What Is the Cost of Quality?
If you own a business, chances are you find yourself pulled between different priorities. One of the most crucial of these is the constant tug of war between ensuring quality and keeping costs down. Of course, you want to provide the best quality goods to your clients, but at the same time, you’re going to all this trouble to make a profit. The bigger the profit, the better.
A company should not waste money in an attempt to get quality that isn’t necessary. However, there is a cost of quality, which are extra costs that emerge when a company attempts to cut corners in order to save money. In this lesson, we’re going to look at these costs of quality as they affect production, sales, and even intangible effects.
Tangible Costs on Production
Let’s say you own a furniture factory that makes beds. You have two choices of wood that you can use. The first, oak, is more expensive but is much more durable. The second, balsa, is very cheap. In case you’re not familiar with it, balsa wood is the wood commonly used in model airplanes. It is very difficult to make a strong bed out of balsa wood.
If you go with beds made out of oak, your production costs are going to be higher. However, if you go with balsa, you’re going to have many extra costs of quality. We call these tangible costs on production because we can calculate just how much they are and because they happen at the production stage. Just a few of these costs include extra inspectors, more materials to make up for any beds that break during the manufacturing process, and more balsa to sure up the beds that are ready to sell.
Tangible Costs on Sales
So you’ve finally got some balsa beds ready to sell – that means you’re in the clear, right? Far from it. There are still plenty of extra costs of quality that you need to factor in.
Yes, an oak bed is going to have a higher sticker price, but chances are, you can include a warranty because you are comfortable in the fact that this bed isn’t going to break. You can’t make the same guarantee of your balsa beds unless you are ready to replace plenty of them.
Also, the act of replacing a bed is expensive because not only do you have to give a new bed but you also have to pay for the labor involved in talking to the customer during the complaint process. All of these costs of quality that happen during the sales phase are called tangible costs on sales.
Still, there are plenty of costs that will never make it to a balance sheet. These are intangible costs because we can’t exactly quantify them. While you once may have had a successful business selling oak beds, no one is going to want to buy balsa beds from you. It causes your reputation to suffer so that even your best oak beds can’t sell as well.
There are internal costs, too. A supply chain is best suited to run in one direction. With all those returns, suddenly your one-way supply chain is being used for two-way traffic. As you can imagine, that slows things down.
Still, that’s not the worst part. There is likely to be a lot of complaints between departments. After all, if those customer service workers are getting yelled at, they may start to think that the manufacturing workers are simply inept.
In this lesson, we took a look at the cost of quality. Remember this is the extra costs that emerge when a company attempts to cut corners in order to save money. We can classify costs of quality in three major fields:
- Tangible costs to production exist when production costs are increased because additional supplies have to be ordered in order to make the final product worthwhile
- Tangible costs to sales happen when extra costs for providing warranties and replacing shoddy goods start to eat into profits
- Intangible costs to quality happen when costs to quality occur that are not as easy to quantify and can range from customers refusing to purchase anything from the company due to perceived lack of quality to internal trouble, like increased disgruntlement between departments or backups in the supply chain