Managing Quality

Integrating the Supply Chain

S. Thomas Foster

Chapter 1

Differing Perspectives on Quality

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Major Themes
n Today, supply chains compete, not individual firms.
n A firm’s supply chain, upstream and downstream, constrains and
enables the firm.
n Firm’s must manage quality in their supply chain, upstream and
downstream.
n Quality management is not “owned” by any one of the functional
areas such as operations, HRM, marketing, etc. All functional areas
must own their “quality management” processes.
n There is no one way to improve quality. Firms must use the
contingency approach to assess the current position of the firm
and identify an effective strategy for improvement based on a clear
understanding of their company, market, customers, suppliers, and
the quality management alternatives. Improvement is based on the
contingent variables that are operative in the firm as it exists.

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 Differing Perspectives on Quality
Chapter 1

Ø Chapter Overview
Ø What is Quality?
Ø Differing Functional Perspectives on Quality
Ø The Three Spheres of Quality
Ø Other Perspectives on Quality
Ø Arriving at a Common Perspective

In chapter 1 through 3, we form the basis for the

contingency approach. To apply( quality improvement on
a contingency basis we need to understand the foundation
that has been laid by leaders in the quality movement.
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What is Quality?
Cross-functional and Cross-firm Flows

n Quality management involves flows: process flows, information

flows, material flows, and fund flows. Each of these flows has to
operate efficiently, effectively, and with quality. Like a river, we have
upstream and downstream flows. The sums of these flows make
up the supply chain for a firm.
n Using the supply chain as the model for competition, we must
internalize external upstream and downstream processes from
raw materials to after-sale service.
n The firm must integrate differing functions, expertise, and
dimensions of quality. This integration requires flexible, cross-
functional, problem-solving and employees who can adapt to
rapidly changing markets.

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 What is Quality?
Product Quality Dimensions

n Garvin’s definitions of quality based on the perspective of the

viewer (perception is reality)

n Transcendent - quality is intuitively understood but nearly

impossible to communicate

n Product-based – quality is found in the components and attributes

of a product

n User-based – if the customer is satisfied, the product has good

quality

n Manufacturing-based – if the product conforms to design

specifications, it has good quality

n Value-based – if the product is perceived as providing good value for

the price, it has good quality

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What is Quality?
Product Quality Dimensions

Garvin’s dimensions (measures) of product quality

Ø Performance Ø Durability
Ø Features Ø Serviceability
Ø Reliability Ø Aesthetics
Ø Conformance Ø Perceived Quality

These different dimensions of quality are not mutually

exclusive.

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 What is Quality?
Product Quality Dimensions

ØEfficiency with which a

ØPerformance
product achieves its
ØFeatures intended purpose

ØReliability
ØConformance
(

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What is Quality
Product Quality Dimensions

ØPerformance Ø Attributes that

supplement the product’s
ØFeatures basic performance – bells
ØReliability and whistles

ØConformance

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 What is Quality
Product Quality Dimensions

ØPerforms consistently
ØPerformance
over the product’s useful life.
ØFeatures

ØReliability
ØConformance

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What is Quality
Product Quality Dimensions

ØAdherence to quantifiable
ØPerformance
specifications within a
ØFeatures small tolerance – the most
traditional definition of
ØReliability quality
ØConformance

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 What is Quality
Product Quality Dimensions

Ø Tolerate stress or Ø Durability

trauma without failing
Ø Serviceability

Ø Aesthetics
Ø Perceived Quality

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What is Quality
Product Quality Dimensions

Ø A product is serviceable if Ø Durability

it can be repaired easily
and cheaply
Ø Serviceability

Ø Aesthetics
Ø Perceived Quality

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 What is Quality
Product Quality Dimensions

Ø Subjective Ø Durability
characteristics such as
taste, feel, sound, look.
Ø Serviceability

Ø Aesthetics
Ø Perceived Quality

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What is Quality
Product Quality Dimensions

Ø Quality as the customer Ø Durability

perceives it - image,
recognition, word of mouth.
Ø Serviceability

Ø Aesthetics
Ø Perceived Quality

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 What is Quality
Service Quality Dimensions

Parasuraman, Zeithamel, and Berry provide service quality

dimensions (measures):
Ø Tangibles
Ø Service Reliability
Ø Responsiveness

Ø Assurance
Ø Empathy

Services have more diverse quality attributes than products

because of wide variation created by high customer involvement.

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What is Quality
Service Quality Dimensions

Ø Tangibles Ø Physical appearance of

the facility, equipment, and
Ø Service Reliability personnel

Ø Responsiveness
Ø Assurance

Ø Empathy

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 What is Quality
Service Quality Dimensions

Ø Tangibles Ø The ability of the service

provider to perform the
Ø Service Reliability promised service
Ø Responsiveness
Ø Assurance

Ø Empathy

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What is Quality
Service Quality Dimensions

Ø Tangibles Ø The willingness of the

provider to be helpful and
Ø Service Reliability
prompt in providing service
Ø Responsiveness
Ø Assurance

Ø Empathy

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 What is Quality
Service Quality Dimensions

ØTangibles Ø The knowledge and

courtesy of the employees
Ø Service Reliability and their ability to inspire
trust and confidence
Ø Responsiveness
Ø Assurance

Ø Empathy

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What is Quality
Service Quality Dimensions

ØTangibles Ø Caring individualized

attention from the service
Ø Service Reliability company
Ø Responsiveness
Ø Assurance

Ø Empathy
In service “If you are in it for the money, you probably won’t
survive.” If employees are constantly focused on efficiency,
they will not give the customers the feeling that they care. There
is no empathy, so there are no return customers.

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 What is Quality?
Why does it matter that different definitions of quality exist?

§ Different functional areas have different definitions of quality.

§ However, we want everyone in all functional areas to execute from

the same playbook with regard to the meaning of quality for the firm.

§ Cross-functional teams must share a common definition of quality

so these diverse teams will be working for a common goal. All
functional areas must focus on what they need to do to meet the
customer’s definition of quality.

§ However, cross-functional teams have poor communication because

of their different vocabularies, priorities, and cognitive styles.

§ As organizational processes become more cross-functional, many of

these communication issues will resolve themselves.
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What is Quality?
Differing Functional Perspectives on Quality
Functional perspectives include:

Ø Supply Chain
Ø Operations
Ø Strategic Management
Ø Marketing
Ø Financial
Ø Human resource

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 What is Quality?
Differing Functional Perspectives on Quality
Supply Chain Management (SCM) Perspective

n Supply chain management (SCM) grew out of the concept of the value
chain.

n The value chain includes inbound logistics, core processes (operations

and marketing), and outbound logistics – processes which directly add
value to the product or service.

n Functions such as HRM, IS, and Purchasing support the core processes
in the value chain – non-value added processes which provide a
context for the value chain processes.

n Upstream activities include all of those activities involving interaction with

suppliers.

n Downstream activities include shipping and logistics, customer support,

and focusing on delivery reliability.

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What is Quality?
Differing Functional Perspectives on Quality
Supply Chain Management (SCM) Perspective

n Supplier development activities include evaluating, training, and

implementing systems with suppliers, such as electronic data
interchange (EDI) to link customer purchasing systems to supplier
enterprise resource planning systems (ERP).

n Supplier qualification involves evaluating supplier performance with

regard to conformance rates, cost levels, delivery reliability, etc. using
supplier filters, such as ISO/TS 16949 (an automotive standard), ISO
9000:2000, and QS9000.

n Value stream mapping flowcharts processes to determine where

customer value is created as well as identifying non-value-added
process steps. Value stream mapping also involves analyzing processes
from a systems perspective such that upstream and downstream effects
of core process changes can be evaluated.

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 What is Quality?
Differing Functional Perspectives on Quality
Operations Management (OM) Perspective
§ The OM view of quality is rooted in the engineering approach and was
the first functional field of management to adopt quality as its own.

§ OM is concerned about product and process design. However, rather

than focusing on only the technical aspects of these activities, OM
concentrates on the management and continuous improvement of
conversion processes.

§ OM uses the systems view which is the basis for quality management.
The systems view maintains that product quality is the result of the
interactions of several variables (manpower, materials, methods,
machinery, feedback, environment, time, and technology) which
comprise a system, and these variables and their interactions are the cause
of quality problems.

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What is Quality?
Differing Functional Perspectives on Quality

Operations Management (OM) Perspective

Planning
Process Customer
Organizing
Controlling Control Feedback

Inputs Conversion Process Outputs Customer

§ OM has an operations-marketing interface which focuses

priorities on the customer in the product and process design and
operations decisions.
§ Ferdows and Demeyer link the strategic view of OM to quality
management with their sand-cone model: quality is the basis on
which lasting improvement in other competitive dimensions (reliability
- dependability, cycle time - speed of delivery of concept to
market, and cost - efficiency) are accomplished.
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 What is Quality?
Differing Functional Perspectives on Quality

n The Sand Cone Model for Priorities

Cost (Efficiency)
Cycle Time (Speed)
Reliability (Dependability)
Quality

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What is Quality?
Differing Functional Perspectives on Quality
Strategic Management Perspective

Ø For Quality Management to be pervasive in a firm it needs to be included

in all of the firm’s business processes including Strategic Planning.

Ø Strategy is the planning process used by an organization to achieve a

set of long-term goals. This planned course of action must be cohesive
and coherent in terms of goals, policies, plans, and sequencing to
achieve quality improvement.

Ø Company strategies are based on a mission (why the organization exists)

and core values (guiding operating principals that simplify decision
making).

Ø Mission and core values influence organizational culture, a major

determinant (and sometimes roadblock) to the successful implementation
of quality improvements.

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 What is Quality?
Differing Functional Perspectives on Quality
Strategic Management Perspective

Ø The ultimate goal of strategic quality planning is to aid an

organization to achieve sustainable competitive advantage.

Ø Alignment refers to consistency between different operational sub-

plans and the overall strategic plan.

Ø Madu and Kuei propose a strategy process based on plan-do-

check-act:

Ø plan – strategy formulation

Ø do – implement strategy in a pilot
Ø check – evaluate pilot implementation and make adjustments
Ø act – full scale strategy implementation

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What is Quality?
Differing Functional Perspectives on Quality
Financial Perspective
Ø “Will quality management pay us financial benefits?”
The answer is an unqualified “maybe.”

Ø Deming made the first theoretical link between quality improvement and
financial results: Quality Improvement leads to reduction of defects,
improved organizational performance, and increased employment.

Ø Finance is concerned with the relationship between the risks of investments

and their potential return on investment to maximize return for a given level of
risk.

Ø Finance professionals communicate using an accounting language: the

language of financial management is money.

Ø Quality professionals must translate the quality concerns into the costs of
(poor) quality in terms of lost sales, inspection, scrap, and rework.

Ø The pursuit of quality does not safeguard a company against bad management
because of intervening variables (e.g., products that don’t meet customer
needs).
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 What is Quality?
Differing Functional Perspectives on Quality

Financial Perspective - The Deming Value Chain

Improve Quality

Decrease Costs

Improve Productivity

Capture Market

Stay in Business

Provide More jobs

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What is Quality?
Differing Functional Perspectives on Quality

n Finance professionals believe the law of diminishing marginal

returns applies to quality improvement.
Total Quality Costs =
Sum of Losses +
Cost Costs of Improving Quality

Losses Due to Costs of Improving

Poor Quality Quality

Minimum Minimum Sum of

Cost Losses + Costs
Quality
Optimum Quality Level
The financial perspective on quality relies on quantified measurable,
results oriented thinking.
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 What is Quality?
Differing Functional Perspectives on Quality
Ø Human Resources (HRM) Perspective
Ø It is impossible to implement quality without the commitment and
action of employees (want hogs – not chickens).

Ø Employee empowerment moves decision making to the lowest level

possible in the organization.

Ø Organizational design is concerned with the design of reward

systems, pay systems, organizational structure, compensation, training
programs, and employee grievance and arbitration.

Ø HRM advocates the employee to management and the company’s

needs to the employee.

Ø Quality management flourishes where the employees’ and the

company’s needs are aligned – what’s good for the company is
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What is Quality?
Differing Functional Perspectives on Quality

HRM Perspective
n HRM Functions
n Job analysis involves collecting detailed information about each job.
This information includes tasks, skills, abilities, and knowledge
requirements for each job. This information is used to define a job
description which is used to set pay levels. The bureaucratic delay
in accomplishing job analysis to modify job descriptions can limit the
ability of the organization to achieve the flexibility needed for quality
management.

n Selection in recruitment and hiring decisions involves finding

employees who have the technical and behavioral preparation to
perform the tasks for a job, and who are fast learners during quality
improvements. The selection process is critical because people,
politics, and culture constrain and enable organizational change.

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 What is Quality?
Differing Functional Perspectives on Quality

HRM Perspective
n HRM Functions
n Effective training provides for standardizing methods for solving
unstructured problems in quality management. Top managers and
low-ranking employees should use similar processes for solving
problems. This is called vertical deployment of quality management.
Different departments should use similar processes for solving
problems to achieve horizontal deployment of quality management.

n Performance appraisals and evaluations are key methods for

motivating employees. Face-to-face reporting sessions and 360-
degree evaluations (an employee’s peers, supervisors, and
subordinates evaluate the employee) are used.

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What is Quality?
Differing Functional Perspectives on Quality
HRM Perspective

n The following table distinguishes between traditional HRM and total quality
human resources management.

Traditional HRM TQHRM

Process Characteristics Unilateral role Consulting role
Centralized Decentralized
Push - Demand Pull – Empower
Administrative Developmental

Content Characteristics Single-mindedness Pluralistic

Compartmentalized Holistic
Worker-oriented System-oriented
Performance Satisfaction
Job-based Person-based

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 What is Quality?
Differing Functional Perspectives on Quality
Ø Marketing Perspective
Ø Traditional marketing involved directing the flows of products and services
from producer to consumer. The new relationship marketing directs its
attention toward satisfying the customer and delivering value to the customer.

Ø Companies are basing sales commissions on perceptual measures of

customer satisfaction rather than volume of sales because the value of the
loyal customer is much greater than an individual transaction.

Ø The marketer focuses on the perceived quality of products and services,

quality as the customer views it, and marketing efforts are focused on
managing quality perceptions.

Ø The primary marketing tools for influencing customer perceptions of quality

have been pricing and advertising, but these tools are inadequate for
influencing perceptions of quality because not all products are priced based
on cost of materials and production only.

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What is Quality?
Differing Functional Perspectives on Quality
Ø Marketing Perspective

Ø Marketing systems involve interactions between the producing organizations,

the intermediaries, and the final consumer, and it is often very difficult for firms
to agree on who the customer is.

Ø Marketing is also focused on service at the time of the transaction and after-
sales support.

Ø Marketing interacts closely with engineering and operations in product design to

bring the voice of the customer into the design process.

Ø Customer service surveys are used for assessing the multiple dimensions of
quality.

Ø The customer is the focus of marketing-related quality improvement in

developing specialized products for different customers, which is in conflict
with standardizing products to reduce complexity by operations.

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 What is Quality Management?

n The focus of quality management is to manage properly the interactions

among people, technology, inputs, processes, and systems to provide
outstanding products and services to customers.

n With total quality management (TQM), the role of the quality department
has moved from a technical, inspection, policing role to a supportive
training and coaching role.

n A strong knowledge of quality is best coupled with technical expertise

in business disciplines such as materials management, supply chain
management, finance, accounting, operations management, HRM,
strategy, and industrial engineering.

n The goal is to completely immerse the organization in quality thinking

and commitment.

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What is Quality Management?

The Three Spheres of Quality

Quality
Management

Quality Quality
Assurance Control
(proactive) (reactive)

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 What is Quality Management?
n Quality Control

n The control process is based on the scientific method which includes

the phases of analysis, relation, and generalization.

• Analysis involves breaking the process into its fundamental

pieces.

• Relation involves understanding the relationships between the

parts.

• Generalization involves perceiving how interrelationships apply to

the larger phenomenon of quality being studied.

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What is Quality Management?

n Quality Control

n Activities relating to quality control include:

• Monitoring process capability and stability

• Measuring process performance
• Reducing process variability
• Optimizing processes to nominal measures
• Performance acceptance sampling
• Developing and maintaining control charts

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 What is Quality Management?
n Quality Assurance

n Assurance refers to proactive activities associated with guaranteeing

the quality of a product or service, especially during the design phase.
n By contrast, quality control is reactive, rather than proactive, by
detecting quality problems after they occur.

n Quality assurance activities include:

• Failure mode and effects analysis

• Concurrent engineering
• Experimental design
• Process improvement
• Design team formation and management
• Off-line experimentation
• Reliability/durability product testing

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What is Quality Management?

n Quality Management
n The management processes that overarch and tie together the control
and assurance activities make up quality management.
n The integrative view of quality management supports the idea that
quality is the responsibility of all management, not just quality
managers.
n All managers, supervisors, and employees are involved in the following
quality management activities:
• Planning for quality management
• Creating a quality organizational culture
• Providing leadership and support
• Providing training and retraining
• Designing an organizational system that reinforces quality ideals
• Providing employee recognition
• Facilitating organizational communication

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 Managing Quality
Integrating the Supply Chain
S. Thomas Foster

Chapter 2

Quality Theory
01/26 – 7:00AM

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Quality Theory
Chapter 2

Ø Leading Contributors to Quality Theory

Ø Viewing Quality Theory from a Contingency Perspective
Ø Theoretical Framework for Quality Management

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 Quality Theory
Is there a theory of quality management?

n There is not a unified theory explaining quality management in the

supply chain that is widely accepted by the quality community. The
literature concerning quality is contradictory and somewhat confusing.
The differing approaches to quality improvement represent competing
philosophies that are seeking their place in the quality marketplace of
theories. Practicing quality managers must apply those theories that are
appropriate to their particular situations using the contingency approach.

n The contingency approach identifies the relevant conditions in a situation

and applies the appropriate theory. This means the effectiveness of the
competing philosophies depends on the context.

n You cannot buy effective quality systems off-the-shelf or apply them

without question from books. You must grow your own quality system
yourself within your firm for your firm.

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Quality Theory
Leading Contributors to Theory – W. Edwards Deming

n Deming was widely accepted as the world’s leading authority on quality

management prior to his death in 1993.

n Deming significantly influenced Japanese industry before the late 1970s

when the quality of Japanese products surpassed U.S. products.

n Deming emphasized the management of a system for improving

quality and statistics for continual improvement.

n After WWII, Deming was sent to Japan by the U.S. Secretary of War to
work on a population census. During this time, Deming presented lectures
to the Japanese Union of Scientists and Engineers on statistical quality
control. Deming became impressed with the precise, single-minded,
focus of the Japanese on quality. Deming believed that the lack of focus
on quality in America led to mediocre results with regard to quality.

n Deming’s emphasis was “continuous, never-ending improvement.”

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 Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
§ The closest Deming came to expounding a theory was his 14 points
for management.

§ The foundation of the 14 points was Deming’s belief that the historic
approach to quality used by American management was wrong in one
fundamental aspect: Poor quality was not the fault of labor; it resulted
from poor management of the system for continual improvement.

1. Create a constancy of purpose toward improvement of product and

service with the aim to become competitive, stay in business and
provide jobs.

§ Constancy of purpose means that management commits

resources long-term to see that the quality is completed. U.S.
management is too short-term oriented.

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Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
2. Adopt a new philosophy: We are in a new economic age.

§ Western management must no longer accept defective

products and services as normal.

3. Cease dependence on mass inspections to improve quality.

§ Build quality into the product or service – do not inspect

quality into the product or service.

§ Quality at the source means management must train and trust

workers so workers can be responsible for quality and
inspections.

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 Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
4. End the practice of awarding business on the basis of price
tag alone.

§Minimize total cost by sole sourcing, developing long-term

relationships of loyalty and trust, JIT purchasing, and certified
suppliers (Malcolm Baldrige National Quality Award Criteria, ISO
9000:2000 international standard for quality systems).

§Using many suppliers causes an overemphasis on per piece

cost, increased variability, and increased supplier management
cost.

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Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
5. Improve constantly and forever the system of production and
service to improve quality and productivity, and, thus, constantly
decrease cost.

§Management is responsible for system design. Workers can be

held responsible only for their inputs into the system. Mediocre or
poor performance of a system is most often the result of poor
performance of management.

§85% of errors and defects are caused by flaws in the system and
only 15% are caused by workers.

§ 80% of the errors and defects are caused by 20% of the system.

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 Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
6. Institute training on the job.

§Training, although a necessary condition for improvement, is not

sufficient to guarantee successful implementation of quality
management.

7. Improve leadership. This is key to improving quality.

§ Improvement by employees can occur only within the realm of

influence of the employee. For wide-ranging improvements to
occur, upper management must be committed (hogs, not
chickens).

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Quality Theory
Leading Contributors to Theory- Deming’s 14 Points
8. Drive out fear of admitting or identifying problems and creating
change so that everyone may work effectively for the company.

§Does an organization want employees who are satisfied with the

status quo or who are fearful of challenging the waste in the status
quo because of blame-fixing or layoffs?

9. Break down barriers between departments.

§Employees from different departments must work together in

cross-functional teams in team-based decision making.
Sequential or departmental approaches to team-based decision
making limit the knowledge, information, and perspectives. Parallel
processing in cross-functional, focused teams bring all available
knowledge, information, and perspectives to bear on the subject. In
design, parallel processing in cross-functional, focused teams is
called concurrent engineering.
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 Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
10. Eliminate slogans, exhortations and targets for the
workforce that ask for zero defects and new levels of
productivity.

§The bulk (85%) of causes of low quality and low productivity

belong to the system and lie beyond the power of the workforce.

§ By pressuring employees to higher levels of productivity and

quality, managers place the onus for improvement on the
employees. If systems or the means for achieving these higher
levels of performance are not provided, workers can become jaded
and discouraged.

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Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
11. Eliminate work standards on the factory floor.

§ Eliminate management by objective.

§ Eliminate management by numbers and numeric goals.

§ Substitute leadership.

§ Eliminate work measurement standards on the shop floor.

§ Eliminate performance appraisals.

§ Althoughobjectives are set for employees, systems often are not

provided by management to attain these goals.

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 Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
12. Remove barriers that rob workers of their right to pride in the
quality of their work.

§The responsibility of supervisors must be changed from sheer

numbers to quality.

§Employees must be trusted with decisions and self-determination

or employees will suffer from low morale and low commitment.

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Quality Theory
Leading Contributors to Theory – Deming’s 14 Points
13. Institute a vigorous program of education and self
improvement.

§Learning in an organization is a function of the creativity of

employees and the ability of the organization to institutionalize
the lessons over time.

§ Organizational learning requires a structure that reinforces and

rewards learning. Such an organization is difficult to create in a
command-and-control environment because command-oriented
managers will not understand what it takes to allow employees to
achieve their best.

14. Put everybody in the company to work to accomplish the

transformation. A total system for improving quality is needed that
includes all of the people in the organization.
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 Quality Theory
Leading Contributors to Theory – The Deadly Diseases
1. Lack of constancy of purpose.
2. Emphasis on short-term profits.
3. Evaluation of performance, merit rating, or annual
review.
4. Mobility of management.
5. Running a company on visible figures alone.
6. Excessive medical costs for employee health care.
7. Excessive cost of warranties.

Deming believed these factors would keep the U.S. from

achieving top quality or competitiveness in a world
market.

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Quality Theory
Leading Contributors to Theory – An Underlying Theory

n Deming’s 14 points do not represent a theory but do represent the artifacts

of a theory. Anderson, Rungtusanatham, and Schroeder propose a
theoretical causal model underlying the Deming management method.

Visionary
Leadership

Organizational Employee Satisfaction

Learning Customer Satisfaction

Process
Management

Process Low Cost

Outcomes High Quality

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 Quality Theory
Leading Contributors to Theory - Juran
The Juran Trilogy – three basic processes are essential for managing
to improve quality

Ø Planning – provides the operating forces with the means of

producing products that can meet the customer’s needs
Ø Control – gathers data about processes to ensure that processes
are stable and provide a relatively consistent outcome
Ø Improvement – can be continuous or breakthrough improvements
which should occur simultaneously
ØContinuous improvement – incremental process improvements
ØBreakthrough improvement – major process improvements
Ø Improvement is accomplished on a project-by-project basis.
Ø Managers must prioritize projects based on financial return.
Ø Juran applied Pareto’s Law (80/20 rule) in stating that the majority
of quality problems are the result of relatively few causes. Focus
on the vital few instead of the trivial many.
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Quality Theory
Leading Contributors to Theory – Scientific Management

Ø Frederick Taylor wrote The Principles of Scientific

Management.
Ø Scientific management separated planning from execution.
The engineers and managers did the planning and the
supervisors and workers executed the plans.
Ø Inspectors were moved out of the plant to a central
inspection (quality) department.
Ø Upper managers concluded that quality was the
responsibility of the quality department and these upper
managers became detached from quality and lost their
knowledge of how to build quality into the product.
Ø Inspecting quality into the product worked as long as all
competitors did the same. However, the Japanese changed
the game by building quality into the product in the 70’s.
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 Quality Theory
Leading Contributors to Theory – Kaoru Ishikawa
Ø Ishikawa became the foremost Japanese leader in the
Japanese quality movement.

Ø Ishikawa provided the basic seven tools of quality (B7)

for continuous improvement. The B7 tools worked well within
the Deming and Juran frameworks.

Ø Ishikawa democratized statistics which provided for the

complete involvement of the workforce in improving quality.

Ø Ishikawa’s major theoretical contribution is his emphasis

on total involvement of the operating employees in
improving quality.

Ø Ishikawa created the phrase company-wide quality

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Quality Theory
Leading Contributors to Theory – Armand Feigenbaum

Ø Feigenbaum wrote Total Quality Control which studied

quality in the context of the business organization.

Ø Feigenbaum’s primary contribution to quality thinking

in America was his assertion that the entire organization
should be involved in improving quality.

Ø Feigenbaum’s three step process to improving quality:

Ø quality leadership – the motivating force for quality

improvement
Ø quality technology – includes statistics and machinery
Ø organizational commitment – including everyone in
the quality struggle
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 Quality Theory
Leading Contributors to Theory – Armand Feigenbaum

n Major impediments to improving quality:

n Hothouse thinking – quality programs that receive a lot of hoopla and

no follow-through which happens when firms do not commit resources
over time
n Wishful thinking – occurs with those who would pursue protectionism
to keep American firms from having to compete on quality
n Producing overseas – used by managers who wish that out of sight,
out of mind could solve quality-related problems
n Confining quality to the factory floor – quality is the responsibility of
the shop-floor and not everyone’s responsibility

n Feigenbaum proposed 19 steps for improving quality which emphasize

total organizational involvement in improving quality.

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Quality Theory
Leading Contributors to Theory – Philip Crosby

Ø Crosby wrote Quality Is Free – in this book he stressed that

quality, as a managed process, can be a source of profit.

Ø Crosby specified a 14 step quality improvement program.

These steps provide the Crosby zero-defects approach to quality,
the behavior and motivational aspects of quality rather than
statistical approaches, and his prescribed actions for management
and workers.

Ø Althoughhe prescribes quality teams consisting of department

heads, Crosby did not promote the same kind of strategic
planning proposed by Deming and Juran.

Ø Crosby adopted a human resources approach similar to

Deming’s in that worker input is valued and is encouraged as
central to quality improvement.
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 Quality Theory
Leading Contributors to Theory – Genichi Taguchi

n The Taguchi method was first introduced by Dr. Genichi Taguchi to AT&T
Bell Laboratories in the U.S. in 1980. The Taguchi method for improving
quality is now believed to be comparable in importance to the Deming
approach and to the Ishikawa concept of total quality control.

n Unique aspects of the Taguchi Method:

n Definition of Quality - Ideal quality is a function of customer

perceptions and satisfaction. The target specification should be a
measure of the targeted customer perception and satisfaction.

n Quality Loss Function - Any deviation from the target specification

results in a loss to society. The magnitude of the loss to society is
directly related to the degree of deviation.

n Robust Design – Products and services should be designed so that

they are inherently defect-free and of high quality. Robust design is
achieved in a three-step process: concept design, parameter
design, tolerance design.
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Quality Theory
Leading Contributors to Theory – Stephan Covey

n Stephan Covey wrote The 7 Habits of Highly Effective People.

n Dr. Covey’s approach to management is value-based.
n According to Dr. Covey, our beliefs affect how we interact with others,
which in turn affects how they interact with us. Therefore, we need to
focus on how we approach our lives rather than focusing on external
factors that affect our lives.
n Many quality management principles from people such as Deming are
integrated into Dr. Covey’s habits.
n Dr. Covey’s 7 habits include:
n Be proactive. Control your environment, instead of having it control
you, in the way you react to your environment.
n Begin with the end in mind. Identify the desired outcome and focus
on activities that achieve that end.

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 Quality Theory
Leading Contributors to Theory – Stephan Covey

n Put first things first. Managers need to personally manage

themselves and implement activities that aim to achieve the second
habit – looking to the desired outcome. Habit two is the first, or mental,
creation; habit three is the second, or physical creation.
n Think win-win. This is the most important aspect of interpersonal
leadership because most achievements are based on cooperative
effort. Therefore, the aim needs to be win-win solutions for all.
n Seek first to understand and then to be understood. Listening well
is more important than speaking well. Be interested, not interesting.
Once you understand their perspective then you can be understood.
n Synergize. Through creative cooperation, collaboration often achieves
more than could be achieved by individuals working independently.
n Sharpen the saw. Learn from previous experience and encourage
others to do the same.
n Find your voice, and inspire others to find theirs. Merge talent,
passion, and conscience to achieve, and to help others to achieve.
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Quality Theory
Leading Contributors to Theory – Other Quality Researchers

n Robert C. Camp – Pioneered benchmarking with the sharing of

information between companies so that both can improve.

n Tom Peters – wrote In Search of Excellence which produced

eight best practices from empirical research of successful quality
practices in the form of case studies of firms. The book is thought-
provoking, though methodologically loose. His latest book, In
Search of Wow!, is entertainment coupled with serious
management thinking.

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 Quality Theory
Leading Contributors to Theory – Other Quality Researchers

n Michael Hammer and James Champy – Their collaboration is termed

reengineering, which has produced unfortunate consequences for many
companies. Their underlying model is sound: Firms can become
inflexible and resistant to change and must be able to change in order to
become competitive. The problem is in the flawed process for
reengineering they promote in their book Reengineering the
Corporation. They admit their failure rate is 70% or higher. By ignoring
the necessity for attention to detail and analysis, they led many firms to
make radical changes to reengineer processes that led to major failures.

n Lesson to be learned from reengineering failures – Some quality and

performance improvement approaches are brainchildren. Others have
been observed to work in a number of organizations, in a variety of
cultures, and in a number of economic sectors. Avoid the former until
they become part of the latter.

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Quality Theory
Quality Theory from a Contingency Perspective
There is a mass of contradictory, conflicting information and
disagreement… it is best to focus on fundamental
questions during the self-assessment phase of strategic
planning such as the following types of questions:

ØWhat are our strengths?

ØWhat are our competencies?
ØIn what areas do we need to improve?
ØWhat are our competitors doing to improve?
ØWhat is our organizational structure?
ØWhat do our customers want?
ØWhat are our customer’s unmet needs?
ØWhere are our customers going?

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 Quality Theory
Quality Theory from a Contingency Perspective

n Once you answer these types of questions, you will have a deep
understanding of your business. You combine your business
understanding with your understanding of the major approaches
to quality improvement. This combination will provide the basis
for selecting those points, philosophies, concepts, and tools that
will form the basis for your quality improvement plans. Then you
creatively apply your selected quality approaches to your
business.

n Firms well known for quality do not adopt only one quality
philosophy. The successful firms adopt aspects of each of the
various approaches that help them improve. This is called the
contingency perspective.

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Quality Theory
Resolving Differences – An Integrative View
Reviewing the literature identifies common variables used by
Deming, Juran, Crosby, Taguchi, Ishikawa, and Feigenbaum and by
Parasurmaman, Zeithamel, and Berry for the services approach.
Ø Leadership Ø Customer role in Quality
Ø Information Analysis Ø Quality Department
Ø Strategic Planning Ø Environment
Ø Employee Improvement Ø Philosophy Driven
Ø Quality Assurance Ø Quality Breakthrough
Ø Project/team-based
improvement

The core variables are in red. The second layer variables are in
blue. And the third layer variables are in black. The primary
driver is a customer focus.
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 Quality Theory
Resolving Differences – An Integrative View

The core variables:

n Leadership – The role of the leader in being the champion and major
force behind quality improvement is critical. Companies having weak
leadership in quality will not achieve a market advantage in quality.
Leaders must become proficient in quality management approaches and
must be willing to lead by example, not just by words.
n Employee Improvement – Employees must be trained and developed.
This training is a long-term undertaking requiring direct investment in
training delivery costs and indirect costs associated with temporary lost
productivity and time spent in training.
n Quality Assurance – Quality can be assured only during the design
phase. Although statistical inspection is important to improving quality, it
is inherently reactive. Effort must be invested in designing products,
services, and processes so they are consistently of high quality.

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Quality Theory
Resolving Differences – An Integrative View

n Customer Focus – An understanding of the customer is key to quality

management efforts. Unless firms are gathering data about customers and
analyzing these data, they are poorly informed about customer needs and
wants. You will not go wrong if you continuously focus on your
customer’s needs.
n Quality Philosophy – Adoption of a philosophy toward quality
improvement should establish a clear, simple, focused message
providing the company with a map to follow during their quest for
improvement. It is up to each organization to determine its own
philosophy.

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 Quality Theory
Resolving Differences – An Integrative View

The second layer variables.

§ Information Analysis – Fact-based improvement requires information
gathering and analysis. Data gathering is a key variable for quality
improvement. Included in data gathering are statistically related quality
control activities.
§ Strategic Planning – This provides a framework for a rational quality
strategy that will align your key business factors with your quality
management philosophy.
§ Environment or Infrastructure – This infrastructure must provide human
resource systems and technological networks that support all other
variables in this list.
§ Team approach – Cross-functional teams achieve process improvement
and manage key processes. The firm should become a collection of
loosely related cross-functional teams performing the work of the firm.

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Quality Theory
Resolving Differences – An Integrative View
The third layer variables.

§ Focus of the Quality Department – Rather than performing the policing

function, these departments fill more of a coaching role. Also, the
knowledge these quality specialists have is useful for training and in-
house consulting.

§ Breakthrough – The need to make large improvements is not precluded

by continuous improvement. Firms must find ways to achieve radical
improvements. You must run the firm with excellent execution and control
processes, grow the firm with continuous improvement, and destroy the
firm with radical breakthroughs. The processes used to achieve this often
involve technological or organizational redesign. Analysis and data are
necessary for successful continuous improvements and breakthrough
implementations.

The power of these common variables is that they focus management

on systemic issues rather than the tactical, day-to-day problems.

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Quality Theory The Primary
Driver
Theoretical Framework for Quality Management
Variable

2nd
Core Layer
Variables Variable
s

3rd Layer
Variables
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Managing Quality
Integrating the Supply Chain
S. Thomas Foster

Chapter 3

Global Supply Chain Quality and

International Quality Standards

01/30 –
7:30PM
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 Global Supply Chain Quality and
International Quality Standards
Chapter 3

Ø Quality Improvement: The American Way

Ø The Malcolm Baldrige National Quality Award
Ø Quality Improvement: The Japanese Way
Ø Quality Improvement: The European Way
Ø Quality Improvement: The Chinese Way
Ø Are quality Approaches Influenced By Culture

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Global Supply Chain Quality and

International Quality Standards
Quality Improvement: The American Way
America has been called the birthplace of modern quality management because it
is home to Shewhart, Deming, Juran, and others. The U.S. military also was an
early adopter of many quality techniques. Originally, the main interest in quality
in the U.S. was in the application of statistics to solve quality problems. In recent
years, the approach has become much more behavioral as teams and other
approaches have been applied.

The Malcolm Baldridge National Quality Award

§ This is one of the most powerful assessment mechanisms.

§ The MBNQA process is open to small (less than 500 employees) and large firms
in the following categories: manufacturing, health care, education, and service
sectors. The MBNQA is not open to public-sector and not-for-profit
organizations.|

§ There can be only two winners per category per year for a total of eight
winners for a given year. The number of winners has always been six or less.

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 Global Supply Chain Quality and
International Quality Standards
Quality Improvement: The American Way

n Key characteristics of the MBNQA:

n The criteria focus on business results (financial performance,

customer satisfaction, customer retention, product performance,
service performance, productivity, supplier performance, and public
citizenship.
n Winners must show they have consistently performed at best-in-class
and best-of-the-best levels.
n Business results weigh from 25% to 45% in the scoring.
n The Baldrige winner must not have financial problems and must be
able to serve as a role model.
n The focus of the MBNQA is on results, but the means of obtaining
these results are not prescribed. The Baldrige criteria are
prescriptive at the strategic level with regard to the nature of the
goals.
n The criteria support and advocate company-wide alignment of goals
and processes.

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Global Supply Chain Quality and

International Quality Standards
Quality Improvement: The American Way

n The criteria permit goal-based diagnosis.

n The criteria and scoring guidelines provide the following
assessment dimensions: approach, deployment, and results.
n Approach defines the method or system for addressing a particular
performance objective. Deployment describes the execution of the
approach. Results show the outcomes of the approach and
deployment.
n By assessing approach, deployment, and results in several areas,
firms are able to assess their current strengths and areas for
improvement in quality management. Once areas for improvement
are identified, these can be prioritized and accomplished one by
one.
n The model for the MBNQA consists of seven interrelated
categories that compose the organizational system for
performance.
n The basis of the model is measurement, analysis, and knowledge
management. This confirms the core value of management by fact.

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 Global Supply Chain Quality and
International Quality Standards
Quality Improvement: The American Way

Organizational Profile:
Environment, Relationships, and Challenges

2. Strategic Planning 5. HR Focus

1. Leadership 7. Business Results

3. Customer & 6. Process

Market Knowledge Management

4. Measurement, analysis, and

knowledge management
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Global Supply Chain Quality and

International Quality Standards
Quality Improvement: The American Way
The Malcolm Baldridge National Quality Award Seven Categories

1. Leadership
2. Strategic Planning
3. Customer and Market Focus
4. Measurement, Analysis and Knowledge Management
5. Human Resource Focus
6. Process Management
7. Business Results

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 Global Supply Chain Quality and
International Quality Standards
Quality Improvement: The American Way
1. Senior Leadership – This category is used to evaluate the extent to
which top management is personally involved in creating and
reinforcing goals, values, directions, and customer involvement.
Also, the applicant outlines what the firm is doing to fulfill its
responsibility as a corporate citizen.

2. Strategic Planning – This category focuses on how the company

establishes strategic directions and how it sets its tactical action
plans to implement the strategic plans.

3. Customer and Market – This category focuses on how well the firm
understands the product and service attributes that are important
to the customer and how well the firm assesses the relative
importance of product or service features.

4. Measurement, Analysis, and Knowledge Management – This

category focuses on the firm’s selection, management, and use of
information to support company processes and to improve firm
performance.
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Global Supply Chain Quality and

International Quality Standards
Quality Improvement: The American Way

5. Human Resource – This category focuses on well the workforce is

enabled to develop and use its full potential, aligned with company
objectives.

6. Process Management – This category focuses on the processes for the

design and delivery of products and services, the support processes,
and the gathering and analysis of data to measure customer
satisfaction.

7. Business Results – This category documents the results of the other six
categories in a series of tables and graphs. This is considered the most
sensitive category by the applicants.

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 Global Supply Chain Quality and
International Quality Standards
The Japanese Way -- The Deming Prize

n The Deming Prize for quality is awarded to individuals and groups who
have contributed to the field of quality control.
n The examination and award process is performed under the direction of
the Japanese Union of Scientists and Engineers (JUSE) Deming
Award Committee. There is no limit on the number of companies that
can receive the award in a given year.
n The Deming Prize is awarded in three categories:
n Deming Application Prize for Division
n Deming Application Prize for Small Business
n Quality Control Award for Factory
n The Deming Prize is much more focused on processes than is the
Baldrige and is more prescriptive. The Baldrige is more focused on
business results and is more general and managerial.

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Global Supply Chain Quality and

International Quality Standards
The Japanese Way -- Lean Production
§ Two views emerge in the Japanese literature about lean
manufacturing:

§ Philosophical Perspective - Anything in the process that does not

add value for the customer should be eliminated (waste reduction).

§ Systems Perspective – Lean is a group of techniques focused on

holistic synergies across symbiotic agents in a system to avoid
sub-optimization.

§ We will combine the philosophical and systems perspectives to define

lean as a productive system whose focus is on optimizing processes
across a system through the philosophy of continuous improvement.

§ We need these words and definitions to help us communicate.

Philosophies, once internalized, help us to communicate on a feeling-
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 Global Supply Chain Quality and
International Quality Standards
The Japanese Way -- Shingo’s seven wastes

For Toyota Motor Company, the focus was

on the continual reduction of waste.
Shigeo Shingo, the industrial engineer who
was fundamental in helping Toyota to reduce
waste, identified a group of seven wastes
that workers could remove or reduce by
continuously improving processes.

1. overproduction
2. waiting
3. transportation© 2007 Pearson Education 3 - 91
4. non-value-added processing steps
91
5. inventory
6. motion
7. making defective products
Global Supply Chain Quality and
International Quality Standards
The Japanese Way -- Visibility

n Often when problems exist in business, the first reflex is to hide the
problems as though they don’t exist. The Japanese approach
makes the problems visible so they can be removed.

n Among the approaches to making problems visible is reducing and

eliminating work-in-process inventory, which reveals process
problems.

n Another approach is the andon, or warning light. Whenever a defect

occurs on the line, the line is stopped. This halts production in several
workstations. As a result, workers from the production line all converge
on the process where the warning light went on. Teams are used to
identify and eliminate the fundamental causes of the defect. Once the
cause is eliminated, work resumes. The approval to stop the line
whenever there is a problem is called the line-stop authority.

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 Global Supply Chain Quality and
International Quality Standards
The Japanese Way – In-Process Inspection & N=2

n With in-process inspection, all work is inspected at each stage of

the process, and the workers inspect their own work. This
approach:
n stops the flow-through of defects
n gives workers authority to immediately stop defects from
happening and
n workers can immediately determine the cause of the defects.

n N=2 is an alternative to acceptance sampling of supplier lots. If

you know the supplier’s processes are in statistical control and
capable, and if the first and last pieces in the lot meet specification,
then you can conclude that the entire lot of materials will meet
specification. Therefore, only a sample size of 2 is needed for
acceptance sampling.

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Global Supply Chain Quality and

International Quality Standards
The Japanese Way – Total Involvement of Workforce & Preventive
Maintenance

n The total involvement of the workforce requires horizontal deployment

and vertical deployment of quality management.

n Horizontal deployment means that all departments are involved in quality.

n Vertical deployment means that all levels of management and workers are
actively involved in quality.

n In preventive maintenance, the worst condition a machine should ever be

in is on the day you purchase the machine. By maintaining scheduled
maintenance and improvement to equipment, machinery actually can
improve with age. With preventive maintenance, heavy, unscheduled
maintenance is still performed by shop engineers and maintenance
specialists. However, regular cleaning, fluid changing, and light
maintenance are handled on a regularly scheduled basis by the people
who operate the machinery.

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 Global Supply Chain Quality and
International Quality Standards
The Japanese Way -- The Five S’s

The five S’s are a sequential process that

companies follow to remove conditions
which can cause problems.

1. Seiri: Organizing by getting rid of the

unnecessary
2. Seiton: Neatness that is achieved by
straightening offices and work areas
3. Seiso: Cleaning plant and equipment to
eliminate conditions that can hide or
obscure problems.
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95 4. Seiketsu: Standardizing locations for

tools and equipment
5. Shetsuke: Discipline in maintaining the
four prior S’s
Global Supply Chain Quality and
International Quality Standards
The European Way – EQA and ISO 9000:000

n It is difficult to tell where Europe now stands concerning quality

management because of radical differences in infrastructure,
politics, and business practices. Europe appears to be behind
the Japanese and U.S. in improving quality.

n ISO 9000:2000 is the European standard for quality that has been
deployed world-wide because if you are going to compete for
European business you have to measure yourself and provide
measures to your customers using the ISO 9000:2000 framework.

n Two types of quality recognition are widely used in Europe.

These are the European Quality Award (EQA) and ISO
9000:2000 certification.

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 Global Supply Chain Quality and
International Quality Standards
The European Way – European Quality Award (EQA)

n The European Foundation for Quality Management administers the

EQA.
n The EQA has two levels. The highest level of the EQA is for the most
accomplished applicant in a given year. The second level given is the
European Quality Prize for other firms that meet the award criteria.
n The EQA is similar to the MBNQA in tone and process. The differences
are found primarily in the focus of the EQA on: people satisfaction,
impact on society, and business results.
n In the EQA, people satisfaction is focused on the perceptions of
employees concerning their employer whereas the MBNQA focuses more
on those things that lead to customer service and improved products.
n The EQA criterion of impact on society is focused on how the company is
viewed by the society it affects: quality of life, environment, and
preservation of global resources.
n The EQA criterion for business results is focused on corporate social
responsibility in addition to operational and financial results.

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Global Supply Chain Quality and

International Quality Standards
The European Way - ISO 9000:2000

n On a world-wide basis, ISO 9000:2000 has had a much more

significant impact than any of the quality standards or recognitions
in terms of the number of companies (400,000) that have
implemented the approach.

n The focus of ISO 9000:2000 is on companies documenting their

quality systems in a series of manuals to facilitate trade through
supplier conformance.

n Once the quality system is documented and certified by a

registrar, ISO 9000:2000 registration states that:
n there is a quality system and
n the quality system is being adhered to.

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 Global Supply Chain Quality and
International Quality Standards
The European Way ISO 9000:2000

n To become ISO 9000:2000 certified, you

need to:
n plan and document your processes,
n prove that you are following these documented processes,
n prove that the processes are effective,
n show that you are correcting deficiencies in your processes,
and
n show that you are continually improving your processes.

n ISO 9000-2000 is not a prescription for

running a business.
n The requirements provide a recognized
international quality standard that
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validate their quality with customers. In
turn, supplier quality can be validated.

Global Supply Chain Quality and

International Quality Standards
The European Way IS0 9000:2000

The eight principles of ISO 9000:2000

are similar to the MBNQA categories.

1. Customer focus
2. Leadership
3. Involvement of people
4. The process approach
5. A systems approach to management
6. Continual Improvement
7. Factual approach to decision making
8. Mutually beneficial supplier relationship
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 Global Supply Chain Quality and
International Quality Standards
The European Way IS0 9000:2000 – Selecting A Registrar

n The ISO 9000:2000 certification process is very different from the

processes for winning the Deming Award, MBNQA, and the EQA.
n The selection of the registrar is the most important and ill defined step.
n There is no centralized authority that qualifies ISO registrars.
n Although many countries officially encourage their firms to use ISO-
registered suppliers, no European countries require ISO 9000:2000
registration. However, individual firms world-wide require their
suppliers to be certified.
n Certain ISO registrars have memoranda of agreement with the
departments of commerce of individual countries, which means that
out of the hundreds of registrars that exist in the world, only a relative few
may be recognized in any particular country. And many registrars are not
recognized officially anywhere.
n You should check with customers in your country and departments of
commerce and customers within the countries to which you plan to
export for recognized registrars.
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Global Supply Chain Quality and

International Quality Standards
The European Way Way – The IS0
9000:2000 Process

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 Global Supply Chain Quality and
International Quality Standards
The European Way - The IS0 9000:2000 Process

n The registration process typically takes several months from

initial meeting to final registration audit.
n Step 1 is inquiry, where the client contacts registrars to investigate
the terms for registration. The client then makes a final selection
of a registrar.
n Step 2 is contacting the registrar. In this process, registration
steps are determined, and a price is negotiated. A client-signed
quotation or purchase order leads to the first stage of the
certification process. Some clients may wish to have a pre-
assessment or gap-analysis audit.
n Step 3 is the phase 1 audit. At this stage, the registrar performs an
onsite audit of the documented quality system against the
applicable standard.

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Global Supply Chain Quality and

International Quality Standards
The European Way - The IS0 9000:2000 Process

n Step 4 is the certification audit. Every element of the ISO

9000:2000 standard is audited several times during the registration
process. A representative sample of an organization’s business
processes are chosen for any audit. During each three-year
period, 100% of the organization is audited. The audit program is
a valuable tool that provides a clearly and mutually defined process
and snapshot of auditing – past, present, and future.

n Step 5 may involve process audits (optional). The client may

choose business processes for auditing to the applicable standard,
allowing the client to learn and experience the registrar’s auditing
methods and style.

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 Global Supply Chain Quality and
International Quality Standards
The European Way - The IS0 9000:2000 Process

n Step 6 involves the final certification audit. Once the client’s

documented quality system has met the applicable standard, the
registrar will conduct an audit to determine the system’s effective
implementation. This may involve interviewing the process
owners and responsible personnel as designated in the
documented quality system for processes chosen from the audit
program.

n Step 7 involves rolling certification audits. These are sometimes

referred to as surveillance audits, where the registrar returns on
either 6-month or annual cycles.

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Global Supply Chain Quality and

International Quality Standards
The European Way – ISO 14000

n ISO 14000 is an international standard for environmental

compliance, which is a series of standards that provide guidelines
and a compliance standard.
n ISO 14000 uses the same basic approach as ISO 9000:2000 with
documentation control, management system auditing, operational
control, control of records, management policies, audits, training,
statistical techniques, and corrective and preventive action.
n ISO 14000 includes quantified targets, established objectives,
emergency and disaster preparedness, and disclosure of
environmental policy.
n The process of documenting these elements and seeking
registration mirrors the ISO 9000:2000 process. Again, a key
process has to do with selecting the appropriate registrar.

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 Global Supply Chain Quality and
International Quality Standards
The European Way – ISO 14000

n Firms in the U.S. usually decide not to adopt the standard for ISO
14000 because the certification process is very risky.
n As a result of the self-study process, firms can possibly discover
violations regarding some environmental topic, such as hazardous
waste. Once firms discover violations, they are required to report
these variances to the U.S. Environmental Protection Agency
(EPA). Even if the firm discovers and cleans up environmental
problems, the EPA has made it clear the firm will be subject to
fines and penalties, which could include shutting down the
business. As a result, firms are reluctant to begin the process of
self-discovery until the EPA changes its policy.

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Managing Quality
Integrating the Supply Chain
S. Thomas Foster

Chapter 4
Strategic Quality Planning

Quality is not just a control system,

quality is a management function.

9/02 – 9:00AM

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 Strategic Quality Planning
Strategic Planning and Quality Improvement

Strategic planning for quality improvement involves:

identifying potential improvements
prioritizing potential improvements
planning the implementation of projects to accomplish the
improvements

Quality has become an order qualifier. High quality production

is an essential ingredient to participation in the market.

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Strategic Quality Planning

Quality and time

The time it takes to achieve business goals related to quality is a

function of the speed at which can companies improve processes.
The speed at which companies can improve processes depends on the
rate at which employees can learn. This interdependence between
employee learning and process improvement is a key variable in
improving quality because employee learning and freezing of
learning have to take place for process improvement to occur.
The key to employee learning for process improvement is to put in
place a process that will improve the rate at which employees can
systematically learn, such as the Deming plan-do-check-act cycle.
However, plants that improve quality more quickly did not see costs
improve as much as plants that improved more slowly because the
improvements were not real.
Setting short-term goals for higher quality levels and managing
toward those goals actually may prove detrimental to the firm.

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 Strategic Quality Planning
Quality and time

n When the culture is “management by dictate” then numeric goals are set
each year. When these numeric goals are set, then people will:

n achieve the goals and incur positive results

n distort the data
n distort the system

n In a “management by dictate” culture, achieving the goals is what

management hopes will occur. Management truly would like to think that a
goal can be dictated and accomplished without providing appropriate
systems to support employee learning.

n In a “management by dictate culture,” techniques for distorting the data

may range from:

n creative “cooking of the data” to

n finding honest data that shed the best light on the system in
question.
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Strategic Quality Planning

Quality costs

Two categories of quality costs:

Costs due to poor quality

Costs associated with improving quality

Accounting for quality-related costs – The collection of quality

cost data has been constrained by the accounting
standards. Accounting rules require definitions which are not
open-ended or open to alternative interpretations. These
constraints relate most directly in classifying prevention
costs.

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 Strategic Quality Planning
Quality costs

PAF Paradigm – translates quality costs into three broad

categories which are then subdivided into other categories:
Prevention costs – those costs associated with preventing defects
and imperfections from occurring. Prevention costs are the most
subjective of the three categories of costs.
Appraisal costs – those costs associated with the direct costs of
measuring quality.
Failure costs – when failure costs are significantly higher than the
sum of prevention plus appraisal costs, increasing prevention and
appraisal activities (and costs) could result in a significant
decrease in failure costs
Internal failure costs – those costs caused by on-line failure
External failure – those costs caused by product failure after the
production process

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Strategic Quality Planning

Quality costs

Prevention Costs - subjective

n The cost of setting up, planning, and maintaining a documented quality
system
n Quality planning – establishing production process conformance to design
specification procedures, and designing test procedures and test
equipment
n Quality and process engineering (including preventive maintenance)
n Supplier quality assurance
n Supplier assessment
n All training
n Robust design
n Defect data analysis for corrective action purposes
n Time spent on quality system audits

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 Strategic Quality Planning
Quality costs

Appraisal Costs
n Laboratory acceptance n Review of test and inspection
testing data
n Inspection and tests by n On-site performance tests
inspectors n Internal test and release
n Inspection and tests by non- n Evaluation of materials and
inspectors spares
n Setup for inspection and test n Supplier monitoring
n Inspection and test materials n ISO 9000:2000 qualification
n Product quality audits activities
n Quality award assessments

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Strategic Quality Planning

Quality costs

Failure Costs
n Re-inspection of stocks after n Cost of corrective action to
defect detection product (redesign, repair)
n Disruption of production n Lost production because of
schedules manpower availability problems
(this refers to idle time brought
n Costs of trouble-shooting about by failure to plan manpower
n Complaint handling and efficiently)
replacements plus extra time with n Lost production caused by
customers system problems (material or
n Warranty (taking care not to instructions not available, cost of
duplicate previous item) idle time only)
n Cost of holding higher levels of n Concessions (design and
stock as a buffer against quality engineering time)
failure n Process waste (including the
n Cost of corrective maintenance to waste commonly regarded as
plant avoidable)
n Cost associated with disposition n Cost of product scrapped at
of all scrap product audit
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 Strategic Quality Planning
Supply Chain Strategy

n What is the ultimate goal of all supply chains?

The ultimate goal in all supply chains is to have

§ spontaneous re-supply,
§ build-to-order, and
§ mass customization to provide a
§ continuous,
§ level,
§ linear,
§ uninterrupted,
§ one-piece flow which exactly matches the
§ mix,
§ volume, and
§ timing of customer demand within your supply chain.

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Strategic Quality Planning

Supply Chain Strategy

n Why is this ultimate goal of all supply chains impossible to

achieve?

We cannot get the information to have perfect visibility about

our supply chain to make the best decisions and we cannot control
all of the factors in our supply chain in the execution of our
decisions to have instant responses, perfect velocity.

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 Strategic Quality Planning
Supply Chain Strategy

n Why should we try to get our supply chain as close to this

goal as possible?

The firms which are the closest to providing, just-in-time, the

exact mix, volume, and timing of products or services which
customers demand will have the lowest costs and the most
profit. These firms will dominate the market after several shake-
outs of firms which have greater waste, non-value-added time,
just-in-case buffers, and variances. These shake-outs will
eliminate firms which fail to have competitive cost structures
and which fail to competitively match the mix, volume, and
timing of customer demand.

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Strategic Quality Planning

Supply Chain Strategy

n To reach this goal, how do you first simplify and streamline

your supply chain before you begin process improvement and
correction efforts?

You eliminate or outsource the 80% of the products and

services which contribute only 20% of the profit. This reduces the
complexity of your processes which simplifies your improvement
and correction efforts to exactly match the mix, volume, and
timing of customer demand.

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 Strategic Quality Planning
Supply Chain Strategy

n Why do you insource the 20% of your products and services

which contribute 80% of your profit?

You will in-source and focus on the 20% of the products and
services which contribute 80% or your profit so you can control
the quality, mix, volume, timing, and innovation of these
products and services.

n Why do you need to outsource the 80% of your products

and services which contribute just 20% of your profit?

The 80% of your products and services which provide just 20%
of your profit will distract you and needlessly complicate your
supply chain.
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Strategic Quality Planning

Supply Chain Strategy

n Why do we need to move from a build-to-forecast strategy to

a build-to-order strategy?

In a build-to-forecast strategy, you build to inventory according

to a forecasted schedule and not to sold orders. Therefore, you
will have the waste of over or under production, in relation to
sales. In a build-to-order strategy, you do not have the waste
caused by over- and under-production. You only build what
you have sold.

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 Strategic Quality Planning
Supply Chain Strategy

n What are the requirements for a build-to-order strategy?

A build-to-order strategy to meet spontaneous, instantaneous
demand without waste requires you to have:
n spontaneous re-supply of standardized parts and raw materials
from supply partners to create a high velocity, high visibility
supply chain
n continuous, level, linear, uninterrupted one-piece flow
manufacturing (i.e., mass customization) which exactly
matches the mix, volume, and timing of customer demand, to
eliminate the waste from over- and under-production
n cellular manufacturing to eliminate interruptions caused by
setups
n concurrent engineering to integrate the needs of all
stakeholders.

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Strategic Quality Planning

Supply Chain Strategy

n Why do you want to create a high velocity, high visibility

supply chain?

You want to reduce or eliminate just-in-case buffers (e.g.,

manpower, materials, machinery, time, and technology) because
they are expensive. For example, inventory costs you 30% of
its purchase cost per year. This cost includes obsolescence,
damage, pilferage, insurance, storage, labor, management, etc.

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 Strategic Quality Planning
Supply Chain Strategy

n What are the steps you must take to simplify your supply
chain to reduce inventory costs?

You need to take the following steps in the order provided to

simplify your end products, parts, raw materials, and
suppliers.

n You need to rationalize your product lines. Rationalize

means you eliminate or outsource the 80% that you
occasionally sell to reduce the variety you produce. When
you eliminate or outsource this 80% that you occasionally
sell, you will eliminate the related parts, raw materials, and
suppliers, and you will immediately reduce the complexity
of your supply chain.
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Strategic Quality Planning

Supply Chain Strategy

n You need to standardize the parts and raw materials required

for your rationalized product lines. Develop and use parts and
raw materials that will work across all product lines to
reduce the variety you need to forecast, order, inspect,
move, and store.

n You need to standardize on 2 or 3 suppliers for each of your

standard parts and raw materials. You do not want to
manage many vendors competing with each other to provide
you with the lowest bid. You want to manage a few partners
with the lowest operating cost who will continuously help you
cut your costs by customizing their offerings for your needs with
regard to quality, mix, volume, timing, and innovation.

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 Strategic Quality Planning
Supply Chain Strategy

n For the 20% of your products and services which provide you
80% of your profit, you need to in-source outsourced
operations that constrain your quality, mix, volume,
timing, and innovation to attain continuous, level, linear,
one-piece flow manufacturing that responds spontaneously to
immediate demand.

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Strategic Quality Planning

Supply Chain Strategy

n You need to implement spontaneous resupply of

standardized parts and raw materials. You need to cut
costs and throughput time throughout the complete supply
chain. The weakest link in the supply chain will constrain the
remaining links. Firms do not compete today. Supply chains
compete and they compete on the basis of cost, velocity, and
value-added. You want spontaneous resupply to reduce or
eliminate inventory because inventory costs 30% per year of
the purchase cost to maintain. You also want spontaneous
resupply to reduce or eliminate lead time because
forecasting demand during lead becomes more difficult as the
lead time increases.

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 Strategic Quality Planning
Supply Chain Strategy

n You need to implement continuous, level, linear,

uninterrupted one-piece flow manufacturing which exactly
matches the mix, volume, and timing of customer demand to
eliminate the waste of over- and under-production.

n You need to implement cellular lines based on product

families which will eliminate the need for setups that interrupt
process flows which, in turn, will eliminate batches and
queues (i.e., work-in-process and delays).

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Strategic Quality Planning

Supply Chain Strategy

n You need to implement concurrent engineering for product

development to achieve manufacturability and to use standard,
readily available, off-the-shelf parts and raw materials.
Concurrent engineering means that all factors involved in
researching, designing, and producing a product communicate,
coordinate, and collaborate in real time to assure the resulting
product will meet the needs of all of the factors (i.e.,
stakeholders).
n You need to continuously repeat this supply chain
simplification process because your supply chain will
continuously become more complicated because of changes in
your products and services.

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 Managing Quality
Integrating the Supply Chain
S. Thomas Foster

Chapter 5
The Voice of the Customer

Quality is as the customer sees it.

09/16 – 6:00PM

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Strategic Quality Planning

The Voice of the Customer
Chapter 5
ØIntroduction
ØCustomer Driven Quality
ØWhat is the voice of the customer?
ØCustomer –Relationship management
ØThe “Gaps” approach to Service Design
ØStrategic
Supply Chain Alliances Between
Customers and Suppliers
ØCommunicating Downstream
ØActively Solicited Customer Feedback Approaches
ØPassively Solicited Customer-Feedback Approaches
ØManaging Customer Retention And Loyalty
ØCustomer Relationship Management Systems (CRMS)

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 Strategic Quality Planning
The Voice of the Customer
Chapter 5

Customer service is important because:

Customers will tell twice as many people about bad
experiences as good experiences.
70% of your customers will remain your customers if you resolve the
complaint satisfactorily.
Service firms rely on repeat customers for 85% to 95% of their
business.
80% of new product and service ideas come from customers.
The cost of keeping an existing customer is 1/6th of the cost of
attracting new customers.

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Strategic Quality Planning

The Voice of the Customer
Customer Driven Quality
ØCustomer-driven quality – This is a proactive approach to
satisfying customer needs that is based on gathering data about
our customers to learn their needs and preferences and then
providing products and services that satisfy the customers.
ØCustomer needs are constantly changing. If you are
attempting to meet customer expectations you are in a reactive
mode because you are pursuing a moving target.
ØReactive customer-driven quality – This occurs when a firm’s
quality performance is increasing while customer’s expectations
also are increasing. Problems occur when the customer’s
requirements increase at a faster rate than quality and service
improvement. This places the firm in a reactive mode that may
signal the need for major process and service redesign.

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 Strategic Quality Planning
The Voice of the Customer
What is the voice of the customer?

ØVoice of the customer – This is the wants, opinions,

perceptions, and desires of the customers. This can be a
standardized, disciplined, and cyclic approach to obtaining and
prioritizing customer preferences for use in designing products
and services.

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Strategic Quality Planning

The Voice of the Customer
Customer-Relationship Management

Approximately 90% of the business for service firms is repeat

business. The focus of process and system design must be
on developing relationships with customers rather than
simply providing clean transactions at each stage of the process.
Customer relationship management views the customer as a
valued asset to be managed.
In relationship management, the tangibles (facilities and
machinery) meet the intangibles (professionalism and empathy)
to provide a satisfying experience for the customer.

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 Strategic Quality Planning
The Voice of the Customer
Customer-Relationship Management

Complaint
Resolution

Feedback
Customer
Relationship
Management Gurarantees

Corrective
Action

Four components of a Customer-Relationship

Management Process
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Strategic Quality Planning

The Voice of the Customer
Customer-Relationship Management - Complaints

Ø Complaints should be viewed as opportunities to improve. Because

only a small percentage of customers ultimately will complain, this
small percentage may represent a much larger population of
dissatisfied customers.
Ø Complaint resolution process – This involves the transformation of
a negative situation into one in which the complainant is restored to
the state existing prior to the occurrence of a problem. The recovery
process must document complaints, resolve complaints, document
recovery, and provide feedback to the customer and feedback to the
firm for system improvement.
Ø You must compensate customers for losses.
Ø You must show contrition.
Ø You must make it easy for complainants to reach resolution to simple
complaints.

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 Strategic Quality Planning
The Voice of the Customer
Customer-Relationship Management - Guarantees

Ø To design a process that ignores product and service failures is a

form of denial.

Ø The guarantee is both a design and an economic issue that must be

addressed by all companies before the first sale occurs.

Ø Guarantees should be designed prior to beginning business so that

employees can be trained to implement the guarantee and marketing
can advertise the guarantee properly.

Ø Guarantees are an important economic issue because of the sales

potential that is created by a guarantee and the costs associated with
fulfillment of the guarantee.

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Strategic Quality Planning

The Voice of the Customer
Customer-Relationship Management - Guarantees

Ø To be effective, a guarantee should be:

Ø Unconditional – No small print exceptions.

Ø Meaningful – Customer grievances must be fully addressed.

Ø Understandable – The customer must be able to understand easily the

parameters of the guarantee and how to achieve resolution quickly.

Ø Communicable – The phrasing of the guarantee should resonate with

the customer.

Ø Painless to invoke – The customer must not be inconvenienced too

much.

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 Strategic Quality Planning
The Voice of the Customer
Customer-Relationship Management – Corrective Action

Ø Corrective Action – This means that when a service or product

failure occurs, the failure is documented and the problem is
resolved in a way that it never happens again. Teams should be in
place to regularly review complaints and to improve processes so
that the problems do not recur.

Ø Closed-loop Corrective Action – The loop is in effect closed

because a process is in place that ensures that complaint and field
repair data is used for improving processes.

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Strategic Quality Planning

The Voice of the Customer
The “GAPS” Approach

Ø Gap – This refers to the differences between desired levels of

performance and actual levels of performance.

Ø Once a gap is identified, it is a candidate for corrective action and

process improvement.

Ø Gap Analysis – The formal means for identifying and correcting

gaps.

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 Strategic Quality Planning
The Voice of the Customer
Strategic Supply Chain Alliances…
Ø Competitive Model – the traditional customer-supplier
relationship in which one party attempts to gain advantage over the
other. Theoretically, the competition among the suppliers drives
costs lower and quality higher. However, this theory ignores the
costs associated with variability in materials created by using
multiple suppliers which is a major cause of defects.
Ø Single-sourcing Model – this model develops relationships with
a few suppliers for long contract terms.
Ø Strategic Partnership Model – developed from single-sourcing
arrangements where the suppliers become de facto subsidiaries to
their major customers. These suppliers integrate information
systems and quality systems that allow close interaction at all
levels. Suppliers also enter into agreements to reduce costs and
improve productivity and are graded on an annual basis concerning
the attainment of these©targets.
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Strategic Quality Planning

The Voice of the Customer
Communicating with Customers

Marketing views every dollar of income equally. Operations does

not view a dollar of income from diverse customers equally with a
dollar of income from a single set of homogeneous customers for a
single product or service because of the costs and confusion
associated with trying to satisfy diverse customer groups with
different products or services.

Customer rationalization results from marketing and operations

focusing on those products and services for the 20% customers
that contribute 80% of the profit.

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 Strategic Quality Planning
The Voice of the Customer
Customer-Feedback approaches

Actively solicited customer-feedback approaches – includes all

supplier initiated contact with customers, such as:
Øtelephone contacts

Øfocusgroups
Øcustomer service surveys

Passively solicited customer-feedback approaches – includes

all customer initiated contact, such as:
Øfillingout a complaint card,
Øcalling a toll-free complaint line, or
Øsubmitting an inquiry via a company’s Web site

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Strategic Quality Planning

The Voice of the Customer
Customer Relationship Management Systems

Customer relationship management systems (CRMS) – use

data to manage the following phases of the customer life cycle:
Acquisition
Retention
Enhancement
CRMS monitor customer interactions and preferences through
media such as customer transaction records, call center logs,
searches, and Web site clicks.
CRMS are used to identify active customers, inactive
customers, and the profitability of customers.

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 Managing Quality
Integrating the Supply Chain
S. Thomas Foster

Chapter 6
The Voice of the Process

09/23 – 4:30AM

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

What is the error rate in typical start-up operations?

Most startup operations have ad hoc processes with error rates

of 20-30% in research and design, staffing, procurement,
inbound shipping, receiving, operations, marketing, sales, order
fulfillment, outbound shipping, and billing. When the economy
turns down or sales increase significantly, the costs of fixing
these defects kills these operations if the business does not reduce
these error rates.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws
How is the 20-30% error rate in start-up operations reduced to 3%
normal error rate over time?

Over time, these businesses get to error rates of around 3% through

trial-and-error and common sense, but progress is slow and
expensive.

What is the problem with allowing the 3% normal error rate to persist?

These operations are vulnerable to the very few “quality”

competitors.

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

Why can operations with 3% error rates be profitable?

These operations can be profitable at this level because most of

the competition has the same problems. Most of these
businesses fail to improve beyond this 3% level.

What is the ripple effect from the 3% normal error rate?

A typical 3% error rate organization is wasting a significant

amount of its resources fixing errors caused by ineffective and
inefficient processes that have a ripple effect of 6-18% as the
effects of errors flow through marketing, sales, ordering,
production, fulfilling, and billing causing more errors.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

Why is there a ripple effect?

One error leads to other errors.

What is the “hidden factory” found in normal firms?

Every 3% error rate organization manages two “factories:” a

mainline factory that delivers your product or service, and a hidden
“fix-it” factory that cleans up all of the errors, defects, and delays
that occur in the main factory. This fix-it factory includes all of the
manpower, material, methods, machinery, feedback, environment,
time, and technology to correct and compensate for the original error
or flawed process and the flow-through effects.

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

Where is this “hidden factory” found in normal firms?

Everywhere, we are including all functions in the organization

in the 3% error rate (e.g., research and design, staffing,
procurement, inbound shipping, receiving, operations,
marketing, sales, order fulfillment, outbound shipping, and
billing), not just manufacturing or sales.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

How much of the organization’s resources are spent on the hidden

“fix-it” factory?

If you are a 3% error rate organization with a 6-18% ripple

effect, then the fix-it factory, which we find throughout the
organization, is costing you approximately 35% of every $100
you spend because of the ripple effect. If you spend $10 million,
then you could eliminate approximately $3.5 million of these
expenses if you completely eliminated the hidden fix-it factory.

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws
What is the 85/15 rule?

85% of the causes for errors are due to flawed processes and
only 15% are due to human error. This is the 85/15 rule which
means processes are the primary cause of errors, not people.
Employees typically try to do things the right way, but the flawed
process design influences their actions. So an error is more likely
a sign that the process needs reworking than it is an indication
that an individual needs training or reprimanding. When you
have errors, the process is talking to you.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

What is the 80/20 rule with regard to the location of process

problems?

20% of the processes cause 80% of the problems.

Why does the 80/20 rule occur?

You will have a small number of key processes which are

more complicated, error prone, and difficult to manage.

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

What do the 85/15 and the 80/20 rules mean to you as a manager?

If you focus your improvement and correction efforts on the

20% of the operations which are giving you 80% of your
problems, and you focus just on the processes and not the
employees, you will have the potential of resolving
approximately 68% of your problems (i.e., 80% * 85% = 68%).

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

If you focus on the 85/15 rule and the 80/20 rule, how much of your
plant expenses can you recover by eliminating the hidden plant
if you hold all other factors constant?

If you hold all other factors constant and you do a perfect job of
correcting the flawed processes, you could recover approximately
24% of your expenses (35% x 85% x 80% = 23.8%) by
focusing on 20% of the processes which produce 80% of the
errors.

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

If you focus on the 85/15 rule and the 80/20 rule, why can’t you
recover approximately 24% of your expenses?

You cannot hold all processes constant. In other words,

you will have continuously changing processes and you
will have new processes added. Also, you will not do a
perfect job at correcting and improving processes.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

Why can’t you hold all processes constant?

Your firm is an open system and processes must constantly

change, because of changes in manpower, materials, methods,
machinery, feedback, environment, timing, and technology. Also,
you will need to add new processes which will either replace
older processes or will add to the current system. These changed
processes and new processes will have design flaws which
require work-arounds and will initially produce 20-30% errors.
But if you can cut your “hidden-plant” fix-it expenses by 10% by
continuously focusing on the most costly processes, with regard
to errors and flawed design, then you will have a competitive
advantage

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Chapter 6 - The Voice of the Process

The Hidden Factory Caused By Process Flaws

Why does the 3% error rate in normal organizations persist?

Because these organizations do not know how to systematically

correct or improve processes, their trial-and-error and common
sense efforts cannot get their error rates below 3%. And they
continue to experience error levels of 6 to 18% across the
enterprise because of the ripple effect from the 3% errors. One
error causes many other errors.

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 Chapter 6 - The Voice of the Process
The Hidden Factory Caused By Process Flaws

How do organizations react to the normal 3% error rate?

These organizations have standardized the procedures used to

work-around these “normal” errors. Some of their
employees are making a career of managing these work-
arounds and errors so they have an interest in making sure
these errors continue. In fact, these employees are highly
regarded for their expertise in this endeavor. They have
positions of authority with subordinates and a suite of offices.

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Chapter 6 - The Voice of the Process

Cutting Costs

Why do top performing firms continuously focus on reducing their

costs?

Top performing companies achieve nearly half of their total

profit improvement directly from continuously reducing
their costs. In other words, if their profit improves from $1
million to $2 million over a year, then their cost reduction
programs caused $500,000 of that $1 million improvement. Top
performing firms exploit their skill in cost reduction to provide
increased profits without an increase in revenues. This skill in
cost reduction becomes a competitive advantage. Competitors
cannot buy or hire this skill. You must grow this skill within
your firm because this skill is judgment intensive and context
dependent.

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 Chapter 6 - The Voice of the Process
Cutting Costs

What do top performing firms focus on in continuously reducing

their costs?

WNJV

These top performing companies focus on continuously reducing:

§ waste,
§ non-value-added time,
§ just-in-case buffers, and
§ variances.

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Chapter 6 - The Voice of the Process

Cutting Costs
How do top-performing firms achieve their cost-reduction
objectives?

LCAV

Disciplined cost-cutting managers continuously make

clear the link between cost reduction and
competitiveness. They find strong champions within the
firm to lead the effort. They continuously conduct quick and
rigorous analyses to discover and reduce or eliminate
waste, non-value-added time, just-in-case buffers, and
variances. These cost reduction methods do not change,
constrain, or starve the value-added portion of the
business model.
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 Chapter 6 - The Voice of the Process
Cutting Costs
Why do costs continuously increase without effective cost-reduction
systems?

All firms are bureaucracies and bureaucracies tend to

become increasingly complicated and layered because
of empire-building and ineffective changes and
growth. Firms continuously change existing processes
and create new processes. These changed processes
and new processes are not automatically cost-effective
(i.e., these changed and new processes will initially have
20-30% error rates). Management must consciously and
continuously simplify bureaucracies and processes and
eliminate waste, non-value-added time, just-in-case
buffers, and variances.
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Chapter 6 - The Voice of the Process

Cutting Costs
How do normal firms reduce costs?

Normal companies intermittently, usually driven by a crisis, try

to reduce costs using across-the-board cuts (e.g., cut head
count by 10%) without excluding the value-added processes
which are already cost effective.

What is the problem with across-the-board cost reductions?

If a process is very cost effective (i.e., highly productive) and

you attempt to cut costs across-the-board, you will destroy
the value-added portion of the process. Doing across-the-
board cost reductions can cause irreparable harm to a company’s
product portfolio and services infrastructure.

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 Chapter 6 - The Voice of the Process
Cutting Costs
What are the symptoms of process flaws which cause waste, non-value-
added time, just-in-case buffers, and variances?

D3/OSN2/MISS/FLP/BQL/CBEDB/TVPD/YU/MVT<>D

decisions movement confusion thru-put time > value-added time

delays inspection bottlenecks production rate <> demand rate
downtime storage errors yield < 100%
overages setups defects utilization < 100%
shortages forks buffers mix/volume/timing <> demand
non-linear loops
non-level pooling When you see these symptoms,
batches the process is talking to you.
queues
lead-time
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