If a company decides to increase productivity by decreasing the cost of of the product by using cheaper parts if you are into manufacturing. You may decide to cut down cost of producing the product by using a cheaper software. If you are into services, you may decide to lay off your more expensive experienced employees and hiring cheaper, less inexperienced employees. In the short run this makes sense. You will produce the same number of products, sell them for the same price and have cheaper cost.
In the short run cutting cost by cutting quality makes sense. You will produce the same number of products and it will cost you less money and will show a higher productivity value. But a few months later the cheaper parts begin to break down. Now you need repair and you order parts. So manufacturing is delayed due to mechanical breakdown. You will have no production during the down time. Add to that the cost of parts and labor to fix the broken parts. So within a few months, the cheaper parts are already costing you more money. Now because you were using cheaper parts, the product itself is not of the same quality. Your customers start to complain about the drop in quality. You lose customers.
Your product is being returned for repair and that is adding to the cost and it is angering your customers. Some of the products may have to be recalled because the drop in quality may actually be a hazard. The recall has a large cost, The drop in quality can lead to lawsuits, also adding to the cost of production. The customers that you do mange to keep, now want to pay a lower price. Who will pay for a luxury car that has the quality of a cheap car?
Of course, it is important to save on cost in manufacturing. It will increase productivity but only if you find a way to cut cost without cutting the quality of the product.
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