WHAT IS THE RELATIONSHIP BETWEEN QUALITY AND BUSINESS PERFORMANCE?

One of the most common questions posed by executives seeking improvement is : "Will this quality efforts pay off ?"

Edwards W. Deming, the father of Quality Management expoused a theoretical basis to explain the relationship in his “Deming Value Chain”.

DEMING’S VALUE CHAIN Source: Adapted from S. T. Foster: Managing for Quality

Improve Quality

Cost Decrease( Less Reworks, Few Mistakes, Fewer Delay, Better use of

machine time and material)

Productivity Improves

Capture the Market

Stay in business

Provide jobs and more jobs

QUALITY, COST, MARKET SHARE &PROFITABILITY COST DRIVEN APPROACH (PROCESS

APPROACH) Reduction of cost or “waste” at the

production level hence premium prices are charged to increase profits. Eg. The cost decreases whiles the selling price and volumes either remains the same or changes positively.

Crosby (1979) asserts that there is an inverse relationship between conformance quality and cost and therefore “Quality is Free”. As quality improves cost reduces and profits increase.

CONTND...

According to Heldt as captured in Harrington (1987) : "Reducing the cost of poor quality will increase your overall profit more than doubling sales“

Where the causes of poor quality involves some waste or MUDA captured as: TIMWOOD

Transportation Over production Inventory Defects Motion Waiting Over processing

CONTND.... Katzan (1985) mentions that poor quality is

costly and has a ripple effect, which will eat away profits.

Day (1988) demonstrated how profits can double because of the elimination of scrap and rework through the improvement of process capability.

The most impressive assertion regarding the cost-driven approach of the quality and profit relationship is proposed by G. Taguchi. In the early 1980s, Taguchi presented a "loss function" concept, which aims at reducing the variability of products. The variability is product's deviation from its target value.

CONTND He believes that the loss caused by the

variability is incurred by society. Therefore, Taguchi (1985) defines quality as the loss a product imposes on society after this product is shipped. He maintains that variability must be decreased so that the total loss can be reduced. Because of the reduction of loss, profits increase.

Since the increased profit can be quickly obtained from the reduction of costs, Taguchi's method has been widely applied in industries.

MARKET DRIVEN APPROACH

Emphasizes that profit is increased by having more customers which is explained by increased market share.

Halpin (1966) stresses that Zero Defects can deliver the best possible product at the lowest possible price on time. This will "assure management a strong market position in the years to come“

Crosby (1984) stresses that if the top management respected the rights of customers like it respects the rights of the stockholders, then quality and profit will both increase at the same time.

CONTND..... Buzzell and Bradley (1987) assert that with higher

quality, stronger customer loyalty and more repeat purchases can result

Owen (1989) believes that attaining higher quality will cost more at first; however, this cost will pay off and result in a higher return on investment.

Ishikawa (1990) stresses that quality assurance approach is "customer-first philosophy,“ (customer focus)

Smith (1990) points out that quality is a strategic and competitive weapon. With a higher level of quality, it is easier to attract customers and increase sales.

CONTND.. Bauer (1990), a retired director of IBM and winner

of National Quality Award in 1990, points out that "Market-Driven Quality" is IBM's quality strategy, and aims at enlarging market shares.

Both Huge (1990) and Bhote(1991) indicate that PIMS(Profit Impact of Market Strategy) research shows a strong relationship exists between quality and profitability. Huge also indicates more definitely that if the quality improves from low to high, market share and profit on sales will at least double from low to high.

CONTD..

Tschohl and Franzmeier (1991) claims that profit is determined by customer satisfaction. Although good product quality alone will not guarantee profit, it helps to increase customer satisfaction and profit.

Munoz, Civille, and Carr (1992) think a strong relationship exists between quality and customers' buying decisions. Customers not only care about quality, but also buy quality. Munoz et al. believe this is the reason that Japanese businesses succeed in U.S. markets.

CONTND... Feigenbaum (1986) maintains that quality is the

"most powerful corporate leverage point for achieving both customer satisfaction and low costs“ This means that more profit can result from improving quality and reducing cost simultaneously

Juran and Gryna (1993) explain the four reasons high quality produces more profits: by the increase of market share, by earning premium prices, by obtaining benefits of a larger production scale, and by attracting and sticking to customer's loyalty.

QUALITY & VALUE OPTIMIZATION

The RationaleToday’s customers do not forgive easily when they

experience poor products & service. The repercussions of bad service can be considerably detrimental to your business, affecting your ability to retain customer loyalty and protect your company’s reputation. Bad news travels fast, so a single failed interaction can spread to a customer’s family, friends and an entire database of contacts. Thus, one unhappy individual can affect a widespread network of prospects through adverse feedback.

THE CONCEPT OF VALUE Affordable cost of service or product + Quality

of service or product = VALUE Results – Expectations = VALUE

The customer’s perception of value is shaped by the following factors :

Freedom from faults Degree to which requirements/expectations are

met Emotional engagement with product/service Quality of contact with supplier Cost of product/service

CONTND.. When the customers service or product

experience is the same as their expectations customer satisfaction becomes the minimum achievement. This does little in terms of customer retention and profit increments.

However when their expectations are exceeded, thus generating positive value then repeated purchase is guaranteed but it does not guarantee customer loyalty because customers expectations are volatile, they would switch to the next competitor that gives them superior value. Eg the fashion industry and the mobile technology industry.

OPTIMIZING VALUE Invest in technology that improves your business

processes and constantly or continually improve through Business Process Re-engineering to reduce cost and improve process capability by reducing process variability to deliver value.

Invest in training the frontline employees especially the process owners (operations) with the latest skills to be equipped to deliver value at both value frontiers (Product and Customer service or relationship management)

Encourage an atmosphere of everybody’s involvement that encourages innovation and creativity to assure customer retention.

CONTND...

The focus of quality management is not solely on profit maximisation but rather more on value maximisation and optimisation. In other words, TQM is not interested in short run profits as they are “dangerous”.

Investment in TQM programs would deliver value in the long run and it would guarantee the sustainability of the business as long as continual improvements remains a priority.

CONCEPT OF “COST OF QUALITY”

It’s a term that's widely used – and widely misunderstood

What is Cost of Quality?

COST OF QUALITY (COQ)

Cost of Quality refers to total cost incurred by an organization to on the following three key activities: Investing in the prevention of nonconformance to

requirements Appraising a product for conformance to

requirements. Failing to meet requirements.COQ=Prevention Cost + Appraisal Cost + Failure Cost

TYPES OF QUALITY COST(THE FIRST TWO COSTS ARE INCURRED IN THE HOPE OF PREVENTING THE SECOND TWO

Quality Control Costs

prevention costs and appraisal costs.

Quality Failure Costs (cost consequences of poor quality) External Failure Costs Internal Failure Costs

PREVENTION COSTS They are all costs incurred in the process of preventing poor quality from occurring. Usually before producing a product. Quality planning costs costs of product and process design Process capability evaluations Cost of new product reviews Cost of Researching to know customer requirements Employee training in quality measurement education Quality improvement team meetings Quality improvement projects

APPRAISAL COSTS They are incurred in the process of uncovering defects for improving before the product is sold to the customer: quality inspections product testing performing audits costs of worker time spent measuring quality cost of equipment used for quality appraisal. Cost of calibration of testing equipments

FAILURE COST

The costs resulting from products or services not conforming to requirements or customer/user needs. Failure costs are divided into Internal failure cost External failure cost

INTERNAL FAILURE COSTFailure costs occurring prior to delivery or shipment of the product, or the furnishing of a service, to the customer. They are associated with discovering poor product quality before the product reaches the customer site

Examples includes cost associated to Scrap Rework Re-inspection Re-testing Material review costs of discounting defective items for salvage value. Downgrading

EXTERNAL FAILURE COSTS

Failure costs occurring after delivery or shipment of the product and during or after furnishing of a service to the customer.They are associated with quality problems that occur at the customer site. These costs can be particularly damaging because customer faith and loyalty can be difficult to regain. Examples of costs associated with this includes:

Processing customer complaints product returns warranty claims recalls litigation costs resulting from product liability issues. cost is lost sales and lost customers

Summary of Cost Of Quality

Quality Control Cost

Prevention costs Costs of preparing and implementing a quality plan.

Appraisal costs Costs of testing, evaluating, and inspecting quality

Quality Failure Cost

Internal failure costs

Costs of scrap, rework, and material losses

External failure costs

Costs of failure at customer site, including returns, repairs, and recalls

SUMMARYCompanies that consider quality important invest heavily in prevention and appraisal costs in order to prevent internal and external failure costs. The earlier defects are found, the less costly they are to correct. For example, detecting and correcting defects during product design and product production is considerably less expensive than when the defects are found at the customer site.

CONTINUES:

External failure costs tend to be particularly high for service organizations. The reason is that with a service the consumption and production is simultaneous for the organisation and its customer. Hence there are fewer opportunities to correct defects than there are in manufacturing. Examples of external failure in services include an airline that has over- booked flights, long delays in airline service, and lost luggage.

THE QUALITY TRIANGLE

THE DIMENSIONS OF COMPETITION ARGUMENT

First Proponent: William Procter, co-founder PROCTER & GAMBLE

After several years in industry, he believed that successful products competes on the following dimensions:

Cost of the product Availability of the product (level of productivity) and Quality of the product

This meant that competition was solely driven by the product so that if the above product competitive dimensions went wrong then the product was bound to fail on the market.

CONTND... Second Proponent: Noori, H., Munro, H., Deszca, G. and

Cohen, M.(1996) in their work :Methodologies for

developing breakthrough products and services:

what we know and don’t know.Laurier Business

School, Wilfried Laurier University,Waterloo, Ontario,

Canada., observed that competition is not solely by the

product but by the organisation, because the organisation

produces the product. Therefore an organisation with a

bad reputation would find it difficult selling its products or

services. They therefore proposed an extension of the

triangle with three new dimensions of competition.

QUALITY TRIANGLE EXTENSION

The extension proposed by Noori et al (1996) are as follows:

Dependability Flexibility ServiceabilityAccording Noori et al (1996) once the product is a subset

of the organisation it is crucial that it maintains the reputation for being dependable (does what it promises it would do), flexible enough to adjust and respond to changes in customer expectations, requirements and environmental requirements which is very fluid and be serviceable do pre-sale services, after sales service and most importantly community service, these are all strategies to improve and enhance organisational image and reputation.

DIMENSIONS FOR COMPETITION Putting the ideas of the two proponents together we

get the overall dimensions for competition hence competition operates at two levels:

The organizational level The product or service levelBoth the organization & the product/service operate

at the following dimensions: Dependability Flexibility Serviceability Cost of the product Availability of the product (level of productivity) and Quality of the product