Economic efficiency of product quality and the quality loop

Economic essence and importance of product quality

Quality is the ability of products, works, and services to satisfy specific needs, determined by a set of physical, chemical, biological, and economic characteristics. It is an important technological, economic, and social category.

In agricultural product processing, high quality allows for obtaining more high-quality final products. For example, per unit of various types of final dairy products, less higher-fat milk is needed, or more sugar can be obtained from sugar beet roots with a high sugar content.

A high level of quality increases the demand for products and boosts enterprise profit due to both sales volume and higher prices. The social aspect of quality consists in the fact that the needs of the population are met more fully, their health is improved, and the consumer's unit costs for a high-quality product are reduced — the so-called consumer price, consisting of purchase expenses, i.e., the price of acquiring the product by the buyer, and their expenses related to the product's consumption.

Expenses for the direct consumption of high-quality products are lower, in particular due to less waste, i.e., higher product utility per unit of the consumer's monetary expenditure is ensured. High-quality products are one of the factors of human well-being.

Quality loop and production standardization

Quality is a factor of product competitiveness and is viewed as the sum of its properties expressing its suitability for performing specific functions. It is established during the initial stages of product manufacturing, and quality requirements are maintained until the product reaches the end consumer, i.e., product quality is continuously researched, controlled, and improved.

Quality is determined by a number of components that form the so-called "quality loop", mainly applied to industrial production. A "quality loop" is a closed sequence of measures defining the quality of goods or processes at the stages of their production and operation, starting from the research of needs and market opportunities, i.e., marketing, and ending with the disposal of the product that has served its term.

The stages of the "quality loop" are:

• marketing;
• design;
• planning;
• procurement of raw materials and equipment;
• production and maintenance;
• packaging, storage, sale, and distribution;
• installation, maintenance, and technical support;
• disposal.

Product quality is regulated by standards, including international ones. A standard is a document that establishes general principles and characteristics for various types of activities or their results for general and repeated use.

Any product, including agricultural products, must meet certain consumer requirements. Product quality is characterized by its compliance with these requirements.

Improving product quality contributes to increasing its competitiveness, its price, and sales opportunities. However, the producer must calculate the profitability of quality improvement based on the cost-recovery indicator, comparing additional revenue with additional costs for quality improvement. The economic essence of cost recovery is that this indicator characterizes the revenue per unit of cost.

Example 16.1.

E x a m p l e 16.2. The level of profitability can be judged by the cost recovery indicator. For example 16.1, it is 23%: [(1197-973)/ 973] 100%.

E x a m p l e 16.3. If the maximum product price under specific local market conditions is 710 rubles/cwt, and the actual price is 630 rubles/cwt, then the quality of this product is below the standard: 630/710 = 0,89.

The stimulating function of price is manifested in relation to quality. For certain types of agricultural products, indicators such as fat content, dry matter, gluten, protein, sugar, oil content, cultivar value, etc., are taken into account and stimulated.

Obtaining higher-quality products requires not only adherence to technological requirements but also higher costs for the purchase of new cultivars, pedigree young livestock and poultry, improved seed, machinery, higher wages, etc. Part of the revenue obtained from selling products at higher (stimulating) prices offsets the listed costs, while the other part stimulates the producer. At the same time, quality improvement must be economically profitable for the producer and in demand by the buyer. The mechanism of stimulation through prices consists in increasing the share of profit in the price, as well as in price premiums and discounts.

Among quality parameters and, accordingly, factors of competitiveness, the environmental friendliness of products occupies a special place. The population's need for environmentally friendly products is met by no more than one-third. The raw material for such products is agricultural produce; consequently, there is an increased demand for ecological raw materials. Obtaining them requires an active environmental policy and the allocation of significant funds, mainly state-funded, for environmental protection, the application of special technologies, staff training, and the study and use of advanced domestic and foreign experience. Thus, the experience of organobiological farming in Germany shows that to stimulate environmentally friendly farming, the state applies payments and compensation to producers, various forms of stimulation, develops and implements environmental education programs, organizes quality control and product certification, and facilitates the creation of a competitive market environment.

The current state of quality for certain types of agricultural products in the Russian Federation is shown in Table 16.1. For a number of quality indicators, a positive trend is observed. Improving quality contributes to increased efficiency and a larger market share for the enterprise, which impacts the economy as a whole.

T a b l e 16.1. Quality of agricultural products in the Russian Federation, %

Indicator 2004 2005 2006 2007 2008 Sugar content of sugar beet root crops delivered for industrial 16 17 16 17 16 processing

Sale of milk Highest grade 17 25 30 37 37 I grade 73 68 63 57 57 II grade 8 6 6 5 5 Ungraded 2 1 1 1 1 Sale of chilled milk 59 66 67 73 81

Sale of poultry I category 69 73 73 71 84 II category 22 16 19 21 12 Lean condition 2 3 2 3 2 Substandard condition 7 8 6 5 2