Friction in business and credit as a lubricant of commerce.(selected topic)

British-born economist Ronald H. Coase was awarded the Nobel Prize in 1991 for his work on transaction costs and functioning of the economy. Just 21 when he wrote The Problem of Social Cost, Coase's Law dealt with the proper working of industrial companies in the pre-information era:

"A company must grow to the point where it is self sufficient in all its core requirements."--Coase's Law

This was the old GM and Ford model that required ownership or control of rubber plantations, glass companies, trains, ships and steel companies ... all so that the assembly lines would run smoothly. And then the Information Age happened. Today, via the Internet, we have the ability to locate and track goods and services. Today businesses can focus on what they do best, and farm out the rest. Premium pay for premium work.

Coase wrote that there is friction created in business, and the greater the friction, the greater the cost of doing business. There's the original friction: the acquisition cost of finding vendors/suppliers and of finding customers. There's the ongoing friction of doing business: i.e., transactional costs. And then there's the greatest friction of all: the friction and cost of failure.

Today, quality in your product/service is a given if you're to remain competitive. Yet, many business managers and companies have yet to accept the fact that they must also have quality in their business processes.

The CE0 of a chain of white linen table cloth restaurants estimated that when a meal was sent back, it took 32 to 34 additional meals to make up for the one rejected. A small mistake or miscommunication on price, color, quantity, paperwork, POs, or any number of other things that can go wrong, can easily cost $300 in time and effort for a company to correct. If a company earns a 5 percent profit it would take ($300 X 20 = $6000) $6000 in new sales to cover the cost the failure to do things right the first time.

But that's not the end of the cost of failure. Edward Demming, the quality guru that no one in the United States wanted to listen to after WWII, took his quality message to Japan--and they did listen. Demming wrote that "the true cost of errors is unknown and unknowable." We might be able to figure out what it costs to fix a failure, but we will never know the effect of the failure ...