Six Sigma
Last Word


Phil's Journal
Philip Crosby

The Cost of Transactions

Ever since time began, or so it seems, I've been talking and writing about the economic effects that properly managed quality processes have on a business. In case after case, organization after organization, accounting results prove it's cheaper and more productive to learn how to do the right thing right the first time. I doubt that anyone seriously disagrees with that determination.

 What they seem to miss is the basic idea.

 Whenever I make a speech, at least a few of the questions revolve around what should be included in calculating the price of nonconformance (PONC). (That's why we produced the interactive CD-ROM on this subject--it explains everything). My e-mail is filled with questions about the cost of quality and PONC. All of this I welcome, but the discussion seems to me to be about the details, not the concept. The problem with this is that nothing gets done while the details are being examined and reexamined.

 When I talk about creating a "reliable organization," I mean an organization in which all of the transactions are completed correctly each time, and relationships with employees, suppliers and customers are successful. It occurred to me that it might be easier to understand all of this if we thought about the transactions rather than the organization. How about the cost of transactions?

 We begin by identifying our customer needs, and then defining the requirements necessary to meet those needs. After that we describe the transactions necessary to implement the requirements. This is where the rubber meets the road, where the work is actually accomplished. We need to know how much we plan to spend to do that work, and then how much we actually are spending.

 Suppose one of our transactions involves a maid cleaning up a hotel room and preparing it for the next occupant. Suppose that exercise takes 20 minutes and the cost for doing that is $3 (we won't count benefits and overhead). If the laundry is running behind and there are not enough towels for her to use, then someone has to come back later and put towels in the room.

 That's an added cost, at least $1, which is a 25-percent increase in the expenditure for cleaning up a room. The extra work in the laundry adds to the costs.

 Suppose one of our salespeople gets a big order from a client after a lot of diligent work. Suppose he transposes a couple of numbers in the order process, which causes the wrong service or material to be delivered to the customer. It takes a lot of scrambling around to recover the erroneous product and replace it with the right product, all the while holding the customer's hand to keep them from striking us. What is the increased cost of this transaction?

 Think small and the concept is easier to deal with. There are people all over the company having to redo processes because they were performed incorrectly the first time. It may be that the requirements aren't clear or correct, or it may be that they don't understand their jobs. That's what PONC is all about.


About the author

 Philip B. Crosby, a popular speaker and the founder of Philip Crosby Associates--now PCA II--is also the author of several books, including Quality and Me: Lessons from an Evolving Life (Jossey-Bass, 1999). To order a number of products, visit his Web site at www.philipcrosby.com or call (800) 223-3932. .

Menu Level Above

This Menu LeveL

Menu Level Below

[Contents] [News] [WebLinks] [Columnists]
[Harrington] [Crosby] [Six Sigma] [Godfrey] [Townsend] [Last Word]

Copyright 2000 QCI International. All rights reserved.
Quality Digest can be reached by phone at (530) 893-4095. E-mail:
Click Here

Today's Specials