Cost of Poor Quality, Essay Example

According to A. Blanton Godfrey of North Carolina State University, the term “Hidden Factory” was first coined by management consultant Joseph M. Juran during a speech to senior management personnel in Japan, circa 1952. As Juran described it, after realizing that company waste was the sole reason for costs associated with poor quality, he came up with the concept of “Hidden Factories” which he defined as a company possessing “two manufacturing plants that made products and one that produced scrap.” At this speech, Juran asked the members of the audience if they had ever considered “how much they could improve profits by finding their hidden factories and closing them,” a question that apparently shocked the audience due to its overall simplicity (“Making Money by Working Smart”).

Blanton also provides some excellent examples related to “Hidden Factories” which in effect are costs that result in poor product quality. It should be mentioned that these “Hidden Factories” are not physical entities, such as a plant or factory that manufactures goods and products for mass consumption; rather, they are hidden costs which if eliminated would result in more profit. One example refers to an anonymous company that discovered that its “standard practice of negotiating the lowest transportation costs” resulted in “owning” or possessing a particular product for thirty days rather than a week, meaning that the product remained in the warehouse for extra time which could have been used to create profit. As Blanton notes, this scenario is about equal to 30% of the company’s annual profit margin (“Making Money by Working Smart”).

Another example is related to labor turnover costs which for many businesses remains as an important problem, especially in service-oriented companies which tend to have high turnover rates regarding their employees. But in the industrial sector, such as with a company that manufactures consumer electronics, “experienced employees produced five times as many items per day” with higher quality as contrasted with employees with less than three months’ experience on-the-job. But nonetheless, the company experienced a 20% turnover rate, due to the fact that in order to “keep salaries as low as possible, it was losing trained employees” to its numerous competitors which resulted in the loss of money related to production. Obviously, retaining employees with the greatest amount of experience on-the-job and who turn out high quality products would have helped to lower the costs, aided of course by raising the salaries which would have acted as an incentive for experienced employees to remain at the factory (Blanton, “Making Money by Working Smart”).

This same scenario holds true in relation to lost capacity, such as shutting down machines that cost more to operate.  As Blanton describes it, in order to help reduce the cost of raw materials, many manufacturing companies “create downtime” or a specific length of time in which a machine is shut off. However, companies have slowly come to realize that by lowering the amount of time that an expensive machine is shut down and by properly maintaining it, they can increase their percent capacities by as much as 40%. Thus, as Blanton explains it, this is equivalent to adding a brand-new factory without having to make any capital investment (“Making Money by Working Smart”).

Several more precise and detailed examples related to “Hidden Factories” and the cost associated with producing poor quality products and services includes a printing company and an ISP or Internet Service Provider, such as AT&T and Earthlink. The first company is related to what are known as non-value-added process actions or those that consume resources and fail to add “actual value and quality into a final product,” such as in a brochure or pamphlet. One of the results of this process is a lowering of quality via waste which creates product defects. Thus, the “Hidden Factory” here are the costs associated with waste and the time that it takes employees to distinguish a high quality item from an item with defects (Rizzo 22). One other area is extra processing time which generally lowers the quality of a product. This involves on-the-job actions like “fixing errors and mistakes” and especially quick-fix solutions that more often than not results in lowering product quality (Rizzo 23).

As to the Internet Service provider, the “Hidden Factory” here which lowers the quality of customer service is the amount of time a consumer needs to spend on the phone with company representatives in order to apply for a new type of service, such as wireless access for a home computer. The most wasteful part of this is the inclusion of legal terms in the phone conversation via the representative and the company’s requirement for certain types of identification which it usually does not need. Obviously, the “Hidden Factory” is time wasted which only lowers customer service quality which leads to a loss of satisfied customer who then decide to switch to a competitor.

Overall, “Hidden Factories” have existed since the beginning of business enterprises in a country like the U.S. However, many American companies are now changing course in order to help lower costs which in the long run will lead to better quality products and services for all consumers.

Works Cited

Godfrey, A. Blanton. “Making Money by Working Smart.” Quality Digest, Web. 2006. 6 Aug. 2014. <http://www.qualitydigest.com/nov02/columnists/agodfrey.shtml>.

Rizzo, Ken. “Seeing the Hidden Plant: Hunting for Waste!” Web. 2011. 6 Aug. 2014.<http://ci14.printing.org/p/wp-content/uploads/2013/10/TheMagazine2011_3_Rizzo_Hidden_Waste.pdf>.