Is Quality Losing to Cost?

Tom posed an interesting question on The Whiteboard.

Has anybody else noticed that quality is taking a back seat lately due to the tough economic conditions? Things are tough everywhere, but I’m seeing more and more evidence of companies taking short cuts (to cut costs) where the end result is poor quality.

I’ll say what I think, but I would also like to invite anyone else to comment as well. This is an important issue.

Background:

First, it is important to understand that the term “quality” carries at least three definitions. There may be more, but here is how I came to understand them.

  1. Grade: The product’s position in the market.
  2. Fitness for use: Whether the product is suitable for the customer’s intended purpose.
  3. Conformance to specification: Whether the product is as the producer intended it.

Some examples.

Grade:

In air travel, there are two (and sometimes three) grades of service offered on a typical flight. Coach is basic transportation. It gets you there quickly and safely. First Class gets you there just as quickly and just as safely as coach. But there are more amenities offered, the seats are bigger, in general it is more comfortable. First Class is a higher grade of product.

In the automobile market, we have expensive luxury cars, such as top-end BMW or Lexus. We have middle grade cars, we have basic cars. Even within a specific make and model, there are different trim levels that each carry a different “feel” as well as a different price.

Thus, the grade of the product reflects an effort to create higher value by adding features and amenities that probably go above and beyond the basic purpose.

It is important to understand that the grade of the product is set by the producer’s decisions on market position. They are trying to deliver more value in order to command higher prices.

Fitness for Use:

Fitness for use is defined from the perspective of the customer. The product is sold as being suitable for some purpose, and the customer buys it to fill a need. How well it fills that need is ultimately defined by the customer’s experience of the product in use. This is probably the easiest to screw up, as many companies tend to rely on internal experts or the highest-paid-person’s opinion rather than getting their shoes dirty and actually paying attention to what customers do with the product. It is easy to delete or alter a feature which turns out to be very important to the customer. Customers can also surprise you and find uses which were never intended by the original design.

Conformance to Specification:

Once the research is done, and the product designed, some kind of production system must be established to actually produce the product (or actually deliver the service, it is the same issue). Conformance to specification defines how well the product delivery actually matches the design intent. Where a Hilton Hotel may offer a higher grade of room than Motel 6, if both rooms are clean, ready for guests, and meet their respective hotel’s standards, then both conform to specification. The Hilton will have some kind of specification for how they deliver room service. Motel 6 has a Denny’s next door.

One More Example

If I am interested in knowing what time it is, a $35 Timex will do exactly the same job as a $5000 Rolex. With today’s quartz technology, they are both accurate within a second or two per month. So if knowing the time is my intended use, both watches are fit for use.

Clearly, however, there is a difference. The Rolex is a higher grade of product than the Timex. If my purpose is to demonstrate wealth or success, or present an extravagant gift, the Rolex is also more fit for that use.

But if they each work out of the box exactly as intended, have no scratches or other defects, then both watches conform to the specifications of their respective manufacturers. Both companies have excellent reputations for “quality” in that sense.

So now to Tom’s question.

Companies facing dramatically declining sales are under great cost pressure. Very few have limitless sources of cash to burn, and publicly held companies must also maintain the goodwill of their investors. In addition, many companies have credit covenants which require them to maintain certain ratios of debt, liabilities, assets, liquidity, etc, or face issues with their banks.

With that background, let’s look at how these pressures could drive decisions that affect quality.

Deliberate decisions are most likely to affect grade. Cheaper materials may be substituted, amenities or extra services can be cut back. Anyone who flys frequently has seen the steady erosion in previously “free” services and amenities as airlines come under increasing cost pressure. The danger here, of course, is that these decisions also reduce value in the eye of the customer, and with that, can reduce the price they are willing to pay or send them to a competitor. Thus, these “savings” can end up backfiring unless the entire industry is following pretty much the same path.

I think the more dangerous effect of turbulent times, however, is in the area of conformance to specification. But I don’t think this is the result of deliberate shortcuts. Rather, I think it is an unintended consequence at the intersection of a couple of other factors.

First, relatively few companies, be they production and manufacturing or service delivery, have an effective system of assuring that things are done the way they expect. When times are good, and employment is stable, the people develop their own individual feel for what is right and do their very best to do it. The level of quality will reach some kind of tolerable norm which may, or may not, conform to the specification.

Now mix things up. Lay off some of your workers, and move the others around. Different people are doing different jobs. Because the work is not well specified in the first place, and because there is likely no process to transfer “how to do it” (like TWI Job Instruction), people have to learn the hard way – by making mistakes. Add to the mix a perceived time pressure, and people will take shortcuts in a good faith effort to get the job done the way they think they are expected to.

If the “specification” itself is poorly defined as well, then the new “norm” for the organization could very well end up different (and worse) than what it was before. Add to that a management culture of acceptance of “what is, is” (an excused-based culture, more common than you think, especially in large companies), and you get a seeming erosion.

So here’s what I think – if Tom is seeing an erosion of quality, he is likely seeing the effect of the economic turmoil rather than deliberate decisions to cut corners. Further, is impossible to deliberately cut corners if no one has ever defined where the corners are in the first place. And that situation is more normal than not.

What is your view?

Do you see quality eroding?

If so, why do you think it is happening?

3 thoughts on “Is Quality Losing to Cost?

  1. Mark and everyone,

    When I was a quality manager my biggest mindset of that company I had to overcome was that you could not inspect quality into a product. Since it was viewed that quality was an inspector’s job it was up to them to find what was wrong. Like Mark said, the expectations of what a quality should be were not defined so it was up to someone’s opinion and not a standard. Until we started putting standards in place, nothing changed.

    When I was a production manager I spent a lot of time defining standard work for the line with the goal of building quality into the product. My view of standard work(and Mark may correct me) was to provide the right tools, right information, right parts to the correct location so a team member can complete the task CORRECTLY in a specified amount of time(takt).

    In this instance I took out the perception that quality=high cost. Quality became standard work. The consistant results also helped to take out the variability of the product flow(heijunka). We were not running around reworking everything. If that happened, it was clearly seen(andon) and a corrective action was put in place.

    Like Mark said, you need to define what the standard is, but include enough time to do the job right. If you are getting the whip out to speed up output then corners will get cut. You have shifted out of looking at standard work. Standard work does not change with the current economic conditions. If you want to decrease cycle time, put your lean hat on and get rid of the waste. Don’t cut corners!

    Duke

  2. Mark,

    Here are a few examples to back up my original post. A friend of mine in the construction business recently retired and had some major renovation work done to his lakeside home. Part of the program was a complete new set of kitchen appliances – and all of them nothing but top notch stuff mind you.

    The microwave oven cost just a few ticks over two grand. It lasted two weeks and then stopped working. He took it back to the store he bought it at and they cheerfully gave him another. “We replace these all of the time” said the clerk. “But isn’t this the best one you sell?” asked my friend. “Yea, but they don’t seem to last as long as they used to” came the reply.

    The Dish Washer was the next thing to clutch its chest one week later. Again, this was a top of the line model from a very well known manufacturer whose former CEO has written several best selling books. (Get my drift?) When the service man arrived, he quickly diagnosed the problem as a fried circuit board. “Yup, these go all the time” he said as he pulled a new board out of the truck. “What makes you think that new board will work any longer than the first one?” my friend asked. “Don’t worry, it’s under warranty” was the reply. Of course my friend was thinking about what happens when the warranty expires.

    Then there’s a personal example. I’ve driven the same brand of truck for almost 25 years. I’m on my 6th one and I always got well over 50,000 miles out of my front brakes and 60,000 out of the rears. When I bought my latest truck (in 2005), the rear brakes were absolute junk after only 23,000 miles and the fronts were in similar shape after 26,000 miles. (No change in my driving style by the way.) When I complained to the dealer, they said that everybody was having similar problems with the new model, but brakes were a wear item and not covered under warranty. They did say that since brake parts were now so much cheaper, one should be able to afford a complete brake job more often! You can guess what my reply was.

    Here’s another personal example. I recently bought a digital camera from a prominent photographic company headquartered in the US. The camera arrived with the wrong lens cap. So, I went to the company web site and sent them an e-mail. They responded by noting that I had to call a Customer Service 800 number. To make a long story short, I ended up having to call three different 800 numbers – each in increasingly distant parts of the world and each staffed by people who knew (and cared) less than the previous person and who barley spoke understandable English. I finally got my lens cap about 3 weeks later, but my several hour long ordeal convinced me never to buy from this company again. Somebody sure picked the low bidder for outsourced customer support!

    Last, but not least is my most distasteful example. A company that a good friend works for has been on about a 10 year long path from vertically integrated domestic manufacturer (with a stellar quality reputation) to outsourced manufacturing – mostly in China. Quality and brand image have tumbled significantly. Since Purchasing has taken over the seat of power in the company from manufacturing, the quality direction has changed dramatically too. In fact, one Purchasing manager has often stated that “Quality is a subset of Unit Manufacturing Cost.” You can guess what this type of thinking has done for quality.

    So why do I think this is happening? I believe it all comes down to short term thinking and the pressure to perform. In each and every example I’ve noted above, conscious decisions were made by management to cut costs. Oddly enough, in each and every instance, quality suffered. The funny thing is, many people seem to think this is completely acceptable. Am I alone in thinking this is totally unacceptable?

  3. Hello Mark, Tom, others,

    I agree with you Mark that the lower quality is probably the side effect of unclear specifications. Or looking from another view: probably they WERE clear in the minds and hands of the people producing. They were clear implicitly; not explicitly and obviously this ‘muda’ becomes more visible when people are moved to other positions they are not used to work. (Which makes me think that this economical situation can also be a benefit for those companies that recognize this opportunity for finding waste they didn’t see before…)

    Besides this, I was thinking there might be an additional explanation for decreased quality. Often a direct link between quality and costs is made in organizations. Quality costs are the sum of quality failure costs (repairs, claims, customer dissatisfaction), quality inspection (inspection, quality control equipment, working time needed for finding and analyzing defects) and quality prevention costs (job instruction, training, preventive maintenance, using quality parts). The latter category requires continuous small investment in terms of time and money to avoid much bigger costs (time, money) later in time. Short term investments vs. long term benefits. In the current situation of limited cash flow there is constant challenge towards many managers to save direct working hours and direct costs. The short term costs with an indirect saving in the future – like the quality prevention costs – are often the first and easiest ‘quick wins’ to find.

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