Product quality vital for success: McKinsey

Several global companies with strong brands and great reputations have suffered huge quality-related shocks in recent years.

Consulting major McKinsey & Company in its whitepaper on quality, released at the 23rd CII National Quality Summit 2015, said quality concerns present a major risk, if not addressed.

David Keeling, senior partner and director, McKinsey, said a prominent sports-car maker recalled thousands of cars due to fire and air bag problems. A toy manufacturing company recalled hundreds of thousands of toys because of contamination concerns. Some of these quality issues led to a loss of lives.

Setbacks such as these have prompted the direct involvement of CEOs, MDs and Presidents, and in some cases even cost them their jobs.

Keeling said, “These challenges span industries and geographies. Companies need to work hard to ensure they are maintaining the highest quality standards at all times. Even companies with strong brands and quality reputations need to focus on setting higher aspirations and continuously improving their quality systems.”

Quality matters more than most imagine. It impacts not just brand perception, but has stark cost implications when clouded by question marks. Most companies understand quality as the cost of rejects, rework or warranty costs, impacting 1.5 to 4 per cent of revenue.

“They fail to account for the fact that quality shocks can affect 5 to 20 per cent of revenue and the equivalent market cap,” he added.

The cost of a quality lapse includes market losses and remediation expenses. Revenue losses can reach 20 per cent of company sales and potential product withdrawals. Compliance crises have caused permanent market share losses of up to 10 per cent and remediation can lead to 20 per cent or more long-term increases in unit costs.

A global manufacturer of pharmaceutical and consumer goods lost revenues close to a billion dollars due to a consent decree. Another had to shut down one of its facilities for remediation, curtailing over-the-counter sales by approximately 20 per cent. To reinstate a particular product in the market, it was compelled to offer significant price cuts.

The speed with which quality shocks snowball into negative impact is astounding. With the ever-expanding reach of the internet and social media, a major product recall can become public knowledge in less than six hours, and the affected company’s stock price can drop in less than 24 hours.

When an organisation is already fire-fighting, there is little time to prepare a public response for damage control. The pace at which issues escalate into major quality shocks is accelerating dramatically. Easy internet access today compared to a decade ago means that discussions about the product start trending on social media sites, interest in the company peaks, and related searches on web engines like Google increase drastically, Keeling added.