I
sometimes think we try too hard to sell quality. Having seen many miracles while working, consulting and teaching, we've become convinced that improving quality will solve any company's most pressing problems. We rush right in with methods that we've seen work in other organizations without stopping to learn what a particular company's specific challenges are at that point in time.
Without knowing what a company's major problems or opportunities are, we put too much trust in luck when starting an assessment, hiring a consultant or beginning training. For example,
we often just assume that reducing defects, improving throughput and increasing production will help the company. But when a company is only running at 70 percent of capacity, improving
production adds very little. Of course, the company will save money by reducing defects and rework and improving throughput, but the savings will be minor compared to the missed opportunities in
other areas. A company running far below capacity creates products with high capital costs for each unit. All fixed costs are divided by a denominator that is likely far smaller than the
original business plan assumed. A simple example suffices: Two companies with equal total investments in capital and equal unit costs in every other way (labor costs, sales and distribution
costs, materials costs, service and warranty costs, etc.) but with significantly different capital utilization costs will have significantly different margins. If, for example, capital costs for
one company with X units of production are 20 percent, capital costs for the other company with 2X units of production will only be 10 percent. For many companies, that 10-percent difference is
the margin between profit and loss. It should be obvious to the first company in this example -- and to its quality staff or outside consultants -- that the issue is sales. The quality
issues are product quality or, in some companies, product differentiation for increased market competitiveness. Reducing capital investments is a harder task: For many organizations, unless there
is a good market for the used equipment and the buildings, shutting down half of the production units is a last resort. There is another, hidden capital cost: the cost of finished goods.
Whether in warehouses (now often called "distribution centers") or in transit, finished goods can represent a large capital investment. Several years ago, while I was working with a
chemical company, we discovered that the average delivery time for a tank car of specialty chemicals was greater than 30 days. The company's distribution staff had taken the lowest bid from the
railroads, which meant that the cars were often shuffled in switching yards so the railroad could manage its costs. By purchasing premium shipping, the company was able to lower the average
shipping time to seven days. The 23-day savings in finished goods inventory for these expensive chemicals increased profits by more than 30 percent. Other companies face far different
challenges. Some sell products as fast as they can make them. For these companies, every improvement in throughput and capacity is extremely profitable. Sometimes the gains are surprisingly
large. One company that was totally out of capacity, with sales growing at 5 percent per year, was stunned by a quality improvement team's production improvement of 11.5 percent. The postponement
of the planned investment in new facilities was worth several million dollars. Another company was able to reduce downtime of production equipment and eliminate late shipments (averaging more
than 10 percent of all shipments). These late deliveries were putting large contracts with the auto companies at risk (they had already lost one) and were the critical issue facing the company at
that time. Many other companies have found their profits eroded by warranty costs. For some industries, such as the building construction industry, this can be the survival factor. Each
return visit to the new house or apartment, especially after the new owner has moved in, creates enormous ill will, and fixing wiring, plumbing, paint, or heating or cooling problems after the
unit is finished is extremely costly. For some companies, reducing warranty costs is a matter of doing the job right the first time. For other companies, it's about sophisticated reliability
tools and understanding statistical reliability and reliability prediction. One of the best features that I see in most Six Sigma Black Belt training courses is the heavy emphasis on
determining the cost of poor quality and establishing good estimates of projected or potential savings early in the definition phase of the project. If we use the newer, nontraditional
definitions of poor-quality cost in these definitions, we are definitely building a business case. If we don't just blindly pick the costs that appear highest at first glance and we understand
the business plan and the challenges and opportunities facing the company, we can make good decisions when we choose projects. Building a business case for all quality initiatives can
lead to real improvements to an organization's fortunes. Too many quality management personnel are disconnected from the business plans and operations of the company. Too often a company doesn't
share the company's business plan with outside consultants. In both cases, the odds are that the quality efforts are not connected to the real needs of the company. About the author A. Blanton Godfrey is dean and Joseph D. Moore Distinguished University Professor at North Carolina State
University's College of Textiles. Prior to his current assignment, he was chairman and CEO of Juran Institute Inc. E-mail him at agodfrey@qualitydigest.com . |
