The Economics of QualityThe Economics of Quality

Grace DuffyASQ Vice President

Past-Co-Chair ASQ Economic Case for QualityWith materials co-developed by:

Bill Denney, Ph.D.CEO: Texas Quality FoundationQuality Management Division

Vice-Chair, Technical Committees

Economic Case for QualityEconomic Case for Quality ASQ strategic theme #2: Prove and communicate ASQ strategic theme #2: Prove and communicate

the economic case for quality.the economic case for quality.

FY 08 operating plan for ECQ:FY 08 operating plan for ECQ:• Collaboration with Sections, Divisions, Members, and Collaboration with Sections, Divisions, Members, and

their affiliationstheir affiliations• Create synergy across all aspects of the program (online Create synergy across all aspects of the program (online

CoP, F2F events, all stakeholders)CoP, F2F events, all stakeholders)• Partner with internal stakeholders and workgroups to Partner with internal stakeholders and workgroups to

increase participationincrease participation• Increase communication and disseminate themes and Increase communication and disseminate themes and

feedback with all member unitsfeedback with all member units

The “why” of QualityThe “why” of Quality

Who cares and what do they Who cares and what do they expect ?expect ?

“I want you to prove our Quality program has value.”

“Quality will reduce costs and help improve revenue.”- - - Mark Davis, CEO EMSI

Why else would you do it?

Quality Must Have Economic Impact

What Is Quality?What Is Quality?

There is no single definitionThere is no single definition• A management system?A management system?• A product attribute?A product attribute?• A set of tools?A set of tools?• A method of continuous improvement?A method of continuous improvement?• Assessments/audits/inspections that Assessments/audits/inspections that

lead to results?lead to results?• Customer satisfaction?Customer satisfaction?

Quality Is Everywhere

ASQ Surveyed 600 executivesASQ Surveyed 600 executives Do you believe Quality contributes positively to Do you believe Quality contributes positively to

the bottom line?the bottom line?• 99% said “Yes”99% said “Yes”

What is Quality?What is Quality?• Resounding answer…Quality is “Customer Satisfaction”Resounding answer…Quality is “Customer Satisfaction”• Quality is essentially a product or service attribute…if Quality is essentially a product or service attribute…if

you give the customer what they want, you have Quality you give the customer what they want, you have Quality and they buy moreand they buy more

Do CEOs and senior managers see a Do CEOs and senior managers see a connection between quality and the connection between quality and the

bottom line?bottom line?

Back To Senior Managers Back To Senior Managers with another question…with another question…

If we define Quality as an organization-If we define Quality as an organization-wide, coordinated effort to use wide, coordinated effort to use

Quality techniques and practices to Quality techniques and practices to achieve business process achieve business process

improvement, do you think this kind improvement, do you think this kind of quality effort produces a positive of quality effort produces a positive

financial return?financial return?

92% said “Yes”92% said “Yes”

The case for quality The case for quality has been made again and againhas been made again and again

1991 General Accounting Office Study1991 General Accounting Office Study• ““Companies that adopted quality Companies that adopted quality

management practices achieved better management practices achieved better employee relations, higher productivity, employee relations, higher productivity, greater customer satisfaction, increased greater customer satisfaction, increased Market Share, and improved Profitability.”Market Share, and improved Profitability.”

1999 Emory University Study, Easton & Jarrell1999 Emory University Study, Easton & Jarrell• 394 companies – “Vast majority of studies 394 companies – “Vast majority of studies

show positive impact associated with TQM.”show positive impact associated with TQM.”

Baldrige Post Implementation ResultsBaldrige Post Implementation Results

Stock PriceStock Price

Are CEOs aware of quality methods?Are CEOs aware of quality methods?Do they use them?Do they use them?

Awareness and Usage PercentAware Use Gap

TQM 84 61 23Six Sigma 46 15 31Baldrige 41 11 30ISO 53 25 28Benchmarking 85 65 20

Why aren’t they using quality methodsWhy aren’t they using quality methodsand what do they expect?and what do they expect?

Quality professionals seldom link “Quality”Quality professionals seldom link “Quality”to the bottom lineto the bottom line

to strategyto strategyto tacticsto tactics

to cost reductionto cost reductionto revenue enhancementto revenue enhancement

Executives expect proof of valueExecutives expect proof of value

Money talksMoney talks

Ask YourselfAsk Yourself

What value do you bring?What value do you bring?

Are you undervalued, ignored, or Are you undervalued, ignored, or overshadowed by other urgent concerns?overshadowed by other urgent concerns?

The fact is, you do drive innovation, process The fact is, you do drive innovation, process management, continual improvementmanagement, continual improvement

We Have to Prove ItWe Have to Prove It

If we can’t show what we do contributes to If we can’t show what we do contributes to cost reduction or revenue enhancement cost reduction or revenue enhancement we are in trouble.we are in trouble.

We MUST:We MUST:• Align our activities with organizational Align our activities with organizational

strategies and specific tacticsstrategies and specific tactics• Demonstrate organizational performance Demonstrate organizational performance

improvementimprovement

What Can We Do?What Can We Do?

Get out your pareto charts, and tools…Get out your pareto charts, and tools…

Cost of not having procedures in placeCost of not having procedures in place Cost of turnoverCost of turnover Cost of poor maintenanceCost of poor maintenance Cost of low performance from no job descriptionsCost of low performance from no job descriptions Cost to customers from poor training Cost to customers from poor training

• Error ratesError rates• ReworkRework

What is the “Cost of Poor Quality”?What is the “Cost of Poor Quality”?

What does your company What does your company want to improve?want to improve?

Share priceShare price Market valueMarket value RevenueRevenue Growth rateGrowth rate Earnings per shareEarnings per share Net profit marginNet profit margin Price / earnings ratioPrice / earnings ratio Return on assetsReturn on assets EBITDA (earnings before interest, taxes, depreciation, and EBITDA (earnings before interest, taxes, depreciation, and

amortization)amortization)

Finance and Accounting for Non-Financial ManagersFinance and Accounting for Non-Financial Managers, by , by Weaver and WestonWeaver and Weston

The Essentials of Finance and Accounting for Non-Financial The Essentials of Finance and Accounting for Non-Financial ManagersManagers, by Fields, by Fields

Use ResourcesUse Resources The Economic Case For Quality (ASQ)The Economic Case For Quality (ASQ)

• www.asq.org/economic_casewww.asq.org/economic_case ““How To Speak The Language Of Senior Management”How To Speak The Language Of Senior Management”

• Quality ProgressQuality Progress, May 2003, May 2003 ““Learn To Talk Money”Learn To Talk Money”

• Quality ProgressQuality Progress, May 2004, May 2004 Show Me Your ValueShow Me Your Value

• Theresa SeagravesTheresa Seagraves Quality Makes MoneyQuality Makes Money

• Pat Townsend & Joan GebhardtPat Townsend & Joan Gebhardt ““A Bare Bones Look At The Bottom Line”A Bare Bones Look At The Bottom Line”

• Quality ProgressQuality Progress, May 2005, May 2005 ““Selling Quality on Growth Rather than Cost Reduction.”Selling Quality on Growth Rather than Cost Reduction.”

• Quality Management ForumQuality Management Forum, Winter 2005, Winter 2005

A Challenge For Quality ProfessionalsA Challenge For Quality Professionals

Facilitate executionFacilitate execution Demonstrate valueDemonstrate value Speak the language of executivesSpeak the language of executives Show Show youryour economic value to the economic value to the

organizationorganization

CEO and Executive PerspectiveCEO and Executive PerspectiveThere Are Two QualitiesThere Are Two Qualities

1.1. A product or service – Attribute QualityA product or service – Attribute Quality

2.2. A management tool –Method QualityA management tool –Method Quality

Quality is….Quality is….What you deliver to the customerWhat you deliver to the customer

Organizational Performance is…Organizational Performance is…What you do internally to deliver What you do internally to deliver

quality to the customer.quality to the customer.

Quality professionals have the knowledge and skills Quality professionals have the knowledge and skills to improve both of them, which reduces cost and to improve both of them, which reduces cost and improves revenue. That’s all CEO’s care about.improves revenue. That’s all CEO’s care about.

What the Quality Management What the Quality Management Division is doingDivision is doing

4 supporting guides for Economics of Quality driven 4 supporting guides for Economics of Quality driven by QMD’s Quality Technical Committeesby QMD’s Quality Technical Committees

Lean/Six Sigma – Bob Meisel (available)Lean/Six Sigma – Bob Meisel (available) Baldrige – Dennis Leonard Baldrige – Dennis Leonard Quality Costs – Doug WoodQuality Costs – Doug Wood 100% Employee Involvement – Pat Townsend100% Employee Involvement – Pat Townsend

www.asq-qmd.orgwww.asq-qmd.org for more information for more information

How can we use these guides?How can we use these guides?

Choose the best opportunity in your Choose the best opportunity in your section to show the economic case for section to show the economic case for qualityquality• High performance employeeHigh performance employee• Strongest team of associatesStrongest team of associates• Baldrige or state award examiner volunteerBaldrige or state award examiner volunteer• ASQ Division memberASQ Division member• Organizational or sustaining member companyOrganizational or sustaining member company

Match the right subject to executive “hot Match the right subject to executive “hot button” and make a call…button” and make a call…

QUESTIONSQUESTIONSgrace683@earthlink.netgrace683@earthlink.net

There are resources available to help plan There are resources available to help plan and execute an effective ECQ executive and execute an effective ECQ executive

call.call.

•Original ASQ ECQ pilot materials

•QMD guides

•5 Success Stories

•Homegrown by your own SMEs…