ems Co. management. The general estimate is that profitability rises after each customer retention rate increase of five percent. Improved customer satisfaction is the route to greater customer retention, and, in the 1990s, greater product quality is the best way to build consumer satisfaction levels.
Improved quality costs money in the short run. In the long run, however, improving quality generates greater profitability. Poor quality means poor sales in the long run. Therefore, expenditures on quality control may not be looked at as some sort of add on cost. Rather, they must be considered as integral production costs whether the product being produced is a good or a service.
Return on investment has been found to be more a function of product quality than of price, regardless of the type of activity manufacturing, service, construction, and so forth. Data pertaining to these relationships are presented in Chart 1, which may be found on the following page. Quality control refers "to a system . . ., by which assurance is sought that the output produced conforms to specific parameters that define product or service quality." An effective quality control program enhances the ability of an organization to both reduce costs and improve productivity. As a consequence, effective quality control has a positive impact on an organization's profitability.
Return on Investment As A Function of Quality and Price
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Relative Quality ((((((((((((((((((((
Relative Price Low Medium High
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High 17% 18% 34%
Medium 9% 2% 16%
Low 15% 11% 36%
[Source: Miller and Camp, 1985, 87 105] (((((...