Many organizations have been disappointed with the bottom-line results from their quality activities. Often they have worked hard but have found that demonstrating actual results has been difficult. When quality efforts are not tied directly to business goals and operations plans, it is not surprising that we can see markedly different results from organizations with similar efforts.
A simple example based on actual results from a leading organization may help to explain this. A company had three similar business units with similar production processes. Business unit A launched a yield improvement program to improve throughput. They had 12-percent first-pass failures, and the rework was tying up personnel, plant facilities, and management and engineering time. Their improvement teams were quite successful and within a year had improved their first-pass yields to 99.5 percent; only 0.5 percent of the products were now "recycled" through the production line.
The savings in rework, scrap, and testing and handling time were significant, almost $200,000 per year. But these savings were dwarfed by the 11-percent increased capacity. The plant had been running at almost full capacity for some time, but sales were growing at only 5 percent per year. The board had already approved the capital for a major investment in plant expansion. The 11-percent increased capacity through the yield improvements gave them a two-year postponement in the plant expansion, which drove the total value of process changes and other improvements to nearly $2 million per year.
After estimating the costs of the teams' training, support, time spent on the projects and other resources needed, plus the extra marketing and sales force expenses, business unit A calculated a 10-to-1 return on investment by the end of the second year.
Business unit B heard of these remarkable results and attempted to replicate the gains. They had about 15-percent first-pass failures with similar rework, scrap and wasted facilities. They were able to replicate many similar improvements and reduced the failures to 2 percent. But this 13-percent reduction in total product failures for them only resulted in about $200,000 in savings. Their plant had been running at only 70-percent capacity, so the yield improvements did not add to any increase in sales beyond normal growth.
Their return on investment was only 2-to-1 by the end of the second year, but savings would continue to increase year after year if they held the first-pass yield at 98 percent.
The third business unit, C, was quite excited about the possibility of improving yields. Like B, they had about an 85-percent first-pass yield rate, but like A, they were already running the plant at full capacity. However, they had also implemented many quality activities in their sales and marketing department, and had improved both effectiveness and efficiencies of their entire field force. They felt that without adding any more staff, they could increase sales and continue to improve support and service.
The entire business unit was also quite sophisticated and mature in its quality management. Strategic plans and annual business operations plans integrated quality, technology, marketing and financial action plans.
They quickly spotted the yield improvement results of business unit A and were soon in almost daily discussions with managers, engineers and team members from business unit A on how to best replicate some of the most appropriate process changes. They soon reduced their first-pass failures to less than 1 percent and, coupled with the marketing and sales improvement efforts, increased total sales by 14 percent. Since many of the process changes and other improvements they made were based on the experiences and advice of business unit A, unit C's investment was roughly half of what unit A had spent.
With the 14-percent increase in production through yield improvements enabling them to increase sales by 14 percent, lower investment costs by replicating many changes pioneered by business unit A, and almost no additional sales and marketing costs, business unit C had better than a 20-to-1 return on its quality investment by the end of the second year.
These three business units had similar quality improvement results, but their bottom-line results were quite different and their returns on investment even more different. By understanding the business goals, the current business opportunities and our true costs and operational constraints, we can choose projects with strikingly different contributions. Far too few of our quality leaders are integrating quality management with business management.
About the author
A. Blanton Godfrey is chairman and CEO of Juran Institute Inc., 11 River Road, Wilton, CT 06897. He welcomes comments or questions on this or other articles either by fax at (203) 834-9891 or e-mail at godfrey@netaxis.com.