Monday, 30 January 2012

Balancing and Alignment of Cost and Quality By Edly Ramly

Balancing and Alignment of Cost and Quality

By Edly Ramly

Which one come first PROFIT or QUALITY

It is not always so obvious though.  Most of profit oriented organization will focus on profit. Ask your top management, what will be the answer. If we doesn’t make any profit, how we can employ you! But for quality practitioner, the argument will be different. Same goes to accountant. So which one comes first? Profit comes from cost. Is the profit also will come from quality? Let discuss the issues in setting the prioritisation.

Defining Cost and Quality
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

For Quality, there are many definitions of quality, but the actual meaning and concept is same. Hence used of standard definition from ISO9000 (2005) was recommended. ISO9000 (2005) defined quality as degree to which a set of inherent characteristics fulfils requirements. The requirements include need or expectation whether is stated, generally implied or obligatory. Commonly the need or expectation refers to customers. Woodhouse (2003) stated that the quality has been applied to a number of characteristics such as excellence, value for money, conformance to specifications, transformation, and value added. This definition is more related toward the accomplishing the purpose of the organization where it is consider that if the organization has any of these characteristic is believed to has quality if it is performing necessary act to achieve its goals. On the other hand, Goldgberg and Shmilovici (2003) define quality as the ensemble of features and attributes which characterize a product or a service, and indicate its capacity to provide an implicit or explicit need. This explain that quality is about creating desired physical attributes of the products or services.

Important to balance
the cost and quality

Customer satisfaction and profit both are required to be achieved and should be balance. But quality cannot be scarifies at the cost of bottom line results. However it is a delicate issue and highly depends on the requirement of organization at that point of time. According to organizational excellence principals, Customer Satisfaction should be the ultimate goal of organizational performance. Logically, and as some mentioned above, you achieve positive financial results through positive quality.

Both are

Both are interconnected. In the business world if solely focus on quality and ignore the bottom line, you probably will be out of business sooner or later. And the same will happen if you focus on your bottom line without taking care of your customers.

So, ultimately excellent organizations should achieve "balanced results" in both areas in order to be able to sustain its performance. The other thing, the three principles (1) financial performance (2) customer satisfaction and (3) employee satisfaction and we should not forget our employees and their own satisfaction with the company they work for, the jobs they are doing, the work environment they live in, the career path possibilities they have, and the kind of incentives, Welfare, SAFETY and HEALTH and motivation.

1- Financial Performance - what you want to achieve in financial side
2- Customer Satisfaction - where the financial results come from
3- Employee Satisfaction - who get the job done and satisfy the customers

Any unbalanced/short-sighted policies focusing on one thing and not the other two will ultimately fail in sustaining their business


Now when it comes to the real world, few organizations are able to do both on a continuous base. The balanced score card is the best and the right method to keep your business on the right path towards excellence.

Famous tool is Balance Scorecards

Choosing the right strategy

Strategic thinking has engaged the brains of business leaders for centuries. Organizations always seek to adopt dynamic and effective strategic management to secure proper growth and remain competitive.  Strategic management is necessary to any organisation where there is a rapidly changing environment with adverse competition and surprises which may act as serious threats to organisation stability.  
There are many other different definitions generated from the nature of strategy approach; but they all have one thing in common, which is the aim to maximize the organization performance by enhancing its capability of competition with other organizations functioning in the same competitive environment.

Government sector used
 Classical Approaches

There are many construction
 contractor adopted the survival in th
e jungle strategies
There are different approaches to strategy. Strategists of today must deeply understand the widely used approaches at least, to be efficient in thinking strategically. Whittington (2001) categorized strategy in four basic generic approaches: Classical, Evolutionary, Processual and Systematic which have different perspectives about strategy. In classical approach, the strategy is a rational process of deliberate calculation and analysis designed to maximize long term advantage (Whittington, 2001). Many scholars argued that classical approach is not applicable any more, since classical theory has no mechanism for strategy creation and doesn’t suit the dynamic environments. However, the classical approached still commonly used in government sector.


How about this organization?

In evolutionary approach, the situation is different. Competition is not overcome by detached calculation and analysis but by constant struggle for survival (Cuizon, 2009) or sometime called “survival in the jungle”. Evolutionary approach calls that successful strategies only emerge as the process of the natural selection delivers its judgment. When there are opportunities, the organization just grabs it and maximised as much profit as it can. The quality comes second as long the organizaton get the money as soon as possible. According to Whittington (2001), this means it is the market not managers which makes the important choices (Whittington, 2001). The approach considers markets too tough and unpredictable to plan for long term strategies. Many organizations that adopted these strategies on sustain a short term growth and it commonly seen in organizations that grab the government project such as construction.

NESTLE (NESCAFE, MILO) used which strategy?

Processual approach is similar to evolutionary approach in the sense that it doubts the value of rational long term planning but it does not agree of leaving the profit-maximizing outcomes to the market since market is full of mess and confusion (Cuizon, 2009). Processual approach states that strategy is an emergent process of learning and adaptation (Whittington, 2001). It adopts a pragmatic view aiming to make the sophisticated processes simple in light of the fact that the environment is not ideal or perfect.   The approached have been adopted in the ISO9001 Quality Management System. However the approaches separated the social requirements such as on occupational health and safety and environment issues.

Systematic approach has a relativist position. It believes that organisation is able to plan and act effectively. It is much less pessimistic than Processual approach about people’s capacity to carry out rational plans of action and much more optimistic than evolutional approach about its ability to define strategy regardless of market forces (Whittington, 2001). The approach argues that strategies must be sociologically efficient to understand the firm’s environment. This means that there should be no separation between economic activities and social factors to ensure success. Which include employee, branding and loyalty

Conclusion Remarks

ISO9001 adopted the 
process approaches

Is branding and Loyalty Important?
Systemic or Processual

Isn't it is question of priorities rather than implying we do one but rather than the other. The point about quality being where the financial results come from but as in all things, the mission of every business is economic performance, meaning satisfying customers in a way that generates a profit to be invested in creating and satisfying new customers.  Balancing the both required processual and systemic strategy.
However, this strategic approaches offer an insight into the motivation behind the company’s vision and what strategies they most likely implement. Strategists agree on a common point that strategic management process includes analysis, choice, implementation and feedback. Prior to start with strategic management process for any firm, the strategist should ensure that the firm already has a well defined and clear mission and vision statements.  On next issues of CQ Review, the author will explore on organization vision, mission, policy and objectives.

Author: Edly Ramly is also the founder for EFR Group

 Whittington, R. (2001) What is Strategy – and does it matter?, Second edition, Thomson Learning, London. Cuizon, G. (Feb. 2009), Theories of Action in Business Strategy: Classical, Evolutionary, Processual and Systemic Approaches. Retrieved on March 22, 2009 from the world wide web:
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Thursday, 26 January 2012

Toward Cost And Quality Excellences

Quarterly Magazine by International Cost and Quality Engineer Society

CQ Review
Click To Download

Happy new year 2012. Download free magazines first issue of CQ review the first issue. CQ review will be issued on a quarterly basis and the special edition.

CQ review Goal
Review the issue of CQ magazine "Cost and Quality Engineers Society" aims to share knowledge and add value in the field of Cost and Quality. Scope of Cost and Quality is divided into four, namely:
1. Increased cost of management performance
2. Increased customer satisfaction
3. Increase employee performance through motivation health, safety and environmental
4. Increased value added to society and the environment