The American quest for quality

The American Quest for Quality

Woodruff Imberman

T wenty years ago, industry in America and Europe was taking a beating from the competition of Japanese defect-free prod-

ucts, which could not be matched. Western autos and trucks, construction equipment, industrial machinery, and consumer electronic durables such as television sets and VCRs were all regarded as inferior to their Japanese counterparts.

Today American industry has come a long way in meeting the Japanese quality challenge. Many manufacturing industries have improved their quality significantly, and in general the quality of American output is now very respectable. How was that improvement achieved, and what can we expect in the future?

How well American industry has progressed toward zero-defect output might be judged from our firm's annual survey of industrial plants in six Great Lakes states: Pennsylvania, Ohio, Michigan, Indiana, Illinois, and Wisconsin. In monthly bulletins covering industry in those states, we report on a variety of industrial topics, such as material handling methods, personnel policies, quality standards, overtime policies, reactions to NAFTA, and other trade matters. The data include: survey results; reports from companies, trade associa- tions, trade journals; and extrapolations from individual company accounts.

The results regarding quality for 1994 and 1997 appear in Table 1 on the next page. They show the costs of poor quality--scrap, waste, rejects, repairs, rework, reinspection, repacking and shipping, warranty funds, claims adjustment, concession adjustments, replacement, additional overhead, and loss of good will--as a percentage of sales revenue, which is the best index of defect levels. The conclusion from the comparison of the yearly data is obvious: Most manufacturing industries have improved their quality, as evi- denced by the decline in rejects and rework. The progress is heartening, even though poor quality is still around. In late 1997, Purchasing queried

1,000 electronics purchasing agents to rate the quality of 18 of the major components they buy. Considerable progress has been achieved over the past years; 80 percent of components are now rated defect-free, although 20 percent are still only fair or poor.

In the main, American industry's success in boost- ing quality (curtailing de- fects) by 10 to 30 percent in most industries is due to three factors: the globalization of industry, the introduction of ISO-9000 and QS-9000, and the expansion of quality incentive pay programs to motivate employees to co- operate in the quest for quality.

INDUSTRIAL GLOBALIZ.ATION AND INTERNATIONAL QUALITY STANDARDS

T he growing globalization of many industries means that U.S. producers have had to meet the needs and expectations of

foreign customers demanding top-flight products that meet world quality standards. What world standards? ISO-9000, or, more formally, "Quality Management and Quality Assurance Standards"-- the pan-European response to the threat of high- quality Japanese products in those markets.

In 1987, the International Standards Office (ISO) of the European Union set quality standards for European industries desiring to preserve their markets by achieving zero-defect products. Hav- ing the ISO-9000 certification served as a docu- mentary badge of high quality. This applied not only to Original Equipment Manufacturers (OEMs) but also to their myriad suppliers--the smaller companies that produce the nuts and bolts and subassemblies that go into the OEM products.

The American Quest for Quality 11

Table 1 Cos t o f P o o r Qual i ty as p e r c e n t o f Sales

1994 Low High

1997 Low High

Manufacturing Industries Aluminum extrusion products 4.4 7.1 3.9 5.3 Automotive stampings 4.3 7.0 3.9 5.6 Bolts, nuts, rivets, washers 5.2 7.1 3.0 5.0 Construction machinery 6.2 7.6 3.7 5.5 Electronic components 6.3 8.2 3.6 5.3 Farm machinery and equipment 6.1 7.2 4.1 4.8 Foundries, aluminum 5.2 7.3 3.5 5.1 Forgings, nonferrous 5.9 6.9 6.5 7.1 Industrial machinery 7.0 8.2 4.5 5.8 Metal stampings 5.9 7.2 4.4 5.3 Motor vehicle parts and accessories 7.2 8.8 5.1 5.7 Office machines 5.4 7.1 4.1 6.4 Screw machine products 5.3 7.0 5.6 6.2 Steel wire and related products 5.9 7.2 6.4 7.8

sources.. Tooling & Production, January 1994, p. 12; Fletcher (1998).

In the main, the ISO-9000 system (there were several parts to it) required a company to maintain:

1. a comprehensive quality manual; 2. a detailed procedural manual; 3. work instructions; and 4. records. American companies selling durables in the

European market discovered that they had to meet these ISO quality requirements. More im- portant, American firms competing against Euro- pean companies in their own domestic markets had to meet high consumer expectations of quality. During the 1970s and early 1980s, remarks about the high quality of Japanese cars became commonplace. Detroit heard the message and began paying some attention to quality, such as its finishes and "fits" (how well all the parts fit together).

During the 1980s--the real "Me Decade," according to some- - the cachet of foreign cars grew, to the detriment of Detroit. Cadillac was out, Mercedes was in; Lincolns were pass6, but Porsches were perfect. Consumer attitudes like these put pressure on American companies producing such end products as autos, machinery, electronics, and electrical items, as well as those producing such components as printed circuit boards, auto parts, machine tools, and filtration products. Meeting ISO standards became a neces- sity for many corporations.

ISO certification does not come cheap. Amy Zuckerman (1997), a guru in this field, warns that instituting an ISO-9000 program to meet quality specifications "has a base price of $35,000, yet midsize companies can pay up to $250,000, [and]

Improvement

+19% +16% +34% +33% +39% +33% +23%

-6% +33% +20% +34% +16% +3% -6%

major companies can see costs hit the $1 million mark."

American firms initially regarded ISO-9000 as just another trade barrier set up to handicap their producers. But they quickly came to realize that if they wanted acceptance for their products in European markets, or acceptance of their components by foreign OEM producers with U.S. plants (Nissan, Honda, Mitsubishi, Toyota, and so on), they had to have ISO-9000 certification.

In the early 1990s, American durable producers were quite compla- cent about meeting ISO-9000 standards. But by 1994, according to the Institute of Management Accountants, 57 percent of durable exporters were actively engaged in preparing themselves for ISO certification. By 1998, the percentage had risen to 74 percent. ISO was a real wake>upper for American manufacturers.

THE AMERICAN PLAN

T he second factor leading to the upsurge in American product quality came in September 1994, when QS-9000 was

thrust upon the U.S. industrial world by the Auto- motive Industry Action Group (AIAG), represent- ing Ford, Chrysler, and General Motors. The system, called "Quality System Requirements," was the American automotive version of the European quality standard system. It had all the ISO-9000 requirements, plus additional features concerning timely delivery, higher productivity, lower unit costs, and continuous improvement programs. The Big Three automakers laid it on pretty thick; QS-9000 enhancements include:

• mandated 100 percent on-time deliveries; • short-and long-term business plans; • conducting and reviewing feasibility studies; • continuous system improvement; • monitoring customer satisfaction; • maintaining control plans from part proto-

typing through final production; • designing systems to identify efficiency,

quality, and productivity improvements; • implementing processes to ensure customer

expectations are met; and • following exacting process control man-

dates, statistical process control (SPC), and geo- metric dimensioning and tolerancing (GD&T).

These requirements applied not only to Tier 1 automotive suppliers like Dana, Monroe, and TRW, who sell directly to the Big Three, but also to Tier 2 and 3 companies like Fanuc Lubriquip, Rostra Controls, Felton, and Colonial Rubber,

12 Business Horizons / September-October 1999

who produce for the Tier 1 suppliers. QS-9000 was initially intended for automotives, but it was quickly adapted by OEM manufacturers of trucks, farm vehicles, off-highway equipment (tractors, cranes, pavers, and so on), industrial machinery, and electrical appliances. The standards applied not only to the end products, but also to the bells, whistles, widgets, and gadgets that go into them. These components are not inconsequential. Table 2 provides estimates of outsourcing (pur- chase of components and/or services) by some major industries--in dollar amounts, probably billions.

Faced with the Big Three's dictat, many Tier 1 suppliers quickly fell in line, and a growing number of Tier 2 and 3s began to scramble to meet the specifications. These standards were also imposed on suppliers to the construction equipment producers, electric and electronic appliance makers, and other producers of durable goods- - f rom 55,000 to 100,000 companies, depending on who's doing the counting. By the end of 1997, about 20 percent of the eligible companies were QS-9000 certified.

Obtaining QS certification is no routine mat- ter. More than 60 percent of companies trying for it fail their first registration test, says Bridget (1995). A company's certification can be granted only by one of several independent auditor orga- nizations functioning under the constabulary eye of the automakers, who watch to see that the requirements are actually met. Boiled down to their essence, QS-9000 companies must have written quality procedures for each and every function, from receiving incoming materials to final packaging and shipping--all supported by a master quality manual minutely documenting evewthing. The procedures must meet or exceed those dictated by the Big Three in their "Quality System Requirements: QS-9000." All employees must know the procedures relating to their jobs, practice them, and keep voluminous records to prove it. Moreover, periodic updates are needed to ensure that the standards are being kept, and everTthing is up to snuff.

The average cost of preparing for QS-9000 certification is $118,100, according to a 1997 survey sponsored by Automotive Industry Action Group and the American Society for Quality (Fellenstein 1998). This is no small burden, even though it has declined somewhat. In 1998, many small and medium-size companies reported to the AIAG that a major barrier to their certification was the strain it put on their financial resources.

Although the Big Three are far from satisfied with component quality, they are happy about the progress being made. Referring only to automotive component producers, the AIAG reports in its 1998 Annual Quality Survey, "From a performance improvement perspective, 48 percent of

Table 2 Percent o f Final Output Due to Outsourcing in Various Industries

Construction machinery Machine tools, metal cutting types Farm machinery and equipment Machinery, general industrial Metal stamping Motor vehicles

24 to 28% 24 to 27% 29 to 32% 19 to 32% 9 to 12%

38 to 42%

Source: Imberman (1997)

our respondents reported improved ppm (parts per million) defect rates, 38 percent have experienced better on-time shipping performance, 23 percent have increased OEM market share, and 'Rework, Scrap and Returns' were improved by more than 10 percent."

While the apparent emphasis of the ISO Eu- ropean systems was on defect-free quality, the Big Three added thumb screws and the rack in their QS-9000 system, using it to enforce rigid price discipline. Every supplier from Tier 1 down to Tier 3 is facing pressure on costs and prices. As pointed out by Lawrence Chimerine, chief economist of Washington's Economic Strategy Institute, "Companies are keeping pressure on suppliers to hold down their prices. Controlling costs allow companies to maintain margins with- out bumping up prices and setting off an escalat- ing pattern of prices and costs feeding off each other" ("Trends in Quality" 1998).

The strictures of QS-9000 were not lost on suppliers. By 1998, at least two-thirds of companies reporting to the Management Accountants Institute were "strongly involved" in cost-cutting and productivity improvement.

Need More Improvement

The imposition of QS-9000 has indeed put the squeeze on suppliers to boost quality and productivity. But there is still much to do. In 1997, Hewlett-Packard reported a comparative study of 300,000 semiconductors produced by American and Japanese companies (Marino 1997). The result, based on inbound inspection, showed that the failure rate of American chips averaged a trifle over 0.1 percent. Good enough? Not quite. The Japanese failure rate was zero.

Arthur Andersen Consulting also reported in 1997 that in terms of quality, Japanese Tier 1 suppliers produced 193 defective parts per million compared to 263 in the United States. This represented a big U.S. improvement over past years. However, Andersen found that among Tier 2 suppliers (who feed Tier 1 suppliers), the defect rate of U.S. companies was seven times


higher than that of Japanese firms, thereby affect- ing both productivity and costs. "The Tier 2 companies were getting away with it because of the current sales boom," Andersen reports.

Obviously, there is still a way to go to reach zero-defect levels. But many American companies report that improving quality and productivity has become a way of life. According to Litsikas (1997), Salvatore Bonanno, former president of Foamex, a major supplier of foam-related products to the Big Three, reports that in his company's experi- ence with QS-9000, product quality and productivity improvements resulted in a $3 million savings in 1996 and $7 million in 1997, with customer returns down 25 to 40 percent. Solvay Au- tomotive Inc., another major Tier 1 supplier, has already seen its ppm defect rate decline by 95 percent.

Stundza (1997) reports on improvements experienced by several companies. Honeywell 's Industrial Automation Controls business annually purchases over $400 million of parts for com- puter-based control systems. By applying QS- 9000 standards on all its suppliers, says vice president Terry Sueltman, Honeywell reported in 1997 that product quality defect rates were cut by 90 percent, customer reject rates by 60 percent, lead time for parts shipments by 75 percent, manufacturing cycle time by 90 percent, manufacturing costs by 35 percent, and warranty costs on end products by 35 percent. Standard Prod- ucts Co., a $1.2 billion automotive components producer headquartered in Detroit, managed to achieve productivity improvements of 25 to 30 percent, and has reduced work-in-progress by 80 percent, according to Mark Griffin, corporate director of quality assurance. Black & Decker reported a 29 percent plantwide productivity gain, a 74 percent reduction in work-in-progress, and total savings of $4.6 million from 1994 to 1997.

Table 3 Percent o f Surveyed Plants Using Incentive Plans to Boost Productivity

1990 1994 1998 Yearly bonus 22% 18% 14% Individual merit awards 24% 21% 14% Profit-sharing on retirement 19% 26% 32% 401(k) contributions 15% 18% 20% Cash profit-sharing 6% 9% 10% Individual piece work 12% 10% 9% Departmental incentives 13% 18% 20% Group incentives (gainsharing) 5% 14% 23% Prizes (merchandise, trips, etc.) 8% 10% 12%

Source.. Imberman and DeForest, annual surveys o f industrial plants in six Great Lakes states, various years.

By the end of 1997, Chrysler could report a 20 to 25 percent overall improvement in quality from its suppliers. Ford and General Motors reported no specifics, but Dan Reid, manager of worldwide purchasing at GM-Pontiac, stated, "We've received positive benefits from suppliers' performance" (AIAG/ASQ 1998).

EMPLOYEE INCENTIVES

T he third factor in the drive for American quality and productivity improvement involves incentive pay plans. To gain

employee cooperation in the endless efforts and documentation required by the ISO and QS systems, American manufacturers have adopted or expanded a variety of incentive pay plans aimed at motivating their work forces to boost quality, improve productivity, and cut costs. As Frederick W Taylor, the father of "scientific management," once emphasized, "Men will not do an extraordi- nary day's work for any ordinary day's pay" (Kanigel 1998).

One of the main weaknesses of the old Qual- ity Circle movement that was briefly popular in the late 1970s and early 1980s was the meager reward. All that employees received for the extra effort and time they invested in improving opera- tions was the opportunity to present to upper management their suggestions for change. So they quickly began to ask themselves, "What's in it for me?" The answer--making a presentat ion-- came up short in most employees' views.

Similarly, employees do not take lightly the extra efforts they perceive they must make to gain and retain their employer's ISO or QS certification. The perceived need for an extra incentive is strong among work forces.

Productivity

What incentive plans have been used, or mis- used? Many clues are available in our surveys of 427 companies in the Great Lakes states (see Table 3). Roughly 96 percent of these firms use some sort of financial incentive to stimulate productivity and better quality. Payment of straight hourly pay with no special provision to stimulate special effort is no longer regarded as sufficient by almost all the managers.

Thus, a glance at Table 3 indicates that a shift toward the use of some kind of incentive plan has taken place in the last decade. Those with the largest percentage gains in popularity have been gainsharing (a form of large group incentives), followed by profit-sharing and gains in small group incentives (such as departmental).

The deferred profit-sharing plans have a variety of forms and many flexible provisions for giving employees access to their funds. These


plans are completely funded by company profits. Similarly, there has been a growth in 401(k) plans, the tax-deferred defined contributory retirement savings vehicles. Some of these plans allow employees to make their own deferred contributions for retirement. Employers often match a percentage of participant contributions.

Profit-sharing and 401(k) plans are the most common types of deferred contributory plan. In 199~ there were 685,000 defined contribution plans, of which 220,000 were 401(k) plans, according to the most recent estimate based on Department of Labor statistics.

The growth in the number of profit-sharing and 401(k) plans indicates management's belief that such incentives are strong motivators of the work force. But although such plans are highly prized by management and workers, the question arises as to whether they effectively motivate hourly employees to alter their day-to-day activities and efforts on the factory floor. How well does it plan paid upon ret irement--a benefit received 40 years from now--motivate the daily activities of a 25-year-old employee? Not much. Moreover, smaller, often closely held companies are reluctant to reveal profit data. The company contribution is often received as a "mystery bonus." Nice, but employees usually don't under- stand why they received what they did.

Profit-sharing has developed into an entitle- ment rather than a motivator. In a few cases, it is paid annually, at the end of the year. Though more immediate, even a year-end bonus is still too far removed in time to provide daily motivation or cause hourly employees to change their daily behaviors.

In its monthly bulletin of May 1996, Paine Webber reported that companies offering incentive pay to non-executives increased from 47 percent in 1990 to 61 percent in 1996. By 1997, the percentage had risen to 74 percent. Such plans put extras into pay envelopes within short intervals.

Watson Wyatt, in its annual survey of incen- tiw~ programs "to be installed" in 1995-96 ("Tech- nicians..." 1994), reported that small group incentives led the list with 37 percent, followed by gainsharing with 13 percent. In 1997-98, those percentages had risen to 40 percent for small group incentives and 54 percent for large group ones, such as gainsharing.

Direct Effect

Gainsharing incentives are direct and timely, and are usually paid monthly to the group (small or large) for improvements. This follows the psycho- logical principle that rewards should be linked as closely as possible in time to efforts. As Schein (1970) describes it:

In terms of learning theory, workers can see under [a gainsharing plan] an immediate connection between their own efforts and the economic rewards they obtain as a group. They obtain immedb ate knowledge of results....This not only provides the workers with immediate gratification of social needs but also im- proves communication between management and the workers and greater in- volvement of workers in organizational activities.

And as Roach (1996) points out, "Gainsharing is a particularly promising way to bring workers into the growth equation. It allows the worker to have a direct stake in corporate performance."

G lobalization, the stimulus of ISO and QS-9000, and the growth of incentive pay plans have all combined to boost

quality and productivity in some basic American industries. Productivity in manufacturing rose at a 3.3 percent annualized rate in the second quarter of 1998, while unit labor costs advanced a mere 0.8 percent annual rate, according to the Bureau of Labor Statistics. Our current mild inflation probably reflects the cost/price stability, with higher productivity matching wage increases.

The ISO-9000 and QS-9000 systems currently affect mainly metal fabricating, electronics, and technological industries. So a whole slew of American industries are not subject to the ISO and QS demands, are not global in scope, and have no external pressure to improve quality.

But it seems none has been needed. The status symbol of Mercedes, Porsches, Rolex watches, and the other accoutrements of the quality-conscious "Me Decade" forced producers of all types of consumer goods to improve the quality of their output, even if they were not subject to ISO-9000 or QS-9000. Industries producing wearing apparel and other soft goods, packaged foods, furniture, packaging, plastic items, rubber goods, clocks, watches, costume jewelry, cosmetics, footwear- -even teenagers' backpacks--all responded to consumer aware- ness of higher styling and quality.

Much of the credit for the revival of quality and productivity in American manufacturing un- doubtedly goes to the Japanese, who scared the daylights out of many American executives. It took about ten years before American automakers managed to cope with the problem, particularly with Japanese automakers establishing plants in the U.S. and setting quality and productivity standards. But the Big Three did make the transition by devising QS-9000 standards and insisting that thousands of companies doing business with them meet those standards.


There are thousands of smaller American suppliers that have not yet qualified for QS-9000. But many of them are slowly trying to reach QS levels, and are altering their compensation systems to generate employee motivation, competition, and effort in the task. The ability of Ameri- can industry to adjust---even belatedly--is an encouraging sign of the flexibility and elasticity of that cliche, the free enterprise system. O

References

AIAG/ASQ Automotive Division, Annual Quality Sur- vey, 1998.

Automotive Industry Action Group (AIAG), Quality Systems Requirements.. QS-9000, August 1994, Detroit.

Dan Bridget, "Understanding the New QS-9000 Stan- dards," The Fabricator, July-August 1995, pp. 24-26.

"Chrysler Suppliers' Ideas Likely to Add $325 Million to Its '97 Net," Wall Street Journal, June 5, 1997, p. A6.

s.J. Fellenstein, "Registered Suppliers Sail to Smoother Waters," Quality in Manufacturing, March-April 1998, pp. 22-23.

Donald Fletcher, "Poor Quality Leads to Losses," As- sembly, September 1998, p. 14.

Woodruff Imberman, "Outsourcing Pressures Spur Suppliers to Grow," Tooling & Production Magazine, October 1997, pp. 28-30.

Woodruff Imberman, "The True Cost of Ignoring Qual- ity," Tooling & Production Magazine, January 1994, p. 12.

Robert Kanigel, The One Best Way.. Frederick Winslow Taylor and the Enigma of Efficiency (New York: Vi- king, 1997).

Mary Litsikas, "QS-9000 Scores High Among Suppliers," Quality, October 1997, pp. 24-30.

Sal Marino, "Is Good Enough Good Enough?" Industry Week, February 3, 1997, p. 22.

Paine Webber, monthly bulletins, May 1996 and May 1997.

Iris Poliski, "Climbing Toward Perfection," OEM Off Highway, July 1998, pp. 18-24.

"Quality Could Be Better," Purchasing, January 16, 1997, p. 101.

Stephen S. Roach, "The Hollow Ring of the Productiv- ity Revival," Harvard Business Review, November- December 1996, pp. 81-89.

Edgar H. Schein, Organizational Psychology, 2nd ed. (Englewood Cliffs, NJ: Prentice-Hall, 1970).

Jeff Sloan, "Micromolding: It Has to Be Perfect," Injec- tion Molding, July 1998, p. 69.

Tom Stundza, "Purchasing Evolves Into Supply Man- agement," Purchasing, July 17, 1997, p. 129.

Christine M. Taylor, "Climbing to QS-9000," Quality, April 1997, pp. 18-20.

"Technicians and Skilled Trade Personnel Compensa- tion," Watson Wyatt Services, 1994.

"Trends in Quality," Purchasing, June 18, 1998, p. 32.

Amy Zuckerman, International Standards Desk Refer- ence.. Your Passport to World Markets, ISO 9000, CE Mark, QS-9000, SSM, ISO I4000, Q-9000, American, European, and Global Standards Systems (New York: AMACOM, 1997).

Woodruff Imberman is the president of Imberman and DeForest, management consultants headquartered in Evanston, Illinois.


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The American quest for quality