For a more intuitive understanding, some scholars have drawn the following analysis charts. The chart shows that the increase in profitability is mainly due to three main areas: higher sales, higher production costs, and lower production costs.
First, improving product quality can enhance consumers' perceived value. When you think a product is well-made and well-designed, you're usually willing to pay more for it. This is known as "cognitive value". Consumers are willing to pay more for what they perceive as "better" products**, and "better" ratings often come from improved product quality.
When the quality of the product is recognized by consumers, the market demand naturally increases. People are always happy to recommend their favorite high-quality products to friends and family, thus forming a word-of-mouth effect. This positive cycle leads to an increase in sales, and the increase in sales directly corresponds to an increase in revenue.
Finally, let's talk about cost. Often, the reduction in production and service costs can directly improve a company's profit margins. And high-quality products mean improved compliance quality, resulting in lower rework rates, fewer defects, and more efficient production processes. Together, these factors can significantly reduce production costs and thus increase profits.
The cost of quality (COQ) is generally divided into four main categories:
Prevention costs: Expenses incurred to prevent quality issues, such as training, process improvement, design reviews, etc.
Evaluation costs: The expenses used to detect and evaluate quality issues, such as testing, inspections, audits, etc.
Internal Failure Costs: The expenses required to find and fix internal quality issues, such as rework, repairs, scrapping, etc.
External Failure Costs: Expenses incurred for quality issues that occur externally, such as warranties, recalls, customer complaints, etc.
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By categorizing and analyzing these costs, companies can identify which areas need improvement and what strategies should be adopted in terms of quality management.
According to a study by the International Lean Six Sigma Institute (ILSSI), the cost of quality accounts for about 20 to 35% of the turnover of enterprises abound. Therefore, controlling the cost of quality will effectively increase the profitability of the company, and Yousi Academy estimates that when the company can improve the ability of the process, from three sigma to six sigma, the company's quality cost is expected to be reduced to at least 1% of turnover.
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Some quality costs are difficult to observe or easy to ignore, and it is not enough to look at the failure rate of the final product or the customer's return. As a result, the term "hidden factory," coined by Dr. Armand Feigenbaum, is often used to describe the difference between the performance it takes to solve a problem and rework a part.
Many of the lost sales caused by poor quality, low inventory, and the like cannot be explained by traditional accounting methods. An inefficient process can also produce a good product, but it is also a waste of resources if it is not optimal.
The Yous Academy Six Sigma certification course is a very meaningful attempt at a detailed study of the cost of poor quality, and most companies don't have the time and resources to conduct such a pre-action assessment. It would be desirable to have an external organization to help with the reform effort or to use a time-based costing approach, so this approach must be adopted across the organization.
Ensuring that opportunities are quantified in an ongoing manner is a key role for the finance department. The most common approach is to start with the general ledger and pay attention to the accounts dedicated to tracking the cost of quality, such as rework, waste, scrap, warranty claims, etc., which can help identify some other costs that can provide a solid foundation for the company to drive Six Sigma in the future.