Quality Management - Principles of Management

An important aspect of product quality is product reliability. A product is said to be reliable when it consistently does the job it was designed for, does it well, and rarely, if ever, breaksdown. Quality management methodologies try to eliminate defects in the process of producinga good or service, thereby producing a more reliable end product. Product reliability canbe a huge source of cost savings for several reasons.

First, if defects are reduced,time and materials are not wasted building products that later have to be scrapped orreworked. Second, if products perform as advertised, the firm will save on warranty costs.Beyond this, if a firm’s products are viewed by customers as more reliable than those ofcompetitors, this can be a source of differentiation and lead to superior pricing, greater demand,or some combination of the two. When demand grows due to a superior reputationfor quality, the firm can realize greater scale economies, which lowers costs.

Quality Management

Thus superior product quality, measured by reliability, can be a source of competitive advantage. Over the last quarter of a century, for example, the rise of Toyota in the global auto industry has in part been due to the company’s superior reputation for product quality, which hasbeen an enduring source of differentiation enabling it to charge premium prices across its modelrange and gain market share.

According to surveys Toyota still has the best quality rankings inthe industry. In 2004 J.D. Power’s Vehicle Dependability Study, which measures quality aftercars have been on the market for three years, ranked Toyota number one with 207 problemsreported per 100 vehicles, compared to an industry average of 269. J.D. Power’s Initial QualityStudy, which measures problems reported in the first 90 days after sale, similarly ranked Toyotanumber one in terms of quality, with a score of 101 against an industry average of 119.

The principal tool that many managers now use to increase the reliability of their products is the six sigma quality improvement methodology. The six sigma methodology is a direct descendent of the total quality management (TQM) philosophy that was widely adopted, first by Japanese companies and then by American companies, during the 1980s and early 1990s.

The TQM concept was developed by a number of American management consultants, including W. Edwards Deming, Joseph Juran, and A. V. Feigenbaum. Originally these consultants won few converts in the United States. However, managers in Japan embraced their ideas enthusiastically and even named their premier annual prize for manufacturing excellence after Deming. See Table for Deming’s steps that should be part of any quality improvement program.

It took the rise of Japan to the top rank of economic powers in the 1980s to alert Western business to the importance of the TQM concept. Since then quality improvement methodologies have spread rapidly throughout Western industry. The six sigma methodology that was the focus of the opening case is widely used today.

The term sigma comes from the Greek letter that statisticians use to represent a standard deviation from a mean: The higher the number of sigma, the fewer the errors. A six sigma production process would be 99.99966 percent accurate, creating just 3.4 defects per million units. Although it is almost impossible for a company to achieve such a low defect rate, the idea behind a six sigma program is to strive toward that goal.

The six sigma methodology is based on what is known as DMAIC, which stands for d efine, m easure, a nalyze, i mprove, and c ontrol. 19 With DMAIC a problem is first defined and quantified; then measurement data are collected to bound and clarify the problem; analytical tools are deployed to trace the problem to its root cause; a solution to the root cause is identified and implemented; and finally the ongoing operations are subject to ongoing control to prevent a recurrence.

Six sigma projects are performed by teams that are led by “black belts,” who are specially trained six sigma experts. Projects normally take three to six months, and a black belt should be able to lead four to six projects a year. The power of the six sigma approach lies in the disciplined methodology it provides for structuring, analyzing, and solving business problems.

Six sigma is a logical problem-solving methodology that in many ways is akin to detective work. Often six sigma analysis can turn up surprising root causes for a specific problem. In one such case a pharmaceutical company was experiencing rapid growth in demand for a new drug, but the drug’s manufacturing line had low yields. Management thought the problem lay in poor-quality raw material from a supplier.

However, six sigma analysis uncovered the real cause of the problem: variation in the temperature in different parts of the production plant. Adjusting the air conditioning system to make sure the entire plant operated at the same standard temperature improved yields by 60 percent and saved the company more than $17 million a year. Moreover, the improved yield let the company postpone a $500 million investment in another production facility.

Despite many examples of success, quality improvement practices are not universally accepted. A study by the American Quality Foundation found that only 20 percent of U.S. companies regularly review the consequences of quality performance, compared with 70 percent of Japanese companies. Another study, this one by Arthur D. Little, of 500 American companies using TQM found that only 36 percent believed that TQM was increasing their competitiveness.

A prime reason for this, according to the study, was that many companies did not fully understand or embrace the TQM concept. They were looking for a quick fix, whereas implementing a quality improvement program is a long-term commitment.

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