Understanding Total Quality Management - II

Cost of Quality

The reason quality has gained such prominence is that organizations have gained an understanding of the high cost of poor quality. Quality affects all aspects of the organization and has dramatic cost implications. The most obvious consequence occurs when poor quality creates dissatisfied customers and eventually leads to loss of business. However, quality has many other costs, which can be divided into two categories. The first category consists of costs necessary for achieving high quality, which are called quality control costs. These are of two types: prevention costs and appraisal costs. The second category consists of the cost consequences of poor quality, which are called quality failure costs. These include external failure costs and internal failure costs. The first two costs are incurred in the hope of preventing the second two.

Prevention costs are all costs incurred in the process of preventing poor quality from occurring. They include quality planning costs, such as the costs of developing and implementing a quality plan. Also included are the costs of product and process design, from collecting customer information to designing processes that achieve conformance to specifications. Employee training in quality measurement is included as part of this cost, as well as the costs of maintaining records of information and data related to quality. Appraisal costs are incurred in the process of uncovering defects. They include the cost of quality inspections, product testing, and performing audits to make sure that quality standards are being met. Also included in this category are the costs of worker time spent measuring quality and the cost of equipment used for quality appraisal.

Internal failure costs are associated with discovering poor product quality before the product reaches the customer site. One type of internal failure cost is rework, which is the cost of correcting the defective item. Sometimes the item is so defective that it cannot be corrected and must be thrown away. This is called scrap, and its costs include all the material, labor, and machine cost spent in producing the defective product. Other types of internal failure costs include the cost of machine downtime due to failures in the process and the costs of discounting defective items for salvage value.

External failure costs are associated with quality problems that occur at the customer site. These costs can be particularly damaging because customer faith and loyalty can be difficult to regain. They include everything from customer complaints, product returns, and repairs, to warranty claims, recalls, and even litigation costs resulting from product liability issues. A final component of this cost is lost sales and lost customers. For example, manufacturers of lunch meats and hot dogs whose products have been recalled due to bacterial contamination have had to struggle to regain consumer confidence. Other examples include auto manufacturers whose products have been recalled due to major malfunctions such as problematic braking systems and airlines that have experienced a crash with many fatalities. External failure can sometimes put a company out of business almost overnight. Companies that consider quality important invest heavily in prevention and appraisal costs in order to prevent internal and external failure costs. The earlier defects are found, the less costly they are to correct. For example, detecting and correcting defects during product design and product production is considerably less expensive than when the defects are found at the customer site.

External failure costs tend to be particularly high for service organizations. The reason is that with a service the customer spends much time in the service delivery system, and there are fewer opportunities to correct defects than there are in manufacturing. Examples of external failure in services include an airline that has overbooked flights, long delays in airline service, and lost luggage. Now let’s look at two approaches that can help companies with continuous improvement: the Plan – Do – Check– Act (PDCA) cycle and benchmarking.

The Plan– Do–Check– Act Cycle

The plan – do – check – act (PDCA) cycle describes the activities a organization’s needs to perform in order to incorporate continuous improvement in its operation. This cycle is also referred to as the Shewhart cycle or the Deming wheel. The circular nature of this cycle shows that continuous improvement is a never ending process. Let’s look at the specific steps in the cycle.

Plan

The first step in the PDSA cycle is to plan. Managers must evaluate the current process and make plans based on any problems they find. They need to document all current procedures, collect data, and identify problems. This information should then be studied and used to develop a plan for improvement as well as specific measures to evaluate performance.

Do

The next step in the cycle is implementing the plan (do). During the implementation process managers should document all changes made and collect data for evaluation.

Study

The third step is to study the data collected in the previous phase. The data are evaluated to see whether the plan is achieving the goals established in the plan phase.

Act

The last phase of the cycle is to act on the basis of the results of the first three phases. The best way to accomplish this is to communicate the results to other members in the company and then implement the new procedure if it has been successful. Note that this is a cycle; the next step is to plan again. After we have acted, we need to continue evaluating the process, planning, and repeating the cycle again.

Benchmarking

Organizations implement continuous improvement by studying business practices of organizations considered “best in class.” This is called bench marking. The ability to learn and study how others do things is an important part of continuous improvement. The bench mark organization does not have to be in the same business, as long as it excels at something that the organization doing  he study wishes to emulate. For example, many companies have used Lands’ End  to benchmark catalog distribution and order filling, because Lands’ End is considered a leader in this area. Similarly, many organizations have used American Express to benchmark conflict resolution.

Today’s customers demand and expect high quality where organizations do not make quality a priority risk long run survival. World class organizations such as General Electric and Motorola attribute their success to having one of the best quality management programs in the world. These organizations were some of the first to implement a quality program called, Six Sigma, where the level of defects is reduced to approximately 3.4 parts per million. To achieve this, everyone in the company is trained in quality. For example, individuals highly trained in quality improvement principles and techniques receive a designation called “Black Belt.” The full time job of Black Belts is to identify and solve quality problems. In fact, Motorola was one of the first companies to win the prestigious Malcolm Baldrige National Quality Award in 1988, due to its high focus on quality. Both GE and Motorola have had a primary goal to achieve total customer satisfaction. To this end, the efforts of these organizations have included eliminating almost all defects from products, processes, and transactions. Both organizations consider quality to be the critical factor that has resulted in significant increases in sales and market share, as well as cost savings in the range of millions of dollars.

Employee Empowerment

Part of the TQM philosophy is to empower all employees to seek out quality problems and correct them. With the old concept of quality, employees were afraid to identify problems for fear that they would be reprimanded. Often poor quality was passed on to someone else, in order to make it “someone else’s problem.” The new concept of quality, TQM, provides incentives for employees to identify quality problems. Employees are rewarded for uncovering quality problems, not punished. In TQM, the role of employees is very different from what it was in traditional systems. Workers are empowered to make decisions relative to quality in the production process. They are considered a vital element of the effort to achieve high quality. Their contributions are highly valued, and their suggestions are implemented. In order to perform this function, employees are given continual and extensive training in quality measurement tools.

To further stress the role of employees in quality, TQM differentiates between external and internal customers. External customers are those that purchase the company’s goods and services. Internal customers are employees of the organization who receive goods or services from others in the company. For example, the packaging department of an organization is an internal customer of the assembly department. Just as a defective item would not be passed to an external customer, a defective item should not be passed to an internal customer.

Team Approach

TQM stresses that the quality is an organizational team effort. To facilitate the solving of quality problems, it places great emphasis on teamwork. The use of teams is based on the old adage that “two heads are better than one.” Using techniques such as brainstorming, discussion, and quality control tools, teams work regularly to correct problems. The contributions of teams are considered vital to the success of the company. For this reason, organizations set aside time in the workday for team meetings. Teams vary in their degree of structure and formality, and different types of teams solve different types of problems. One of the most common types of teams is the quality circle, a team of volunteer production employees and their supervisors whose purpose is to solve quality problems. The circle is usually composed of eight to ten members, and decisions are made through group consensus. The teams usually meet weekly during work hours in a place designated for this purpose. They follow a preset process for analyzing and solving quality problems. Open discussion is promoted, and criticism is not allowed. Although the functioning of quality circles is friendly and casual, it is serious business. Quality circles are not mere “gab sessions.” Rather, they do important work for the company and have been very successful in many firms.

The importance of exceptional quality is demonstrated by The Walt Disney Company in operating its theme parks. The focus of the parks is customer satisfaction. This is accomplished through meticulous attention to every detail, with particular focus on the role of employees in service delivery. Employees are viewed as the most important organizational resource and great care is taken in employee hiring and training. All employees are called “cast members,” regardless of whether they are janitors or performers. Employees are extensively trained in customer service, communication and quality awareness. Continual monitoring of quality is considered important and employees meet regularly in teams to evaluate their effectiveness. All employees are shown how the quality of their individual jobs contributes to the success of the park.