Executive Summary
Margins are being squeezed across the board for many organizations
Rising tariffs increase input costs while labor shortages are driving inefficiencies and wages higher
Many organizations are responding by cutting costs broadly, but leading firms are optimizing how they invest in quality
The ones that invest correctly see lower cost of poor quality (COPQ), stronger margins and more resilient operations
The shift squeezing margins from all directions
The tariffs might be new and the labor constraints might be on-going, but many companies have seen their effects before. Namely, in tighter margins.
Although tariffs increase the cost of materials and components often with little warning or control, organizations have been dealing with the challenge of maintaining margins while finding the right talent to fill in gaps for as long as businesses have existed.
Sometimes, the response is to freeze hiring, cut budgets and delay investments, but those actions can reduce throughput, increase overtime costs and introduce variability into production and service delivery. And all that leads to future problems that eat away at margins, such as:
More defects due to overextended teams
Slower response times to quality issues
Increased scrap, rework and warranty exposure
Of course, these costs rarely show up immediately in the earnings reports. Over time, though, they chip away at those margins. It’s one of the invisible taxes many executives can get caught underestimating.
What the leaders are doing to loosen the belt
Top-performing organizations are examining the quality investment opportunities that can provide the most revenue or at least stop the hemorrhaging from the cost of poor quality (COPQ).
Whether the market’s volatile or calm, quality is one of the few levers that can both reduce costs and protect revenue at the same time. Sometimes it requires spending more. Sometimes it requires reducing costs. Usually, it’s both.
So when should you approve new spending initiatives vs clamp down on the budget? Here’s how to choose.
Increase spending where it reduces system-wide inefficiency
In these environments, even modest investments, particularly in connected quality systems, can significantly reduce scrap and rework, audit findings and compliance risk, and customer complaints and returns.
The ROI comes from eliminating waste caused by disconnection. You should invest more in quality when:
Processes are fragmented across systems, spreadsheets and teams
Data is delayed or unreliable
Root causes are difficult to identify
The goal is to look for systems that truly connect your quality systems and automate quality processes.
Decrease spending where quality tools don’t deliver value
Evaluate which tools and resources lead to spending drain. Anything inefficient needs to go. That includes tools that:
Duplicate functionality
Lack adoption across teams
Fail to produce actionable insights
Here, you can eliminate spending on quality when it doesn’t translate to measurable outcomes. A good quality management system (QMS) can optimize your quality processes so that they contribute directly to margin protection.
What you can do now to protect margins
Quality is no longer only about risk reduction and compliance, and you can’t treat it as a static cost. There’s risk in overinvesting in low-impact tools, underinvesting in high-impact process improvements and missing opportunities to offset tariff and labor pressures. To determine where you should cut and where you should spend, do the following:
Reassess quality spend as an ROI factor instead of a cost factor
Identify areas where disconnected processes are driving hidden costs
Eliminate tools or systems that do not produce measurable improvements
Prioritize investments that improve visibility, speed and cross-functional alignment
Engage quality leaders directly to quantify the cost of poor quality and the opportunity to reduce it
Conclusion
Tariffs and labor shortages are forcing difficult trade-offs, but they also reveal where inefficiencies have been hiding. Quality is one of the few areas where strategic investment can both reduce costs and protect revenue. Executives who treat quality as a set of levels they can pull and push will be better positioned to sustain margins in an increasingly constrained environment.
To see how manufacturers are responding to the current economic climate and how they plan to invest in quality this year, see our full 2026 Pulse of quality in manufacturing report.