Written by Dennis Keay

There’s a common misconception that high quality implies high cost. Very often, poor quality means even higher costs because it can lead to costs related to re-work (sometimes at overtime rates); delays; warranty claims; dissatisfied customers, poor reputation and potentially reduced sales.

But is it the supplier or the customer, who defines ‘Quality’ in the first place, and whether it’s high or not?

If you think it’s the supplier, then that’s a common position. Sure, the supplier must have a set of standards which meet the expectations of the target market they’re selling to. But it’s the customer who decides what quality means to them and how much they’re willing to pay for it. It’s their definition that counts. Too often, a supplier may spend time and money adding features and finishes to a product or service to increase their perception of quality…but these usually come at an additional cost, with little or no additional value for the customer.

For example, if a customer wants to buy a shovel to dig a hole, and you manufacture titanium shovels which are the best (and most expensive) in the world, chances are you’ll go out of business through lack of sales. In the end, it’s a hole that the customer really wants…not a shovel!

Charging a premium for quality

Instead of thinking about what quality costs, come from the other direction and think about your target customer’s definition and how you can meet that definition most efficiently, at lowest cost. Simply give them what they want, what they value, and charge them according—and that doesn’t mean the lowest price!  Having a discussion with your customer, to clearly understand exactly what they value, can be of great value to your business.

As an example, one of our clients, experts in their industry, provide custom-made solutions in the lifting industry. Their customers’ basic requirements are to lift things up and down, safely and reliably, and they highly value very short delivery time. They also value the peace of mind that the solution will work properly from day 1. Our client is generally able to charge a high premium because, for their target customers, ‘time is money’ and a short lead-time puts more money in their bank. Simply put, the customers’ focus is on making more money, not buying at the lowest price!

What about ‘internal’ customers and suppliers?

The above discussion isn’t restricted to supplying external customers. Years ago, when I was managing a particular manufacturing facility, I had an employee filling a Maintenance Fitter role. His background prior to that was as an automotive machinist.  One day I told him I wanted to hang a wide range of spare fan-belts on the wall in an old storage room. I needed a long strip of metal we could bolt to the wall with about 16 rods sticking out of it, and asked him to do the job. Not wishing to micro-manage, I left him to it.

Perhaps a poor assumption on my behalf, but I thought the job would take about 2-3 hours and that he would simply cut up some lengths of rod, weld them to the strip, and bolt it to the wall. Two days later, when I returned to the area, the job was half done, but instead of simply welding the rods, he had decided to drill and tap the holes and thread the rods to suit. A definite overkill!  For him (the supplier), he took great pride in using his automotive machining skills and making everything ‘shine’ — a top quality product. For me, as the customer, I just wanted the belts hung and for him to get onto other important maintenance activities. The price of his quality definition came at the cost of my needs in the form of delays to other maintenance work.

This example goes to show that as the customer, I shouldn’t just assume that the supplier knows what I want and value—there’s some onus on me to make that clear, if I want to receive the I value that I’m expecting for the price I’m willing to pay. So, it’s important to think about people in your business (internal suppliers) who service the needs of other people in your business (internal customers) and the importance of clearly communicating value and quality expectations.

In summary

Instead of assuming that high quality comes at a high cost, a better way to think about it is that high quality can command a higher price than poor quality, leading to higher margins and profits. Again, we’ve got to keep in mind that it’s the customer who defines what quality means to them, and how much they’re willing to pay for it.

The flip side is that Poor Quality can be hugely expensive, and that’s what we’re going to look at in a subsequent article.

‘Error Proofing’ or ‘Mistake Proofing’ is about ‘Getting it right, first time’. 

Depending upon the situation, the cost of not ‘getting it right first time’ can have a compounding effect and can be enormous. Just think of the costs of product recalls to a business, or, if you think about the COVID situation, the cost of allowing a single inadvertent transmission of the virus to spread to others in a domino effect.

In some fields of engineering, we use disciplined procedures such as DFMEA (Design Failure Model and Effects Analysis) and PFMEA (Process Failure Model and Effects Analysis) for risk analysis and management. I don’t want to go into much detail here, but it’s essentially about proactive trying to identify what the risks are, the likely hood of an error occurring, how easily an error is detected, and the potential consequence (impact or cost) if an error were to occur. Based on the overall risk level, we then implement ‘countermeasures’ to reduce or manage the risk.  You don’t always have to use highly technical tools though. Sometimes simple brain-storming, cause-and-effect diagrams, and a modicum of common sense will get you a long way.

The Key Point

The point is, in any business, there are a range of risks, and if you don’t proactively try to identify them and manage them, then you might be caught out, at great cost. This could be anything from having your website hacked…without a backup, to having some super-critical resource in the business that becomes unavailable, having a devastating effect on the business.

Dennis (Lean Logic Founder) remembers a particular case, not too long ago, when he was doing a general assessment for a business, and as part of it he included a risk assessment. On the first day Dennis found that the computer system they were using for managing their inventory and related production tasks was DOS based (i.e. Disc Operating System, many years old and prior to Windows, and with zero back-up support in the industry anymore!), and the only person who could use it properly ‘protected his territory’ and was approaching retirement. The system worked fine, but WHAT WOULD HAPPEN if it failed? WHAT WOULD HAPPEN if the key user left the company for any reason?  

At the end of that first day, the company manager was very thankful, and red-faced, when Dennis alerted him to this risk. It was simply one of those things that had been working, and was ‘out of sight, out of mind’. They didn’t realise there was a problem that needed fixing.

What has that to do with Crash Test Dummies and Spinning and Engine Backwards?

It’s about risk management. For example, it’s about looking at your systems and trying to predict what could happen if people use the system in a manner that it’s not designed for, then to prevent them using it in that ‘wrong’ manner in the first place.

Dennis remembers a particular case as a young engineer, responsible for an engine test facility, where they had some very large electric motors used for testing the power and torque of petrol engines they were developing. These electric motors had a shaft sticking out of each end, and the operator would choose which engine to connect and then control the dynamometer to spin in the ‘correct’ direction.

Outsourcing – does it cost you more than it saves? A case study, by Dennis Keay.

Businesses outsource work for a number of reasons, for example, insufficient number of in-house resources (capacity) or insufficient expertise. Of course, some businesses are simply an intermediary, on-selling or packaging products made by others.  But, there are occasions where businesses do have the internal capability and capacity, and still choose to outsource. Two key reasons are to reduce risk exposure and to reduce costs.

When it comes to reducing costs, we’ve noticed that the apparent savings from outsourcing are often offset by significant ‘hidden’ costs…and so the exercise can be a false economy in the long run.  A case in point is when a large international company I worked in, which always had its Accounts Payable function performed internally, decided to outsource this function to an overseas company where the hourly labour rates were much lower.

At the time, amongst a range of other managerial and engineering duties, I was in charge of a departmental budget of several million dollars, yet I hadn’t been informed about the outsourcing decision. I found out when, one day, while I was reconciling budget expenditure, I noticed a very large sum that had been charged to our account, and I had no idea what it was for. So, I tried phoning our Accounts Payable Department to resolve this issue, only to be told that I’d have to ‘call India’ to find out.

Resolving the issue consumed many hours of my time…time that was effectively stolen from my other duties, adversely impacting projects I was working on. But, who paid for my time?  My employer of course…in two ways!  They paid for my physical time trying to resolve the issue, and they paid even larger costs in the delays to other things I should have been devoting my time to. (Unfortunately, leaving the budgetary issue unresolved was simply not an option.)  But where were these costs factored into the ‘cost of outsourcing’?  The answer is, they weren’t!  And how many other people within our company had similar types of issues?  Who knows? 

The types of costs I’ve referred to can be considered ‘hidden costs’, and there are many examples you can probably think of in everyday life.  I know I’ve changed internet hosting providers because local support was outsourced overseas and issue resolution plummeted. The wasted time can be just too expensive if you’re trying to run a business!  Did I tell friends and colleagues – yep! Does the company I was with know how much they’re losing in revenue and opportunity cost?  Most likely not!

The point isn’t that outsourcing is bad. It’s often essential and can be good in terms of reducing risk exposure and reducing overall costs.  The point is that if you’re looking to cut costs by outsourcing (and other costs for that matter), look at the big picture and the potential costs if everything doesn’t work out ‘perfectly’, and you encounter time delays and quality issues. Look at the flow-on costs and issues it might cause your business.

I’d definitely put outsourcing in the category of ‘caveat emptor’ (buyer beware), for as the saying goes, “The bitter taste of poor quality remains long after the sweetness of low price is forgotten”.

Sometimes, businesses miss out on competitive advantages and profits because they adopt the beliefs of their peers and do what their peers do…even if those beliefs have been proven to be wrong.

This is known as ‘The Tomato Effect’ and it’s a real phenomenon. The term was coined because, until the 1820’s, the North Americans falsely believed that tomatoes were poisonous, despite the fact that they had become part of the European staple diet since the mid 1500’s. Around 300 years of proof simply ignored!  So, the North Americans missed out on a juicy, healthy addition to their diets, laden with vitamin C.

But does the same thing happen elsewhere and could it be affecting your business?  Well, the simple answer is YES!

As an example, it’s happening right now regarding testing of COVID 19 vaccines where, because most vaccines take many years to be developed and tested, many people believe that vaccines that have been developed in only 1 year haven’t been tested properly. So, they’re afraid to take the vaccine because they believe it might, in a way, be ‘poisonous’. (Where have I heard that before?) They don’t understand that testing usually takes many years because normally: a) there are only a relatively small number of people to do testing on; b) there’s often relatively little funding and resources for research; c) it’s totally new.

However,

• Some of the research underpinning these vaccines isn’t new…it’s been going on for decades (e.g. Pfizer & Moderna vaccines use technology that stems from research that began in the 1990’s, and been tested against other viruses like influenza)
• There’s been ample funding and resources due to the scale of the problem
• COVID vaccines were tested in more participants than many other approved vaccines, and masses of data have been available for analysis
• There’s been unprecedented cooperation between countries and pharmaceutical organisations, sharing research knowledge that would normally be kept secret.

But what about in your business?

Do you believe, for example, that:

• Lean Manufacturing Principles only apply to large manufacturers or mass production environments?
• Lean Manufacturing is about getting rid of people?
• You’ve got a ‘lean business’ because you’ve got little or no cash or people?
• The business has low risk because it’s ‘going well’ based on cash in the bank and work in the pipeline?
• There’s not much that can be done to improve your business because it’s been improving every year and it’s better than most of your competitors and you’re an expert in your industry?

In our experience, the businesses that excel, long term, are those whose leaders know there’s always a better way, and are active in seeking it. They’re not simply relying on their peers as a source of knowledge…but looking further afield, to other industries and to people who can bring fresh eyes to their business.

We get a kick out of being those fresh eyes seeing business leaders take knowledge and know-how that we share with them and turn it into tangible results and competitive advantage. Knowledge that we’ve gained over many years from many businesses, in many industries in many different situations.

Our strong recommendation to you as a business leader, is to bring new eyes and knowledge into your business…just make sure they’re eyes with very broad experience so that they’ve seen more than just your industry.

If a business doesn’t change, then sooner or later it’s left behind…overtaken by its competitors. So, change is necessary for a business to survive and grow.

People with Authority can force change upon subordinates within their business, but when subordinates don’t understand the need for the change or how it will affect them personally, they typically go into ‘self-protection mode’ and try to keep the status quo, either overtly, or more insidiously, covertly. So, change isn’t always welcomed with open arms.

Effective leaders don’t need to rely on hierarchical authority. They earn trust and they lead so that others will follow. Importantly, they remove barriers to change.

Common barriers to change are:

• people don’t see the need for change. They have a false sense of security because things are going ‘ok’ or ‘well’ and they don’t see the inherent risk of not So, they become complacent;
• they’re in their comfort zone, afraid of the risks that change may introduce; afraid of making mistakes;
• they can’t see the benefits the change can bring, because those benefits are outside their current sphere of experience. Simply put, they don’t know what they don’t know, and so they don’t know how much it’s actually costing them to ‘do nothing’;
• they don’t know WHAT to change to, or HOW to make the change.

As business mentors and change agents, we see these factors play out time and time again, and they need to be addressed from both logical and psychological stand-points.

To make people more comfortable with moving forward, the key questions they need answered are:

• “Does it really work?”
• “Will it work for me?”
• “Do I trust you (the leader or change agent)?”

If you think about it, each of these is about the person understanding, assessing and trying to minimize risk to themselves personally and to the business. To minimize their perceived risk, we recommend three things:

• Demonstrate how it works – for example, by some form of physical demonstration, logical model, or experiential learning event;
• Use case-studies and ‘social proof’ – that is, show them that it works for other people who are just like them and in similar situations. For example, in engaging with various businesses, we typically use case studies and video testimonials from other clients (with their permission of course).  This not only confirms that it works, but also helps build trust.
• Build trust by going at a pace that is ambitious yet not too uncomfortable for the individuals concerned. That means we take baby steps where necessary, so that the individual sees there is minimal risk while they make progress. The results that they experience builds confidence and gives them a taste of what could be, while trust is developed at the same time. As their confidence, certainty and trust increases, so can the pace of change.

We’ve been doing this a long time now, and we find it works pretty well.  As a leader in your business, if you haven’t tried this approach, give it a go. You might be surprised at how much more accepting of change some of your people may become. A key point is don’t just expect that people are ready and willing to change—you need to get them ready. We liken it to the saying, ‘When the student is ready, the teacher will appear’.

There’s more to it of course. Sometimes the importance and urgency for change is so intense that you don’t have the luxury of taking baby steps. None the less, if the leader already has the trust of his or her people, then the change will be more readily supported and more effectively implemented.

Getting past resistance is one thing, but if you really want to make headway, you need to be engaging the hearts and minds of your people to help drive the changes. That’s where much of the psychology comes in—getting people to take ownership of the change and pride in the outcome. We like to call it ‘Getting your people on the Change Train’.

If you’re ready and interested in learning more, check out our Performance Upgrade Accelerator Program, where we go into more depth, outlining a tried and proven 8-Step Process for Successful Change.