Mental Miscalculation
Intuitively we know the quality of our product or service is directly related to the value our customers perceive. However as a quality professional I witness the same mental miscalculation happen over and over again. That is "value" is confounded with "profit". Product, project, accountant and even the quality managers confuse and co-mingle value and profit. It is almost a reflex we can't help. We seem to have a paradigm that value is equivalent to the difference between the cost to produce and the price we sell. We believe we can increase the value by decreasing the cost. Nope! The difference between the cost to produce and the price we sell is called profit, not value. Here are a couple of points of orientation for this article.
The products/services we provide have zero value to us. They provide value to our customers and our customers are valuable to us.
Value is witnessed and testified to by the consumer.
Value is pressured by the total cost to the consumer.
The price we sell at is a function of supply and demand.
The price we sell at is pressured by competition.
Let's think about this in terms of a scale. The company puts the Sales Price minus the Cost to Produce on one side of the scale and Profit on the other. These are equal. The customer puts their Total Cost (Purchase Price, Maintenance Cost, Operational Cost, Repair & Replacement Cost, and Inconvenience Cost) on one side of the scale and the Value to them on the other side. These are not equal. The value to the customer must outweigh the total cost significantly.
When we choose to cut a cost we are reacting to competition, not adding value. You add value by adding features to the product or service the customer wants. When we react to competition and cut the cost of production we must also reduce sales price for the customer to notice it. Additionally we must ensure we don't have a negative impact on the total cost to the customer, or to your supporting workforce. So this means companies need to understand and calculate both the direct and indirect costs associated with poor quality. Just knowing these numbers and having a company culture that uses them when quality spills occur provide managers with incentive to do due diligence when making changes like moving to lower cost suppliers. Its a balancing act and you need to be careful what you move.
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