Flashback
By A. Blanton Godfrey
The Hidden Costs of Poor Quality (Editorâs note: The following article originally appeared in the Fall, 1998 issue of Springs. Coincidentally, that issue of the magazine was printed under the same theme as this edition, âSafety First.â Many will enjoy this look back because the article advocates that âIf we could estimate every productâs total life cycle cost, then we would truly know the importance of process and product improvement.â That same value continues to hold true today.)
38 | SPRINGS | Winter 2022
Earlier this year, I served on the committee for a doctoral candidate, Lars SĂśrqvist, at the Royal Institute of Technology in Sweden. His thesis concerned poor quality costing. It examined how companies currently estimate poor quality costs and explored some new ideas about estimating actual costs. It also expanded upon the concept of total losses due to a companyâs imperfect products and processes. This theory, not completely new, relates to Genichi Taguchiâs earlier definition of âloss to societyâ caused by poor quality. When I first encountered this concept in the early 1980s, I found it hard to accept. At the same time, one of the early papers went so far as to suggest that if a television picture was too good, children watch too much TV, thereby resulting in a loss to society. But, as usual, Taguchi was ahead of his time, and now weâre beginning to realize the far-reaching implications of this line of thought. SĂśrqvist carefully defines five levels of poor quality costs. The first level comprises the traditional poor quality costs of rework, warranties, scrap, inspection costs and other visible internal and external failure costs. Normally hidden expenses he classifies as level two costs. These include invoice errors, unnecessary paperwork and wasted meeting times incurred by management. But level two costs also include chronic, routine problems that are easy to ignore and frequent, unthinking corrections that arenât captured by accounting systems. In the third level, SĂśrqvist includes costs related to lost income. When marketplace goods and services fail to meet customersâ needs or wants, substantial losses may occur. Although itâs usually difficult to quantify them, these costs are real and often quite high. They may result in immediate loss of market share or goodwill as well as long-term market effects. Poor service in a hotel, for example, might not impact revenues from the customerâs current stay, but the customerâs refusal to return to that particular hotel could certainly impact future revenues. SĂśrqvistâs fourth level of poor quality costs include losses incurred by customers. Such costs may or may not result in lost sales or market share and may not even result in warranty costs. Competitors may incur the same losses and customers may believe the costs are unavoidable. These costs include early replacements (for example, light bulbs that last only a few thousand hours), incompatibilities with other equipment or software, items that are unnecessarily difficult to repair and other defects in design or workmanship for which customers end up paying. But itâs the fifth level that stretches the usual definition of poor quality costs the farthest. These are the socio-economic costs, losses that affect a community due to inadequate processes or products of companies, organizations or governments. These
