The relationship between quality, volume and cost

In this blog, Paul Thompson critiques United Airline’s new operations strategy.  In particular, the decision to call this ‘Project Quality’, when it is designed to save the airline $2 billion annually by 2017.  This brings out two interesting points…

First, Thompson – like many people – equates quality with prices or costs.  If something is expensive, it must be high quality; if its cheap, then it’s low quality.  But as we know, this is far too simplistic.   Quality is really about fitness for purpose and value.  It is possible to have high (and poor) quality goods at low prices, as well as poor (and high) quality expensive goods.   Hence its possible for goods and service to be ‘over engineered’, providing features that customers do not want, and hence poor value.  If Project Quality is actually about removing all United’s waste from their systems, then it is appropriately named.

Second, the piece illustrates how apparently minor changes can save very large sums of money in a high volume business.  Thompson identifies that United plan to do this by no longer serving ketchup and garlic bread on their planes, although he does not identify how much this will save.  Instead he gives another example of American Airline saving $40,000 a year by removing olives from their on board salads.  Now this may sound apocryphal – can that level of savings really be made in this way?  Well, it reminds me of a conversation I had with the Catering Manager of one of the UK’s largest charter airlines.  He explained that a few years before, the airline needed to cut costs, so it decided to remove the chocolate from the meal tray.  This cost 1 penny, but because the airline flew 6 million passengers a year it immediately saved £60,000 in direct cost.   Two years later, the company was taken over by a larger firm, who wished to shift the airline more upmarket.  So it reinstated the chocolate, but to a higher quality level, so that each piece now cost 2 pence.  You’ll realise that this added £120,000 to operating cost.  Apparently small decisions can make a big difference to the bottom line in this kind of business.

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