Total Quality Management: Cost, Gurus and Customer Service - Essay Example

Total Quality Management: Cost, Gurus and Customer Service Introduction The advent of Total Quality Management has completely revolutionized existing strategies on achieving organizational efficiency and business success that it has been compared to the prodigious changes in communication ushered in by the IT revolution. Some of the so-called quality gurus that the new management concept engendered even see some parallels between its far-reaching benefits for business and the Industrial Revolution. This is mostly because business success under TQM is more than a balance in financial statements, positive profit margins or full production capacity. It even looks beyond the capability to offer competitive prices or deliver products on time. TQM also encompasses such previously glossed-over factors as overhead, cost of quality and, most important, customer satisfaction. Total quality describes the culture, attitude and organizational structure of a company that strives to provide customers with products and services that fully satisfy their needs. This culture requires quality in all aspects of a company’s operations, harnessing processes that do it right the first time and eliminate all defects and waste from the entire operation. TQM was wielded into a coherent operating philosophy in Japan in the 1950s in its search for better methods to stimulate product quality. Its wisdom and usefulness caught the interest of W. Edward Deming and Joseph Juran who in the 1960s weaved into the Japanese concept their own ideas of quality generation. The TQM strategy was thus enriched by Deming’s statistical process control and Juran’s teamwork and plan-do-check-action concepts. In 1962, all three quality circles combined as TQM was registered with the Japanese Union of Scientists and Engineers as a workable concept of organizational process. By the 1980s, when Japan was rising as a global economic power, TQM was picked up by US and European companies. It was institutionalized in 1988 with the establishment of the European Foundation of Quality Management and has since become the basis for the granting of such quality achievement awards as the International Standards Organization 9000 and British Standards 5750. To implement TQM successfully, an organization must bring its eight key elements into play. These are ethics, integrity and trust, which serve as the TQM basic foundation; training, teamwork and leadership which act as the building blocks; recognition as the roof; and communication as the binding mortar. Based on the strong foundation of ethics, integrity and trust, the building blocks of training, teamwork and leadership are set in place to reach the roof of recognition. Communication then binds all the elements together to work for the accomplishment of the TQM objectives. In so doing, there are three things to consider: the cost of quality, the counsel of quality gurus, and customer satisfaction. I. Cost of Quality The cost of quality is the extra time, effort and money spent by a company for preventing poor-quality products or services from reaching the consumers. In the words of Crosby, P. (1979), it is the price to pay for non-conformance. The cost of poor quality (Juran, J.,1988). As such, the cost of quality is distinguished from the company’s expense on raw material, production and labor in that it involves, for the most part, activities on reworks, returns and customer complaints. There are four known types of quality cost: 1. External failure cost – this is associated with defects found after the customer receives the product, the cost incurred in processing customer complaints, returns, recalls and warranty claims. 2. Internal failure cost – the cost of quality associated with defects found before the customer receives the product, which is spent mostly on scrap, rework, re-inspection, re-testing, material review and material downgrade. 3. Integration/appraisal cost – the cost allotted on measuring, evaluating and auditing processes to determine the degree of a product’s conformance to quality standards. Such processes may include inspection, testing, audits and calibration of measuring equipment. 4. Prevention cost – this is the cost involved in preventing poor-quality products such as activities on new product review, quality planning, supplier surveys, process reviews, education and training and maintaining quality improvement teams. Although the cost of quality is separate from production costs, the company bottom line benefits handsomely when the flaws of a product are discovered early in the production stage. The sooner a production error is found, the less quality cost a company will sustain thus influencing a decrease in production costs (Kaner, C., 1996). Estimates were that the costs entailed by seeking and correcting mistakes in a product come up to five times more than the actual production and manufacturing cost. The company coffers are also deprived of at least 40 per cent of sales that goes into the necessary remedial work on a defective product. Surprisingly, literature on quality cost analysis is rare even in Japan where quality management amounts to a gospel. Companies that put quality-cost approaches into practice are even rarer. Schiffauerova, A. & Thomson, V. (2006) expressed dismay at the fact that despite the interest of the academic community in cost of quality methods, this strategy is seldom used in TQM programs. “Most companies do not have an idea of how much profit they are losing through poor quality,” the pair observed. For this reason, few companies set aside a quality budget and fewer exert efforts to monitor quality costs. The problem could be that most of the required cost of quality is hidden from view and when it does exposes itself, it is difficult to measure and quantify. Measuring a possible return on quality expense is indeed difficult to measure. But the few companies that adopted the cost of quality concept were noted to have succeeded famously in reducing quality costs and enhancing consumer acceptance of their products or services. Based on the experience of these companies, there are two popular cost-of- quality models: the opportunity cost and process cost models. The first model invokes the expression “lost opportunity” since it represents the possible profit or revenue missed by the company when its poor-quality products turned off customers. The second model refers to quality cost incurred from flaws in a process, not in a product or service. The UK-based Rank Xerox used the opportunity cost model when it found that copiers and papers from competitors were enjoying better sales, losing money in the process. After pinpointing the manufacturing defects, the company proceeded to execute the cost of quality concept by bringing its products closer to the customers. In time, Rank Xerox achieved an 83 per cent reduction in quality cost and brought higher satisfaction to customers. Another company, GEC power systems division, availed itself of the process cost approach because its facilities and employees were scattered in several places, making process control difficult. With this cost of quality method, GEC facilitated better understanding and interdepartmental communication. When a product turns out pretty bad as to cause injury and death to customers, the quality cost that should be paid is enough to sink a medium-size company. Even the giant General Motors in the US was believed to have staggered in 1992 when it settled a multimillion-dollar case with a family in Alabama whose 7-year-old grandchild died in a vehicular accident caused by a faulty fuel injector manufactured by GM. After a long-drawn court battle, the Alabama supreme court ordered GM to pay the family involved $42 million in damages representing the amount saved by the company for not having a recall or otherwise notifying its purchasers of a problem in the fuel injector. This was precisely the cost of quality that GM failed to take into account. The quality costs that GM should have paid to avoid such a nasty accident and the resulting drain on its resources include technical support, refund and recall, warranty and liability costs and investigation of customer complaints. Even after the tragedy, GM continued to bleed in terms of public relations work to soften its impact, production and shipping of a new product, lost sales and customer goodwill, penalties and other legal costs. For companies seeking to avoid such a massive quality cost, experts warn against rushing the implementation of a cost of quality method. Kaner, C. (1996) believes a quality cost approach is bound to fail if not carried out one at a time. For example, a new product that is still being fine-tuned is scheduled for market launch on July 1. The tendency is for the company to drum up interest for the product beforehand, so it may start an advertising campaign on, say, June 10. But the fine-tuning of the product is delayed so the launch has to be moved until December. All that advertising money would then be lost. --------------------------------------------------------------------------------------------------------------------- References 1. Crosby, P. (1979). “Quality is Free.” McGraw Hill, New York 2. Juran, J. & Gryna, F. (1988). “Quality Costs.” 4th Edition, Juran’s Quality Control Handbook, McGraw Hill, 1988. 3. Perry, J. & Mesch, D. (1997). “Strategic HR Management.” Public Personnel Management: Current Concerns, Future Challenges, New York 4. Kaner, C. (1996). “Quality Cost Analysis: Benefits and Risks.” Jan. 1996. 5. Schiffauera, A. & Tomson, V. (2006). “A Review of Research on Cost of Quality Methods and Best Practices.” International Journal of Quality and Reliability Management, vol. 23, no. 4, 2006. II. Quality Gurus The buzzwords which capture the essence of quality management were created by people like Juran, Deming and Philip Crosby who were credited with transforming the theory into a workable and functional concept. To Crosby, quality management is operating with “zero defects” and doing it “right the first time.” Juran and Deming called it “fitness for use” and “plan-do-check-action,” respectively. Juran, one of the world’s leading quality theorists, came up with his Quality Control Handbook in 1951 and has since advocated that companies pay close attention to quality-related costs as a critical factor in their continued profitability. In a sense, he blazed the trail that Deming and Crosby treaded later, improving and bringing the concept up to date. Crosby became famous for the zero-defect program that he started as director of quality for the Pershing missile project at Martin-Marietta Corp. in the US. After the undertaking succeeded in reducing manufacturing defects in the missile project, Crosby brought his idea to ITT where he started the Quality College for company employees. Encouraged by its growing popularity, Crosby forthwith established his own Quality College in Florida. In Crosby’s view, quality is “conformance to requirements, not elegance” and that the cost of quality should be spent on prevention, not inspection or correction. Thus, any activity on cost of quality should focus on improving the process and nothing else since once you improve the process, the cost of quality will take care of itself. The cost of imperfections, if corrected, could yield immediate benefits to a company’s bottom line and on customer relations, he maintained. For this reason, he sees huge investments as necessary for training and support activities to eliminate errors and recover the costs of waste. On the idea of zero defect, Crosby argued that it should be the standard for performance, the cost of quality the measurement of quality based on that concept. This should be expected in work performance in the same way that we choose to patronize an airline with a record of zero accident, or a surgeon with a reputation for zero fatality. But Crosby’s focus on process as the be-all and end-all of quality cost undertakings, an idea shared by Deming, may be a bit misplaced. By concentrating on the process cost model at the expense of the opportunity cost model, a company is likely to miss out on possible revenues and other intangible benefits derived from a positive market perception of its product. It should be noted that “process” implies activities within the confines of a company while “opportunity” suggests impressions at the market. Carlson, D. & Young, S.M. (1993) indicated that the quality cost measured outside of the process model are the non-cost information which is just as important because this represents the attitudes of suppliers and customers – those who supply the inputs of a company and those who receive the outputs of the organization. This attitudinal information must include statements of perception, verbal comments that provide either favorable or unfavorable opinions on one or more activities of a company. Such data are considered crucial in efforts to satisfy the objectives of TQM. As for Deming, he made the issue of quality a modern and vital concern with the following “must-dos:” 1. Instead of looking at short-term profitability, a company must innovate and allocate resources for its long-term needs and those of its customers. 2. Companies must discard the old philosophy of accepting non-conforming products and services. 3. The company should depend on process control instead of mass inspection for quality control. 4. Use statistical data to identify and reduce the two sources of waste – system and local waste. 5. Institute a more thorough and better job-related training program. 6. Create a structure in top management to push for continuous improvement. 7. Instead of quantity, use quality in selecting suppliers. 8. Encourage open, two-way communication in the workplace. Fear to ask questions or report trouble results in great economic loss. Many of these pointers on quality management were taken up in 2003 by BMI, the UK domestic airline which experienced a slump at the time. BMI adopted a quality cost program called “Blue Sky” which reviewed its operational processes, introduced simplicity, used more technology and increase automation to cut manpower costs. The checking-in process was improved and made faster to the delight of passengers. In 2006, the program yielded a 100-million pound-sterling reduction in costs. The huge investments Crosby wanted to see in the area of training was made by another UK company, Hydro Coatings. This money went into training on how to implement cost-of-quality methods that use the prevention type along with the appraisal, external and internal failure types of quality cost. The cost of quality calculation was based on the percentages of the company’s sales and raw materials. In four years, the investment paid off with a 1.6 per cent reduction the cost of quality, from 4.1 per cent to 2.5 per cent. --------------------------------------------------------------------------------------------------------------------- References 1. Watson, J. (2005). “IT Pilots Lead Airline’s Revival.” Computing Business, 07 July 2005. 2. Kaner, C. (1996). “Quality Cost Analysis: Benefits and Risks.” January 1996. 3. Information QLT. http://www.synq.org./INFORMATION?QLT leaders/Joseph.htm. 4. Hugh, J. (2001). “Quality: Engineer on a Disk.” Version1.0, Aug. 31, 2001. III. Customer Service Culture In a quality management approach, assessing the satisfaction level of customers, vendors and employees, in that exact order, takes precedence over efforts to measure performance and organizational activities. Creating products and services that would appeal to customers and satisfy their needs is in fact the reason for being of a business organization. Kaner, C. (1996) says operations management occupies a central role in creating products and services that we all need and rely upon. This is not an easy task what with the rapid changes in the business world and, consequently, in customer preferences. Putting a positive customer service culture at the center of a TQM initiative is in fact the main criteria for the granting of the Malcolm Bridge National Quality Award, which places 30 per cent on a company’s emphasis on customer satisfaction. This and other award bodies give recognition to companies that promote quality as the central customer value and consider it to be a critical success factor for achieving competitiveness. That customer satisfaction is synonymous with quality management is shown by the fact that activity-based studies for TQM are begun in the customer service department and telephone operations. This quickly becomes interwoven with concerns about product costing. The cost of quality then links improvement actions with associated costs and customer expectations. Value engineering is used to increase the value of a product or organization for the benefit of customers. First, a functional description of a product is drawn, then the product’s parts are joined into the functions that those parts perform to generate a functional description with the proper cost estimates. In assessing the product value, customer requirements are balanced with the function costs. This is the essence of the FACT (Functional Administrative Control Technique) model designed by Brian Higgins which uses such slogans as “Resolve customer problems” and “Document customer problems.” Under the FACT model, all the organization’s necessary costs are defined and allocated. To these are added the non-cost information representing the attitudes of customers and suppliers In many cases, Carlson and Young say, companies feel that they have done a complete analysis once they have estimated the total cost of quality associated with a project. This should go further than that. The customer’s external failure costs must be given careful consideration as well, or the companies will be startled by huge costs over decisions that they thought were safe and reasonable. Such costs may come in the form of lawsuits. Expersts say may reduce failure costs without bothering to improve product quality at their own risk. The company, for instance, may charge the post-sale support to customers by reflecting it in the price tag instead of shouldering this cost itself. Or, when entertaining potential customers on the telephone, the company may switch from a toll-free support line to a toll line and leave callers on hold at their expense. This way, the company reduces its quality costs but alienates customers too. Which is no way to promote a corporate culture that strives to provide customers with products and services that satisfy their needs. In 1990, the American Express implemented a quality improvement program called Integrated Payment Scheme (IPS) intended to expand competitive advantages by further improving service and increasing income without increasing costs. The project involved 1,000 employees at the company’s Denver office. The first two things the IPS wanted to know: 1) What can IPS do to boost the company’s services or advance its mission? 2) How do IPS suppliers and customers feel about the reliability of activities performed by the organization, or about the contribution those activities make toward their requirements? The answers gathered by the quality improvement team provide a valuable bank of information on high cost areas, costs for difficult system changes and overhead. Also identified were less tangible but no less valuable opportunities for quality improvement. Once all these shortcomings were pinpointed, ways were found on how to address them. Based on the study, processes for the frontline functions of Amex’s MoneyGram were streamlined. Only two months after the study was completed and the results tabulated, IPS recorded savings in several areas of operation in the amount exceeding $100 million. The net savings were complemented by improvements in this customer service. Analysis of quality cost, as a rule, looks at the company’s costs and rarely at the customer’s possible costs. This is not the correct attitude (Kaner, C., 1996). Like the manufacturer and seller, the customer also suffers quality-related costs when a product is defective. If the product turns out a lemon, the customer has to shell out considerable expense in dealing with it. In some cases, both manufacturer and seller have to pay dearly for a defective product. A case in point is the manufacturer of a fuel tank for Ford Pinto which focused on company costs and gave little attention to the possible cost to customers. When the fuel tanks leaked and exploded in many places, the company paid $200,000 per death, $67,000 per injury and $700 per damaged vehicle. Ultimately, such payment in damages and lawsuits cost the company much more than it saved in quality cost. Conclusion All told, both the company and its customers lose disproportionate sums of money when that company fails to take measures to improve its cost of quality. For the company it means extra expenses on PR damage control, reworks and refunds, damages and lawsuits, etc. For the customers who buy a defective product, it translates into time wasted, lost data and business, embarrassment, repeat purchase, injury or death. Cost of quality measurement and activities should be part of any quality management program or companies become the ultimate loser especially over the long haul. In a cost of quality analysis, customer dissatisfaction and risks of lawsuits must be included, otherwise the analysis is incomplete. Huge costs from lawsuits can come from decisions that were thought to be safe and reasonable. The motive of litigations related to the cost of quality is to transfer some of the costs borne by a cheated or injured customer back to the maker or seller of a defective product. Other than cases for personal injuries, there are plenty of cases for breach of contract, breach of warranty, fraud, violation of truth in advertising laws, etc. The best thing is to heed the advice of the quality gurus about looking closely into failures in an operational system, combating weak spots, and evaluating performance every so often. References 1. Carlson, D. & Young, S. (1993). “Activity-Based TQM at American Express.” Journal of Cost Management, 1993, pp. 48-58. 2. Kaner, C. (1996). “Quality Cost Analysis: Benefits and Costs.” January 1996. 3. Schiffauerova, A. & Thomson, V. (2006). “A Review of Research on Cost of Quality Methods and Best Practices.” International Journal of Quality and Reliability Management, vol. 23, no. 4, 2006. Read More