This article first appeared in the January, 2005 edition of the Jacksonville Business Journal
My wife and I have been buying furniture recently, and are having a surprising experience. When the furniture arrives, quite often something is wrong. The style or fabric may not be what we selected. Or the goods will have been damaged in manufacture, packing or transit.
The stores are very apologetic and gracious and work with us to solve the problem. What surprises me most is their lack of surprise about the problem. Re-work or replacement seems to be a natural part of doing business for them.
I worked with a CEO several years ago who was upset with the number of service calls his company was receiving. His management team explained that the problems occurred because they were so busy and backlogged. Everyone was rushing to get the work out and additional errors were a natural consequence of the extra pressure. His response was: "Why is it we never have enough time to do it right but we always have enough time to do it over?"
The cost of service, re-work, repair and replacement is very high, but often hidden. The investments to prevent those errors from happening in the first place represent real dollars, so it's easier to put the fix on the back burner without understanding the long term financial implications.
Let's Do the Math
Let's do the math together on a simple example. Assume you manufacture chairs. It costs you $100 total cost for each chair you make, and you want to sell them for $125 per chair.
You manufacture 100 chairs, for a cost of $10,000. Unfortunately, two of the chairs were not made properly and could not be sold, so you now have 98 salable chairs which you ship to your distributor. Two more are damaged in shipment and have to be discarded. Now you have 96 chairs left. You sell all 96 chairs, but then receive calls from two customers who find defects in their chairs. You send out a repair person, which costs you $50 per visit. In one case the repair person fixes the problem. In the other case the chair is not repairable, so you ship a replacement.
Now let's do the math again. Your costs were $10,000 to manufacture the 100 chairs, plus $100 for the two service calls, plus $100 for the extra replacement chair. Total cost of $10,200. You were able to sell 96 chairs, since 4 were rejected before they made it to the store. Total revenue at $125 per chair for 96 chairs was $12,000. Profit was $12,000 minus the $10,200 costs or $1,200. If you had sold all 100 chairs for $125 each (as you originally intended), your profit would have been $2,500. So you are about half as profitable as you expected. And that does not include the potential damage caused by the two customers who received damaged goods, when they tell their story to their friends. Ah well.the cost of doing business.
Now consider another scenario. Your competitor makes a similar chair and sells it for the same price. But your competitor became infected with the "quality bug" and decided to invest in some improvements. He analyzed and modified his work processes, and provided quality training for his employees. He also added a final inspection step in the manufacturing process to ensure that damaged products don't leave the factory. Finally, he invested in an improved packaging system so that goods are not damaged in transport. These investments all cost money, amortized to about $5 per chair over a three year period. So his cost of manufacture is actually $105 per chair compared to your $100, and he sells each chair for the same $125. But here's the difference. He has 100 chairs to sell, no service calls, and no replacement chairs. So he generated the full $12,500 in revenue and his costs were $10,500, leaving him $2,000 in profit, and no rework or dissatisfied customers. He is generating 16 percent profitability, while yours is 10 percent.
Quality Increases Profitability
The results are obvious. Companies that do not implement quality systems have increased costs, which they often attempt to reduce by cutting overhead. This leaves the organization understaffed and quality erodes even further, creating a vicious reinforcing cycle.
The solution? Get it right the first time, which may include improving work processes, training employees, upgrading equipment, etc. Your employees know best how to improve quality. Ask them what they need to get it right the first time. You may be surprised at what you learn.
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