The Source of Corporate Profits: A Comprehensive Exploration
The Core Pursuit and Real - world Dilemma of Corporate Profits
In the vast ocean of business, enterprises are constantly forging ahead, and their ultimate goal shines like a bright lighthouse, which is to generate profits, simply put, to make money. For corporate management and bosses, profit is the "universal language" they can best understand and focus on. The formula for profit is straightforward, like a fundamental law in mathematics: profit equals revenue minus cost. From this formula, we can clearly see that the higher the revenue and the lower the cost, the greater the profit will be, just like a snowball rolling down a hill. However, in actual corporate operations, achieving this goal is by no means easy. It's like a towering mountain waiting for enterprises to climb.
Nowadays, competition in the business world is becoming increasingly fierce. Every industry is like a battlefield, especially in those traditional and mature industries where the competition is extremely intense. In these industries, the price differences between products of different enterprises are getting smaller and smaller, just like a group of soldiers wearing similar uniforms, making it difficult to tell them apart. In such a situation, it's extremely difficult for enterprises to increase revenue by raising product prices without reducing sales volume. It's like trying to raise the price of your goods in a crowded market without losing customers. So, reducing corporate operating costs has become another "lifesaver" for many enterprises to increase profits.
Unfortunately, there are very few enterprises that can accurately calculate their costs and clearly know which products are profitable and which workshops are losing money. It's like walking in the dark without knowing where the money is being wasted. How can one know where to save costs? Many enterprises have tried various traditional methods to reduce costs. They change product designs, hoping to make products more concise and efficient; replace equipment, expecting higher production efficiency from new machines; and improve process layouts, attempting to make the production process smoother. A more direct approach is to ask raw material suppliers to lower prices, but this often leads to a series of quality problems, like opening Pandora's box. Although it temporarily reduces costs, it may bring greater troubles to the enterprise. When these traditional methods are exhausted, enterprises find it extremely difficult to further compress costs. They are like magicians longing for magical powers, always hoping to be like the Monkey King with 72 transformation abilities to come up with new ways to reduce costs, but it's easier said than done.
Some people may think that checking financial statements can help find areas to save costs. However, traditional financial statements are prepared based on actual transactions and events. Their main purpose is to let enterprises understand their operating and financial conditions. They are like a photo, only reflecting the results of corporate operations, but unable to reveal the sources and reasons for cost occurrence. They are not designed to reduce costs, so it's difficult to see the real reasons behind costs through them. And quality cost, as a very important cost for enterprises, is like a hidden treasure in the dark, easily overlooked by most enterprises.
Quality Cost: The Exploration of Concept and Origin
So, what exactly is quality cost? Quality cost refers to all the expenses incurred by an enterprise to ensure and improve the quality of its products or services, as well as all the losses caused by failing to meet product quality standards and failing to meet the needs of users or consumers. It's like an invisible shadow always accompanying an enterprise's production and operation activities.
The concept of quality cost originated in the 1950s. Two pioneers in the field of quality management, Feigenbaum and Juran, proposed this concept respectively. At that time, Feigenbaum was working at General Electric (GE). With a unique perspective, he wrote a report for his boss in monetary terms about the relationship between quality non - conformity and costs. This report was like a bombshell, attracting the boss's high attention. The boss adopted his suggestion, and GE became one of the pioneer enterprises, along with IBM and AT&T, to implement quality cost management. Feigenbaum's personal experience is even more legendary. When he joined General Electric, he was just an employee in a pre - college entry - level position. But with his unremitting learning spirit, he obtained a doctorate in economics from the Massachusetts Institute of Technology during this period and continuously explored in practice. Eventually, he became the global manufacturing operations and quality control manager at GE, achieving both fame and fortune.
Feigenbaum is significantly different from other quality personnel. His bachelor's, master's, and doctoral degrees are all focused on management and economics, and he is relatively weak in science and engineering. In the traditional group of quality management personnel dominated by science and engineering backgrounds, he stands out. In the field of quality management, many predecessors have science and engineering backgrounds. For example, Shewhart obtained a doctorate in physics from the University of California, Berkeley in 1917 and completed the classic work Statistical Methods from the Viewpoint of Quality Control in 1939. Another example is Deming, who obtained a doctorate in theoretical physics from Yale University in 1928 and also taught statistics at an institute established by the Department of Agriculture to train agricultural engineers. If Feigenbaum, an economics doctor, were to compete with physics doctors in science and engineering knowledge, it would be like using a bow and arrow against a cannon, a self - defeating attempt. However, Feigenbaum didn't get discouraged. He fully utilized his advantages and worked on the front - line. He discovered the secret of the "hidden factory". He pointed out that in fact, every factory has a hidden factory, and its production capacity may account for 20% - 40% of the total production capacity.
Feigenbaum's advantages are mainly reflected in three aspects. First, he can view quality and production operations from a financial perspective better than ordinary quality personnel. He is like an observer standing on a mountaintop, able to see a broader picture and understand the impact of quality issues on the company's finances. Second, he understands quality and production operations better than ordinary financial personnel. He has in - depth knowledge of every aspect of production by being on the front - line, and can accurately grasp the root causes of quality costs. Finally, he knows very well how to communicate with senior management and what kind of reports can make management excited and adopt his suggestions. That is to focus on "money" because for corporate management, profit and cost are their top concerns. And two of these advantages are exactly what traditional quality personnel lack.
Meanwhile, Juran more straightforwardly pointed out that the costs that can be saved in quality are like a "gold mine". In addition, many experts such as Harrington, Jean - Marie Gogue, Genichi Taguchi, Shigeo Senju, Norikazu Mizuno, and Hideo Hayashi have also actively promoted the concept of quality cost. Their efforts have gradually attracted more widespread attention to the concept of quality cost. Subsequently, various organizations and countries have also begun to pay more attention to quality cost. The international standard ISO 8402 - 1986 in 1986 and the British standard BS 4778 - 1987 in 1987 both gave definitions of quality cost. China has also kept up with the trend, introduced the concept of quality cost, and formulated a series of corresponding standards. In 1986, China promulgated the national standard GB 6538.1 - 86 Terms for Quality Management and Quality Assurance, which defined the concept of quality cost. In 1988, GB/T 10300.5 - 88 Guide to Quality Management and Quality Assurance Elements further explained the meaning and content of quality cost. In 1992, GB/T 13339 - 1991 Guide to Quality Cost Management was implemented, but it was abolished on October 14, 2004, and there has been no updated version since then.
Quality Cost Management: The Current Situation of Standards and Industry Supplements
The "T" in GB/T stands for "recommended". With the rapid development of the times, many descriptions in this standard have indeed failed to keep up with the needs of corporate management, and its abolition is reasonable. What's puzzling is that there has been no corresponding upgraded standard issued since then, and the reason is hard to figure out. In terms of standard formulation and reference, there is usually such a path: many standards are first formulated by the US military, then become international standards, and China often directly refers to international standards. However, in the process of reference, there are sometimes problems. For example, errors may occur when copying, and it's difficult to detect these errors during normal reading if they are not discovered in work that requires precise logic such as programming. So, enterprises should also be extra careful when referring to standards.
In 2006, the 41st Order of the Ministry of Finance announced the General Rules for Enterprise Financial Management. Article 36 stipulates that enterprises should establish a cost control system, strengthen cost budget constraints, and implement quality cost control measures. Although there are some problems with the national standard, in addition to the national standard, there are also industry standards for enterprises to refer to. These industry standards are like different bottles. Although the packaging is different, they contain similar "wine" and do not affect the actual use of enterprises. For example, the electronic industry standard SJ/T 10466.4 - 1993 Guide to Quality Cost Management in 1993, the military standard GJB 5423 - 2005 Financial Resources and Financial Measurement of Quality Management Systems in 2005, and the nuclear industry standard EJ/T 699 - 2007 Guide to Quality Cost Management in the Nuclear Industry in 2007.
Composition of Quality Cost: Clear Definition and Practical Impact
Next, let's take a detailed look at the specific composition of quality cost. Different people may view quality cost from different perspectives. To have a unified standard, we base on the national standard and do not discuss some non - mainstream views. Quality cost mainly includes prevention cost, appraisal cost, internal failure cost, external failure cost, and external quality assurance cost.
Prevention cost is the cost incurred by an enterprise to prevent the occurrence of non - conforming products and failures. This is like taking preventive measures before a disease occurs. Enterprises invest funds in quality training, quality planning, etc., aiming to reduce the occurrence of quality problems at the source. Through the investment in prevention cost, enterprises can improve employees' quality awareness and optimize the production process, thereby reducing possible subsequent losses.
Appraisal cost is the cost paid to evaluate whether products meet the specified quality requirements. Enterprises need to conduct inspections, tests, etc. on raw materials, semi - finished products, and finished products to ensure that product quality meets the standards. It's like a strict goalkeeper, conducting multiple checks before products enter the market. Although appraisal cost increases the enterprise's expenditure, it can effectively prevent non - conforming products from entering the market and reduce subsequent losses.
Internal failure cost is the cost lost due to non - compliance with specified quality requirements before product delivery. For example, when products become defective or waste products and need to be reworked or repaired, these processes will consume the enterprise's manpower, material resources, and financial resources. The existence of internal failure cost not only increases the enterprise's production cost but also affects production efficiency and reduces the enterprise's competitiveness.
External failure cost is the cost lost due to non - compliance with specified quality requirements after product delivery, resulting in claims, repairs, replacements, or loss of reputation. Once a product has quality problems after reaching the customer, the enterprise may face claims from the customer and need to repair or replace the product. This not only increases the enterprise's cost but may also damage the enterprise's reputation. Reputation is an intangible asset of an enterprise, and once damaged, it will be very difficult to restore.
External quality assurance cost is the cost paid to provide objective evidence required by users. It includes the costs of special and additional quality assurance measures, procedures, data, verification tests, and evaluations, such as the cost of testing special safety performance by an accredited independent testing agency. This is an additional cost that enterprises pay to meet customers' higher requirements for product quality and is also a way for enterprises to demonstrate their quality strength in market competition. Although external quality assurance cost increases the enterprise's burden, it can improve customer satisfaction and loyalty, bringing long - term benefits to the enterprise.
Exploring the Alarming Height of Quality Costs
In the complex landscape of business operations, quality costs are like a hidden deep - sea area. Just how high they are has always been a mystery lingering in the minds of many managers. Philip Crosby, a master in quality management, once said emphatically that the cost of non - conforming quality can easily reach 15% - 30% of a company's sales revenue. This statement is like a heavy hammer, causing extensive shock and deep thought in the business community.
Imagine a scenario where a company painstakingly expands its market and boosts sales, yet a significant proportion of its revenue is mercilessly gobbled up by non - conforming quality costs. This is undoubtedly a severe challenge to the company's profitability. It's like a huge ship sailing in the business sea. Seemingly moving forward, in fact, a large amount of its power is being consumed by invisible undercurrents. However, when we try to explore the specific quality cost data of various industries, we seem to be caught in a thick fog.
In this era of information explosion, the materials about quality costs in different industries are not only scarce but also out - of - date. I'm like a persistent treasure hunter, rummaging through a vast sea of materials. After a long and arduous search, I finally managed to find some data. I'd like to explain to you in advance that these data can only be used as a reference. They are like the faint stars in the night sky, only allowing us to roughly sense the vague outline of the magnitude of quality costs.
These hard - won data come from the statistics of another master in the field of quality management, Juran, presenting the proportion of quality costs to sales. Although these data may not accurately reflect the actual situation of various industries at present, they still open a window for us to understand quality costs. Looking out through this window, we can see that quality costs occupy a non - negligible share in enterprise operations, and we can also realize the urgency and importance of effectively managing and controlling quality costs. Just like in a fierce battle, understanding the enemy's troop deployment is the key prerequisite for formulating strategies. Only when enterprises clearly recognize the height of quality costs can they take targeted measures, stand firm in the fierce market competition, and achieve sustainable development.
This is a statistics of 87 foreign companies from a few years ago.
What is the appropriate proportion of each sub item within the quality cost?
Similarly, the opinions of these quality experts are also inconsistent.
The necessity of implementing quality cost
I have discussed with several senior quality professionals multiple times, and they generally believe that it should be determined based on the company's own situation.
If a company has not even established the most basic quality system, there is no need to aim too high. Consolidating the foundation is the top priority. If the operation mode of the enterprise itself is very simple and the quality cost is not high, there is no need.
Quality Cost Statistics: A Multifaceted Tool for Unleashing Corporate Potential
In the operation and management of enterprises, we can't help but wonder: What exactly are the reasons for conducting quality cost statistics? Is it simply because corporate managers believe that the expected benefits of uncovering corporate potential through quality cost statistics will outweigh the input costs? Clearly, the answer is far from being so one - dimensional.
Quality cost statistics should not be regarded merely as an ordinary financial task. Instead, it is a powerful tool for improving product quality, optimizing operational processes, and revealing potential problems in various departments. It's like a precise scalpel that can penetrate every corner of an enterprise to identify hidden issues.
Take the discrete manufacturing industry with a large number of components as an example. Even with advanced information systems, the chaotic management of drawings remains a persistent headache for many enterprises. The drawings in the hands of suppliers, those used by the production department, and those from the R & D department often differ from one another. This is like a ticking time bomb that can trigger a series of serious problems at any time, such as production halts, rework, backlogs of semi - finished products, and delivery delays. To address these issues, enterprises have formulated numerous rules and regulations. However, old problems remain unsolved while new ones keep emerging. Usually, all departments get along harmoniously on the surface, but once a problem breaks out, they often resort to temporary solutions and conduct campaign - style rectifications, lacking the internal driving force for sustainability.
This is where the role of quality cost statistics becomes prominent. If the losses caused by drawing - related problems can be accurately calculated, it will be easy to closely link the immediate interests of each department and employee with the interests of the enterprise. The goal is not simply to implement rewards or punishments but to align the interests of all departments and employees with those of the enterprise, enabling them to work together towards the same goal. Instead of evaluating performance through indirect indicators such as pass rates, overtime hours, rework quantities, customer return quantities, and delivery delay times, it is better to measure losses directly in monetary terms. Of course, it is not possible to achieve a complete monetary measurement of all problems overnight, but it is a direction worthy of effort.
Are the benefits of quality cost statistics limited to this? Certainly not. What can be counted from a financial perspective are merely expenses such as overtime pay, inspection fees, material losses, and customer fines. These are just the tip of the iceberg. The truly difficult - to - solve problems are like huge ice blocks hidden beneath the ice surface. They seem scattered, random, and elusive, yet they constantly affect the operational efficiency and effectiveness of the enterprise. These problems occur in the enterprise every day but are difficult to capture and eliminate. Only by successfully eliminating these hidden problems can an enterprise undergo a transformation and become an excellently - operated team, standing firm in the fierce market competition.
Incalculable business losses: the cost black hole behind quality issues
In the cost accounting system of enterprises, the losses that can be accurately calculated by accountants only account for 20% -25% of the total losses, while the remaining losses of up to 75% -80% are like giant beasts hidden in the dark, difficult to capture by accounting books. To give everyone a more vivid experience of these difficult to quantify cost situations, let's take a look at a few specific examples.
Imagine that during the production process, the customer's production line was forced to stop running due to the use of incorrect drawings. At this point, the general manager had to personally visit the client and apologize. In this process, the large amount of work time invested by the general manager passed silently like flowing water, but this time cost was never included in the calculation of losses. Moreover, due to this incident, customers' confidence in the company has been greatly reduced, which is likely to lower the company's supply share. But how can we measure the losses caused by a decrease in customer confidence with numbers? It's like a mist, vague and elusive.
Looking back at the chaotic production site, employees work in such an environment, causing panic and a significant decrease in production efficiency. But how should we count the losses caused by the chaos on the production site? It is not a clear calculation method like the loss of raw materials or depreciation of equipment, but an intangible and subtle loss.
What's even more headache inducing is that when companies discover and attempt to fix these issues and return to normal operations, they also need to invest a lot of extra time and money. However, how can these additional costs be accurately calculated? They are like huge parts hidden beneath an iceberg, difficult to fully excavate and quantify.
Next, we will delve into this issue from a profit perspective. On the grand stage of market competition, the prices of most products are not unilaterally determined by inpidual enterprises, but rather the result of competitive games among peers. Enterprises are like racing on a crowded track, and in order to stand out and increase profits, they often have to turn their attention to the internal workings of the enterprise and tap into their own potential. This is like a treasure hunter searching for hidden wealth within their territory, improving the profitability of the enterprise by reducing those difficult to count but tangible losses, and standing invincible in fierce market competition.
Exploring Effective Ways to Reduce Quality Costs
When an enterprise realizes that it's time to conduct quality cost statistics and extract profits from quality, the primary challenge it faces is: how should it carry out this work? Should it adopt a piecemeal approach of "treating the headache when there's a headache and the foot pain when there's a foot pain", or initiate a large - scale, all - out transformation?
In my opinion, a wiser approach is to "treat the headache when there's a headache and feel the way across the river by groping for stones", starting from specific points and gradually expanding to the whole, and delving deeper step by step. Take an enterprise with SMT workshops, motor workshops, stamping workshops, injection - molding workshops, and assembly workshops as an example. It's advisable to choose the injection - molding workshop, which seems to have a relatively simple process flow, as a starting point, and conduct a detailed statistical analysis of the links where there may be more problems.
Specifically, the following aspects of costs can be focused on:
- Proportion of non - conforming product costs: Determining the proportion of non - conforming products in the total cost helps to clearly understand the impact of quality problems on costs.
- Time cost of secondary manual trimming: Secondary manual trimming consumes additional manpower and time. Statistics on this part of the cost can identify inefficiencies in the production process.
- Overtime costs caused by non - conformities: Overtime due to non - conforming products increases the enterprise's labor cost. Statistical analysis of this cost can evaluate the additional expenses caused by quality problems.
- Rent for exceeding the planned site occupation: Occupying the site beyond the planned scope incurs rent expenses, which reflects the rationality of production management.
- Subsequent losses caused by non - conformities in color or size: Non - conformities in color or size not only affect the production progress of the subsequent assembly workshop but may also cause losses to real customers. Accurately estimating these losses is crucial.
- Supply - chain costs caused by quality non - conformities: Quality problems lead to an increase in working hours and business expenses in the supply chain. Statistics on this part of the cost can comprehensively understand the chain reaction of quality problems.
According to relevant data, the quality cost in the plastics industry accounts for approximately 14.70% of the sales revenue. If an enterprise can effectively control quality costs, the increase in profit will be quite significant.
In the actual production process, there may be many hard - to - detect quality cost problems in the injection - molding workshop. For example, due to non - conforming products and urgent customer needs, the workshop directly takes materials from the warehouse without accounting registration, which leads to subsequent material shortages; inadequate mold maintenance results in the temporary addition of trimming workers, causing semi - finished products to be piled up everywhere and the material flow in the workshop to be in chaos; backward size control methods for multi - mold and multi - cavity products lead to assembly problems for customers, requiring emergency on - site repairs or replenishment; the omission of the annealing process for nylon products causes a large number of products to crack after half a year, leading to returns and claims; lax control of raw materials, with suppliers mixing too much recycled materials or non - conforming chemical additives, results in a decline in product performance or color changes, and so on.
The employees in the injection - molding workshop are on the front line of production and are most aware of these wastes and problems. However, how to mobilize their initiative and get them actively involved in the work of reducing quality costs is a huge challenge.
Next, let's look at a real - life example of a machining enterprise. As a second - tier supplier in the automotive industry, this enterprise supplies products to many well - known first - tier suppliers. The following are the real data of this enterprise in 2021:
- The sales revenue was 180 million yuan.
- The non - conforming product rate reached 12.5%, among which the scrap rate was 6.7%. There were also non - conforming products worth nearly 10 million yuan stored in the isolation warehouse waiting for rework.
- Due to quality problems in the supplied products, the number of customer complaints reached 122, and the enterprise was required by customers to conduct third - party inspections at a cost of 1.6 million yuan.
In the fourth quarter of 2021, the enterprise hired a new quality management team and conducted statistics on the quality costs of that year. Previously, this enterprise had no concept of quality cost at all. Now, based on the statistical data of quality costs and following the 80/20 principle, the enterprise focuses on reducing the non - conforming product rate internally and reducing customer complaints externally. It has established project teams to rectify these two key items of quality cost.
Currently, the improvement results are gradually emerging. In January 2022, the number of customer complaints decreased significantly, only 2, and the inspection cost was only more than 20,000 yuan. If this trend can be maintained and continuously improved, by the end of this year, both the number of customer complaints and the inspection cost will be greatly reduced, and the cost savings will be directly converted into the enterprise's profit.