Budget Ahead of Quality

In this root cause category, management does not recognize the fundamental concept of the costs of quality, as explained by Philip Crosby and Frank Gryna and places concerns over costs ahead of quality. (1) (2)

From the perspective of a belief system that puts concern for costs ahead of quality, obtaining quality and performance and service is perceived as an expense rather than an indispensable element for sustainable profitability and organizational efficacy. Key decisions are made based on perceptions that do not recognize the concept of the cost of poor quality.

Philip Crosby made the argument that leaders in any organization need to appreciate what he called the “fully loaded” costs in their organization. This includes all of the effort required to do work over again, all scrap costs, all warranty costs, after-service warranty costs, complaint handling, inspection and testing costs, engineering change notices, corrective action costs, and product liability costs.

Frank Gryna framed the issue of the cost of quality in an even more comprehensive manner. Gryna classified the major category of quality costs as internal failure costs – scrap, rework, failure analysis, supplier’s scrap and re-work, requirements for 100% sorting inspection, re-inspection and retesting, and downgrading the asking price of a product due to poor quality; external failure costs – warranty charges, complaint adjustments, returned material, and the cost of concessions to customers; appraisal costs – inspection and testing of incoming materials, in-process inspection and testing, final inspection and testing, product quality audits, calibration of test equipment, and evaluation of materials in inventories; and prevention costs – quality planning, new product review, process planning, process control, quality audits, evaluation of supplier’s quality programs, and training.

In addition, Gryna identified what he called “hidden costs” associated with poor quality, including potential lost sales, costs of necessary product redesigns, adjustments to equipment due to inability to meet requirements, software changes due to quality problems, unreported scrap, and errors in support organizations.

Both Crosby and Gryna made the compelling case that the costs of internal failures, external failures, and the “hidden costs” far outweigh the costs associated with appraisals and prevention. And, it should be remembered, that quality failures can lead to the total loss of consumer trust in the specific product and in the company that provides the product. Skimping on the control of quality can be not just more costly to the organization, it can be fatal.

Many in the quality profession have been highly successful in implementing methods to stimulate quality control and quality improvement, such as statistical process control and Six Sigma projects, only to witness an overall failure of the management system due to a lack of understanding of the economics of quality among the senior leadership. This results in a wide variety of dysfunctional behaviors that undermine quality, environmental, health, and safety performance.

Dr. Deming spoke to this issue in the 1980’s, drawing upon his observation of decades of failure of American industries to embrace quality as the driving force for economic success. His seminar handouts were consolidated into a publication called Quality, Productivity, and Competitive Position.(3) In these lecture notes, Deming observed that the American business community had trapped itself by convincing investors that quarterly dividend payments were the best – and only – method for evaluating management’s success or failure.(4)

Return on investment is indeed one appropriate measure of an organization’s success, but the problem that Deming identified was with the short-term timing of the measurement of the return on investment.

Deming suggested that the relentless need to show profits on a quarterly basis drove business leaders to make decisions that would have short term benefits but long term adverse consequences to the company. The tyranny of quarterly reports causes leaders to cut corners, ignore or cover up problems, and underinvest in quality systems – all behaviors which would cause organizations to fail in the long run. Deming also admonished all organizations to end the practice of awarding business to suppliers based solely on price. In his words, businesses and government are “rooked” by rules that require purchases to be made based on price alone since this will probably mean the purchase of low quality items which will end up costing businesses and government more in the long run.

Deming offered a bleak forecast for America as a country which would soon depend on its agricultural production alone to balance its losses in foreign trade. (5)

Of course there have been for-profit businesses that have taken the long view in terms of their budgeting – aiming for sustainability for themselves and all of their stakeholders. Unfortunately, some of these have become targets for take-overs by corporate “raiders” who dismantle these organizations or use them to run up huge debts that the new owners syphon off as profits.

Nevertheless, the fact remains that many corporations fail because they make operational decisions that result in poor quality, resulting then in poor competitive position, dissatisfied customers, costly accidents, environmental disasters, and regulatory penalties that destroy the ability to generate profits. From the perspective of radical quality, leaders should focus on quality, and knowing that profits will follow.

(1) Philip B. Crosby. Quality Is Free. New American Library, 1979.

(2) Frank Gryna. “Quality Costs” Juran’s Quality Control Handbook. McGraw-Hill, 1988.

(3) W. Edwards Deming. Quality, Productivity and Competitive Position. MIT Press, 1982.

(4) Ibid.

(5) Ibid.