The Taguchi Loss Function is a graphical depiction of loss developed by the Japanese business statistician Genichi Taguchi to describe a phenomenon affecting the value of products produced by a company. Praised by Dr. W. Edwards Deming (the business guru of the 1980s American quality movement),[1] it made clear the concept that quality does not suddenly plummet when, for instance, a machinist exceeds a rigid blueprint tolerance. Instead "loss" in value progressively increases as variation increases from the intended condition. This was considered a breakthrough in describing quality, and helped fuel the continuous improvement movement that since has become known as lean manufacturing.
The Taguchi Loss Function is important for a number of reasons. Primarily, to help engineers better understand the importance of designing for variation. It was important to the Six Sigma movement by driving an improved understanding of the importance of Variation Management (a concept described in the Shingo Prize winning book, Breaking the Cost Barrier[2]). Finally, It was important to describing the effects of changing variation on a system, which is a central characteristic of Lean Dynamics, a business management discipline focused on better understanding the impact of dynamic business conditions (such as sudden changes in demand seen during the 2008-2009 economic downturn) on loss, and thus on creating value.[3]