The Cost of Transactions

By Philip B. Crosby

Ever since time began, or so it seems, I have been talking and writing about the economic effect on a business that comes from a properly managed quality process. In case after case, organization after organization, accounting results prove it is 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 will revolve around what should be included in calculating the Price of Non-conformance. (That is why we produced the interactive CD ROM on that subject — it explains everything). I also get many e-mail 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 re-examined.

When I talk about creating a "Reliable Organization" I define it as a place where all 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 this if we thought about transactions rather than the organization. How about the cost of transactions?

We begin with identifying the needs of our customer, and then defining the requirements necessary to meet those needs. After that comes describing 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 $3.00 of a maid’s time. We won’t count benefits and overhead. If the laundry is running behind and there are not enough towels for the maid to use then someone has to come back later and put towels in the room.

This is an added cost, at least $1.00, which is a 25% increase in the expenditure for cleaning up a room. The extra work in the laundry adds to the costs.

?Suppose one of our sales persons gets a big order from a client after a lot of diligent work. Suppose he or she transposes a couple of numbers in the order process, which delivers the wrong service or material to the customer. It takes a lot of scrambling around to recover the erroneous stuff and replace it with the right stuff 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.

That is what Price of Non-conformance is all about. There are people all over the company doing things over and wrong. It may be that the requirements are not clear, or correct. It may be that they do not understand their job.