New Metrics

The True Cost of 'Cheap'

All businesses stay alive by being price competitive. After all, if there are no customers to pay for your product, you can’t make sales and without sales there are no revenues. In an ideal world, a business sets its pricing based on the costs it incurs to produce but other businesses compete by offering different pricing (some do choose strategies based on servicing or other value-added activities).

By Cecilia Wandiga | Published 11 years ago | About a 2 minute read

Today’s mass consumerism is fueled by global imports and exports. We all want the best product for the lowest price. However, very little time is spent truly analyzing what is “best.” While “best” definitely encompasses product features and functionality, it should also encompass positive impact. As posited by William McDonough in The Upcycle, instead of products that need to be recycled, how about products that are biodegradable and nourish the earth? Instead of creating jobs, why not create abundance by paying living wage instead of minimum wage? Going to the moon sounded like science fiction for centuries and today it is so common the fact that we have astronauts living in space stations isn’t even headline news.

In order to be able to redefine “best,” we need to redefine what we measure. A key business metric is Cost of Quality (Total Quality Control). Cost of Quality was first defined in 1956 by American quality control expert Armand Vallin Feigenbaum during his tenure as Director of Manufacturing Operations at General Electric. The original definition did not include the cost or value of intangibles (things that should be done). Thus far, there has been no concerted effort to link Cost of Quality to the Triple Bottom Line.

However, for True Cost Accounting (aka True Cost Economics) to occur there needs to be an examination of Cost of Quality that goes beyond profits to include people and planet as well. Following is a proposed revision to the measure:

Cost of Quality

Value distinction becomes readily apparent when the costs of non-conformance are detailed. Those offering “cheap” have to start explaining who is expected to absorb the costs of remediation. Quality, like cream, rises to the top for those who make an effort to follow Crosby’s call for zero defects.