The Balance Between Cost and Quality Of Product

Before we look closer into the subject, first we must look at exactly what is meant by quality and cost.

Quality is the totality of the attributes of a good or service that meet the requirements of the buyer or customers. The materials which make up the product, the design and the engineering of the product, product performance, reliability and durability are all important characteristics of the “quality package”, which ultimately influence customers to buy a product and repeat-purchase It. (Pass 1995)

Cost is the expenditure upon resources incurred by a firm in producing and selling its output, Each cost is a charge against revenues and profits for the use or consumption of resources during a trading period.

Cost can be classified along the functional lines, distinguishing between production, selling, distribution, administration and finance costs. (Pass 1995)

Quality is a term we use to signify excellence of a product or service. We think of a quality product, for example a B.M.W. motorcar. We know its well designed, well built and will therefore last a long time. If we think of car of being low quality, we think of something like a basic model type of Citroen or Fiat, with its flimsy panels, cheap components and low specifications.

The quality hotel is denoted by the internationally recognised star rating system, i.e. a 1 star hotel will provide the most basic of comforts and low on hygiene, and a 5 star hotel will provide the most comforts and services. We can immediately recognise then, by simply looking at a hotel’s star rating how good it will be and how good of a time we will have if we stay at the hotel.

Total Quality Management (TQM) is an organisational process that actively involves every function and every employee in satisfying customer’s needs, both internal and external. TQM works by continuously improving all aspect of work through structured control, improvement and planning activities that are carried out in concern with guiding principles that focuses on Quality and Customer Satisfaction as the top priorities.

TQM recognises that the Customer is at the centre of every activity. The customer may be external or internal. The key is to determine the gap between what the customer needs and what the system delivers. Once the gap is recognised, it would be systematically reduced and results in never-ending improvement in customer satisfaction at every level.

The balance between cost and quality in purchasing is questioned when an organisation is looking to purchase the best for what they can get for their money. However, this is not always the case. One of the main considerations in the purchasing functions is that the quality in question is fit for purpose. Sometimes the overriding factor on the decision to purchase is that products are of the highest quality. E.g. luxury car manufacture Roll Royce will pride themselves on using the finest materials when manufacturing their cars. When at the ordering stage the emphasis will be on high quality rather then cost. Keeping cost to a minimum is an important factor for any business including companies like Roll Royce (to a certain degree). However, Roll Royce will not compromise their image of quality for the sake of cost.

Often, a company has no choice but to use the most expensive materials or highest quality that money can buy. Sometimes safety is the overriding factor. If Rolls Royce is building an engine that is going to be mounted onto an aircraft, then titanium will be the preferred choice of material. Titanium is extremely expensive but will guarantee the utmost reliability in this situation.

As mentioned above, purchasers have to take into consideration whether or not the quality is fit for purpose and what the product is going to be used for. The decisions that are made can be made personally for individual use or at corporate level. E.g. if a purchasing manager for a car manufacturer has to make a decision on the type radio to buy, then there is a combination of factors that will need to be considered. The price will have to suit his budget. The quality would have to be of a standard that one would expect from a car of that type from the company.

The buyers final decision may well be to buy a radio system that he or she would never consider putting in their own car. But yet the decision made will mean that the system chosen will go into thousands of newly built cars. This is because the decision made was not personal; it was made of behalf of a company so it had to suit their needs.

Many purchasing managers are under constant pressure to drive cost down. Even professionals have problems finding the balance between cost and quality when their budget is very low. If costs are too low then it seems inevitable that the quality will suffer. The Ford motor company has suffered the consequences of cutting costs too low. After rave reviews following introduction of the new Ford Focus into the US market, Ford decided to build the car using cheaper components in a bid to save money. The cheaper components included rear wheel bearings that would prematurely wear, causing noise and wheel instability.

Not only does Ford now has to recall thousands of Ford Focuses, but it also has to deal with the fact the this decision has damaged their reputation even further.

As people we are constantly trying to find the balance between costs and are own perception of quality on a daily basis. According to Juran, quality is: “fitness for intended use.” This definition basically says that quality is “meeting or exceeding customer expectations.” So according to this theory, we achieve quality when we buy a product that does what its supposed to do. If a purchasing manager is buying radios that he or she wouldn’t use personally, this still ties in with Juran’s definition of quality because the radios will meet the customers expectations, although is will not meet the buyers.

When we shop we have to ask ourselves if the use of the product will justify the cost. E.g. when studying late at night, the natural choice of beverage for some students would be something like the caffeine boosting energy drink Red Bull at the cost of ?25. ?25 is far too much to pay (double) for a can of fizz pop. On this particular occasion, the beverage will not be used as a thirst quencher or as a vodka mix, but used as an aid to keep the student awake through the studying session. The cost (?25) of the product is justified due to the products fitness for intended use.

Deming states that the customer’s definition of quality is the only one that matters. This is true but I feel that the customer does not always get quality from what they perceive as quality. This is partly to do with the fact that some companies are very good at doing some things, but is not so good at others. Designer label brand Gucci is a prime example of this. If somebody buys a Gucci designer watch for the cost of ?0, there are a host of other things that the buyer will achieve like admiration, prestige and self-esteem. Gucci is not a watchmaker and does not have the same level of expertise of watch making as Rolex or Cartier. Although somebody who does not have knowledge of watches may perceive this watch as quality.

Those with know-how or those in the industry would regard this watch as crap. Watches of this nature are purely soled through success of the brand. The watches are simply a spin-off from their designer clothesline and are made with very low quality and cheap components. According to Which magazine, the life expectancy for a Gucci watch is two – three years. This is very low compared to Rolex’s lifetime life expectancy.

looking at Pass’s definition of quality, a Gucci watch does not carry vital characteristics such as, reliability and durability, which are key to the “quality package”. This brings us to Deming’s theory that the customer’s definition of quality is the only one that matters. I appreciate that the customers opinion is all that matters them, but whether or not the customer is actually receiving quality is another matter. If a product were purchased on the basis of the customer being happy with the product initially, then it would be very difficult to apply Deming’s theory of quality if the product has hidden defects. Similar to the phrase, “things aren’t always what they seem”.

To achieve high quality, a company does not have to always have to pay the high costs. For example the cars produced by the Japanese used to be of low quality and unreliability was common. Things have changed now. Japanese’s cars are now built to an excellent standard and reliability is second to none. Not only are the Japanese building excellent cars, they are building them at a great speed. This is partly due to lean supply techniques that the Japanese have mastered. The whole area of purchasing and suppliers is streamlined to achieve minimum waste. Adopting these techniques cannot be done over night, but lean supply is an excellent step in the right direction in achieving a good balance between cost and quality long-term.

Philip B. Crosby (1979) believed in the “zero-defects” program adopted by the US federal government defining quality as “conformance to requirements”. He emphasized prevention rather than inspection (audits) and promoted a definition of quality as “meeting the customers requirements the first time and every time”. His work is part of TQM.

Crosby’s (1979) philosophy on quality is driven solely by prevention of defects. It is expressed in a phrase he uses: Do it right the first time and every time. Crosby emphasizes zero defects, given that he believes there is only one level of quality. In other words, the presence of any flaw in the product deprives it of quality. He believes management’s perception and attitude towards quality needs to be transformed if the organisation is going to succeed at delivering quality consistently. For example, Deming and many managers believe that error is inevitable and one only has to deal with it. Crosby believes it is self-defeating to plan and invest in strategies that deal with errors instead of investing in strategies and processes that prevent errors from occurring in the first place (Garvin and March, 1986).

The Lean thinking method allows Japanese car manufactures have strong relationships with their suppliers and offer incentives for better quality. E.g. The supplier will carry out rigorous tests on their products before the buyer receives it to ensure reliability.

Purchasing can improve quality by contributing to the competitive advantage of the undertaking by participating in the procurement of bought – out items at the economical cost.

It is important to ensure that quality is not confused with price and grade.

Managers should be using their extensive knowledge and expertise to provide high quality to both internal and external customers of the purchasing function.

To maximise quality, the purchasing departments responsibilities should meet with the requirements of BS/ EN and BS 7750

Keeping the balance between cost and quality in an important factor for any business. As mentioned above, it depends on what the buyer is trying to achieve overall. If high quality is the overriding factor for a company, then this will tie in with the companies’ high quality image. Whether it is no frills or impeccable quality, managers will try to find a reasonable balance where appropriate.

Bibliography

1. Lysons, K (2000) Purchasing and supply chain management. 5th edition. Prentice Hall
2. Crosby, P. (1984) Quality without tears. 1st edition. Mc Graw – Hall companies
3. Crosby, P. (1995) Quality is still free. Mc Graw – Hall companies
4. Crosby, P. (1979) Quality is free.  – Dutton signet
5. Garvin, D.A. and A. March. (1984) A Note on Quality: The Views of Deming, Juran and Crosby. Boston, MA: Harvard Business School Press.
6. Juran, J.M. (1988) Juran on Planning for Quality, New York: Free Press.
7. http://www.which.co.uk/