacement may involve more than 46 million units, which is significant replacement cost.
Second, higher quality can lower cost by reducing the scrap and waste and improvement of yield or process. A quality product that is durable and robust can withstand impact of handling. It must use a high quality raw material with generally does not cause failure or defect internally until it is needed to be scrap. Latent failure may cost manufacturer but if the failure reach customers not only there is replacement cost, the customers confidence will erode eventually. One of the ways is to control the incoming material quality as deter any quality issues that will cost manufacturer. For example, Ford Customer Driven Six-Sigma program is driving supplier to set a stricter internal control that will contribute to Ford’s cost saving efforts.
Third, without quality issue we will not having related cost in managing the defect products from customers. When there is defect return or return material authorization, business must bear the cost of rework, claims, warranty, reshipment, and reverse logistic. Higher quality product also prevents spillover effect cost such as budget for promotional and public relation activities to rebuild back customers’ confidence after any quality incidence.
Fourth, if there is higher quality product there will be less potential holding cost. For a big company which reputation matters, any quality issue arises there must be responsibility to stop the production and sale of the product. Sometimes there is law or government intervention to stop the sale. Delay in moving goods or shipment can generate potential high holding cost to business such as cost in keeping inventory in third party warehouse, transportation cost etc. When there is high quality associated with a product, the customer’s confidence will be higher and there are likely to turn over the inventory much faster. For example is the Toyota Aurion delay in sale and production due to engine failure in 2007.
Fifth, reduction of none value added activities and improvement in productivity because all human resources, machinery, equipment can be utilized fully utilized for production to achieve optimum efficiency. If the needs for rework, retest or reassemble arise from poor quality, these resources must be separated to both activities. High cost such as overtime, labor hour’s usage, electricity etc that must be committed to solve the problem. In addition, there are costs associated in retraining the human resources for quality issues, over inspection, new procedures, and addition of quality control process or gate if the quality not built in the first place. Wastage of financial resources for these activities is a cost that we can eliminate by building quality in the first place. Inspection headcounts in traditional quality control is a poor quality strategy because it does not eliminate quality but only prevent it from getting out from the factory. Factory that has poor quality product or process will invest considerably in inspection gates. However, there are potential human errors escapees to consider compare to having a set of high quality assurance standard.
Sixth, there will be loss of business revenues opportunities resulted from poor quality impact. Customers will only be delighted with high quality product, which will not giving negative impact to them or their business operation. Higher quality products will minimize potential financial impact such as cost of losing market share and customers, profit margin and brand equity.
In conclusion, the losses due to poor quality can be significant if the business neglect the importance of providing quality in the first place. Cost of Poor Quality such as labor cost, material cost for rework, loss of opportunities, underutilization of resources, loss of sales and poor customer satisfaction will persist and giving financial impact to bottom-line company’s performance – cost. However, there must be a balance in building the quality in products, as there is law of diminishing marginal returns for investment in quality. There must be equilibrium between cost of losses due to poor quality and cost of improving quality. This is because after a certain level any increase in investment for quality will not yield any return to the business anymore.
1 comment:
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