ROLL NO.

: 1058

SURAJ PANT

INVESTMENT IN QUALITY

Quality is an important dimension of production and operations management. It is not sufficient

to produce products/goods or services in the right quantity and at right time; it is important to
ensure that the goods/items and services produced/provided are of the right quality.

Quality is: “The degree to which a component, system or process meets specified requirements
and/or user/customer needs and expectations.”

Quality is a perceptual, conditional, and somewhat subjective attribute and may be understood
differently by different people. Consumers may focus on the specification quality of a
product/service, or how it compares to competitors in the marketplace. Producers might measure
the conformance quality, or degree to which the product/service was produced correctly. Support
personnel may measure quality in the degree that a product is reliable, maintainable, or
sustainable

The term “cost” means an expenditure that we pay to move on or to continue business. It will not
offer a profitable return. It is money lost. Alternatively, “investment” means money that we set
aside or spend now in order to achieve a greater return later. If we look the pursuit of quality
correctly, we see it as an investment, not a cost.

Investments involve expenditures that are directly linked to measurable benefits, and a certain
ROI is expected. To be considered profitable, the return must exceed the investment’s
expenditure over time.

In quality, the cost of a preventive action must be calculated and in line with its expected benefit
or return. From a financial perspective, a preventive action is more beneficial to an organization
than a corrective action.
Organizations see the cost of a project or product as the cost of its development, but the actual
cost includes production costs plus failure costs. Organizations can reduce project and product
costs by investing in preventive and appraisal costs, which in turn reduce failure costs and
overall project and product costs. This difference in reduced failure cost is quality’s ROI.

The Cost of Quality (COQ) can be defined as a methodology that allows a company or
organization to evaluate how much of their resources are being used on:

1. Activities that prevent poor quality

2. Activities that can effectively appraise the quality of the organization’s products or
services
3. Appraise costs resulting from internal and external failures.

The Cost of Quality can be represented by the sum of two factors. The Cost of Good Quality
(COGQ) and the Cost of Poor Quality (COPQ) equals the Cost of Quality (TCOQ).

The total COQ mentioned above, the TCOQ value cannot be zero. It is due to optimization.
Since nobody is operating in a perfect world, no organization can ever produce or offer a defect-
free product or service without deploying appraisal or prevention measures. Obviously, COGQ
components – appraisal and prevention costs – need to be maximized, while COPQ components
– internal and external failure costs – are to be minimized to reach to the minimum TCOQ value.
As shown in Figure above, COPQ declines as the quality level improves, but this doesn’t occur
without exerting some level of prevention efforts. The key question that the TCOQ formula
should answer is: To what extent should the organization invest in COGQ so that it reaches the
minimum TCOQ with the optimum quality level of the product or service. The answer points to
where the organization needs to position itself consistently to retain competitiveness or, more
bluntly, to survive.

Improving a product or service quality level while keeping profitability at decent levels is not a
walk in the park endeavor. It means having a proper grasp of the COQ concept and methodology,
coupled with a standardized approach of monitoring and controlling over optimum levels of cost.
Such mastery will allow the organization to balance the competing demands of profit and
customer and employee satisfaction.

Let us consider a common scenario to explore the difference between cost and investment in
terms of quality.

Let’s consider material or parts that we purchase from a supplier say “Cement” in order to
manufacture a pre cast slab as our final product for our customers. Ideally, we engage cement
suppliers or factory itself that produce exceptional quality, consistently. As our cement factory
prove this to us with the factory testing certificate, we relax our efforts to continuously assess
their performance. After all, continually proving that our cement factory always produce quality
inputs to our own processes becomes a waste of time, energy, and resources.

Unfortunately, due to some reasons there occur changes like regulation changes, environment
changes, changes in the production procedure or even the changes in the cement clinker chemical
properties etc. and also our cement factory own inputs are subject to change, environments
change, demands and resources change, electricity fluctuations, temperature fluctuations in the
production process, grinding process fluctuations etc. and cause our cement performance to shift.
Such that the incoming cement from the factory fails to be of desired quality. We contact our
cement supplier or the factory and inform them of our findings and we try to ascertain risk and
damage. It may also mean that we suddenly have an unexpected shortage of quality requirements
meeting cement for our own pre cast slab production processes.

While we work with our cement supplier or factory to try an understand what caused the failure,
while we review and re-perform our tests to make sure we didn’t introduce an error, we also try
to manage the risk or challenge of a supply shortage, meaning we begin to expedite cement. We
may also start losing cash flow from late revenue, or losing profit due to penalties for late
deliveries of the pre cast slab.

Already, we are experiencing costs for a quality failure. What happens when we have a second
failure on expedited cement, or if we audit previously acquired cement and find more failures.
This raise concerns not only about risk and variation between lots of cement, but also variation
within lots of cement. Hence statistical tools for the identification of variation and risks shall be
used to determine the extent of variation and to gain the level of confidence in the cement
delivered from the cement supplier or factory and the already produced pre cast slab.

Maybe we chose to spend time and resources to assess variation within and between lots all
along and maybe we determined not to waste our energy on measuring reliable processes. These
factors become part of the discussion that needs to be finalized before moving ahead again taking
substantial time and effort.
In either case, we have a real significant problem if each incoming expedited cement
demonstrates poor quality and previously acquired cement demonstrates poor quality. It means
that we have just experienced a very great cost compounded by further delay. It also means that
we may have product in the market or in the field that is not of the quality we expect or intend.

The cost of the poor-quality precast slab needs to be identified. If it means that our customers
might be slightly dissatisfied with the performance of our pre cast slab because we used
substandard materiel, we might never receive the feedback to tell us what the problem really
cost. It might be minor.

However, if the quality problem results in a regulatory or safety issue, it could warrant a product
recall. In some cases, we may have to scrap defective products and pay additional production
costs to replace them. If defective products reach customers, we will have to pay for returns and
replacements and, in serious cases, we could incur legal costs for failure to comply with
customer or industry standards.

That can be devastatingly costly both in terms of resources and productivity, and also in terms of
brand or product reputation and future revenues. The cost of the recall can be fairly assessed. The
cost of reputation and future sales we may never know for sure. We do know that it is not
acceptable.

One simple quality failure now has us spending resources measuring and assessing quality on a
great deal of materiel, it has us expediting material, we are late with deliveries, we have quality
failures in customer hands, and we have the potential for very costly recalls or penalties. Those
are genuine and significant costs.

More so, those costs are inevitable if we do not protect ourselves from their occurrence. We must
assume that it will happen if we don’t proactively prevent it. Reasonable measures to
continuously prevent poor quality inputs and also poor-quality outputs will reduce or eliminate
costs to our business due to quality issues.

The simplest of the thing that is true to all the scenario is that if we reduce costs, we increase
profits. Therefore, if we spend a little time, energy, and money to prevent quality issues, we
increase profits, which mean spending money to assure appropriate quality an investment,
increase an investment to avoid a cost.

If we can prove that superior quality is a value to our customers, quality becomes a sales driver, a
revenue driver, and a profit driver. When this occurs, there can be no question that quality is an
investment, as long as what we invest in producing the quality is less than the profit from it.

There are several benefits of delivering quality services. Some major benefits of delivering
service quality are:

1. Retaining Customers – This means “repeat business.”

2. Referrals – Satisfied customers are happy to generate positive word-of-mouth.
3. Avoidance of “Price” Competition – If our organization is seen by customers as the same
as others, then our product/service is essentially undifferentiated. Differentiation is a
strategy upon which to effectively compete. Price strategy is another way to compete,
however this may not always be possible or desirable. Attaining service quality allows
competition based on a differentiation strategy.
4. Retention of Good Employees – Employees like to work for a “quality” organization.
5. Reduction of Costs – When quality is achieved, costs of correcting problems (after they
have occurred) is reduced. Since a focus on quality stresses preventative maintenance,
then these costs are reduced. Of course, many other costs are reduced such as lowing
employee turnover and the cost of having to motivate uninspired employees.

The challenge is not to understand the quality-balancing act. The challenge is to achieve the right
threshold of investment. This requires work and planning, and information that many of us
choose not to do, and that is the main problem.

Poor quality increases costs. If we do not have an effective quality-control system in place, you
may incur the cost of analyzing nonconforming goods or services to determine the root causes
and retesting products after reworking them.

If we perceive efforts to ensure quality as a cost, our mindset automatically becomes focused on
reducing or eliminating that cost. However, if our perspective is that efforts to ensure quality are
an investment, our mindset shifts to optimizing that investment. We focus on investing just the
right amount to maximize our return.

That is precisely what our focus should be. Actions to monitor quality are a waste if they are not
improving quality. That is a dangerous perspective because it tends to lead to the idea that our
practices to assess and assure quality are waste and, therefore, a cost.

We need to reset our mindset that efforts to assess, assure, and ensure quality are an investment.
Focus not on how to reduce or eliminate them, but rather on how to optimize them for maximum
return. Considering the risks and costs of a quality escape as a means of determining if the
money spent preventing them is appropriate and profitable.

Once we have changed our own habitual perspective on the matter, begin to work on our
colleagues and leaders. Change our perspective and our language, and then change our culture.
The organization that invests appropriately comes out ahead.