The Cost of Quality

How much do you pay for quality? OK, that’s a loaded question. Do I mean how much does quality “cost” your organization or how much are you willing to pay for a “quality” product? Are these two questions related? And, does the cost of quality affect the price of the good or service I produce? Does my demand for a quality product determine the price I am willing to pay?

These questions are particularly relevant in today’s fast-changing global economy. As consumers, we are faced with making economic decisions based on a variety of factors: price, features, quality, availability, etc. For example, the cost of product seems to be more important to many U.S. consumers than their desire to keep manufacturing jobs in the United States. The desire to buy “Made in the U.S.A.” goods doesn’t outweigh the desire to pay the lowest cost for goods or to have products with the latest and greatest features and a long, trouble-free lifespan (the key to success for Japanese manufacturers).

The cost of quality to a consumer isn’t usually a conscious decision. It generally comes from personal experience with a company or product or the product’s reputation. For example, you might hear someone at the Honda dealer say, “I drove my last Honda Accord for 10 years and never had any trouble with it. Therefore, I’m going to buy another one.”

Generally speaking, consumers are willing to pay more for quality, but only as much as they need or can afford. That’s why the Toyota Camry consistently outsells the Roll-Royce Phantom. However, both meet the quality needs of their respective buyers.

As businesspeople, we must make economic decisions based on many factors: the cost of labor, competition, market share, return on investment, quality, etc. Although quality isn’t as high on the CEO’s to do list as most quality professionals would like it to be, I believe that they do make decisions regarding quality. Unfortunately, rather than asking “What is the price of quality?” they ask, “What is the cost of quality?” This is a critical distinction. Because organizations that view quality as a cost instead as an investment are missing the bigger picture. The same executive who decides to build a $400 million factory because he realizes the profit it will produce may balk at spending $5,000 on quality training or $10,000 on customer surveys or $25,000 for a new coordinate measuring machine. When Corporate America thinks quality, it thinks cost.

U.S. business looks for the least expensive way to “buy” quality. And as we all know, you get what you pay for. On the other hand, Japanese business regards quality as an investment. Japanese managers actively look for ways to build quality in to product design, to continuously improve processes, to reward workers for quality initiatives.

In Japan, quality is everyone’s job because quality is viewed as a key element of the organization. In the United States, quality departments are disappearing and quality is becoming “everyone’s” job merely as a means to save money, not to invest for the future.

Here’s another interesting way of looking at the cost/price of quality. At Toyota, quality is a key element of the organization. In fact, Toyota regards quality as a top priority. Toyota’s investment in quality from design through manufacture and on to delivery is enormous, yet its products are competitively priced (because Toyota’s investment in quality yields huge money-saving returns) and it is poised to become the world’s number one automaker. Toyota has the highest possible bond rating, and its profit is estimated to be $10 billion this year. Contrast that with General Motors. GM is expected to lose $4 billion and has the worst possible bond rating. GM is forced to offer huge incentives to sell its products, is downsizing, losing market share and blaming the competition, the workforce and even the consumer for its decline. Which automaker has made the best “investment” in quality?

Many blame the U.S. workforce for the huge disparity between these two automotive titans. Nonsense. Many of the Toyotas driven in North America are built in North America. Plus, many of the Toyotas driven in North America are designed in North America. Toyota and other Japanese automakers may enjoy a slight advantage in the cost of labor compared to GM and Ford, due primarily to lower health care and benefit costs, but this doesn’t explain such huge losses in sales and market share.

Unless U.S. manufacturing begins to see quality as an investment for its future success, it will continue to lose out to those who have figured it out. The Japanese quality revolution in the 1980s was a powerful wake up call for U.S. industry. Unfortunately, we seem to have hit the snooze button and rolled over.

What do you think of the price of quality? How invested in quality is your organization? Will we wake up in time to reverse our decline? Let me know what you think!