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132 Part 2 • Designing and Assuring Quality

Problems 1. One of the problems encountered by universities is developing reliable and valid course evaluation

survey instruments. Choose a class you took last semester. For that class, identify two dimensions rela- tive to course delivery. Now, develop five valid survey items for each of your two dimensions. Defend why you think these items are valid.

2. For the class you chose in Problem 1, develop five valid critical-incident survey items for each dimen- sion. Defend why you believe your items are valid.

3. A manager for the Golden Bear publishing company found out that you are taking quality manage- ment. The manager desires to improve her supply chain performance by employing you as a consultant to provide quality improvement training to the supply chain employees. As a result, you now have to create a survey instrument to gauge the effectiveness of your training sessions. Choose four dimen- sions relative to your quality management training and develop five valid survey items for each dimen- sion. Defend why you feel your survey items are valid.

4. For your performance dimensions in Problem 3, develop five critical-incident survey items for each dimension. Explain how you would demonstrate that these items are reliable.

17. Describe the difference between hard data and soft data. What are the unique advantages of each type of data in terms of obtaining information about customer perceptions?

18. Are customer surveys better suited for accessing customer perceptions in services or manufacturing? Explain your answer.

19. Explain the concepts of reliability and validity. Why is it important that survey instruments be both reliable and valid?

20. Why is it important to have open-ended questions in survey instruments?

CASES

Case 5-1 Customer Quality Feedback at Apple Computer Apple Computer Homepage: www.apple.com

(continued)

In the fast-paced personal computer industry, it would be very tempting for a computer company to rush a new product to market without taking the time to solicit cus- tomer input and feedback during the product develop- ment cycle. To avoid this temptation and to highlight its commitment to customer satisfaction, Apple Computer has developed a program called Customer Quality Feedback (CQF). CQF is a hands-on program providing Apple engineers with the ability to communicate with potential end users during the entire development cycle of an Apple product. The program integrates many of the features of a focus group but is sustained on an ongoing basis. It is also a very substantive and useful tool for Apple because it keeps the company attuned to the needs, preferences, and desires of its end users.

For people interested in participating in the pro- gram, Apple has posted an application form on its Web site. The application form is fairly comprehen- sive and outlines the terms and conditions of participa- tion. Although the program is open to anyone, it is clear that Apple wants well-informed participants who will stick with the program. Participants are selected

based on their interest, ability to provide timely infor- mation, commitment to working with Apple person- nel, and the suitability of their computing environment as it relates to Apple’s current needs. Once selected, the participants become an integral part of the devel- opment process for the products they are evaluating. They are provided early prototypes of Apple products and are asked to provide feedback pertaining to the product’s features, interaction with employees, ease of use, performance, compatibility with third-party soft- ware, and other topics. The participants are also asked to provide suggestions as the product development cycle matures. The information provided by the par- ticipants is fed directly to the Apple engineers who are developing and testing the products. The overriding objective of the program is to incorporate customer input into the development of Apple products before they are shipped, rather than waiting for customers to react to the company’s products after they are made available for sale. Prior to a product launch, the CQF participants involved with the product are asked to write testimonials about their input into the product’s

Chapter 5 • The Voice of the Customer 133133 Part 1 • Understanding Quality Concepts

final design. These testimonials are used by Apple to demonstrate to other potential end users how Apple incorporates user feedback into the design and devel- opment of its products.

Apple’s CQF program is a good example of a pro- active approach to satisfying customer needs. It is also

evidence of the company’s willingness to “listen to the voice of the customer” in its product development and design. These are important steps in the development of a customer-driven approach to quality.

Case 5-2 Chaparral Steel: Achieving High Quality through a Commitment to Both External and Internal Customers Chaparral Steel Homepage: www.gerdauameristeel.com .

Chaparral Steel Company, located near Dallas, Texas, is a steel minimill producing a variety of steel products by recycling scrap steel. The company, founded in 1973, sells to a diverse group of industries, including con- struction, railroad, defense, mobile homes, and appli- ances. Chaparral has received a great deal of attention in the media and among business leaders because it has been relatively successful in an industry beset by a mul- titude of problems. Much of the company’s success can be attributed to a focus on customer service and product quality through a commitment to both its external cus- tomers and internal customers.

To ensure that external customers are satisfied, Chaparral routinely conducts customer surveys, sends employees on site visits, and listens carefully to cus- tomer comments and suggestions. In addition, the com- pany practices a number of quality-minded manufacturing techniques to reduce defect rates and prevent problems from occurring. Chaparral is very efficient, and new ideas and manufacturing techniques are transferred very quickly to the factory floor. As a result, the company remains on the leading edge of steel manufacturing technology and can adapt as customer requirements change. The company continues to improve its products and operations by benchmarking against world-class producers and giving employees paid sabbaticals where they learn about new work prac- tices and technologies from academic institutions and industry leaders.

Although these efforts are commendable, the company’s commitment to its internal customers is equally important. At any one time, approximately

85% of Chaparral’s employees are enrolled in some type of class ranging from electronics to Spanish. If the training is off-site, the company reimburses employees for their tuition costs. In the plant, the majority of the employees are cross-trained, which enhances their individual job skills. The company ben- efits through consistency in operations because one employee can step in and perform the job of another employee if the need arises.

In many instances, Chaparral’s commitment to its employees directly contributes to its employees’ ability to contribute to company objectives of customer service and product quality. All of Chaparral’s employees, from the CEO to the maintenance crew, have business cards they can give to customers to promote interaction. Frontline employees are periodically sent on customer site visits to answer questions, observe the customer’s manufacturing process, or simply to see how Chaparral products perform. Every employee is salaried, and merit increases are tied to a variety of factors, including indi- vidual performance, versatility of skills, and training credits earned through the company’s continuing educa- tion program. All these practices serve the dual purpose of increasing quality while at the same time enriching the jobs of the employees. Through its commitment to its internal customers, Chaparral has obtained some remarkable results. For example, a group of Chaparral employees recently developed a proprietary system for manufacturing wide-flange steel beams resulting in a substantial cost savings for the company. Chaparral credits its training program, along with individual effort on the part of its employees, for this accomplishment.

Discussion Questions

1. Explain how Apple’s Customer Quality Feedback program helps the firm hear the voice of the customer.

2. In your opinion, what are the most important aspects of Apple’s program? Would you make any changes or modifications?

3. If you were an Apple user, would you enjoy par- ticipating in the Customer Quality Feedback pro- gram? Why or why not?

(continued)

134 Part 2 • Designing and Assuring Quality

Discussion Questions

1. For a company like Chaparral Steel, why is a commitment to both its internal and external cus- tomers necessary?

2. As mentioned in the case, Chaparral periodically sends frontline employees on trips to visit the

manufacturing sites of the company’s customers. In your opinion, is this a justifiable expense? Why or why not?

3. Compare Chaparral’s employee commitment to your current employer or a recent employer.

Overall, Chaparral’s commitment to both its internal and external customers has produced impressive results, particularly as they relate to firm productivity and product quality. The company’s daily absentee rate is less than 1%, and the average yearly turnover rate is only 5%. These rates are far lower than industry aver- ages. These low rates provide for continuity in opera- tions. Partially as a result of this, Chaparral produces steel at a lower cost per ton than its rivals. At Chaparral, it takes 1.4 hours to produce a ton of steel, as com-

pared with an average of 2.4 hours per ton at other steel minimills. Chaparral was awarded the Japanese Indus- trial Standard Certification on its general structural steel products, becoming the only steel company outside Japan given that recognition. Similarly, Chaparral is the only steel company of its type to be certified by the American Institute of Mining, Metallurgical, and Petro- leum Engineers to manufacture its products for nuclear applications.

135

C H A P T E R 6

The Voice of the Market

And he said unto them, What have I done now in comparison of you? [Is] not the gleaning of the grapes of Ephraim better than the

vintage of Abiezer?

—Judges 8:2

Different people have different ideas about how to perform similar work. As a result, we can benefit by exploring different perspectives in designing products and processes. In the same sense, different organizations solve problems differently and take different approaches toward their work. For this reason, it can be helpful to observe how different firms perform tasks.

For example, a small computer software firm must consider many things when establishing a customer service unit. Some questions they must ask themselves include, What type of equip- ment would be needed? How should customer service specialists be trained? How would cus- tomer complaints be settled? How should refunds be handled? What procedures should be established to resolve customer issues? And what is an acceptable response time for returning customer calls? One method could be for the firm to blaze forth with the new customer service department and make mistakes as it goes along. A wiser approach would be to benchmark exter- nal customer service units in other companies first.

WHAT DO WE MEAN BY THE VOICE OF THE MARKET?

Strategy formation results from understanding customers and the marketplace (see Figure 6-1 ). The marketplace includes immediate customers as well as competitors, the customers of competitors, potential competitors, and potential customers. In every market, advances shape and reshape the markets. Each firm strives to introduce new products, develop innovative processes, and find better ways to satisfy the customer. Customers can be good sources of information about competitors. This type of data gathering should include both strengths and weaknesses of your competitors. Some customers might be reticent to share this information. However, most cus- tomers realize that it is in their best interest to improve the performance of suppliers and will eagerly help. Information from lost customers also can be extremely useful for targeting weak- nesses and improving products and services.

136 Part 2 • Designing and Assuring Quality

In Chapter 5 we considered how customers shape markets and how information about cus- tomers is obtained. However, customers are not the only source of information about the market. One of the best sources of information can be other companies. By understanding our competi- tors, we begin to understand the marketplace better and what it takes to compete successfully in the marketplace.

GAINING INSIGHT THROUGH BENCHMARKING

Suppose that you wanted to learn how to snow ski during your winter break. There are a few options available to you: You could teach yourself how to ski, you could enlist the help of your friend who learned how to ski last week, or you could take ski lessons with a certified instructor. Perhaps you could become a decent skier using any of these methods; however, your odds of suc- cess in learning quickly, avoiding injury, and gaining an appropriate respect for the sport would be greatest if you opt for the lessons.

The same is true in business. For a start-up firm, a rapidly growing company, or an organi- zation in need of some improvements, the opportunity to observe and learn from a master could be invaluable. A benchmark is an organization recognized for its exemplary operational perfor- mance. There are many benchmarks in the world, including Toyota for processes, Intel for design, Scandinavian Airlines for service, and Honda for rapid product development.

To be a benchmark, a company must be willing to open its doors and allow others to view its operations and tour its facilities. Thus a distinguishing feature of benchmarks is their amazing openness to other firms. Consider Toyota Motor Company. From the 1960s to the 1980s, Toyota developed the world-class production system known as just-in-time or lean. This production system resulted in previously unseen levels of productivity, minimal cost, and a source of com- petitive advantage. Some companies might have put barbed wire and guard dogs around their lean facilities to keep this technology to themselves and maintain their competitive advantage. Instead, Toyota allowed employees such as Taiichi Ohno and Shigeo Shingo to write books explaining the lean concept to the rest of the world. Toyota also allowed thousands of visitors to tour its facilities and learn about the lean system. The company even entered into strategic alli- ances with chief competitors so that they could learn about lean production.

Two rationales explain why benchmarking is good business. The first originates from Deming’s thought that “the worst thing for a business is a weak competitor.” Therefore, strength- ening the competition forces everyone to improve in order to maintain a competitive edge. As such, openness provides an impetus to continual improvement . An opposite view is that openness can create a competitive advantage through creating psychological barriers to competition . A manager of a high-technology firm marketing a new product once said, “We do not mind if the others come to see how we produce our product. Once they see what we can do, they will not want to compete against us.” In other words, the large amount of work it would take to establish

Strategic Quality Plan

Company Mission

Strategic Plan

Competitive Forces

Customer Needs

FIGURE 6-1 Strategic Quality Planning Model

Chapter 6 • The Voice of the Market 137

and develop the systems that a truly outstanding competitor already has in place can be daunting and discouraging to its competitors.

Benchmarking is the sharing of information between companies so that both can improve . The first step a benchmarking firm must take is to document current performance. This activity will allow the company to pinpoint its goals and find a company (inside or out- side the industry) that already excels at what it is trying to accomplish, study what it does, and gather ideas for improvement. Benchmarking is useful for externally validating an organiza- tion’s approach to its business. If the managers in a firm are unsure that they are pursuing a useful plan of action, benchmarking can help them understand how what they are doing stacks up against the masters.

There are two parties to each benchmarking relationship: an initiator firm and a target firm . The initiator firm initiates contact and studies another firm. The target firm is the firm being studied (also called a benchmarking partner ). These are not static roles. Often the target firm enters into a reciprocal agreement to observe the initiator firm. As shown in Table 6-1 , there are several types of benchmarking. Note that they are not all mutually exclusive.

Process Benchmarking

In process benchmarking , the initiator firm focuses its observation and investigation on busi- ness processes. This can involve studying process flows, operating systems, process technolo- gies, and the operations of target firms or departments. The goal is to identify and to observe the best practices from one or more benchmark firms. By improving core processes, overall business performance is enhanced.

Financial Benchmarking

The goal of financial benchmarking is to perform financial analysis and to compare the results in an effort to assess your overall competitiveness. This type of benchmarking need not involve direct interaction between the initiator firm and the target firms. There is, however, interaction between the initiator and a third party that gathers this information. Usually the information can be gathered using CD-ROM databases such as Lexis/Nexis or Compact Disclosure. As more companies place annual reports online, the Internet has become an important tool for bench- marking financial performance.

Performance Benchmarking

Performance benchmarking allows initiator firms to assess their competitive position by com- paring products and services with those of target firms. Performance issues may include cost structures, various types of productivity performance, speed of concept to market, quality mea- sures, and other performance evaluations. For example, an initiator firm may be interested in identifying other firms that have implemented effective cost accounting practices such as activity- based costing systems to observe and compare the performance of various cost drivers.

TABLE 6-1 Benchmarking Types Process benchmarking—comparing processes Financial benchmarking—comparing business results Performance benchmarking—comparing cost structures, speed, quality levels, etc. Product benchmarking—comparing product attributes and functionality Strategic benchmarking—comparing firm competitiveness along several dimensions Functional benchmarking—comparing or learning how another firm performs a particular function

138 Part 2 • Designing and Assuring Quality

Product Benchmarking

Many firms perform product benchmarking when designing new products or upgrades to cur- rent products. Product benchmarking often includes reverse engineering , or dismantling com- petitors’ products to understand the strengths and weaknesses of their designs. By observing the designs of others, the initiator firm can develop new ideas for product and service design. Micron Technologies maintained a cost advantage in producing DRAM computer chips because of its ability to produce chips with fewer mask levels than its competitors. To compete with Micron, competitors would have to analyze their chips and try to understand their chip-making processes.

Strategic Benchmarking

Strategic benchmarking involves observing how others compete. This often is not industry- specific because firms go outside their own industries to learn lessons from companies and orga- nizations in different industries. This typically involves target firms that have won prestigious honors such as the Malcolm Baldrige award, the Shingo Prize, or the Deming Prize. The focus of this type of benchmarking is to identify the mix of strategies that makes these firms successful competitors. Such benchmarking can be very time-consuming and costly. At Boise Cascade Company, when establishing a quality management process, the firm took a team of executives to Japan and visited several firms to get a sense of what a high-quality firm looked like. Although firms were from other industries, the executives returned with a very realistic idea of the task they faced in establishing quality processes. Pal’s Sudden Service ( Quality Highlight 6-1 ) uses strategic benchmarking.

QUALITY HIGHLIGHT 6-1 Pal’s Sudden Service 1

www.palsweb.com

A privately owned, quick-service restaurant chain, Pal’s Sudden Service serves primarily drive-through customers at 21 locations, all within 60 miles of Kingsport, Tennessee, where its first restaurant opened in 1956. Carefully following its formula for standardizing high levels of product and service quality, Pal’s has since grown to become a major regional competitor.

Today, Pal’s employs about 650 people, 95% of whom are in direct production and service roles. The company competes directly with national fast-food chains, earning a steadily increasing—and, now, second best in its region—market share of almost 19%, doubling since 1994.

Featuring hard-to-miss exteriors festooned with larger-than-life menu items, Pal’s restaurants sell hamburgers, hot dogs, chipped ham, chicken, French fries, and beverages, as well as breakfast biscuits with country ham, sausage, and gravy. The company aims to distinguish itself from fast-food competi- tors by offering competitively priced food of consistently high quality, delivered rapidly, cheerfully, and without error. The majority of customers live or work within three miles of Pal’s locations, and nearly two thirds are women.

Pal’s is the first business in the restaurant industry to receive a Malcolm Baldrige award. For everything organizational and operational, Pal’s has a process. Almost nothing—from new product introductions to hiring decisions to the design of support processes and work systems—is done without a thorough understanding of likely impacts on customer satisfaction.

The company’s Business Excellence Process is the key integrating element used in every transac- tion. Carried out under the leadership of Pal’s two top executives and its 21 store owner/operators, the Business Excellence Process spans all facets of the operation—from strategic planning (done annually with two-year horizons) to online quality control. Every component process, including those for con- tinual improvement and product introduction, is interactively linked, producing data that directly or indirectly inform the others.

1 From NIST, Profiles of Baldrige Winners, 2011.

Chapter 6 • The Voice of the Market 139

Benchmarking underpins the entire Business Excellence Process. Managers are continually on the lookout for benchmarking candidates, and each one compiles a running list of potential subjects. For the leadership team, benchmarking yields meaningful competitive comparisons, new best practices for achieving higher performance goals, or new organizational directions. For the entire organization, benchmarking results are a constant reminder that performance always can be improved.

Pal’s is exhaustive in its pursuit of useful data, the basis for sound planning and decision making. In particular, customer, employee, and supplier feedback is central to all processes, and it is gathered in numerous formal and informal ways. For example, Pal’s owner/operators must devote part of every workday to “marketing by wandering around.” A portion of this period is spent engaging employees and customers to hear their views on how a location is performing and to solicit ideas for improvement.

Owner/operators also go door-to-door within a three-mile radius of their restaurants, seeking direct input on customer requirements and satisfaction levels. Answers to predesigned questions are recorded, compiled, and later analyzed at the store and corporate levels.

Owner/operators also maintain a communications log. They record what they have learned about sales, expenses, customers, staff, products, services, equipment, and suppliers, and they list ideas for improvement. Weekly logs are sent to senior Pal’s executives, who comb the entries for issues and oppor- tunities to be addressed at formal monthly management reviews of organizational and business results.

Data are gathered systematically at all levels—process, shift, individual store, and entire busi- ness. The company’s enterprise resource planning system, SysDine, is a key tool, generating store-level and company-wide data on sales, customer count, product mix, ideal food and material cost, and turn- over rates. This information supports daily operational decisions. It also is used to update Pal’s Balanced Scorecard of Core Performance Measures, which links directly to its key business drivers: quality, ser- vice, cleanliness, value, people, and speed.

Managers regularly review the value of the data collected, and the company employs an outside statistician to evaluate the type of information tracked, how it is used, and how it is collected.

Developed with the aid of benchmarking studies, the company’s training processes support improve- ment in operational and business performance. Owner/operators and assistant managers have primary responsibility for staff training. They use a four-step model: show, do it, evaluate, and perform again. Employees must demonstrate 100% competence before they are certified to work at a specific work station.

In customer satisfaction, including food quality, service, and order accuracy, Pal’s is outperform- ing its primary competitor. For example, customer scores for quality averaged 95.8%, as compared with 84.1% for its best competitor.

Pal’s order handout speed has recently improved more than 30%, decreasing from 31 to 20 seconds, almost four times faster than its top competitor. Errors in orders are rare, averaging less than 1 for every 2,000 transactions. The company aims to reduce its error rate to 1 in every 5,000 transactions. In addi- tion, Pal’s has consistently received the highest health inspection scores in its market and in the entire state of Tennessee.

Functional Benchmarking

Another type of benchmarking is referred to as functional benchmarking , where a company focuses its benchmarking efforts on a single function to improve the operation of that function. An example of functional benchmarking occurs in purchasing. Often purchasing managers use their networks to share information about the purchasing function in many different organiza- tions. The Institute for Supply Management (ISM) provides a framework for networking pur- chasing professionals that facilitates the sharing of information about the purchasing function. In addition, the ISM gathers information about purchasing departments and makes this information available to members of the organization.

PURPOSES OF BENCHMARKING

There are seven primary purposes for benchmarking. These purposes require different levels of involvement in the benchmarking activities. Time consumption and costs may vary according to the purpose of benchmarking.

140 Part 2 • Designing and Assuring Quality

The purposes of benchmarking range from basic learning to achieving world-class leader- ship. The life cycle in Figure 6-2 shows that benchmarking purposes evolve as the firm becomes more mature in its quality journey.

DIFFICULTIES IN MONITORING AND MEASURING PERFORMANCE

Many times firms desire to compare financial measures between companies when benchmark- ing. This can be a useful activity; however, there can be problems. One of the most significant problems stems from limitations of accounting systems. Often companies have variations in the way they compute their measures that affect the results.

Consider the computation of scrap in which a company computes the ratio of cost of goods sold to scrap. The formula for this computation is

Scrap efficiency = cost of goods sold>scrap (6.1) This formula normalizes the cost of scrap based on the volume of business that a firm does. The resulting ratio is the proportion of the material inputs to production that is wasted as scrap. The higher the ratio, the more efficient is the use of these materials.

Now consider two companies, A and B. Company A uses Equation 6.1 and computes scrap by weighing discarded materials at a standard cost of $.15 per pound of scrap. However, Com- pany B has a variation in its measures. Company B computes scrap at the industry standard of $.15 per pound, less $.03 per pound (the amount it receives from a recycling company that pur- chases its scrap). Therefore, Company B’s account equation would be

Computed ratio for Company B = cost of goods sold>(scrap - recovery) (6.2)

I Learning

from successes

II Borrowing

ideas

III Best-in-

firm

IV Beating industry standards

V Best-in-

class

VI National

leadership

VII Best-in- world

World- Class

Lead ersh

ip L ife C

ycle

Benchmarking Purpose

Quality Maturity

World-Class

Outstanding

Industry Competitive

Internally Focused

FIGURE 6-2 Benchmarking Purpose and Quality Maturity

Chapter 6 • The Voice of the Market 141

The resulting equations are

Company A ratio = cost of goods sold>.15 Company B ratio = cost of goods sold>.12

If the cost of goods sold is the same for both companies, the ratio will be higher for Company B. In this case, Company A is at a disadvantage because of the differences in the ways that scrap is costed. These differences might be more apparent if a careful benchmarking study is performed in which the participants know exactly what the numbers mean and what the differences in accounting systems are. However, if a great number of data, ratios, measures, and numerical statistics are shared between the companies, the differences in accounting methods might not be as obvious.

The ratio we have focused on is a type of productivity ratio. The cost of goods sold to scrap ratio measures the efficient use of materials. One remedy for the effects of accounting differ- ences on productivity ratios is to compute total-factor productivity measures. To understand total factor productivity measures, we first must understand single factor productivity measures. Single factor productivity measures are computed as

Single factor productivity = output>(a single input) (6.3) The cost of goods sold to scrap ratio is a single factor ratio in that it focuses on scrap material alone. Multiple factor productivity measures use multiple inputs in their computation. For example,

Multiple factor productivity = output>(the sum of multiple inputs) (6.4) Multiple inputs might include scrap, labor, energy, materials, equipment, and other mea-

sures of inputs. Hayes and Wheelwright 2 suggest that it is better for firms to use multiple factor productivity measures in making comparisons because these measures are more robust. The total factor productivity measure is similarly computed as

Total factor productivity = output>(sum of all inputs to production) (6.5) Total factor productivity, although still subject to the “apples and oranges” problems of compari- sons, is less sensitive to differences in costing conventions and accounting practices.

Notice that if you focused on plant and equipment productivity, the conclusion would be that the competitor is lagging in productivity. Also notice that labor productivity may be a small part of total productivity. 3

3 Some firms are using a method called data envelopment analysis (DEA) to improve comparisons between firms. This is a linear programming approach that can potentially be used to eliminate the “apples and oranges” problem.

2 Hayes, R., and Wheelwright, S., Dynamic Manufacturing (Boston: Free Press, 1988).

EXAMPLE 6-1 Computing Productivity

A company has gathered the following financial information for itself and a competing firm. The company wishes to compare productivity for the two firms (all the following numbers are in 000s).

Firm A Competition

Labor $ 20,000 $ 15,000 Plant and equipment (P&E) 100,000 145,000 Energy 5,500 10,500 Materials 220,000 190,000 Sales 425,000 500,000

142 Part 2 • Designing and Assuring Quality

Labor and other productivity ratios for the two firms are computed as

Firm A labor productivity = (sales>labor) = 425,000>20,000 = 21.25 Competitor labor productivity = (sales>labor) = 500,000>15,000 = 33.33 Firm A P&E productivity = (sales>P&E) = 425,000>100,000 = 4.25 Competitor P&E productivity = (sales>P&E) = 500,000>145,000 = 3.45 Firm A energy productivity = (sales>energy) = 425,000>5,500 = 77.27 Competitor energy productivity = (sales>energy) = 500,000>10,500 = 47.62 Firm A materials productivity = (sales>materials) = 425,000>220,000 = 1.93 Competitor materials productivity = (sales>materials) = 500,000>190,000 = 2.63 Total factor productivity for Firm A = (sales>total of inputs) = 425,000>345,500 = 1.23 Total factor productivity for the competitor = (sales>total of inputs) = 500,000>360,500 = 1.39

21.25

33.33

4.25

3.45

77.27

47.62 1.93

2.63

1.23

1.39

Firm A Firm B Firm A Firm B Firm A Firm B Firm A Firm B Firm A Firm B Labor Productivity Overall ProductivityMaterial ProductivityEnergy ProductivityP & E Productivity

As you can see, the total factor productivity measure provides a more complete picture of firm productivity.

Another caveat for comparing measures between companies is based on the Deming argu- ments against such things as work measurement and management by objective. To concentrate too much on comparative measures might focus managers on results and not causes. This could result in the unfortunate development of numerical goals that ignore the necessity of improving the system of production.

Because of the possibility of serial correlation of data, even greater care should be taken when analyzing longitudinal (time-series) data. For example, company researchers might want to compare rates of growth for two companies in assets, sales, and other measures. If the data have serial correlation, they might reach the wrong conclusions.

Problems in comparisons are even more pronounced when comparing U.S. firms with for- eign companies. The cost accounting conventions and accepted accounting principles can vary greatly between countries. For this reason, it is best not to compare accounting figures with for- eign companies. However, if you must, take great care as to how the results of the comparisons are used in formulating policy.

COMMONLY BENCHMARKED PERFORMANCE MEASURES

Different firms in different industries use thousands of different benchmarking measures. The measures a firm chooses depend on the key business factors (KBFs) of each particular firm. The key business factors are factors significantly related to the business success of the firm. For example, in a given firm, customer satisfaction might be significantly related to market share. If this is the case, then a company would be very interested in tracking its customer satisfaction.

Chapter 6 • The Voice of the Market 143

Table 6-2 shows the categories of measures that are often gathered in benchmarking stud- ies. Financial ratios such as return on assets (ROA) or return on investments (ROI) are probably the easiest to obtain and compare. For many financial ratios, all that is needed is an income state- ment of a firm and a balance sheet. Many of these statistics are available in annual reports and on the Internet. Generally, senior management is keenly interested in these measures to guide their decision making.

Productivity ratios are useful in measuring the extent to which a firm effectively uses the scarce resources that are available to the firm. As we have previously discussed, these include single-factor, multifactor, and total-factor productivity measures.

Customer-related results include customer satisfaction, customer dissatisfaction, and comparisons of customer satisfaction relative to competitors. These measures may be in the form of retention, gains, losses, customer-perceived value, competitive awards, competitive customer ratings, and independent organization evaluations. Customer satisfaction measures are important for gauging the effectiveness of quality improvement because they are good indicators of finan- cial performance.

Operating results are important for monitoring and tracking the effectiveness of company operations. These might relate to cycle times, waste-reduction measures, value-added measures, lead times, time from concept to market, setup times, percent reduction in setup times, and myr- iad other operating results.

Often, one of the key aspects of running a business involves the people employed by the organization. Therefore, human resources measures provide important insights into how effec- tively the business is being run. Employee satisfaction is significantly related to business perfor- mance in many firms. Therefore, employee satisfaction measures, training expenditures, training hours per year, work system performance, employee effectiveness measures, turnover, safety statistics, absenteeism, and many other data might be important measures for benchmarking.

Of course, quality measures are often compared between firms. These can include conformance-based quality information such as reject rates, capability information, performance information, or other measures. These quality measures also can include scrap and rework mea- sures, percentage of defectives, field repairs, costs of quality, and many other metrics. The qual- ity measures also may include data concerning the performance of processes and time-related statistics. Where customer service quality is important, the types of data that are captured often include such things as percentage of customers whose phone calls are answered within seven seconds, average response time for phone inquiries, number of people a caller must contact to get a problem resolved, and many other metrics (or measures).

Market share data are an essential indicator of business success. This has resulted from the change in competition because of increased global competition. However, market share does not encompass only a single measure. Because markets are segmented, market share includes shares in the different markets served by the firm. Market share comparisons also are made to determine where the initiator firm ranks in the market.

TABLE 6-2 Benchmarking Data Financial ratios Productivity ratios Customer-related results Operating results Human resources measures Quality measures Market share data Structural measures

144 Part 2 • Designing and Assuring Quality

Finally, with the advent of ISO standards and a move to formalized production systems, structural measures often are benchmarked. Structural measures include objectives, policies, and procedures followed by a firm. They may include safety, production, accounting, financial, engineering, and other types of structural measures that are used in determining competitiveness.

Why Collect All These Measures?

Management by fact dictates that decisions are made based on the sound collection and analy- sis of data. The Malcolm Baldrige criteria are clear about this:

Data and analysis support a variety of company purposes, such as planning, reviewing company performance, improving operations, and comparing company performance with competitors or with “best practices” benchmarks. 4

A major consideration in performance improvement involves the creation and use of per- formance measures or indicators. Performance measures or indicators are measurable character- istics of products, services, processes, and operations the company uses to track and improve performance. The measures or indicators should be selected to best represent the factors that lead to improved customer, operational, and financial performance. A comprehensive set of measures or indicators tied to customer and/or company performance requirements represents a clear basis for aligning all activities with the company’s goals. Through the analysis of data from the track- ing processes, the measures or indicators themselves may be evaluated and changed to better support such goals.

Key Business Factors

When benchmarking, it is important to understand your target firm’s key business factors (KBFs) as well as your own. Key business factors are important attributes of a business that influence its operations and decision making. Examples of KBFs include mission, vision, values, key customer segments, core capabilities, culture, governance, and other facets of a business. KBFs are not to be confused with key measures (the metrics that need to be monitored to gauge the health of the business) and critical success factors (factors that help to determine the success of the firm).

BUSINESS PROCESS BENCHMARKING

Many benchmarking professionals believe that the most important type of benchmarking is busi- ness process benchmarking. There is good reason for this. Suppose that you compare your cus- tomer service quality with a competitor’s. You find out that your competitor is using a standard survey instrument to gauge customer satisfaction. You then administer the survey to your cus- tomers and find out that on a 5-point scale your company rates a 4.3 and your chief competitor rates a 4.7 (with equal dispersion). Now what do you do with this information? The fact that your score differs from your competitor’s tells you nothing about how the competitor is achieving these higher scores. To understand how your competitor has achieved these scores, business pro- cess benchmarking is necessary.

Business process benchmarking is based on the concept of 5w2h developed by Alan Robinson. 5 The 5w2h concept is labeled as such because a business process benchmarking proj- ect should result in the answers to seven questions. Five of these questions begin with the letter w ( w ho, w hat, w hen, w here, w hy), and the remaining two questions begin with the letter h ( h ow and h ow much).

4 2006 Criteria for Performance Excellence (Gaithersburg, MD: National Institute of Standards and Technology, 2006), p. 4 . 5 Robinson, A., Continuous Improvement in Operations: A Systematic Approach to Waste Reduction (Cambridge, MA: Productivity Press, 1991), p. 245 .

Chapter 6 • The Voice of the Market 145

The 5w2h concept is a good starting point because it focuses the participants in the bench- marking process on the nuts and bolts of what is being done. If the initiator organization can answer the 5w2h questions at the end of a benchmarking process, then information will be in place that could, for instance, help a company improve its customer satisfaction.

The 5w2h questions should be viewed in the context of a process. Figure 6-3 contains a diagram of a generic process. In a broad sense, inputs include the equipment, people, machines, materials, and design that combine to form a product or service. The inputs are combined in what is known as the conversion process . In the conversion process, we align the inputs together to form the product or service. Conversion processes might include turning sheet steel into chimney pipes or turning wood pulp into paper or, for a shipping service, moving materials from point A to point B.

The conversion process results in outputs that are eventually sold to customers. Notice in Figure 6-3 that there are two feedback loops in the process. The first feedback loop results from gathering data from the process. This is known as the control process . As we explained in Chapter 1 , the control process involves gathering, analyzing, and using the data to adjust the process. This is often the result of using process control charts.

The second feedback loop in the process is the customer feedback loop and results from gathering data from the customers. Using these data, the control process is improved to give the customer greater satisfaction. A third feedback process can be added by gathering information from competitors through benchmarking.

Figure 6-4 shows what to benchmark at each stage. Again, the questions asked are similar to the 5w2h questions posed earlier.

Robert Camp’s Business Process Benchmarking Process

We have already defined process benchmarking. We now discuss the benchmarking process developed by Robert Camp. Xerox was an early adopter of benchmarking and has used bench- marking effectively to improve processes. This approach includes a formal 10-step process to benchmarking, as shown in Table 6-3 .

Step 1: Decide what to benchmark. There are innumerable areas for improvement in every company. Obviously, not all of these can be tackled at once. Too many simultaneous changes can result in a confused organization and actually can hurt performance. There- fore, you must prioritize those processes that offer the greatest potential for improve- ment. To do this, you must have identified your key processes and charted those processes for future analysis.

Step 2: Identify whom to benchmark. This involves identifying those competitors in your industry and those firms outside your industry that have outstanding results and processes for study. Those companies that have developed best practices are prime candidates for benchmarking.

Inputs Conversion

Process

After- Sales

Processes

Other Firms

Output

Control Process Loop

Customer Feedback Loop

Benchmarking Feedback

FIGURE 6-3 Process Model

Video Clip: Benchmarking at Xerox

146 Part 2 • Designing and Assuring Quality

TABLE 6-3 Benchmarking Steps at Xerox

1. Decide what to benchmark 7. Revise performance goals 2. Identify whom to benchmark 8. Develop action plans 3. Plan and conduct the investigation 9. Implement specific actions and 4. Determine the current performance gap monitor progress 5. Project future performance levels 10. Recalibrate the benchmarks 6. Communicate benchmarking findings

and gain acceptance

ResultsProcesses

Source

Market

Produce

Service

Invoice

Deliver

(What is supplied)

Customer inquiries

Customer requirements

Orders

Maintenance request

Completed orders

(Sequence of work steps)

Problem resolution process

Product development

process

Order picking process

Broken parts (cull)

process

Billing process

(What is delivered)

Satisfied customers

Product features

Order complete

Uptime increased

Billing quality

(Performance measure)

Percent customer repurchasing

Unit manufacturing

cost

Percent accuracy

Percent parts filled from service-

person's inventory

Percent invoices error free

Outputs

Feedback

Inputs

FIGURE 6-4 Process Information Source: R. Camp, Business Process Benchmarking (Milwaukee, WI: ASQ Quality Press, 1995), p. 26 . Reprinted with permission from the Quality Press. © 1995 American Society for Quality.

Step 3: Plan and conduct the investigation. To complete this step, identify data to be col- lected. Next, develop a method with the target firms to determine how the data are to be collected. Once the data are selected, observe the practices of the target firm and docu- ment the best practices that are observed.

Step 4: Determine the current performance gap. Once you have collected the data about the processes, a determination is made as to which processes in the initiator company have the greatest performance gap with the target company. Brainstorming can help make this determination. This step helps to prioritize which areas are the first candidates for change and improvement.

Step 5: Project future performance levels. Predict whether the performance gap for the benchmarked processes will narrow or widen in the coming years. If the performance gaps are likely to widen in the future, project how this will affect the company.

Chapter 6 • The Voice of the Market 147

Step 6: Communicate benchmarking findings and gain acceptance. This step begins the communication of the benchmarking findings to those who will be affected by the results. This can be done through meetings and written media. Communication keeps the process as open as possible, which minimizes uncertainty and fear.

Step 7: Revise performance goals. Once best practices are identified, operational goals are revised. This establishes measures for evaluating the results of improvements based on benchmarking.

Step 8: Develop action plans. Action plans are the specific steps and objectives for imple- mentation. Assignments to personnel and timetables for implementation are used with a project management approach.

Step 9: Implement specific actions and monitor progress. As implementation proceeds, progress is reported to management and stakeholders.

Step 10: Recalibrate the benchmarks. Continued benchmarking with the best firms helps to identify new best practices. This “raises the bar” for higher levels of future performance.

LEADING AND MANAGING THE BENCHMARKING EFFORT

Like other quality management efforts, benchmarking is a managed process. Therefore, manage- ment must have an understanding of the benchmarking process, the participants involved, and the objectives of the exercise.

Managing the benchmarking process involves establishing, supporting, and sustaining the benchmarking program. To begin the management process, a strategy statement outlining the goals and strategies to be used is developed (see A Closer Look at Quality 6-1 ).

A CLOSER LOOK AT QUALITY 6-1 Benchmarking at Intuit 6

Intuit’s new CEO Brad Smith was faced with the challenge of reshaping the company. Intuit has found success with products such as QuickBooks, TurboTax, and Quicken. However, the company’s revenue growth has slowed and Wall Street viewed the company as short on ideas. In addition, Intuit and other tech companies are faced with a new generation of customers who prefer online tools and technologies that emphasize design and online user interaction.

In order to complete Intuit’s transformation, Brad Smith did not limit himself to the company’s collective knowledge. Smith sought the counsel from several tech industry icons. Some viewed this move as risky, but Intuit has experienced positive results.

Smith reached out to Hewlett Packard to study how to measure Intuit’s spending on procurement, marketing, legal services, information technology, and HR. The effort resulted in a benchmarking study of comparing Intuit with 1,000 other companies. At the end Smith noted, “In many cases we were over- investing.”

Smith discovered that Google was known for allowing employees time to work on personal proj- ects. Adopting a similar policy at Intuit resulted in launching cellphone banking software. In adapting to its customer base, Intuit developed more online services. A new version of QuickBooks includes soft- ware that enables small businesses to create Web sites. Intuit will be responsible for hosting the sites and managing the customers who use these services. To better understand how to manage online communi- ties, Brad Smith talked with Facebook’s COO.

As Smith continues to reach out to other tech companies, outsiders feel Intuit is planting seeds for new ideas. Time will tell when Intuit’s transformation is complete. No matter the result, CEO Brad Smith recognizes the importance of benchmarking and seeking advice from other companies in order to improve Intuit.

6 Based on Ricadela, A., “Intuit Taps Hewlett-Packard and Google for Advice,” Bloomberg BusinessWeek, 30 September 2008.

148 Part 2 • Designing and Assuring Quality

A CLOSER LOOK AT QUALITY 6-2 The Legal Environment of Benchmarking

Legal issues such as antitrust, intellectual property, and trademark issues are central concerns for firms entering into benchmarking agreements. To overcome these issues, benchmark practitioners should fol- low a code of conduct. One such code of conduct for benchmarking has been proposed by the Strategic Planning Institute Council on Benchmarking. 7

The Benchmarking Code of Conduct Principles

To contribute to efficient, effective, and ethical benchmarking, individuals agree for themselves and their organization to abide by the following principles for benchmarking with other organizations:

• Principle of legality. Avoid discussions or actions that might lead to or imply an interest in restraint of trade: market or customer allocation schemes, price fixing, dealing arrangements, bid rigging, bribery, or misappropriation. Do not discuss costs with competitors if costs are an ele- ment of pricing.

• Principle of exchange. Be willing to provide the same level of information that you request in any benchmarking exchange.

• Principle of confidentiality. Treat benchmarking interchange as something confidential to the indi- vidual and organizations involved. Information obtained must not be communicated outside the partnering organizations without prior consent of participating benchmarking partners. An organi- zation’s participation in a study should not be communicated externally without their permission.

• Principle of use. Information obtained through benchmarking partnering should only be used for the purpose of improving operations within the partnering companies themselves. External use or communication of a benchmarking partner’s name with their data or observed practices requires permission of that partner. Do not, as a consultant or client, extend one company’s benchmarking study findings to another without the first company’s permission.

7 www.apqc.org

With the strategy statement in place, management sets expectations for performance relat- ing to the benchmarking project. At a minimum, the expectations for benchmarking are that this is an ongoing process that serves as a basis for improvement (not a onetime event) and that spe- cific deliverables are to be identified by management that must be fulfilled.

Other activities for management include providing management awareness training, establishing a benchmarking competency center, developing guidelines for information shar- ing, and overseeing the development of a visit protocol. Once this benchmarking infrastructure is in place, benchmarking teams are commissioned and trained to perform the benchmarking project.

Training

Training is a key to success in all quality management approaches. This is especially true for benchmarking. Participants must have project management skills and be familiar with bench- marking approaches and protocols. Benchmarking carries with it legal liabilities that should be addressed during the training (see A Closer Look at Quality 6-2 ). Training should include mana- gerial training, cross-functional benchmarking skills training, team training, and documentation training (flowcharting). Many of these training courses are available from many different con- sulting organizations. It is best to obtain training from organizations that are experienced with benchmarking. Many companies have established external training arms that can be hired by competing firms.

Chapter 6 • The Voice of the Market 149

• Principle of first-party contact. Initiate contacts, whenever possible, through a benchmarking contact designated by the partner company. Obtain the permission of the contact before relaying any information or delegating any responsibility to other parties.

• Principle of third-party contact. Obtain an individual’s permission before providing their name in response to a contact request.

• Principle of preparation. Demonstrate commitment to the efficiency and effectiveness of the benchmarking process with adequate preparation at each process step; particularly, at initial part- nering contact.

• Principle of completion. Keep your commitments with your benchmarking partner in a timely fashion and keep your agreements.

• Principle of understanding and action. Follow the golden rule with benchmarking partners. Strive to understand how your benchmarking partner wants to have information handled.

Remember:

• Keep it legal. • Be willing to give what you get. • Respect confidentiality. • Keep information internal. • Use benchmarking contacts. • Don’t refer without permission. • Be prepared at the initial contact.

Etiquette and Ethics

Benchmarking partners must make themselves vulnerable to one another in order to gather useful infor- mation. Therefore, a level of trust must be established. The following general guidelines should be fol- lowed by both partners in a benchmarking encounter:

• Establish specific ground rules up front (e.g., “We don’t want to talk about those things that will give either of us a competitive advantage; rather, we want to see where we both can mutually improve or gain benefit”).

• Do not ask competitors for sensitive data or cause the benchmarking partner to feel that sensitive data must be provided to keep the process going.

• Use an ethical third party to assemble and blind-review competitive data, with inputs from legal counsel, for direct competitor comparisons.

• Consult with legal counsel if any information-gathering procedure is in doubt before contacting a direct competitor.

• Any information obtained from a benchmarking partner should be treated as internal, privileged information.

There are also some general rules of etiquette to be followed. On the one hand, never disparage a competitor’s business or operations to a third party, nor should you attempt to limit competition or gain busi- ness through the benchmarking relationship, nor misrepresent yourself as working for another employer.

On the other hand, always know and abide by the benchmarking code of conduct; have a basic knowledge of benchmarking and follow a benchmarking process; have determined what to benchmark, identified key performance variables, recognized superior performing companies, and completed a rig- orous self-assessment; have developed a questionnaire and interview guide and shared these in advance if requested; have authority to share information; work through a specified host; and have mutually agreed on scheduling and meeting arrangements. For face-to-face visits, the following guidelines are essential: Provide a meeting agenda at least a week in advance; be professional, honest, courteous, and prompt; introduce all attendees and explain why they are present; adhere to the agenda and maintain the focus on benchmarking issues; use language that is universal, not a company’s specialized jargon; do not share proprietary information without prior approval from the proper authority of both parties; and share information about your benchmarked processes.

Outside consultants can be useful in providing training and coaching on benchmarking and other quality-related efforts. However, it is best for the firm that is interested in benchmarking to

150 Part 2 • Designing and Assuring Quality

perform the benchmarking with its own employees rather than through consultants because a self-perpetuated approach creates the best platform for organizational learning. It may take lon- ger; however, it probably will be more useful to do it yourself.

BASELINING AND REENGINEERING

Many firms are facing the important decision to reengineer business processes to enhance pro- ductivity, to reduce cost, to improve quality, and to achieve better customer service. Reengineer- ing (see Chapter 2 ) is defined as a fundamental rethinking and redesign of business processes. Such change is often accompanied by the automation of business processes. Two factors are critical to achieving success through reengineering: breadth and depth. Breadth refers to the impact of the reengineering process to the entire organization. Depth refers to organizational ele- ments such as responsibilities, measurements, information technology, and skills. These dichoto- mous factors imply that business process reengineering will result in both localized (such as the affected work areas) and generalized (or organization-wide) performance impacts. However, these impacts are difficult to assess. Therefore, appropriate, effective methodologies are needed to assess the impacts of business process reengineering.

A methodology that can be applied in assessing business process reengineering impacts is baselining. Baselining , which has been discussed in other chapters, requires the monitoring of key internal firm performance measures over time to identify trends such as improvement (or decline) to inform managerial decision making. The baselining process involves identifying measures, establishing time frames for future data collection, gathering data, and analyzing data on an ongoing basis to identify performance trends and changes (see Figure 6-5 ).

Because business process reengineering affects multiple levels in a firm, abrupt organiza- tional changes are reflected in baselining results. If changes are effective in improving the orga- nization, the data collected will reflect this improvement.

PROBLEMS WITH BENCHMARKING

Benchmarking is not a simple activity, and it can be difficult to implement any of these tools and concepts. There are four key problems with benchmarking:

1. There may be substantial difficulty obtaining cooperation from other firms in your own industry—unless you happen to be a Fortune 100 firm. Most organizations have much less clout. The thing to remember is reciprocity . To be effective, you must have something to offer the target firm in return for sharing information. For example, a small firm may feel that it has little to offer a larger firm. If the small firm is flexible, the Goliath firm may want to learn how to achieve that flexibility.

2. The predominance of functional benchmarking with firms in noncompeting industries makes it difficult to benchmark with these firms. It takes much ingenuity to identify

Identify Measures

Establish Time Frames

Gather Data

Analyze Data to Identify Trends

FIGURE 6-5 Baselining Process

Chapter 6 • The Voice of the Market 151

benchmarks properly from noncompeting firms. This is where the business and industry lit- erature is very helpful in trying to identify benchmarking firms in noncompetitive industries.

3. Your efforts will be wasted unless you fully understand your own processes before you benchmark someone else. Using tools such as business process maps, it is possible to iden- tify the exact performance measures and metrics needed from the target firm.

4. Benchmarking is time-consuming and costly. A recent benchmarking project between two firms took nearly two years to complete and cost each of the firms more than $250,000. Of course, this was a major benchmarking project. Other projects have been completed at lower costs. However, some have been much more expensive. Costs of benchmarking include time for planning, travel, documentation, and implementation. By far, the largest costs are associated with implementa- tion. The investment is lost if benchmarking data are not used to drive improvement.

Summary In this chapter we discussed an important method for listening to the voice of the market. We discussed the purposes of benchmarking. Most often companies benchmark processes. They also benchmark many performance measures such as productivity.

The goal of benchmarking is to become best in class and then best of the best. Benchmark- ing is more effective for firms that have been pursuing quality and process improvement over time. This is certainly not a starting point for quality improvement efforts.

Remember that the use of data and measures can result in undesired outcomes as individu- als attempt to exploit the measurement system to reflect well on them. Baselines and other mea- sures should be implemented carefully with attention to the possibility of unintended outcomes.

Key Terms Baselining Benchmark Control process Conversion process Critical success factors Customer-related results Financial benchmarking

Financial ratios 5w2h Functional benchmarking Human resources measures Initiator firm Key business factor (KBF) Key measures

Management by fact Market share data Operating results Performance benchmarking Process benchmarking Product benchmarking Productivity ratios

Quality measures Reverse engineering Strategic benchmarking Structural measures Target firm

Discussion Questions 1. Describe the concept of benchmarking. Provide an example of how a restaurant you are familiar with

could use benchmarking to improve its performance. 2. What is a benchmark firm? Why is it good practice for a benchmark firm to open its doors and allow

others to view its operations and tour its facilities? 3. What are the pros and cons of becoming a benchmark firm? If you were the manager of a highly suc-

cessful company, would you want other companies benchmarking against your firm? Why or why not? 4. In the context of benchmarking, describe the distinction between an initiator firm and a target firm. 5. Describe how benchmarking can be used by a firm to validate externally the value of its present busi-

ness practices. 6. Describe the concept of process benchmarking. How does process benchmarking improve a company’s

overall business performance? 7. Is the growing popularity of the Internet a positive development or a negative development for the

future of benchmarking? Explain your answer.

152 Part 2 • Designing and Assuring Quality

8. Compare and contrast process benchmarking, product benchmarking, and strategic benchmarking. 9. When benchmarking, what is the primary hazard in comparing measures across companies to gauge

performance differences? 10. How do a firm’s key business factors help direct its benchmarking program? 11. Provide several examples of the types of measures that are often gathered in benchmarking studies.

How does a firm determine which measures should be included in its benchmarking program? 12. Imagine yourself in the role of the CEO of a medium-sized auto parts company. Briefly describe how

you would set up a benchmarking program. Include in your description an analysis of how you would determine “what” to benchmark and how you would determine “whom” to benchmark against.

13. Consider the following: “Despite its many advantages, benchmarking is not an appropriate technique for all firms. Some firms are so unique that it is impossible for them to find benchmark firms that experience the same challenges they do. As a result, it is impractical for these firms to participate in benchmarking.” Do you agree or disagree? Explain your answer.

14. Many scholars believe business process benchmarking is the most important type of benchmarking. Do you agree with this particular belief? Why or why not?

15. Describe the concept of 5w2h. 16. What management activities can be undertaken to support a firm’s benchmarking activities? Make

your answer as substantive as possible. 17. What are some of the pluses and minuses of the benchmarking code of conduct? Would you add any

other points to the code? If so, what? 18. Although benchmarking is a popular management technique, many firms are not engaged in the

benchmarking process. Why do you think some firms avoid benchmarking? Are any of the reasons valid? Why or why not?

Problems 1. A company has gathered the following financial information for itself and a competing firm. They

wish to compare productivity for the two firms (all numbers in 000s).

Firm A Firm B

Labor $30,000 $16,000 Plant and equipment 200,000 150,000 Energy 17,500 20,500 Materials 200,000 180,000 Sales 1,200,000 900,000

a. Compute partial and total factor productivity measures for Firms A and B. b. What is the picture you get of the two firms? c. What would you suggest to the management of Firm B?

2. For the firms in Problem 1, you have been asked to make a report to the management of Firm A. What are some of the caveats relating to accounting practices that you would include in the report? Which numbers should be interpreted cautiously?

3. For the data in Problem 1, suppose Firm B is a foreign firm. What additional caveats would you place on interpretation of the data?

4. A domestic company operating a subsidiary in an LDC (less-developed country) has shown the fol- lowing financial results:

Parent (Domestic) Subsidiary (LDC)

Sales (units) 200,000 80,000 Labor (hours) 40,000 60,000 Materials (currency) $40,000 FC40,000 Equipment (hours) 120,000 10,000

Chapter 6 • The Voice of the Market 153

a. Calculate partial labor and capital productivity numbers for the parent and subsidiary. Interpret the results.

b. Compute total factor productivity figures. Does your interpretation change? c. If $1 ! 10 FC units, calculate materials productivity figures. Explain your finding.

5.

Marketing Manufacturing Engineering Supply Chain

Aerospace 4.8 12.5 10.0 Automotive 8.5 5.0 6.0 Communications 11.6 11.8 20.0 Components 3.0 2.4 5.5 Computer 5.0 8.0 12.5 Electromechanical 6.3 6.0 10.0 Electronic Subsystems 4.2 4.5 8.0 Heavy Mechanical 6.0 9.0 9.0 Instrumentation 7.5 4.8 6.1 Light Assembly 2.8 2.5 3.3 Medical 3.8 4.0 13.4 Cross-Industry 4.9 6.0 8.2

Above are industry comparisons of the percentage of sales spent on salaries for marketing employees, manufacturing engineering employees, and supply chain employees for several different industries. Rank these industries by the amount spent in each of the areas and report your findings to manage- ment. What can you infer from your findings about each of the industries?

6. Using the data from Problem 5, suppose you are a computer company that spends 9% on marketing staff, 6% on manufacturing engineering, and 8% on supply chain staff. Comparing your expenditures with the above averages, what would you recommend to management? What more information would you want?

7. Following is an announcement from a study from The Benchmarking Network, Inc.

5th Annual Shared Services Measures The Benchmarking Network and the Shared Services Benchmarking Association announced they will be kicking off the fifth Annual Shared Services Measures benchmarking study. Now is the time to join and become involved in setting the focus and direction of the study by attending the kickoff meet- ing. The study will review Shared Services Measures including research into:

• Accounting; • Finance and Treasury; • Human Resources; • Information Technology; • Procurement and Supply Chain; • Legal; • Regulatory; • Auditing; • Corporate Communications/External Affairs; • Facilities, Real Estate, Security; • Environmental; • Fleet; and • Other Shared Services Measures.

Put yourself in the place of the Benchmarking Network researchers. How would you design this study? What would you have to consider in undertaking such a study?

8. Below are enrollment data from several British universities.

154 Part 2 • Designing and Assuring Quality

Change in Student Numbers

99/2000 to 2000/01 98/99 to 99/2000

Supporting Data 2000/01 Student Numbers FT PT FT PT ALF

Institution % % % % £ FT PT

Abingdon and Witney College b b 0 -7 b b b Accrington and Rossendale College -16 -1 7 -1 17.22 1246 8896 Alton College 2 34 11 10 17 1478 1522 Amersham and Wycombe College -4 -6 5 21 17.07 1762 5064 Aylesbury College -14 11 -5 -2 22.63 800 3117 Barking College -6 6 2 -68 17.05 2193 8638 Barnet College -7 -2 5 -22 17 4383 13189 Barnfield College 3 7 7 24 17 2601 15480 Barnsley College -3 -85 -9 -24 17 3084 6029 Basildon College -8 -43 -12 41 17 583 5695 Basingstoke College of Technology -4 2 -6 8 17 1463 7670 Bedford College -1 19 -3 -7 17.32 1855 8524 Beverley College of Further Education 17 6 31 4 17 851 3972

ALF = Average Level of Funding FT = Full Time PT = Part Time b = Not Available

Compare the data from these schools and present them in a way that is useful for the administrators in these schools.

9. Suppose the chancellor of Bedford College asks you to infer meaning from the data in Problem 8. Put together a report for the chancellor explaining how Bedford is performing relative to the other schools.

10. Choose a company in your local area. Develop a list of five companies among the best in class in their industry and the best of the best. Explain how you chose the benchmarking targets you chose. Identify a list of 20 benchmarking questions. What kind of data would you select? How would you contact the target firms?

11. Following are financial statements from American Ecology. Studying these figures, what are some possible financial benchmarks this firm might want to develop?

American Ecology Corporation Consolidated Statements of Operations: Proforma and Unaudited ($ in 000s except per share amounts)

2003 2004 2005

Revenues 38,960 41,522 49,972 Operating costs 23,545 23,219 33,571 Gross profit 15,415 18,303 16,401 Selling, general, and administrative expenses 15,702 21,909 24,187 Impairment loss on long-lived assets — — 7,451 Loss from operations (287) (3,606) (15,237) Investment income (618) (1,203) (932) Gain (or loss) on sale of assets (72) (136) (55) Other expense (414) (1,723) (1,326) Gain (or loss) before income taxes 817 (544) (12,924) Income tax expense (benefit) 55 132 (1,517) Net income (or loss) 762 (676) (11,407) Preferred stock dividends 417 760 465 Net income (or loss) available to common shareholders 345 (1,436) (11,872) Basic earnings per share 0.03 (0.17) (1.47) actual dollars Diluted earnings per share 0.03 (0.17) (1.47) actual dollars

12. Baseline the data from Problem 11. Is the company’s performance improving or worsening?

Chapter 6 • The Voice of the Market 155

CASES

Case 6-1 Amgen Corporation: Using Benchmarking as a Means of Coping with Rapid Growth Amgen: www.amgen.com American Productivity and Quality Center: www.apqc.org

Chemical, Lexus, Lucent Technologies, Motorola, Anheuser-Busch, Eastman Chemical, and IBM. Four of the companies invited Amgen personnel to visit their facilities, and the other three participants were inter- viewed over the phone. The study was successful, and Amgen redesigned its sales training and development department as a result of the benchmarking initiative.

Amgen has found other opportunities to use bench- marking to help cope with the challenges of rapid growth in a high-technology industry. For example, the company used benchmarking to study the way it moves its products from production to the end user, and it conducted a bench- marking study that examined its marketing practices. Through its experiences, Amgen has learned some of the barriers to effective benchmarking and some of the global benefits. In terms of barriers, Amgen learned that a benchmarking study is only as good as its implementa- tion. If the implementation stage is lengthy or is not taken seriously by the people involved, the study will not be useful. Another potential barrier is finding companies that are similar enough to your company to benchmark against and that are willing to participate. Having a partner like the American Productivity and Quality Center that main- tains a best-practice database to draw from helps address this concern. Amgen has learned there are also global benefits to benchmarking, beyond the specific ideas and techniques that are gleaned from a particular benchmark- ing study. Benchmarking helps a firm gain visibility and sends a clear message to its stakeholders that the firm is interested in continuous improvement. In addition, bench- marking helps a firm determine whether its best-in-class activities are truly best in class. Often, it is difficult for a firm to know just how good (or poor) it is at some activity until it measures its activity against a similar firm.

Amgen has been successful in its early experi- ences with benchmarking and serves as a model for how to initiate a benchmarking program. Although Amgen excels in the development of high-potential pharmaceu- tical products, it recognizes that it has a lot to learn about other management issues. Benchmarking has been a useful tool for the company in its learning efforts.

8 Powers, V. J., “Amgen Succeeds with Benchmarking through Outside Facilitation, Hard-Working Teams,” American Productivity and Quality Center 8 (October 1997): 1.

Amgen Corporation is the largest biotechnology company in the world. Founded in Thousand Oaks, California, the company produces lifesaving pharmaceutical prod- ucts based on advances in cellular and molecular biol- ogy. One of the company’s products, EPOGEN, is a product used for the treatment of anemia associated with chronic renal failure and is one of the top-selling pharmaceutical products in the world.

Although Amgen is very good at developing cutting-edge pharmaceutical products, the company has struggled at times with the demands of managing a rap- idly growing workforce. In the past 20 years, the com- pany has grown from a workforce of 400 employees to 7,500. In particular, Amgen has faced challenges in terms of making the transition from a single-product company to a multiproduct company and in staffing and training its growing divisions. To deal with these challenges, Amgen decided to turn to benchmarking. The first department involved with the benchmarking initiative was sales train- ing and development because the company’s employees believed that improvement was needed in that area. There also was recognition within Amgen that training and development needed to be strengthened. Commenting on the merits of the first benchmarking study, Ellen Nichols, the director of the sales training and development depart- ment, said, “We’d been clearly focused on our products and customers, but perhaps we haven’t had as focused an effort on developing our people.” 8

To conduct its first benchmarking study, Amgen solicited help from the American Productivity and Qual- ity Center (APQC) in Houston, Texas. APQC is a non- profit organization that provides benchmarking training, maintains a best-practice database, and helps firms locate businesses to benchmark against. APQC helped Amgen develop a list of 40 potential benchmark targets, based on Amgen’s criteria for selection. Amgen wanted to bench- mark against companies that were high-growth, high- tech, successful, and had a geographically dispersed sales force. Eventually, Amgen narrowed the list to seven companies and benchmarked its sales training and devel- opment department against similar departments at Dow

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156 Part 2 • Designing and Assuring Quality

Discussion Questions

1. Why was benchmarking so important for Amgen at the point in the company’s history when bench- marking was initiated? Do you believe that benchmarking will contribute to Amgen’s long- term success?

2. Was it a good idea for Amgen to solicit the help of the American Productivity and Quality Center? Do you think that Amgen would have been suc- cessful without the APQC’s involvement?

Case 6-2 AT&T Teleholdings: Making Benchmarking a Part of the Process Improvement Tool Kit AT&T: www.att.com

AT&T Teleholdings offers local telecommunications services to people in Illinois, Indiana, Ohio, Michigan, and Wisconsin. The company has a rich history of inno- vation and customer service. For example, they were the first U.S. company to offer commercial cellular ser- vice. Today, the company offers a broad array of ser- vices to its customers and is an industry leader in productivity and financial performance.

AT&T Teleholdings is firmly committed to benchmarking. To maximize the potential of its bench- marking efforts, the company employs internal bench- marking experts and conducts benchmarking forums for its employees. Stories about successful benchmarking efforts in the company are always included in the forums. According to Orval Brown, the company’s manager of business process architecture and bench- marking, “Other people’s success stories (about bench- marking) get people interested and excited about the possibility of improvement.”

The company has found three approaches helpful in the attainment of quality improvements:

Internal (best-of-breed) benchmarking involves a comparison of processes between different busi- ness units within the firm.

External (best-in-class) benchmarking involves finding companies to benchmark against, even if the company is in an unrelated industry.

Competitive (industry best) benchmarking against a leader in the same industry.

Each of these types of benchmarking has unique challenges and rewards. Internal benchmarking is the simplest because there is typically no problem getting access to information. External benchmarking is more challenging because of access and confidentiality issues, but the rewards can be quite good. Competitive benchmarking is the toughest because a direct competi- tor typically will go only so far in terms of sharing information. The rewards, however, can be substantial.

Because the company is multifaceted in its bench- marking efforts and because a lot of employees are involved, the firm uses a benchmarking code of conduct to maintain strict control of its benchmarking efforts. The benchmarking code of conduct (reflecting the guidelines from the Strategic Planning Institute Council of Benchmarking) is as follows:

• Keep it legal. • Be willing to provide the same information you

request. • Respect confidentiality. • Keep information internal for your use only. • Initiate contact through benchmarking contacts. • Don’t refer possible benchmarking candidates

without their permission. • Be prepared at initial contact. • Have a basic knowledge of benchmarking, and

follow the process.

This code of conduct provides a measure of conti- nuity across the company’s benchmarking efforts that is very helpful in developing a consistent set of bench- marking behaviors. It also helps ensure that benchmark- ing will in no way impinge on the ethical standards of the firm.

One component of the benchmarking process that the company has become very good at over the years is finding suitable firms to benchmark against. They typi- cally look for the following types of companies to include in benchmarking studies: companies that have received quality or business awards, companies with excellent financial results, companies with success sto- ries published in major periodicals, and companies that are top-rated in their industries. These criteria help to select firms that have the highest potential to provide successful benchmarking results.

Management is also keenly aware of the fact that the litmus test of any management initiative is effective implementation. The company typically takes the

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Chapter 6 • The Voice of the Market 157

following steps in implementing what it learns from a benchmarking initiative:

Select implementation alternatives.

Assign resources and create a schedule.

Establish goals.

Develop a monitoring plan.

Gain appropriate approval to alter current practices.

Implement the plan.

Communicate the benchmarking findings.

This formalized process of implementation helps ensure that a benchmarking effort translates into actual change.

As the telecommunications industry continues to become more competitive, the company’s reliance on benchmarking as part of its process improvement tool kit will probably become even more pronounced.

Discussion Questions

1. Is AT&T Teleholdings’ benchmarking code of conduct a good idea? What types of ethical abuses potentially could occur in benchmarking if a firm did not follow a strict code of conduct?

2. This case describes benchmarking as an impor- tant part of the company’s “tools” of quality.

What other tools of quality does benchmarking complement?

3. Telecommunications is a fast-paced, rapidly changing industry. Do you believe that bench- marking is particularly important in a fast-paced industry? Why or why not?

We all prefer copiers whose copies are clear under low power; we all prefer cars designed to steer safely and predictably, even on roads that

are wet or bumpy. . . . We say the products are robust. They gain steadfast customer loyalty.

—Genichi Taguchi and Don Clausing 1

C H A P T E R 7

Quality and Innovation in Product and Process

Design

158

Have you ever needed a copy quickly but the copy machine was jammed? Have you ever worked against an impending deadline only to have a computer or a printer fail? Have you ever gotten into your car on a cold day to find it would not start? These annoyances are relatively minor. However, other examples of product failures can be catastrophic. If a lum- berjack uses a defective chainsaw, he or she might lose an arm. If a heart monitor malfunctions, the results might be fatal to a patient. A race car driver’s tires blow at 210 miles per hour, and a spinout results. A faulty fire alarm fails to alert the home’s occupants until it is too late. These are major product failures that can result in severe injury or death.

In this chapter we focus on quality assurance. We have already learned that we cannot ensure quality at the final stages of inspection. After all, assurance is best achieved at the design stage.

DESIGNING PRODUCTS FOR QUALITY

In designing products, we must first answer many questions. For example, what are the functions the customer wants? What are the capabilities of current products? What are the limitations of the materials we have selected for the product? Are there better materials available? How much will the product cost to make? How much must the product cost to make it successful in the marketplace?

What does it mean to design products for quality? As we have already said, quality has many different dimensions. David Garvin’s dimensions of quality from Chapter 1 make it clear that each dimension poses different design problems. Take the first dimension of performance.

1 Taguchi, G., and Clausing, D., “Robust Quality,” Harvard Business Review 68 (1990): 65–75.

Chapter 7 • Quality and Innovation in Product and Process Design 159

What are the critical measurements of performance? How much performance does the customer want? How much performance is overkill? How do we balance competing dimensions of perfor- mance (e.g., audio output versus distortion)? Similar questions could be constructed concerning any of Garvin’s product quality dimensions. All these questions must be answered early in the design process. For example, if durability is an important quality dimension for the producer of an electronic calculator, then the design team might actively investigate new polymers to find a durable housing for the internal electronics.

It might seem that materials choices are technical and should be made by engineers. How- ever, engineers need input from marketing and operations to understand customer needs, market- ing requirements, and the realities of production. Supply chain functions provide inputs on needs such as sourcing, logistics, and collaborations. Given free rein, engineers would design many products to the n th degree. If you don’t believe this, look at a remote control for a DVD player or a television set. You will never use many of the buttons on the remote. A study was performed by Sony Corporation to determine which buttons were actually used by the customer. Based on the results of the study, the remotes for Sony televisions were simplified.

Professor Noriaki Kano of the Science University of Tokyo illuminates the relationship between quality and design with the Kano Quality/Design Model in Figure 7-1 . The Kano model shows that quality is a function of fulfilling customer requirements and achieving high levels of satisfaction. He then distinguishes between basic quality, performance quality, and exciting quality. The goal should be exciting quality. As you contemplate the Kano model, you should realize that as time passes, customer demands will increase and what was once exciting will become a basic expectation.

THE DESIGN PROCESS

There are many different approaches to designing products. Even within the same industries, the approaches vary in some important ways. Yet there are some similarities across the board. For example, design projects often involve a project team rather than a single designer working inde- pendently. Preferably, these teams will work closely with customers to ensure that customer needs are met.

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Figure 7-2 shows a generic approach to designing products. The design process includes nine phases that are interrelated. These stages begin with product idea generation and end with manufacture, delivery, and use. Project managers monitor design projects at each stage for cost and adherence to schedules.

Product idea generation is the first step. During this stage, external and internal sources brainstorm new concepts. Internal sources include marketing, management, research and devel- opment (R&D), and employee suggestions. The primary source for external product ideas is the customer. Original equipment manufacturers (OEMs) and contract manufacturers work closely with customers to develop new products. In other circumstances, customer needs are identified to generate product ideas. Other external sources for product ideas can be market-related sources such as industry experts, consultants, competitors, suppliers, and inventors. There are fundamen- tal differences between R&D-generated ideas (known as R&D push ) and marketing-generated ideas (known as marketing pull ). R&D-generated ideas tend to be groundbreaking, risky, and technologically innovative. An example of R&D-based development was the Altair microcom- puter. In the mid-1970s, the MITS (Micro Instrumentation and Telemetry Systems) Altair 8800 appeared on the cover of Popular Electronics. At the time, there was a very small market for this

Manufacturing System Design

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Project Customer Needs

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Manufacture, Delivery, and Use

FIGURE 7-2 Product Development Process

Chapter 7 • Quality and Innovation in Product and Process Design 161

product. However, the article inspired two computer whizzes named Paul Allen and Bill Gates to develop a BASIC Interpreter for the Altair. The rest is history. Although there was not a large established market for personal computers, they have radically affected business and home life since their introduction.

Marketing-generated ideas tend to be more incremental—that is, they build on existing designs—and are better aligned with customer needs. For example, at the product idea-generation stage, a gap in the market or a customer need should be identified. Preliminary assessment of the marketability of the product is performed and funding provided for beginning development of a prototype of the product. Recent developments in computers have included technological devel- opments such as improved multimedia capabilities and faster speeds as well as cosmetic changes in casings such as tablet designs and the use of clear plastics. These are marketing-oriented changes. As shown in Quality Highlight 7-1 , new product ideas have enhanced the bottom line.

QUALITY HIGHLIGHT 7-1 A Turnaround at Kellogg’s Cereals: Driven by Design 2

www.kelloggcompany.com

Due to the leadership of Carlos Gutierrez, former CEO, Kellogg has regained the top spot in sales in the highly competitive cereal industry. Driving the turnaround is research and development (R&D). In the 1990s, the company only introduced two new products: Nutri-Grain Bars and Raisin Bran Crunch. Since 2000, over 100 food scientists have been busily working at the new R&D center in Battle Creek, Michi- gan. The results are evident—Kellogg generates over 100 new products per year! In addition, over 20% of Kellogg’s sales are from new products—up from less than 5% in prior years.

Here is one example of a new product: Special K with Red Berries. When Kellogg marketers in France decided to jazz up Special K by adding freeze-dried berries, headquarters took notice. Cereal makers had tried using freeze drying in the 1970s, but freeze drying was more primitive back then and wreaked havoc with moisture levels in the cereal boxes, turning flakes into mush. Now, food scientists at Kellogg have perfected the technology, and the R&D folks in Battle Creek and Europe tinkered with a mix of tart raspberries and sweet cherries until they had the right blend. The cereal now generates over $100 million in sales according to figures that exclude Walmart sales.

2 Adapted from “The Man Who Fixed Kellogg,” Fortune , 6 September, 2004: 218–226.

Source: LiPo Ching/MCT/Newscom.

162 Part 2 • Designing and Assuring Quality

Stage 2 is customer future needs projection . This uses data to predict future cus- tomer needs. Designers for Intel, the maker of the microprocessors for personal computers, have been masters at this. They have been able to project and introduce new products that are well timed to fit with changes in the technology requiring them. With the explosion of graphics in programs and on the Internet, Intel developed new chips to fit these needs. The company also has introduced these microprocessors at a rate that has not outstripped the ability of the market to absorb the new technology. At the same time, the company has been able to outpace competing microprocessor developers by staying slightly ahead of the tech- nological curve.

The task of the product designer is to offer products with value that exceed customer needs at any point in time by careful planning and thought as to what future customer needs will be. There is no single approach to gathering information about future customer needs. Surveys might give insights, but they are usually insufficient to uncover emerging customer needs.

During technology selection for product development , designers choose the materi- als and technologies that will provide the best performance for the customer at an acceptable cost. A technology feasibility statement is used in the design process to assess a variety of issues such as necessary parameters for performance, manufacturing imperatives, limitations in the physics of materials, special considerations, changes in manufacturing technologies, and conditions for quality-testing the product. At this stage, preliminary work can be per- formed to identify key quality characteristics and potential for variability with each of the different materials.

Technology development for process selection means choosing those processes used to transform the materials picked in the prior step into final products. Careful technology selection of both automated and manual processes is key from a quality perspective because machinery, processes, and flows need to be developed that will result in a process insensitive to variations in ambient and material-related conditions.

Final product definition results in final drawings and specifications for the product with product families by identifying base product and derivative products.

Product marketing and supply chain preparation are marketing-related activities such as developing a marketing plan. The marketing plan should define customers and distri- bution streams. The production-related activities are identifying supply chain activities and defining distribution networks. Nowadays, this step often requires the design of after-sales processes such as maintenance, warranties, and repair processes that occur after the customer owns the product.

Product design and evaluation requires definition of the product architecture, the design, production, testing of subassemblies, and testing of the system for production. A product design specification (PDS) demonstrates the design to be implemented with its major features, uses, and conditions for use of the product. The PDS contains product characteristics, the expected life of the product, intended customer use, product development special needs, production infrastruc- ture, packaging, and marketing plans.

Manufacturing system design is the selection of the process technologies that will result in a low-cost, high-quality product. The selection of process technology is a result of projected demand and the finances of the firm. Processes must be stable and capable of producing products that meet specification. One of the major developments in this area is that firms now desire the ability to change over to new products with a minimum of cost associated with defects. In the past, it was considered standard operating procedure to produce a certain amount of bad product to prove that the system works. For example, a producer of stove pipe would process a small batch of pipe, inspect the pipe and then adjust the line, produce another small batch and rein- spect, and so forth until they proved the process. This is no longer considered a cost-effective means of introducing new products.

Finally, product manufacture, delivery, and use finish this process. The consumer then enjoys the result of the design process.

Chapter 7 • Quality and Innovation in Product and Process Design 163

QUALITY FUNCTION DEPLOYMENT (QFD)

When you have determined customer needs, those needs must be translated into functional product design. Quality function deployment (QFD) describes a method for translating cus- tomer requirements into functional design. Sometimes this process of translation is referred to as the voice of the customer . The quality function deployment approach was developed by Dr. S. Mizuno, 3 a former professor of the Tokyo Institute of Technology. Since then, this approach has been used extensively throughout the world. In the United States, Hauser and Clausing, 4 two MIT professors, were central in researching and publishing articles describing this approach. 5

Designers need a means for implementing customer requirements into designs. The house of quality illustrated in Figure 7-3 shows how QFD is used to accomplish this. The left wall on the house of quality contains a listing of customer requirements. The roof on the house of quality

3 Mizuno, S., and Akao, Y., “QFD: The Customer-Driven Approach to Quality Planning and Development,” Asian Productivity Organization, Tokyo, Japan, 1994. 4 Hauser, J., and Clausing, D., “The House of Quality,” Harvard Business Review (May–June 1988): 63–73. 5 Ibid.

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lists technical requirements. We introduce QFD step by step so that you can see how a house of quality is developed and analyzed. Following are steps in performing a QFD: 1. Develop a list of customer requirements. The list of customer requirements includes the

major customer needs as they relate to a particular aspect of a process. In Figure 7-4 , a part of a QFD house of quality is shown with customer requirements for a restaurant. Custom- ers want to have a clean restaurant, a comfortable seating arrangement, delicious food, and responsive servers.

2. Develop a listing of technical design elements along the roof of the house. These are the design elements that relate to customer needs. Figure 7-5 shows the design elements for the restaurant that may affect the customers’ requirements. These design elements are building materials such as type of tile, dirt resistance of floor tiles, material used in making seats, training for servers, and standardization of menu.

3. Demonstrate the relationships between the customer requirements and technical design elements. A diagram can be used to demonstrate these relationships. The symbols shown in Figure 7-6 are used, and scores are assigned relating to these symbols (i.e., 1, 3, and 9).

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FIGURE 7-6 QFD Technical Requirements and Customer Requirements Relationships

Chapter 7 • Quality and Innovation in Product and Process Design 165

Where 9 means strongly associated, 3 is somewhat associated, and 1 is weakly associated. Notice that tile and dirt resistance are strongly associated to clean facilities.

4. Identify the correlations between design elements in the roof of the house. Using the symbols identified in Figure 7-6 , show whether different design elements are positively or negatively correlated. As shown in Figure 7-7, positive and negative scores are assigned to each symbol as shown. Notice that seat material and type of tile are negatively related, whereas type of tile is strongly positively related to dirt resistance. Server training and menu standardization are also strongly positively related.

5. Perform a competitive assessment of the customer requirements. On both the right side and in the lower middle portion of Figure 7-8 , there is an assessment of how your product compares with those of your key competitors. These comparisons are on a 5-point scale with 5 being high. A stands for competitor A, B means competitor B, and Us stands for the company in question. Note that there are two assessments, one for customer requirements and another for technical requirements.

6. Prioritize customer requirements. On the far right side of Figure 7-9 are customer require- ments priorities. These priorities include importance to customer, target value, sales point, and absolute weight. A focus group of customers assigns ratings for importance. This is a subjective assessment of how critical a particular customer requirement is on a 10-point scale, with 10 being most important. Customer requirements with low competitive assess- ments and high importance are candidates for improvement. Target values are set on a 5-point scale (where 1 is no change, 3 is improve the product, and 5 is make the product better than the competition). With the target value, the design team decides whether to change the product.

The sales point is established by the QFD team members on a scale of 1 or 2, with 2 meaning high sales effect and 1 being low effect on sales. The absolute weight is then found by multiplying the customer importance, target factor, and sales point. This is expressed in the following equation:

Absolute weight ! customer importance " target value " sales point (7.1)

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FIGURE 7-7 QFD Technical Requirements Interrelationships

166 Part 2 • Designing and Assuring Quality

7. Prioritize technical requirements. As shown in Figure 7-10 , technical requirements are prioritized by determining degree of difficulty, target value, absolute weight, and relative weight. The degree of difficulty is assigned by design engineers on a scale of 1 to 10, with 1 being least difficult and 10 being most difficult. The target value for the technical require- ments is defined the same way the target values for the customer requirements were assigned.

The values for absolute and relative weights are now established. The value for the absolute weight is the sum of the products of the relationship between customer and tech- nical requirements and the importance to the customer columns (fourth column from the right). The value for relative weight is the sum of the products of the relationship between customer requirements and technical requirements and the customer requirements absolute weights (the farthest right column).

8. Final evaluation. The relative and absolute weights for technical requirements are evalu- ated to determine what engineering decisions need to be made to improve the design based on customer input. This evaluation is performed by computing a percentage weight factor for each of the absolute weight and relative weight numbers (see Figure 7-11 ).

As you can see in this example, the standardized menu has a very high relative importance. This gives the restaurant a focus for the coming period.

Finally, the house of quality we have shown is only the first level. As shown in Figure 7-12 , a similar process is followed in rolling out a new design. The first stage we have discussed is the technical requirement stage. During the second stage, a house of quality is completed for

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Chapter 7 • Quality and Innovation in Product and Process Design 167

component attributes to prioritize components and subsystems. At the third level, process opera- tions, process engineers use QFD to prioritize process points that can lead to better customer satisfaction. At the fourth stage, the quality control plan is put in place to ensure that customer needs are given proper priority.

TECHNOLOGY IN DESIGN

No longer are the tools of the designer a square, a pencil, and a drafting table. Today, a designer is much more likely to use a computer-aided design (CAD) system . These systems are used in designing anything from an ultralight airplane, to a hamburger, to a home, or to a new intersec- tion that can handle higher volumes of traffic. Computer-aided tools greatly improve the ability of designers to generate new and varied designs. In addition, they simplify the design process. For example, auto designers once had to place mock-ups of automobiles into wind tunnels to test the aerodynamics of a design. However, now the wind resistance coefficients for automobiles can be simulated on computers, cutting costs and design times and allowing for quick adjust- ments to the design. CAD systems help to develop more reliable and robust designs.

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168 Part 2 • Designing and Assuring Quality

An important advance in CAD systems has been the advent of multi-user CAD systems . Using a common database in a network, multiple designers in locations worldwide can work on a design simultaneously around the clock. Consider a multinational corporation developing a new product. When the U.S. designers sleep, Asian and European designers work. When the U.S. designers return to work, they can see the progress that has been made overnight. For exam- ple, when developing a new airplane, Boeing used hundreds of designers on the project simulta- neously. These designers used their CAD systems to ensure there were no inconsistencies in design that would render the airplane unusable.

CAD systems are used in geometric design, engineering analysis, design review and auto- mation, and automated drafting. Geometric modeling is used to develop a computer-compatible mathematical description of a part. 6 The image developed is typically a wire-frame drawing of a component. This part may appear in two dimensions, as a two-dimensional drawing of a three- dimensional object, or in full three-dimensional view with complex geometry.

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A

B A

U s Competitive

Assessment

1 2 3 4 5

Us

A

B A 9 3 1 27

6 5 1 30

8 4 2 64

7 4 2 56

Us B

AB Us

B Us A

81

243

81

243

81

351

80

595

93

744

Computing Relative Weight:

9 27 = 243

Computing Absolute Weight:

9 9 = 81

Intercorrelations = + 9 (Strong positive) = + 3 (Positive) = 3 (Negative) = 9 (Strong negative)*

FIGURE 7-10 QFD Example

6 Stroud, I., and Nagy, H., Solid Modelling and CAD Systems (New York: Springer, 2011).

Chapter 7 • Quality and Innovation in Product and Process Design 169

Engineering analysis may involve many different engineering tests such as heat-transfer calculations, stress calculations, or differential equations to determine the dynamic behavior of the system being designed. Analysis-of-mass-properties features in CAD systems automatically identify properties of a designed object such as weight, area, volume, center of gravity, and moment of inertia. CAD systems allow for the automatic calculation of these properties.

Designs are checked for accuracy during design review . Using CAD, the designer can zoom in on any part of design detail for close inspection of a part. Layering also is performed during design review by overlaying the geometric images of the final shape of a part over an image of a rough casting. This layering validates the design by ensuring that enough material is available on the casting to accomplish the final machined dimensions of the part.

Examining a design to see if different components in a product occupy the same space is called interference checking . Interference checking is of major importance in an design of air- planes. Hundreds of pipes and thousands of wires occupy the walls of the aircraft. Interference checking in design review ensures that designs are feasible. This is especially important for air- plane makers because so many engineers are participating in the design. Automated drafting results in the creation of a final drawing of the designed product and its components. Some of the features of an engineered drawing include automated dimensioning, generation of cross-hatched

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Clean facilities

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Absolute weight Absolute factor Relative weight Relative factor

81

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243

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81

.19

243

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81

.19

351

.16

80

.19

595

.27

416

2176

Sums 93

.22

744

.34

Computing Absolute Factor:

81/416 = .19

Computing Relative Factor:

243/2176 = .11

*

Intercorrelations = + 9 (Strong positive) = + 3 (Positive) = 3 (Negative) = 9 (Strong negative)

FIGURE 7-11 QFD Example

170 Part 2 • Designing and Assuring Quality

areas, scaling of the drawing, development of sectional views, and enlarged views of particular part areas.

CAD systems can be stand-alone or tied into computer-assisted manufacturing (CAM) systems that are used in automated production systems. Another important component of a CAD system is the group technology component that allows for the cataloging and standardization of parts and components for complex products. Standard parts can result in fewer suppliers, simpler inventory, and less variability in processes.

CAD/CAM systems are often tied together in a closed-loop system with computer-aided inspection (CAI) and computer-aided testing (CAT) quality control systems. CAI and CAT allow for 100% inspection of products at a relatively low cost. Inspection is performed by infra- red and noncontact sensors that allow for parts to be inspected without handling, thereby reduc- ing the chance of damage to products.

OTHER DESIGN METHODOLOGIES

Organizing the Design Team

If the design process steps discussed previously are performed sequentially, the design process will be very time-consuming. Therefore, the steps are performed simultaneously as often as pos- sible. This approach is called concurrent engineering and has been very helpful in speeding up the design life cycle. Products such as John Deere tractors and all-new automobiles have been designed using this strategy. Teams are a primary component of concurrent engineering and include program management teams, technical teams, and design-build teams.

Technical Requirements

1

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3

Quality Control Plan

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Critical to Quality Characteristics

(CTQs)

FIGURE 7-12 The Houses of Quality

Chapter 7 • Quality and Innovation in Product and Process Design 171

The benefits of concurrent engineering primarily include communication among group mem- bers and speed. By working on products and processes simultaneously, the group makes fewer mis- takes, and the time to get the concept to market is reduced drastically. The team concept joins people from various disciplines, which enhances communication and the cross-fertilization of ideas.

Another benefit of concurrent engineering is increased interaction with the customer. Often customers are included in concurrent engineering teams to give immediate feedback on product designs. This requires contractual agreements between suppliers and customers because the cus- tomer representatives may work for the design team on a contract basis. However, the immediate feedback is very helpful.

The Product Life Cycle

As is shown by the ski industry (see A Closer Look at Quality 7-1 ), product development is not a static process. Once new products are developed, work may already be under way to introduce the next generation of products. The product life-cycle concept demonstrates the need for devel- oping new products by showing product design, redesign, and complementary product develop- ment on a continuum. Figure 7-13 shows a product life cycle for a typical product. As soon as a product is developed, it is on its way to decline.

Start-up Growth Maturity Decline

FIGURE 7-13 Phases of the Product Life Cycle

A CLOSER LOOK AT QUALITY 7-1 Ski Design

www.rossignol.com

During the 1930s and 1940s, skiing in the United States was a sport for the very wealthy, who could afford to take a train to Sun Valley, Idaho, or a resort in Colorado. By the 1950s and 1960s, middle-class people had taken up skiing. By the 1970s, skiing was at the peak of its popularity. People in the 1960s and 1970s began spending more time outside and were living a less sedentary lifestyle. However, by the 1980s, skiing had begun to decline. Other winter sports were becoming popular. The baby boomers were aging, and many downhill skiers were turning to cross-country skiing. This resulted in a decline of sales for ski mak- ers such as K2 and Rossignol. These companies responded by pouring more money into research and development. One development was the introduction of snowboards. Snowboards appealed to skate board- ers and young people. This market grew steadily, and now almost all ski areas in the United States have snowboard parks with half-pipes (a snowboarding area) and other amenities for snowboarders. In the early 1990s, ski sales were still flat, and “capped” skis were introduced. The theory behind capping of skis was that shock was more evenly dispersed throughout the skis. However, it was suspected that the real appeal of the capped ski was that it could hold 30% more graphics than the traditional models. In the mid-1990s, “fat boy” skis were introduced. These were skis that were much shorter and wider than traditional skis, and they made it much easier to ski in deep-powder snow and frozen, chunky, icy snow.

(continued)

Video Clip: Product Life Cycles at Regal Marine

172 Part 2 • Designing and Assuring Quality

Product Families and the Product Life Cycle

Two imperatives have come to the forefront in the study of product life cycles. The first is that product life cycles are becoming shorter. This means that obsolescence is a greater problem for designers and that the speed at which new product concepts are delivered to market is becoming much more important for companies around the world. The second imperative is that as product life cycles shorten, product variety and change become much more important to the successful competitor because complementary products are needed to consume productive capacity. Com- plementary products are needed for two reasons. First, as discussed, product obsolescence requires that products be updated. Second, some products have seasonal demand necessitating counterseasonal products. Variety refers to the differences in products that are produced and marketed by a single firm at any given time. Change is the magnitude of the differences in a product when measured at two different times. 7 Using the framework for variety and change developed by Sanderson and Uzumeri, 8 variety is the range of different items produced by a firm. Variety is related to a specific family of products. Change can occur as a result of evolutionary small changes to a product or drastic big changes to a product.

Complementary Products

What do we mean by managing product life cycles? Don’t they just occur naturally? Well, yes, they do occur naturally. There probably isn’t a lot you can do to control the rate at which the life cycle occurs. However, we can plan to introduce new and complementary products, which are new products using similar technologies that can coexist in a family of products. These products extend the life of the product line by offering new features or improvements to prior versions of the product. At times, these improvements are cosmetic, and at times, they are substantive. One exam- ple of a complementary product is a product that has a counterseasonal demand when compared with a base product such as motorcycles and snowmobiles. Arctic Cat produces ATVs for summer use and snowmobiles for winter use. This allows for level production rates throughout the year.

When we study issues such as variety and change, it becomes clear that at a strategic level, the problem of the product life cycle is not that a single product is becoming obsolete. Rather, if a variety of products are produced by a given company, management must be aware that several product life cycles must be managed simultaneously.

Designing Products That Work

As A Closer Look at Quality 7-2 shows, there are many things to consider when designing prod- ucts. One of the biggest considerations is design for manufacture (DFM) —“Now that we have

7 Ashby, W. R., An Introduction to Cybernetics (New York: Methuen, 1956). 8 Sanderson, S. W., and Uzumeri, M., Managing Product Families (Chicago: Irwin, 1997).

Later, the industry introduced a radical change in ski design known as parabolic , or shaped, skis. The shaped skis have wider tips and tails that provide ease in turning and greater stability in the snow. “Rocker” design makes it easier to ski in deep snow. One interesting variation of this growth in ski designs is the “parabolic fat boy” manufactured by Rossignol and others. The parabolic skis have adapted snowboard technology into skis and make skiing much easier. Although this ski is recom- mended for expert skiers, it is great for intermediate skiers who want to improve. This is a pleasure to aging baby boomers, whose legs enjoy the relief provided by these technological design changes. These design changes have reinvigorated the ski industry.

Source: Rossignol S3 Freeride Ski.

Chapter 7 • Quality and Innovation in Product and Process Design 173

designed it, can we make it?” Loosely speaking, design for manufacture means to design prod- ucts so that they are cost-effective and simple to build. However, there are many other consider- ations in a design. One consideration is how we design the product so it is easy to maintain. After all, maintenance, if required, can be very expensive. Another aspect is designing for reliability. It makes little sense to design a product that is capable and stable but not reliable. Another issue relating to design is speed, the time it takes for a concept to reach the market. If it takes a long time for products to reach the market, competitiveness may be hampered. Product designs must be simple. Designing for simplicity means standardizing parts, modularizing, and using as few parts as possible in a design. Environmental issues also have become key considerations for com- panies designing products. With changes in regulations around the world, products must be designed for reuse, disassembly, and remanufacture.

Design engineers, operations managers, supply chain managers, and others involved in the design process must consider each of these topics simultaneously. Although this may seem com- plicated, in fact, design’s cycle times have improved for many companies.

A CLOSER LOOK AT QUALITY 7-2 It Takes a Scientist to Design a Winter Coat 9

If you think that it is easy to design products such as clothing, it’s not just about style and fit. There is a lot of technology that goes into keeping skiers warm. First, there is a need. For example, Vermont’s Jay Peak is known as one of the coldest ski areas in the United States. Where else can you find a lift nick- named “The Freezer”? Temperatures can hit minus 30 with 50-mph winds. Last winter a group of frigid skiers had to be rescued by ski patrol. “They were so cold,” says patrol director Peg Doheny, “that their brains were freezing up.”

Cold and skiing go together like noses and sniffles. Now, thanks to advances in the science and technology of skiwear, modern skiers can stay warmer longer. “If your clothing performs at a higher level, you can accomplish more and enjoy skiing more,” says Tom Duguid, brand-marketing director for Arc’teryx. Battling the cold is big business. Consumers spent more than $1.1 billion on cold-weather apparel last winter. “We want to keep people warm, dry and protected,” says Woody Blackford, vice president of innovation at Columbia Sportswear.

Modern ski clothing is an amalgam of synthetics, insulations, and chemical treatments that make the best down jackets of only a few years ago seem like wool knickers. Take Patagonia’s Nano Storm jacket. It has a breathable waterproof H2No barrier bonded to a 2.6-ounce, 50-denier nylon shell. Beneath is a layer of 60-gram PrimaLoft One polyester insulation. To shed moisture, the shell and 22-denier polyester lining are treated with Deluge DWR water-repellent finish. You almost need a PhD to buy cold-weather apparel these days.

Not surprisingly, textile companies, such as GoreTex, have chemists devising new fabrics, insula- tions, membranes, and coatings. Polartec works with military researchers. PrimaLoft uses technology from the aerospace industry. Others turn to physiologists to understand how the body reacts to tempera- ture changes. Columbia Sportswear has hired electrical engineers to develop heated garments. On the materials front, the company’s Omni Heat jackets and gloves have metallic-dot linings to reflect and preserve warmth.

Sewing machines? Ha. Manufacturing modern ski garments requires machines that spray, heat, inflate, and laminate the layers together. Columbia Sportswear uses high-pressure compressors to adhere the interior membrances and baniers of its gloves to the outer fabric layers. The gloves are then baked to activate adhesives.

“Body mapping”—structuring a garment to provide heat retention in some zones, breathability in others—is a recent development. Body-mapped jackets often have waterproof fabric on the shoulders

9 Based on Tolme, P., “The Cold War,” Ski (January 2011): 24–26.

(continued)

174 Part 2 • Designing and Assuring Quality

Design for Manufacture Method

The overriding concept to consider when discussing DFM is to make it easy to build . This may seem intuitive; however, it is sometimes difficult to be intuitive when you are too close to a pro- cess (like people who design products). The reason for this may be more behavioral or organiza- tional rather than technical. In the old world of designing products, there existed a hierarchy of engineers. At the top of this hierarchy was the product design engineer. Lower down the hierar- chy were the process design engineers. Often these different engineers worked in totally different departments. The fact that they were in different departments often impeded communication.

This organizational problem has been referred to as the over-the-wall syndrome . The over- the-wall syndrome is demonstrated by looking at the design process sequentially. First, the prod- uct design engineers developed a design. This product design would then be approved by the manager or the vice president of product design. The design would then go to the manager or vice president of process design. Process design engineers would then develop the processes to make the product. If at any point a problem with the product design was found by the process engineers, a request for redesign would be sent to the manager of product design. Product design engineers would solve the problem and send the new product design back to the process design- ers. The process designers would then continue their work of developing the process. When

and breathable fabric on the core and sides, mimicking the body’s own natural heat-retention systems. Wet skin loses heat 30 times faster than dry skin. “Staying dry is paramount to staying warm,” says Dr. Gregory Haggquist, founder and chief scientist of Cocona, a fabric technology company.

Insulation is where the big advances are taking place. Powderhorn weaves ceramic yarn into its goose down to better disperse heat. To mimic down, synthetic insulation makers combine a variety of fiber and filament sizes. Electronic apparel is the new frontier. Until now, electrically heated apparel has suffered from short battery life and electronics that were too bulky, not durable, or had burn risks. But modern materials are making heated garments, or “wearable technology,” more viable.

Columbia Sportswear’s Circuit Breaker Softshell uses lithium polymer batteries and carbon fiber instead of metal wire to conduct heat. Carbon fiber is stronger, lighter and corrosion resistant. “In 10 years, heated products will be commonplace,” Columbia Sportswear’s Blackford predicts.

“Today’s ski apparel is light-years better,” says John Seifert, an associate professor at Montana State University, who has done research for The North Face in the school’s Subzero Lab, a 2,700-square- foot meat locker. The facility has cold rooms, environmental chambers, CT scanners, a treadmill, and medical devices to measure cold’s impact on performance.

While modern lab research is vital, nothing can replace fieldwork. That’s why garment makers have teams of product testers. Columbia has 300 worldwide. Greg Hill is Arc’teryx’s star tester. He’s attempting to skin 2 million vertical feet in one winter, providing product feedback and marketing buzz.

Companies use a range of tests to quantify a garment’s performance. The hydrostatic resistance test, for instance, measures how hard it is to force water through fabric at high pressure. Other tests include the dynamic moisture permeation cell, which changes humidity and air pressure levels to mimic weather conditions. The moisture-vapor transmission-rate test involves heating water beneath a piece of fabric and measuring how much vapor moves through the material in 24 hours.

But are the marketing hype and performance pledges just hot air? Sometimes. Many companies, for instance, cite their garments’ wicking abilities. “A paper towel wicks,” says Polartec’s Simmons, “but you’re not going to wear paper-towel underwear.” What matters most is a garment’s ability to trans- port moisture away from the body after it’s been wicked.

There isn’t government oversight of marketing claims for ski apparel. “This is where consumers get left out in the cold,” Cocona’s Haggquist says. Testing standards organizations, such as ASTM, ensure that everyone uses the same protocols.

But not everyone agrees on the best tests. Sometimes tests developed for other industries are used by apparel makers. One example is the ASTM E96 test, which was developed to measure vapor trans- mission in building materials. With a combination of proper design and testing, we will see better options for winter wear in the future.

Chapter 7 • Quality and Innovation in Product and Process Design 175

other problems occurred, they would have to be referred back to the product design engineers. Many times it took years to develop a new product, and the result was processes that built poorly functioning products. DFM methods are designed to eliminate the over-the-wall syndrome and radically reduce design cycle times.

Many firms use enterprise resource planning (ERP) systems to integrate financial, plan- ning, and control systems into a single architecture. As a result, there is an effort in the business world to include computerized design systems in these ERP systems. An important component of such design software is the product data management (PDM) tool. PDM is a general exten- sion of techniques commonly known as engineering data management, document management , and other similar names. PDM helps manage both product data and the product development process by tracking the masses of data needed to design, manufacture, support, and maintain products. It does this in part using a bill of materials that is later transferred to manufacturing, planning, and control systems after the design phase of the product life cycle. 10

Design for Maintainability

One of the major concerns with new products is ease of maintainability. It often seems cheaper to replace a product than to repair it. This certainly is true for inexpensive products such as elec- tric can openers, transistor radios, and other small appliances. However, the cost of repairing relatively expensive products such as personal computers, automobiles, and large appliances is also becoming prohibitive. Consider a broken video camcorder. A new, relatively inexpensive camcorder may cost $250. If the camcorder breaks, a repair may cost half to two-thirds that. The decision to repair is essentially an economic decision involving costs, benefits, and trade-offs. This decision becomes particularly difficult when the product life cycle is short. Suppose you owned a personal computer for the past few years. You purchased the computer for $1,000, and it satisfied your needs at the time. Now you realize that you need more memory, your sound card is inadequate, and you need a larger hard drive. If you go to a discount store, you can purchase the upgrades you need for about $500. At the same time, for a little more money you can pur- chase a new computer that has all the desired features as well as many others. For example, the new computer will be faster than your old computer. Should you spend $1,000 on a new com- puter or $500 to upgrade your old computer? One solution to this problem is design for maintain- ability. Design for maintainability concepts include

Components that are easily replaced

Components that are easily removed with standard tools

Adequate space to perform the maintenance function

Nondestructive disassembly

Safe maintenance

Available adequate owners’ manuals and documentation (e.g., wiring diagrams, help facil- ities, or videos showing how to perform minor repairs)

Many personal computer manufacturers include how-to videos in their memory that dem- onstrate maintenance functions such as adding memory, connecting interfaces, and other simple maintenance functions. Craftsman tractors sold by Sears include videos that demonstrate how to change oil, how to operate the tractor, and how to perform other service functions. The bottom line is that customers should be provided with the necessary information and ease of access to the product that allow for simple or preventive maintenance.

An important issue is ease of delivery of more serious maintenance. Many repairs can be performed only by trained professionals. Many personal computer companies offer at-home

10 Bourke, R. “PDM and ERP Continuing to Converge,” APICS: The Performance Advantage (August 1997): 66–67.

176 Part 2 • Designing and Assuring Quality

maintenance for their personal computers. It is common for auto repair facilities to offer rides and loaner cars for customer use. Car rental companies typically offer on-the-road repair and towing service when their cars break down. It is important to recognize that service is also a design issue. At the design phase, after-sale processes must be designed such that maintenance is received simply, rapidly, and cost effectively. Experience has shown that consumers are willing to pay more for products that are supported by outstanding service.

A recent trend in service is remote monitoring of products that diagnoses problems and dispatches repair people before breakdowns occur. BMW has experimented with this approach. One of the leaders in this area is Otis Elevator, with its Remote Elevator Montoring System (REM). REM tracks system function on elevators. The system diagnoses an emerging problem in an elevator and automatically makes a service call to a repair person. Often problems are fixed before elevator owners know that a problem has occurred.

DESIGNING FOR RELIABILITY

Reliable products are always available when you need them, and you can depend on them to work properly. Reliability, as it relates to products, results from the interaction of multiple com- ponents in a system. Quality Highlight 7-2 shows how a luxury product is designed to be reliable at Vuitton. Reliability has two dimensions, failure rate and time , both of which can be applied to components and to systems. Component reliability is defined as the propensity for a part to fail over a given time. System reliability refers to the probability that a system of components will perform the intended function over a specified product life. It is important to recognize the dif- ference between component reliability and system reliability. The levels of measurement are different for system and component reliability. When we talk of component reliability, we refer to a finite aspect of the overall product. System reliability is computed from the aggregation of multiple components. Reliability models are discussed in Chapter 13 .

QUALITY HIGHLIGHT 7-2 Designing Reliable Luxury at Vuitton 11

www.louisvuitton.com

Behind a locked door in the basement of Louis Vuitton’s elegant Paris headquarters, a mechanical arm hoists a brown and tan handbag a half meter off the floor and drops it. The bag, loaded with an eight- pound weight, will be lifted and dropped, over and over again, for four days. This is a type of rapid-life- testing usually reserved for designing reliability into machinery and vehicles. Here it is being used on elegant handbags.

Vuitton has designed a high-tech torture chamber for testing its products. A piece of lab equip- ment bombards handbags with ultraviolet rays to test resistance to fading. Still another machine tests zippers by tugging them open and shutting them 5,000 times. There’s even a mechanized mannequin hand, with a Vuitton charm bracelet on its wrist, being shaken vigorously to make sure none of the charms falls off.

If you think about Louis Vuitton, you likely don’t think about robots beating up on bags. Likely, you think of waiflike supermodels or lithe Hollywood celebs toting Vuitton luggage to Palm Springs. However, to understand what makes Vuitton tick, you have to look behind the glittery façade and look closely at the world’s most profitable luxury moniker.

Vuitton focuses relentlessly on quality in design and performance. Remember that the robot makes sure that Vuitton rarely has to make good on its lifetime repair guarantee. The supply chain

11 Adapted from Matlack, C., “The Vuitton Machine,” BusinessWeek , (22 March, 2004): 98–102. Used with permission.

Chapter 7 • Quality and Innovation in Product and Process Design 177

Reliability Analysis Tools

There are many ways to make designs more reliable. These methodologies include failure modes and effects analysis; fault-tree analysis; and failure modes, effects, and criticality analysis.

Failure Modes and Effects Analysis

Failure modes and effects analysis (FMEA) systematically considers each component of a system, identifying, analyzing, and documenting the possible failure modes within a system and the effects of each failure on the system. It is a bottom-up analysis beginning at the lowest level of detail to which the system is designed and works upward. The FMEA process results in a detailed description of how failures influence system performance and personnel safety. FMEA answers the question, “How do the systems or components fail?”

Failure modes and effects analysis was created by the aerospace industry in the 1960s and is used extensively in Six Sigma (see Chapter 14 ). An early application of FMEA occurred when Ford Motor Co. used it to analyze engineering design. Ever since, Ford has tried to refine FMEA through continued use in its operations, as many software applications have evolved recently that aid in the use of FMEA. Some benefits that can be derived through the use of FMEA include

1. Improvement of the safety, quality, and the reliability of products 2. Improvement of a company’s image and its competitiveness 3. Increased satisfaction from a user standpoint 4. Reduction in product development cost 5. Record of actions taken to reduce a product risk

There are five basic areas where FMEA can be applied: concept, process, design, service, and equipment.

Concept. FMEA is used to analyze a system or its subsystems in the conception of the design.

Process. FMEA is applied to analyze the assembly and manufacturing processes. Design. FMEA is used for analysis of products before mass production of the product starts.

Service. With respect to services, FMEA is used to test industry processes for failure prior to their release to customers.

Equipment. A company also can use FMEA to analyze equipment before the final purchase.

is rigorously controlled and no bag is ever discounted. Above all, there’s the efficiency of a finely tuned machine, fueled by ever-increasing productivity in design and manufacturing—and, as Vuitton grows bigger, the ability to step up advertising and global expansion without denting the bottom line.

Following are some examples of how attention to design detail sets the Vuitton bag apart:

• Zipper: Laboratory equipment randomly tests zippers by opening and closing them 5,000 times. • Production: Manufacturing methods adopted from automakers and other industries are boosting

productivity by 5% per year. • Handle Metal Ring: To cut costs, Vuitton pressured supplier of metal rings to improve production

efficiency. • Leather Trim: Vuitton uses hides from northern European cattle, which have fewer blemishes

from insect bites. • Price Tag: Forget bargains: Vuitton never holds sales and price increases are common.

178 Part 2 • Designing and Assuring Quality

How FMEA Works

As is shown in Figure 7-14 , failure modes and effects analysis uses a nine-step process:

1. The first FMEA step is to give each component in the system a unique identifier; this is so that none of the parts will be overlooked in the analysis.

2. In the second step, list all the functions each part of the system performs. This step requires you to develop a block diagram for the description of your design.

3. List the one or two failure modes for each function from the second step. The best descrip- tion of a failure mode is a short statement of how a function may fail to be performed. What a product does or does not do when it fails describes the failure mode.

4. The fourth step describes what effects each failure mode of the component will have, espe- cially the effects perceived by the user or operator. Analysis of the effects should follow a hierarchical order because any effect should be fairly detailed so that the severity of each effect can be judged. Some of these effects measure the consequence of failures on a com- ponent or part of a device, the whole system, the user, and/or the public.

5. Determine whether the failure will result in a potential hazard to personnel or the system. Then categorize how severe each hazard will be. There are four basic categories that haz- ards fall into: catastrophic, critical, marginal, and negligible.

6. Estimate the relative likelihood of occurrence for each failure. The likelihood of occur- rences is estimated using a 10-point scale and described in steps 4 and 5, ranging from highly unlikely (1) to very likely (10).

7. Estimate the ease with which the failure may be detected. If the failure takes so long to be detected that it becomes too late to replace or repair, the magnitude of the problem is likely to be much greater than if the failure can be easily detected.

8. Use the estimates from steps 5, 6, and 7 to identify the highest risks related to the system. 9. Decide what action will be taken to eliminate or reduce the highest risks in the system. The

most common decision made is to alter the design to reduce the likelihood of occurrence and failure severity or simply to bring about easy failure detection. Figure 7-15 shows an example of an FMEA form.

Fault-Tree Analysis

Fault-tree analysis (FTA) is an analytical tool that graphically renders the combinations of faults that lead to failure of a system. This technique is useful for describing and assessing the

1. Assign each component an identifier.

2. List functions for each part.

3. List one or two failure modes for each function.

4. Describe effects of each failure mode.

5. Determine hazard likelihood and categorize.

6. Estimate likelihood of failure.

7. Estimate failure detection.

8. Identify highest risks.

9. Eliminate or reduce highest risks. FIGURE 7-14 FMEA Steps

FIGURE 7-15 FMEA Form Source: FMEA Handbook, “Environmental and Safety Engineering” (Dearborn, MI: Ford Automotive Operations, 1995). Reprinted from Potential Failure Mode and Effects Analysis , 4th ed., 2008 Manual, with permission of DaimlerChrysler, Ford, and GM Supplier Quality Requirements Task Force.

Potential Failure Modes and Effects Analysis

(Concept FMEA) _X_System FMEA Number: (1) __Subsystem Page 1 of 1 __Component:000000/COMPLETE VEHICLE SYSTEM. Design Responsibility: (3) Prepared by: (4) Model Year/Vehicle(s): / (3) Key Date: (6) FMEA Date (Orig.): 94.06.06 (Rev.): 94.06.06 Core Team: (0)

Item C O D I c e Responsibility Action Results Potential Potential S a c t R. Recom- & Target S O D R. Failure Effect(s) of e s Potential Cause(s)/ u Current Design e P. mended Completion Actions Taken e c e P. Function Mode Failure v s Mechanism(s) Failure r Controls c N. Action(s) Date v c t N.

( 9 ) ( 10 ) ( 11 ) ( 14 ) ( 16 ) 0 ( 19 ) ( 20 ) ( 21 ) Enter a Enter the For each failure From the block diagram, Enter the analytical Enter the Enter Enter a brief system potential mode, list its determine if/how each method, test, or recommended —System design description of the function. failure consequences element can cause the technique used to design actions Dept —System action taken and Use the mode(s) for on: System failure mode. (The detect the cause intended to design its completion verb-noun the system —Other Systems cause will be a failure mode of the System reduce one or Eng —Target date. format. function. —The Vehicle of the element.) failure mode. more of the Completion date —The Customer If no detection Severity, If known, Describe the —Government Typical causes (element methods are Occurrence, Revised ( 22 ) —> enter the failure mode Regulations failure modes) will be: known, enter and/or Detection RPN Engineering in terms of —fails to operate “None identified ratings. After actions require- “loss of Severity ( 12 ) —operates prematurely at this time” have been taken, ments and function,” or —> —operates intermittently If no actions reestimate the constraints as the For each failure —fails to stop operating Detection ( 17 ) —> 0 can be listed, ratings for Severity, associated negative mode, rate the —loss of signal to next element Estimate the likeli- enter “None Occurrence, with each of the most serious hood the Detection at this time.” and Detection. function. function. effect. Enter Occurrence ( 15 ) —> method(s) will Enter the revised rating in Estimate the rate at which detect the cause <— ( 10 ) RPN ratings in column 12. a cause is expected to of the System Risk Priority the columns occur over the design failure mode. If Number to the right. Use Severity life of the element. several methods If no actions Rating Table are listed, enter are listed, for System Use Occurrence Rating the lowest (best) leave these FMEA. Table for System FMEA. rating. columns blank. If no information is Use the Detection available to estimate the Rating Table for Occurrence rating, enter System FMEA. a rating of 10. If no methods can <— ( 13 ) Reserved for be listed, enter future use. a rating of 10

179

180 Part 2 • Designing and Assuring Quality

events within a system. Such events can be either normal or abnormal, but it is their sequence and combination that are important. FTA shows the probabilities of systems failure caused by any event and is widely used in the aerospace, electronics, and nuclear industries. A fault tree is a qualitative model that also can be evaluated quantitatively. FTA is used for reliability, maintain- ability, and safety analysis and was used originally in 1961 at Bell labs to evaluate Minuteman Launch Control Systems to avoid inadvertent missile launches.

Failure Modes, Effects, and Criticality Analysis

Failure modes, effects, and criticality analysis (FMECA) is an extensive but simple method for identifying ways in which an engineered system could fail. As in FMEA, failures, effects, and causes are identified. FMECA rates failure modes by ranking each possible mode accord- ing to both the probabilities of its occurrence and the severity of its effects. The primary goal of FMECA is to develop priorities for corrective action based on estimated risk. FMECA is used to analyze a probable cause of a product failure, to determine how the problem affects a cus- tomer, to identify the probable manufacturing or assembly processes responsible, to identify which process control variable to focus on for prevention detection, and to quantify the effects on the customer.

Criticality in FMECA is important because it prioritizes how the design team should be spending its resources. In general, criticality refers to how often a failure will occur, how easy it is to diagnose, and whether it can be fixed. Criticality assessment is somewhat subjective because it depends on the viewpoint of a service or field engineer. This view is markedly different from the designer or marketing manager. All members of an interdisciplinary team should participate in ranking criticality so that their concerns are factored into rankings. As a design team considers the various failure modes in the ramifications, one or more of the team members fills out a struc- tured FMECA form that summarizes all that is involved in what can go wrong. In general, a design FMECA includes

1. A description of the product’s function 2. Listings of the potential failure modes 3. Potential effects each failure mode could have on the end user 4. Potential causes of each failure mode with the likelihood ranking for each 5. Preventive measures in place for firmly scheduling by the time production starts 6. Ranking of the effectiveness of each preventive measure 7. A ranking of the difficulty of detection 8. An estimate of the probability that the cause of a potential failure will be detected and cor-

rected before the product reaches the end user

Product Traceability and Recall Procedures

Although FMEA and FTA help predict where defects will occur and what their effects will be, from time to time unforeseen defects occur that can result in dangerous and costly results that can subject the firm to liability.

For example, one cool summer morning a young pilot was asked to fly some hunters over some extremely remote wilderness territory. The pilot was rather inexperienced at flying in these types of conditions; after all, backcountry flying is dangerous, and experience is hard to obtain. However, the temperature and weather conditions were perfect. The adventure proceeded with- out incident until the final leg of the trip over some of the most extreme country. The wind began to pick up and gusted to more than 100 miles per hour. The light aircraft had never experienced these types of winds before. The young pilot pulled out of the mountainous canyon to get well above the mountaintops. This caused the aircraft to pitch and roll, and the wind shear coming over the mountaintops stressed the plane. The plane’s vertical stabilizer was rendered useless by the powerful winds, but the team was able to return to the airport safely.

Chapter 7 • Quality and Innovation in Product and Process Design 181

Subsequent investigation showed that an alloy structural support had been stressed to the breaking point in the plane’s vertical stabilizer. The plane’s manufacturer issued a recall of 1,200 planes fitted with the same special alloy in the vertical stabilizer. The problem occurred in one piece used in the manufacturing process. This piece had been produced by another vendor. An identification number allowed the plane manufacturer to track the purchase of this part back to its supplier. All aircraft built with the weak structural piece were recalled to replace the defective vertical stabilizer. Without proper identification techniques and sufficient tracking systems, poten- tially hazardous products could remain in use without any way of recalling or repairing them.

This characteristic is called product traceability . Product traceability and recall proce- dures are important aspects of product design. Because companies are liable for the products they create, it is important to be able to identify the origins of defective products or components through product traceability procedures.

In 1972, Congress created the Consumer Product Safety Commission (CPSC) to protect citizens from unreasonable risks of injury and death. To avoid being listed on the CPSC list of hazardous products, a company must have a system in place for tracing components. When a recall is demanded by the CPSC, a company needs to narrow its recall to a particular identifica- tion (ID) number or product line. Therefore, a good ID system can help isolate where the break- down in the product occurred.

A major goal of product traceability and recall procedures is to be able to trace products with a minimum of cost. Product traceability also helps limit product liability relating to safety hazards.

ENVIRONMENTAL CONSIDERATIONS IN DESIGN

Currently, society demands much more from product designers than just high-quality products. Many manufacturers have turned to a more environmental form of manufacturing that offers positive returns on investment. Many companies, such as Siemens, Caterpillar, Xerox, Eastman Kodak, Hewlett Packard, and others, are using environmentally friendly forms of manufacturing.

The move to green manufacturing began in Germany with requirements for importers to remove packaging materials. Using a life-cycle approach to product design causes designers to focus not only on incoming materials, manufacturing processes, and customer use but also on the eventual disposal of the product. This life-cycle approach has led to practices known as design for reuse , design for disassembly , and design for remanufacture .

Design for reuse refers to designing products so they can be used in later generations of products. One example is the Kodak FunSaver camera. 12 Initially, the camera was made so it could be disposed of after use. Although Kodak had experimented with recycling the cameras, the cameras really ended up in landfills. Kodak received a wake-up call when it received the dreaded “wastemaker of the year” award for the disposable cameras, and it responded by con- verting the design from disposable cameras to recyclable cameras. Initially, the camera had been ultrasonically welded. Through design-for-disassembly processes, the camera case is now made so it snaps apart easily. There is great potential for reuse of products. Consider that currently two computers are discarded for every three computers purchased. The method for designing for reuse involves analyzing existing products for materials, identifying other uses for these materi- als, and developing a disassembly process to sort out these materials. This is good business for the producers of personal computers because if chemicals used in making PCs were to find their way into groundwater, the manufacturers could be held liable. The resulting costs could be in the billions of dollars.

The principles for design for disassembly include using fewer parts and fewer materials, using snap-fits instead of screws, making assembly efficient and improving disposal, using design for disassembly experts in concurrent design teams, and eliminating waste through better design.

12 Office of Technology Assessment, Green Products by Design (Washington, DC.: Congress of the United States, 2005).

182 Part 2 • Designing and Assuring Quality

Key Terms Change Complementary products Component reliability Computer-aided design

(CAD) system Computer-aided inspection

(CAI) Computer-aided testing

(CAT) Concurrent engineering Consumer Product Safety

Commission (CPSC) Criticality Customer future needs

projection Design for disassembly

Design for manufacture (DFM)

Design for remanufacture Design for reuse Design review Engineering analysis Enterprise resource

planning (ERP) systems Failure modes and effects

analysis (FMEA) Failure modes, effects, and

criticality analysis (FMECA)

Fault-tree analysis (FTA) Final product definition Geometric modeling

Green manufacturing Group technology House of quality Interference checking Kano Quality/Design Model Manufacturing system

design Multiuser CAD systems Over-the-wall syndrome Product data management

(PDM) Product design and

evaluation Product idea generation Product manufacture,

delivery, and use

Product marketing and supply chain preparation

Product traceability Quality function

deployment (QFD) Recall procedures System reliability Technology development

for process selection Technology feasibility

statement Technology selection for

product development Variety

Discussion Questions 1. Product idea generation initiates the process of designing a product by generating ideas from external

and internal sources. What are some examples of external and internal sources that are used in this process?

2. Discuss the concept of consumer future needs projection. Does a firm that excels in this area have a competitive advantage? Explain your answer.

3. What is a technology feasibility statement? Why is it important? 4. Briefly describe the role of computer-aided design (CAD) in the product design process. How has

CAD changed the way that product designers go about their jobs? 5. Describe the concept of concurrent engineering. How does concurrent engineering improve the prod-

uct design process? 6. The product life cycle for many products is getting shorter. In what ways does this trend complicate the

product design process? Can you think of any advantages to shorter product life cycles for firms that have exemplary product design processes?

7. What is the role of complementary products in managing the product life cycle? 8. What is meant by design for manufacture?

Summary As life cycles for products become shorter, a focus on quality in the product design process is necessary to remain competitive. Many of the dimensions of quality we discussed in Chapters 1 and 2 are addressed in the design phase of the product life. By focusing on issues such as main- tainability, assembly, reliability, and product traceability, we are able to continually improve our ability to make things.

We have said that you should design products so they are easy to build. By simplifying design processes (through concurrent design teams, by standardizing, and through the use of modular designs), we make products that are more reliable.

Companies have implemented these processes with great results. These results have facili- tated huge increases in production capacity, coupled with a reduction in cost. These cost savings do not always result in higher profits. As we have seen, the costs of computer chips dropped consistently. However, a company that does not become better at design will simply not be com- petitive in the future.

Chapter 7 • Quality and Innovation in Product and Process Design 183

9. The design for maintainability concept states that a product should be designed in a way that makes it easy for a consumer to maintain it. What product attributes make it easy for a product to be serviced or maintained?

10. What is the over-the-wall syndrome? How can the over-the-wall syndrome be avoided? 11. Define component reliability and system reliability. What is the major difference between these two

concepts? 12. Describe the concept of failure modes and effects analysis (FMEA). What is the end result of an FMEA

analysis? What are some of the ancillary benefits that can be derived through engaging in FMEA? 13. What is the primary purpose of conducting a fault-tree analysis? 14. Describe a method for identifying ways in which an engineered system could fail. What is the primary

goal of this method of analysis? 15. Discuss the importance of product traceability and recall procedures. Why is product traceability con-

sidered an important consumer safety issue? 16. What environmental considerations are important for product designers? Do you believe that environ-

mental considerations will become more important or less important in the future? Explain your answer. 17. Compare the job of a product designer 20 years ago to the job of a product designer today. In your

opinion, what has been the single most significant technological advancement that has changed the job of a product designer?

Problems 1. Flowchart the design and production processes for writing a book such as Managing Quality: Integrat-

ing the Supply Chain. Use the standard process for designing products in the chapter. 2. Define key customer requirements for a pen. Next, define key technical requirements for the pen. Create

a matrix showing the relationships between technical and customer requirements using the QFD format. 3. Define key customer requirements for an automobile windshield. Next, define key technical require-

ments. Create a matrix showing the relationships between technical and customer requirements using the QFD format.

4. For the QFD Problem 4 Matrix, compute the a. Customer requirements absolute weight. b. Technical requirements absolute weight and factor. c. Technical requirements relative weight and factor. d. Which design and technical factors should be emphasized? Why?

A

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184 Part 2 • Designing and Assuring Quality

5. For the QFD Problem 5 Matrix, compute the a. Customer requirements absolute weight. b. Technical requirements absolute weight and factor. c. Technical requirements relative weight and factor. d. Which design and technical factors should be emphasized? Why?

6. For the QFD Problem 6 Matrix, compute the a. Customer requirements absolute weight. b. Technical requirements absolute weight and factor. c. Technical requirements relative weight and factor. d. Which design and technical factors should be emphasized? Why?

A

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Chapter 7 • Quality and Innovation in Product and Process Design 185

7. What are important design elements for a pair of pants? a. Define the customer requirements. b. Define technical requirements. c. Using the QFD format, show the relationships (with strengths, i.e., 1, 3, or 9) between a and b

above. 8. Using the format in Figure 7-15 , develop an FMEA for a pair of women’s panty hose.

CASES

Case 7-1 Keeping Apple’s iPhone Competitive 13 www.apple.com

The past several years have seen an increase in smart- phone ownership by cellphone users. In its infancy, few companies produced the smartphone, such as RIM’s Blackberry and Motorola. However, the market is getting crowded. Still, Apple’s introduction of the iPhone changed the industry. The purpose of a smartphone has shifted from e-mail and business to apps and functionality.

The cellphone industry must be in tune with the customer. Apple attempts to incorporate popular fea- tures in its designs. The iPhone includes Apple staples of app capability and interfacing with other Apple prod- ucts. The iPhone is operated using a touchscreen and plays music and video. Like other smartphones, the iPhone can manage e-mail accounts.

With a new generation introduction, customers expect improvements to the features. Recent improve- ments include front and back cameras for video confer- ences. Including dual cameras in the design required Apple to create new software for the video conferenc- ing. This feature is only available between iPhones, but Apple hopes to expand to other cellphone users. Cam- era quality in phones is improving as people rely on them more than handhelds. Knowing this is important to some customers, a reviewer of the iPhone com- mented, “It isn’t the best cellphone camera I’ve tested, but it is a big improvement.” This is an example of the

trade-offs that may occur in product design. With so many features to incorporate, it may not be possible for a company to have the best for each. A company must decide which areas to focus on in the design.

The iPhone has addressed other areas of cell- phone design. Apple claims that the iPhone is the world’s thinnest smartphone and sports the world’s highest-resolution smartphone screen. The high-resolution screen helps compensate for its smallish screen. Talk- time battery life has been increased. New multitasking software manages apps to reduce battery drain. Battery life is a concern for all cellphone designs.

The iPhone incorporates some features over which Apple has limited control. Facebook, Twitter, and Pandora are popular apps among customers. Incor- porating these features requires limiting battery con- sumption, but allowing for frequent updates. Some users want to be constantly connected to their social networks. Apple’s multitasking feature addresses some of these issues but may still disappoint some users.

With all of the care and attention a new product receives, it still isn’t perfect. The iPhone had a famous “reception bar” bug that showed the wrong level of sig- nal reception. For Apple, there is still a need to improve iPhone design. Even with its limitations, Apple’s iPhone continues to push the limits of smartphone design.

Discussion Questions

1. The case discusses the issues of trade-offs in design. What are some smartphone trade-offs? Why are these important to consider in design.

2. Choose another product besides a smartphone. What are some important trade-offs for that prod- uct design?

3. How should Apple evaluate the “quality” of its iPhone?

4. How could Apple improve its design processes for the iPhone?

13 Mossber, W., “Thinner, Faster, Smarter iPhone Raises the Stakes” Wall Street Journal , 20 June 2010.

186 Part 2 • Designing and Assuring Quality

Case 7-2 Nucor Corporation: Producing Quality Steel by Stressing Sound Management Practices Nucor Corporation: www.nucor.com

Nucor Corporation, headquartered in Charlotte, North Carolina, is the largest manufacturer of steel and steel products in the United States. The company received a great deal of attention because of its impressive perfor- mance in an industry plagued by a multitude of prob- lems, especially in recent years. Since the 1970s, Nucor pioneered the minimill concept, which is a method of making steel by melting scrap metal in electric arc fur- naces at a fraction of the cost of conventional steelmak- ing. Nucor is admired for its quality products, its state-of-the-art manufacturing processes, and its industry- leading productivity ratios.

It is difficult to find a single reason that explains Nucor’s success. Although the company has recently made key acquisitions and has modern facilities and equipment, competitors that have the same level of tech- nology do not fare as well. What Nucor does have that is unique is a set of sound management principles and a somewhat novel approach to employee relations. Although Nucor is a $4.8-billion-per-year company, there are only four management layers between the CEO and frontline employees, and the general managers on the plant floor make the day-to-day decisions. Rank-and- file employees are involved in devising methods to improve operations. The company has a very egalitarian culture. There are no company cars, company planes, assigned parking spaces, hunting lodges, or other indica- tions of status. All the employees wear the same color hard hat (with the exception of maintenance workers and visitors, who must be easily recognizable in case of an emergency), have the same group insurance program, have the same holidays, and have the same vacation plan.

There are other areas in which Nucor is distinct. The company has a well-developed employee incentive plan that aligns the interests of the employees with the interests of the firm. The typical millworker at Nucor

receives a base pay that is slightly below the industry standard, but the firm’s bonus plan is very generous when the company is doing well. Two distinctive fea- tures of Nucor’s bonus system are that it is all written down and is totally objective, based on firm perfor- mance criteria. There is no subjectivity involved. If the firm reaches certain performance levels, a bonus will be paid, period. With bonuses figured in, Nucor employees typically lead the steel industry in terms of average pay. Yet the company’s total cost per ton of steel produced is lower than that of other integrated producers.

In return for the generous compensation package, Nucor holds its employees to a high standard. Decision making is pushed down to the factory floor in many instances, requiring mental toughness and continuous education on the part of the company’s employees. The company also asks its employees to be prompt and fully engaged in their jobs. For example, if an employee is late to work, he or she loses his or her bonus for the day. If the employee is more than 30 minutes late, the bonus is lost for a week. In return for this level of employee commitment, Nucor has not laid off a single employee for lack of work in 20 years. A very unusual indication of what Nucor thinks of its employees is evidenced in the company’s Annual Report for 2006 14 (and in many previous years). The name of each of the company’s 10,600 employees is written on the front and back cover of the Annual Report. Nucor produces high-quality products by stressing sound management techniques. Commenting on this issue in a book about Nucor, Jeffery L. Roengen wrote, “The amazing thing about Nucor’s success is that it is so simple: Give employees a stake in the company’s growth; focus on the business at hand; keep red tape and bureaucracy to a minimum.” Apparently, this formula has continued to work for Nucor.

14 Nucor Annual Report, 2006.

Discussion Questions

1. This chapter has emphasized process design. At Nucor, do human resources processes affect prod- uct quality?

2. How do Nucor’s management practices affect its ability to produce high-quality products? Make your answer as substantive as possible.

3. Would you enjoy working at Nucor? Why or why not?

Encouraging employees to solve customer problems and eliminate the source of complaints allows them to be “nice,” and customers treat them better in return. Not just customers but also employees want to

continue their relationship with the business.

—Frederick Reichheld and W. Earl Sasser 1

187

High-quality service is essential for competitiveness and can even improve employee satisfaction. However, service, like quality, is a multidimensional term. To provide high-quality service, we need a profound understanding of the needs, wants, and desires of the customer and an understanding of who the customer is.

Quality service is not only an imperative for competitiveness but also a sign of quality maturity. As we have discussed previously, even manufacturing firms—after reliability, confor- mance, design, and other requirements have been met—eventually focus on service throughout the supply chain. In today’s economy, service still is a major differentiator that allows firms to beat competitors in the marketplace. 2

Figure 8-1 shows the power of satisfied customers. If customers are satisfied, they will be loyal. Revenue streams will increase—as will profits. If a credit card customer leaves after one year, the credit card firm will lose money. For example, for every dollar lost in year one of card membership, 60 cents is made in year two and the profits grow as time passes. Profit per cus- tomer for the laundry industry increases steadily year after year as well. This principle is the same for other service industries.

In this chapter we discuss services in general first and then services from a quality perspec- tive. Tools such as the SERVQUAL, gap analysis, and services blueprinting will be developed. The central theme of this chapter is to understand customers’ needs and to use that understanding to design services that will satisfy customers.

1 Reichheld, F., and Sasser, E., “Zero Defections: Quality Comes to Services,” Harvard Business Review (September– October 1990): 105–113. 2 Heskett, J. L., et al., “Putting the Service-Profit Chain to Work,” Harvard Business Review (March–April 1989): 164–174.

C H A P T E R 8

Designing Quality Services

188 Part 2 • Designing and Assuring Quality

DIFFERENCES BETWEEN SERVICES AND MANUFACTURING

In Chapter 1 we talked about the multidimensional nature of quality. If quality is multidimen- sional for manufactured products, it will be more so for services. Understanding some of the differences between manufacturing and services helps to design useful approaches to quality improvement in services. Using a contingency perspective, we understand that the nature of services causes us to approach service quality improvement from a different direction from manufacturing.

Services are distinguished from manufacturing on several dimensions. First, many service attributes are intangible . This means that they cannot be inventoried or carried in stock over long periods of time. However, all services have some tangible aspects as well. The outputs of ser- vices are also heterogeneous . This means that for many companies, no two services are exactly the same. Consider, for instance, an advertising firm. No two advertising campaigns are alike. Customer requirements are different, and different campaigns are launched for different custom- ers according to their needs. A third factor is that production and consumption of services often occur simultaneously . If you hire someone to mow your grass, you’ll receive the service exactly at the same time it is produced.

The term service is very broad and covers many diverse industries, such as hotels, hospi- tals, financial services, and even prisons. Are financial services distinctly different from trans- portation, health care, or law firms? Certainly, there are similarities among the problems faced by these different categories of firms. However, there are also many dissimilarities.

One useful distinction between services and manufacturing centers on the aspect of cus- tomer contact . Customers tend to be more involved in the production of services than they are in production of goods. For instance, you probably have never seen anything you own during its manufacturing stage. In fact, many of the products you own were manufactured overseas. How- ever, you probably are actively involved in the production of services you receive. If you work for a firm that hires a consultant, you will work closely with the consultant as he or she provides the services you purchased. When you receive a haircut, you are actively involved in the service by providing information and sitting still. In many restaurants it is not uncommon for the cus- tomers to fill their own drinks. This is called customer coproduction .

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FIGURE 8-1 Profit Growth over Time Based on F. Reichheld and E. Sasser, “Zero Defections: Quality Comes to Services,” Harvard Business Review (September–October 1990): 106. Copyright 1990 by the Harvard Business School Publishing Corporation. All rights reserved.

Chapter 8 • Designing Quality Services 189

Because customers are actively involved in producing the services they consume, they cre- ate problems for service providers. For example, the time required to serve different customers can vary widely, making it difficult to plan capacity. The varying demands of customers also contribute to process variability that makes quality production of services difficult. Therefore, even though customers are the reason for the existence of services firms, they also make provid- ing good service difficult.

The good news for customers is that by being actively involved in the production of the service, they can exert control over the service provider and achieve customization. This control can be manifested in a variety of different ways. For instance, if you have never visited the pro- ducer of a food product you purchase, you may not be aware of many issues concerning the products, such as sanitation or environmental pollution. However, you are not likely to remain a customer of a restaurant that is unclean or creating environmental problems. As a result of this greater customer control, service facilities, processes, and interactions must be designed in a way that promotes a positive encounter with the customer.

Internal versus External Services

An aspect of services that affects the definition of quality is whether a service is internal or exter- nal. External services are those whose customers pay the bills. Internal services are in-house services such as data processing, printing, and mail. Typically, these services are separate from the external customer. However, customer service to internal customers is very important to internal service because their services often can be outsourced. There is a trend in companies to outsource internal services. In a sense, this presents a competitive pressure on internal services. Although internal and external services may be very different, they do have many similarities. In both cases, competitive pressures can result in the possible loss of customers.

Voluntary versus Involuntary Services

Another way services differ is by being voluntary or involuntary. Voluntary services are ser- vices that we actively seek out and employ of our own accord. Generally, we research a voluntary service, such as a gas station, a restaurant, or a hotel, and have certain expectations when we engage its services. Even doctors often provide many voluntary services because patients can choose among different doctors to some extent.

The quintessential example of an involuntary service is a prison. Other involuntary ser- vices include hospitals, the IRS, the police department, the fire department, and other services that you do not choose. If you have the chance to engage this type of service at some point, you likely will have vague expectations about the experience. It is generally more difficult to achieve high levels of customer satisfaction in involuntary services. For example, does anyone really enjoy visiting a hospital or a dental clinic? A customer service survey would be laughable for a county jail. Yet employees of these organizations often desire to provide better service to the patrons. For example, many IRS agents are involved in quality improvement activities. Certainly, our perceptions and expectations of service quality can be affected by whether the service is voluntary or involuntary.

How Are Service Quality Issues Different from Those of Manufacturing?

We’ve identified three major realities in services that affect the approaches to quality adopted by service providers; these are intangibility, simultaneous production and consumption, and cus- tomer contact. Not surprisingly, they lead us to the major differences between services and man- ufacturing when it comes to quality.

Because services’ attributes can be intangible, it is sometimes difficult to obtain hard data relating to services. In manufacturing, dimensions such as height, weight, and width are avail- able for measurement. Conformance to these measurements implies a certain dimension of

190 Part 2 • Designing and Assuring Quality

quality. However, in services, such measurable dimensions are often unavailable. For this reason, many services organizations that use quality control charts encounter difficulty in using them, or they use them incorrectly. This is not to say that control charts cannot be used in services. How- ever, compared with manufacturing, their use in services is quite low. Generally speaking, time (such as cycle time or response time) is a primary measurement available in service environments.

Simultaneous production and consumption of services means that you have to do it right the first time. You can’t easily inspect and rework defects in a hair salon the way you can in manufacturing.

Customer contact leads to an increase in variability in the process. This leads to a high degree of customization in services as well as great variability in the time required to perform services. In manufacturing, repetitive tasks are easily measured, and cycle times are generally consistent. When customers are intimately involved in processes, there is much more customiza- tion and much more variability than in manufacturing.

Services design, as is discussed in this chapter, is also very different from design in manu- facturing. Because services involve intangibles, warranty or repair processes are not as important as recovery or reimbursement processes (see A Closer Look at Quality 8-1 ). Also, the design of the services must take into account such variables as customer moods and feelings because these affect customer perceptions of service quality.

Product liability issues in services are very different from manufacturing. Whereas in manufacturing liability issues center around safety concerns, in services liability issues often relate to malpractice , which refers to the professionalism of the service provider and whether reasonable measures were taken to ensure the customer’s well-being. However, services also may have liability issues. In the Rocky Mountains, ski areas are sued regularly by customers

A CLOSER LOOK AT QUALITY 8-1 Service Warranties: Profitable or a Rip-off—You Decide 3

Here’s a secret one of the nation’s largest consumer electronics retailers doesn’t want you to know: Many times, they make more money off service contracts than they do selling products. Best Buy Co. isn’t banking on sales of TVs, computers, and DVD players to make profits. They are counting on the service contracts to make them profitable.

Just look at the numbers. At Best Buy, service contracts are 4% of sales but provide 45% of profits. Before bankruptcy at Circuit City, the numbers were 3.3% and 100%! The profit margins on these contracts are between 50% and 60%. If you spend $400 on a service contract, Best Buy keeps $240 itself and gives $160 to the insurer. As profitable as these are, it is interesting that Walmart has been slow to jump aboard. However, unlike Best Buy, they don’t have as many salespeople to pitch these contracts.

As service contracts have become more profitable, Best Buy has cut back on disclosure. The company no longer reports its warranty profits separately. Best Buy’s spokesperson says the products and contracts should be seen as inseparable.

So, as a consumer, when do service contracts make sense? Most often, the correct answer is “Never!” Typically, only 20% goes to repair or replacement of products. That’s why consumer organiza- tions generally counsel against service contracts. According to one consumer advocate, “The worst rip- off is on appliances because they have gotten so reliable.”

Consumer Reports cites four products for which contracts might make sense—these are tread- mills, elliptical trainers, plasma TVs, and laptop computers. Remember, most products come with man- ufacturer warranties. Many times, extended warranties can be purchased more cheaply directly from the manufactuer.

3 Adapted from Symonds, W. “The Warranty Windfall,” BusinessWeek (20 December, 2004): 84–89.

Chapter 8 • Designing Quality Services 191

who are injured. In many states, laws protect ski areas from such lawsuits by limiting liability for injuries.

Services do not have as long a history of quality practice as does manufacturing. Although many quality techniques such as control charts have been adopted by services companies, this trend is still new. Certainly, as time passes, more quality techniques are being developed specifi- cally for services. For example, a new tool is emerging for service supply chains known as pro- cess chain network (PCNP diagrams).

How Are Service Quality Issues Similar to Manufacturing?

For both manufacturing and service firms, the customer is the core of the business, and customer needs provide the major input to design. By focusing on the customer, many manufacturers and services firms have come to view themselves as service providers. Companies from Harley- Davidson to Hewlett Packard have spent extraordinary amounts of time designing services for their customers.

WHAT DO SERVICES CUSTOMERS WANT?

In Chapter 1 we considered the different quality dimensions relating to services. These were

Tangibles

Reliability

Responsiveness

Assurance

Empathy

Parasuraman, Zeithamel, and Berry 4 provided this list of dimensions of service quality after extensive research in a number of services sectors, and they have become widely accepted. How- ever, this does not mean that your particular services industry does not include other dimensions. Therefore, the adoption of these dimensions in your service should include a careful consider- ation of the applicability of these and other dimensions.

As in any industry, the concept of leadership is one that Parasuraman, Zeithamel, and Berry believe is the key to success. However, they define this leadership role in a way that is quite interesting. The key aspects of a leader in services are given in Table 8-1 .

First, a leader has a service vision . Such leaders really view service quality as the force underlying profitability and business success. When selecting strategies for improvement, lead- ers see quality as the winning strategy. Such a vision can be translated into action and excitement for others in the company. To win in services, a firm must develop a passion for service quality within the entire workforce. When there is intense interaction between customers and service providers, the attitude of employees is the key element in achieving service success. Active and involved leadership is very important to attaining this important organizational attribute.

Services leaders have high standards . In services, you will notice that some firms are better equipped and maintained than others. Sometimes this is evident in the small details. Some doctors’ offices have a better selection of magazines than others; some restaurants are more comfortable

4 Zeithamel, V., Parasuraman, A., and Berry, L., Delivering Quality Service (New York: Free Press, 1990).

TABLE 8-1 Attributes of Services Leaders

Service vision High standards In-the-field leadership style

192 Part 2 • Designing and Assuring Quality

than competitors; some grocers have a better selection of products; the list goes on and on. Those things don’t happen by magic. They are the result of a leader with high standards and a focus on details. Have you noticed that some professors come to class impeccably prepared and others appear somewhat disorganized? This is so because the student/customer-oriented professor has higher standards for preparation and presentation than other professors. Think about yourself in a work situation. Do you provide a high level of service that reflects a high standard?

Outstanding services leaders have an in-the-field style of leadership . Because there is so much contact with the customer in a service system, the field is where the action is. Sam Skaggs, the founder of American Stores Corporation in Salt Lake City, Utah, was famous for stopping by his stores to make sure that things were in order. He viewed this as an important way of keeping the management on its toes. If Skaggs showed up at a single store in Kansas City, Missouri, for example, the manager immediately contacted all the other managers in town to give them a “heads up” that Skaggs was in town. Too often owners can become isolated from their busi- nesses. By being in the field, they gain a better understanding of the business and how to serve the customer. Quality Highlight 8-1 shows how Ritz-Carlton uses a gold standard to keep its managers in touch with its customers.

QUALITY HIGHLIGHT 8-1 Ritz-Carlton Hotels 5

www.ritzcarlton.com

The Ritz-Carlton hotel company is a success in one of the economy’s most logistically complex service businesses. Targeting primarily industry executives, meeting and corporate travel planners, and affluent business travelers, the Atlanta-based company manages more than 60 luxurious hotels that pursue the goal of being the very best in each market. Ritz-Carlton does so on the strength of a comprehensive service quality program that is integrated into marketing and business objectives.

Hallmarks of the program include participatory executive leadership, thorough information gath- ering, coordinated planning execution, and a trained workforce that is empowered to satisfy customers. Quality planning begins with the president, the CEO, and the 13 senior executives who make up the corporate steering committee. This group, which doubles as the senior quality management team, meets weekly to review the quality of products and services, satisfaction, market growth and development, organizational indicators, profits, and competitive status. Each year executives devote about one-quarter of their time to quality-related matters.

The company’s business plan demonstrates the value placed on goals for quality products and services. Quality goals draw heavily on consumer requirements derived from extensive research by the travel industry and the company’s customer reaction data, focus groups, and surveys. The plan relies on a management system designed to avoid the variability of service delivery traditionally associated with hotels. Processes are well defined and documented at all levels of the company.

Key products and service requirements of the travel consumer have been translated into Ritz- Carlton gold standards, which include a credo, three steps of service, and 20 “Ritz-Carlton basics.” Each employee is expected to understand and adhere to the standards with defined processes for solving guests’ problems as well as detailed grooming, housekeeping, safety, and efficiency standards. Com- pany studies prove that this emphasis is on the mark, paying dividends to customers and, ultimately, to Ritz-Carlton.

The corporate motto is “ladies and gentlemen serving ladies and gentlemen.” To provide superior service, Ritz-Carlton trains employees with a thorough orientation, followed by on-the-job training, and then job certification. Ritz-Carlton values are reinforced continuously by daily “line-ups,” frequent rec- ognition for extraordinary achievement, and a performance appraisal based on expectations explained during the orientation, training, and certification processes.

5 NIST, Profiles of Baldrige Winners, 2011.

Chapter 8 • Designing Quality Services 193

SERVQUAL

An important tool developed by Parasuraman, Zeithamel, and Berry for assessing services qual- ity is SERVQUAL . The SERVQUAL survey has been used by many firms and is an off-the- shelf approach that can be used in many services situations. The SERVQUAL instrument, a survey, has many advantages. Among these are the following:

• It is accepted as a standard for assessing different dimensions of services quality. • It has been shown to be valid for a number of service situations. • It has been demonstrated to be reliable , meaning that different readers interpret the ques-

tions similarly. • Each instrument is parsimonious in that they have only 22 items. This means that it can be

filled out quickly by customers and employees. • Finally, it has a standardized analysis procedure to aid both interpretation and results.

One of the benefits of statistical quality control (SQC) is that it is an accepted procedure for assessing process variability. One of the comforts of implementing SQC is knowing that many other firms have used this approach and benefited from it. Although the SERVQUAL sur- vey is not as widely used as SQC, it is a standardized approach to gathering information about customer perceptions of service quality. As such, it provides a base, or a means, to get started in assessing customer perceptions of quality.

Expectations

The SERVQUAL survey has two parts: customer expectations and customer perceptions . Before discussing SERVQUAL expectations, we should first discuss the reasons for assessing both expectations and perceptions.

Let’s say that you desire to improve service quality along some dimension—either tangi- bles or reliability. The natural question is “Which will create the greater improvement to the system for service?” If we understand both customer expectations and perceptions, we can assess the gap in these areas. For example, if customers have higher expectations for tangibles than for reliability, and customers perceive tangibles as poor, then a large gap or disconnect exists between the expected and delivered performance on tangibility. Given that this gap is larger, the greater potential for increasing customer satisfaction lies in addressing tangibles first. This type of anal- ysis provides a good way to understand how best to improve customer satisfaction. Figure 8-2 shows the 22 survey items for expectations. The wording of the statements in the expectations survey relates to a generic firm in an industry that interests you. For example, if you were assess- ing customer service for a given grocery store, you might first administer the expectations survey

To ensure that problems are resolved quickly, workers are required to act at first notice regardless of the type of problem or customer complaint. All employees are empowered to do whatever it takes to provide “instant pacification.” No matter what their normal duties are, other employees must assist if aid is requested by a co-worker who is responding to a guest’s complaint or wish.

Much of the responsibility for ensuring high-quality guest services and accommodations rests with the employees. Surveyed annually to ascertain their levels of satisfaction and understanding of quality standards, workers are keenly aware that excellence in guest services is a top hotel and personal priority. At each level in the company—from corporate leaders to managers and employees in individual work areas—teams are charged with setting objectives and devising action plans, which are reviewed by the corporate steering committee. In addition, each hotel has a “quality leader” who serves as a resource and advocate as teams and workers develop and implement their quality plans.

Teams and other mechanisms cultivate employee commitment. For example, each work area is covered by three teams responsible for setting quality-certification standards for each position, solving problems, and planning strategy.

194 Part 2 • Designing and Assuring Quality

FIGURE 8-2 SERVQUAL Expectations Survey Source: Based on V. Zeithamel, A. Parasuraman, and L. Berry, “SERVQUAL: A Multiple-Item Scale for Measuring Customer Perceptions of Service Quality,” Journal of Retailing (Spring 1988): 12–40. Copyright Elsevier.

Strongly Disagree

Strongly Agree

1. Excellent ________ companies will have modern-looking equipment. 1 2 3 4 5 6 7

2. The physical facilities at excellent ________ companies will be visually appealing.

1 2 3 4 5 6 7

3. Employees at excellent ________ companies will be neat-appearing. 1 2 3 4 5 6 7

4. Materials associated with the service (such as pamphlets or statements) will be visually appealing in an excellent ________ company.

1 2 3 4 5 6 7

5. When excellent ________ companies promise to do something by a certain time, they will do so.

1 2 3 4 5 6 7

6. When a customer has a problem, excellent ________ companies will show a sincere interest in solving it.

1 2 3 4 5 6 7

7. Excellent ________ companies will perform the service right the first time.

1 2 3 4 5 6 7

8. Excellent ________ companies will provide their services at the time they promise to do so.

1 2 3 4 5 6 7

9. Excellent ________ companies will insist on error-free records. 1 2 3 4 5 6 7

10. Employees in excellent ________ companies will tell customers exactly when services will be performed.

1 2 3 4 5 6 7

11. Employees in excellent ________ companies will give prompt service to customers.

1 2 3 4 5 6 7

12. Employees in excellent ________ companies will always be willing to help customers.

1 2 3 4 5 6 7

13. Employees in excellent ________ companies will never be too busy to respond to customers’ requests.

1 2 3 4 5 6 7

14. The behavior of employees in excellent ________ companies will instill confidence in customers.

1 2 3 4 5 6 7

15. Customers of excellent ________ companies will feel safe in their transactions.

1 2 3 4 5 6 7

16. Employees in excellent ________ companies will be consistently courteous with customers.

1 2 3 4 5 6 7

17. Employees in excellent ________ companies will have the knowledge to answer customers’ questions.

1 2 3 4 5 6 7

18. Excellent ________ companies will give customers individual attention.

1 2 3 4 5 6 7

19. Excellent ________ companies will have operating hours convenient to all their customers.

1 2 3 4 5 6 7

20. Excellent ________ companies will have employees who give customers personal attention.

1 2 3 4 5 6 7

21. Excellent ________ companies will have the customer’s best interests at heart.

1 2 3 4 5 6 7

22. The employees of excellent ________ companies will understand the specific needs of their customers.

1 2 3 4 5 6 7

Chapter 8 • Designing Quality Services 195

to customers concerning a grocery store in general. Later, the perceptions survey might be administered to the customers of the particular grocery store. Table 8-2 shows the items that address specific service quality dimensions. The averaged scores for these dimensions provide SERVQUAL difference scores (demonstrated later).

Perceptions

The SERVQUAL perceptions survey shown in Figure 8-3 is administered to customers in the same way that the expectations survey was administered. Notice that the perceptions survey also

TABLE 8-2 SERVQUAL Items and Dimensions

Dimension Items

Tangibles 1–4 Reliability 5–9 Responsiveness 10–13 Assurance 14–17 Empathy 18–22

FIGURE 8-3 SERVQUAL Perceptions Survey Source: Based on V. Zeithamel, A. Parasuraman, and L. Berry, “SERVQUAL: A Multiple-Item Scale for Measuring Customer Perceptions of Service Quality,” Journal of Retailing (Spring 1988): 12–40. Copyright Elsevier.

Strongly Disagree

Strongly Agree

1. XYZ Co. has modern-looking equipment. 1 2 3 4 5 6 7

2. XYZ Co.’s physical facilities are visually appealing. 1 2 3 4 5 6 7

3. XYZ Co.’s employees are neat-appearing. 1 2 3 4 5 6 7

4. Materials associated with the service (such as pamphlets or statements) are visually appealing at XYZ Co.

1 2 3 4 5 6 7

5. When XYZ Co. promises to do something by a certain time, it does so. 1 2 3 4 5 6 7

6. When you have a problem, XYZ Co. shows a sincere interest in solving it. 1 2 3 4 5 6 7

7. XYZ Co. performs the service right the first time. 1 2 3 4 5 6 7

8. XYZ Co. provides its services at the time it promises to do so. 1 2 3 4 5 6 7

9. XYZ Co. insists on error-free records. 1 2 3 4 5 6 7

10. Employees in XYZ Co. tell you exactly when services will be performed. 1 2 3 4 5 6 7

11. Employees in XYZ Co. give you prompt service. 1 2 3 4 5 6 7

12. Employees in XYZ Co. are always willing to help you. 1 2 3 4 5 6 7

13. Employees in XYZ Co. are never too busy to respond to your requests. 1 2 3 4 5 6 7

14. The behavior of employees in XYZ Co. instills confidence in you. 1 2 3 4 5 6 7

15. You feel safe in your transactions with XYZ Co. 1 2 3 4 5 6 7

16. Employees in XYZ Co. are consistently courteous with you. 1 2 3 4 5 6 7

17. Employees in XYZ Co. have the knowledge to answer your questions. 1 2 3 4 5 6

18. XYZ Co. gives you individual attention. 1 2 3 4 5 6 7

19. XYZ Co. has operating hours convenient to all its customers. 1 2 3 4 5 6 7

20. XYZ Co. has employees who give you personal attention. 1 2 3 4 5 6 7

21. XYZ Co. has your best interests at heart. 1 2 3 4 5 6 7

22. Employees of XYZ Co. understand your specific needs. 1 2 3 4 5 6 7

196 Part 2 • Designing and Assuring Quality

contains 22 items that are matched with the same five service quality dimensions as the expecta- tions survey (the dimensions are listed in Table 8-2 ).

Gap Analysis

The SERVQUAL instrument is useful for performing what is called gap analysis . Because ser- vices are often intangible, gaps in communication and understanding between employees and customers have a serious negative effect on the perceptions of services quality. The model in Figure 8-4 shows the gaps that commonly occur and can affect the perceptions of services quality.

Each of the gaps in the model demonstrates differences in perceptions that can have a det- rimental effect on quality perceptions in services. The SERVQUAL survey instrument can be administered in a variety of ways that examine each of these gaps. For example, SERVQUAL can be used to explore differences in perceptions between customers, between managers, between managers and customers, and between employees. We briefly examine each of the different gaps in the next paragraphs.

Management perceptions

of customer

expectations

Expected service

Gap 1

Service quality

specifications

Management perceptions

of customer

expectations

Gap 2

Gap 3 Service quality

specifications

Service delivery

Gap 4Service delivery

External com- munications to customers

Gap 5 Perceived service

Expected service

FIGURE 8-4 Gaps 1–5

Chapter 8 • Designing Quality Services 197

Gap 1 shows that there can be a difference between actual customer expectations and management’s idea or perception of customer expectations. As a customer, have you ever wanted to tell a service provider, “I don’t want you to do that; I want you to do something else!” It is very difficult for managers or employees to break out of the internal, process-oriented view of the business. Many times, improving processes does not equal improving customer service. To truly improve customer service, we must understand what the customer wants. The SERVQUAL instrument can be used to help in this understanding (see Figure 8-4 ).

Managers’ expectations of service quality may not match service quality specifications. This mismatch is demonstrated in gap 2 . Once managers truly understand what the customer wants, then a system can be developed to help provide exactly what the customer wants. Often, because firms do not specify customer requirements according to a well-defined process, there is no way to know whether customer specifications and management expectations are aligned.

Once services specifications have been established, the delivery of perfect services quality is still not guaranteed. Inadequate training, communication, and preparation of employees who interact with the customer, referred to as contact personnel , can lower the quality of service delivered. This mismatch is gap 3 .

Gap 4 shows the differences between services delivery and external communications with the customer. Companies influence customer expectations of services through word of mouth and through other media such as advertising. As a result, there could be a difference between what customers hear you say you are going to deliver as a service provider and what you actually deliver. Have you ever heard someone say, “They promised me one thing and gave me another.” This gap can lead to seriously negative customer perceptions of service quality.

Gap 5 is the difference between perceived and expected services, which we considered briefly when we introduced the SERVQUAL instrument. Think of the first time you dealt with your university admissions office or financial aid office. In many universities and colleges, these offices are well run and provide great service. However, in other colleges, their service is not so good. The difference between your expectations and your perceptions is directly related to your perception of service quality.

The key to closing gap 5 is to first close gaps 1 through 4 through thoughtful systems design, careful communication with the customer, and a workforce trained to provide consis- tently outstanding customer service. As long as these gaps exist, there will be lowered percep- tions of customer service.

Assessing Differences in Expectations and Perceptions by Using the Differencing Technique

Let’s suppose that you have administered both the expectations and the perceptions SERVQUAL instruments to your customers. Typically, you need a sample size of between 50 and 100 for each of the surveys (i.e., 50 < n < 100, where n is the sample size). The difference score for SERVQUAL is computed by the following steps. Separate the SERVQUAL dimensions as follows:

Dimension Items

Tangibles 1–4 Reliability 5–9 Responsiveness 10–13 Assurance 14–17 Empathy 18–22

For each respondent, sum your SERVQUAL scores for each set of items relating to a given dimension. Sum across the n respondents and divide the total by n .

198 Part 2 • Designing and Assuring Quality

EXAMPLE 8-1 SERVQUAL Differencing

Recently, a hospital administered the SERVQUAL survey to its customers as a way to determine where it should focus the training of its employees to best improve customer service. Fifty sur- veys were administered to customers before and after they were treated. In cases where the patients were in too much pain to fill out the perceptions survey after a procedure, they were asked to fill out the survey at the follow-up visit. On the basis of the 50 responses, the following averages were computed for each item:

Item Number Average Perception Average Expectation

1 6.5 6.3 2 6.4 6.4 3 6.9 6.2 4 6.8 6.8 5 3.2 5.2 6 3.4 6.1 7 3.3 6.3 8 3.5 5.9 9 3.6 6.6

10 5.2 2.4 11 5.5 2.2 12 5.6 2.4 13 5.8 2.6 14 4.1 3.2 15 5.5 3.3 16 4.3 3.4 17 4.1 3.2 18 4.2 3.5 19 2.6 6.5 20 2.8 6.6 21 2.5 6.4 22 2.4 6.3

Perception Averages

Average Perception

Average Expectation

Expectation Averages

Tangibles: 6.650 6.5 6.3 Tangibles: 6.425 (Avg. items 1–4) 6.4 6.4 (Avg. items 1–4) 6.9 6.2 6.8 6.8 Reliability: 3.400 3.2 5.2 Reliability: 6.020 (Avg. items 5–9) 3.4 6.1 (Avg. items 5–9) 3.3 6.3 3.5 5.9 3.6 6.6

On the basis of these means, the following overall averages were computed for the differ- ent dimensions:

(continued)

Chapter 8 • Designing Quality Services 199

Perception Expected

Tangible difference ! 6.65 less 6.425 equals 0.225 Reliability difference ! 3.4 less 6.02 equals "2.62 Responsiveness difference ! 5.525 less 2.4 equals 3.125 Assurance difference ! 4.5 less 3.275 equals 1.225 Empathy difference ! 2.9 less 5.86 equals "2.96

Perception Averages

Average Perception

Average Expectation

Expectation Averages

Responsiveness: 5.525 5.2 2.4 Responsiveness: 2.400 (Avg. items 10–13) 5.5 2.2 (Avg. items 10–13) 5.6 2.4 5.8 2.6 Assurance: 4.500 4.1 3.2 Assurance: 3.275 (Avg. items 14–17) 5.5 3.3 (Avg. items 14–17) 4.3 3.4 4.1 3.2 Empathy: 2.900 4.2 3.5 Empathy: 5.860 (Avg. items 18–22) 2.6 6.5 (Avg. items 18–22) 2.8 6.6 2.5 6.4 2.4 6.3

The averages for each of the dimensions of service quality were computed by averaging the items pertaining to each dimension. Finally, differences for the dimensions were computed as follows:

The differences show that the greatest negative mismatch exists in the dimension of empathy, with reliability as a close second. Therefore, the training program should focus on teaching employees to be empathetic. Also, the process improvement efforts should focus on improving reliability. These changes will lead to the greatest improvements in customer service.

EXAMPLE 8-2 SERVQUAL Two-Dimensional Differencing

If there is enough variation in the responses given to different dimensions, the two-dimensional differencing technique is very useful for evaluating SERVQUAL responses. Note that this tech- nique is also used for specific questionnaires relating to specific services offered by companies. For example, St. John’s Hospital administers surveys to patients asking about several specific services such as food, laundry, nursing, and many other services. The two-dimensional differenc- ing technique allows the hospital to determine which services it should emphasize to improve customer perceptions and those that make little difference.

Using the information from Example 8.1, it is fairly simple to develop a two-dimensional services plane. The vertical axis reflects the expectations score and the horizontal axis relates to the perceptions score ( Figure 8-5 ) using 4 (the neutral response) as the origin. The hospital ana- lyst learns that emphasis is needed in the areas of reliability and empathy as these are areas where expectations are high and perceptions are relatively low.

200 Part 2 • Designing and Assuring Quality

DESIGNING AND IMPROVING THE SERVICES TRANSACTION

So far in this chapter we have discussed customer perceptions of quality. One of the ways to improve customers’ perceptions of quality is to improve the process of delivery of the service. Just as teams can succeed in manufacturing, teams in services can develop ways to improve pro- cesses and customer satisfaction.

Other concepts and tools include services blueprinting, moments-of-truth concept, and the Japanese method known as poka-yoke. Each of these is discussed in the following paragraphs.

Services Blueprinting

Lynn Shostack, CEO of Joyce International, Inc., is known for the statement, “The process is the service.” Shostack also developed the process known as services blueprinting . 6 A services blueprint is a flowchart that isolates potential fail points in a process. She recommends that blue- prints be kept on every process in a service and that a “keeper of the blueprint” make the blueprints available for others in the firm. If possible, the blueprint also should be available on a computer network for all to view. There are four steps to developing a services blueprint:

1. Identify processes. In this step, processes are flowcharted so that the bounds of the process are identified. Figure 8-6 shows a simple process used by Shostack to demonstrate services blueprinting, in this case for a hair salon’s processes.

2. Isolate fail points. Notice in Figure 8-6 that the hair coloring stage is a possible fail point. What can happen here? The wrong color could be applied, and the hair style will be ruined. This would be a very expensive mistake.

EXPECTATIONS

TangiblesReliability

Empathy

Assurance

Responsiveness

PERCEPTIONS

5

6

7

3

5 6 7

2

1

321 4

FIGURE 8-5 Two-Dimensional Differencing Plane

6 Shostack, G. L., “Designing Services That Deliver,” Harvard Business Review 62, 1 (1984): 135.

Chapter 8 • Designing Quality Services 201

Make reservation

4 Minutes

Seen by customer

30 Seconds 5 Minutes 108 Minutes 2.5 Minutes 2 Hours total

execution time

Line of visibilityNot seen by customer but necessary to performance

Enter salon

Redo color by applying

rinse or other chemicals

Hair stylist gathers

information

Select and purchase supplies

Style and color hair

Collect payment

Fail point

Materials (e.g.: supplies, hair

colors, hair care potions)

FIGURE 8-6 Services Blueprinting Example in a Hair Salon

3. Establish a time frame. In a hair salon operation, time is a major determinant of profitability. As a result, those steps that waste time result in lost income. The analyst observing this process should establish a standard time for each step in the process.

4. Analyze profits. The customer spends about two hours in the process. As errors occur in the process, the salon owner becomes liable, and other business is lost.

Notice also that Figure 8-6 includes a line of visibility. The activities below the line of vis- ibility are not seen by the customer, but they influence performance. This is true in many organi- zations. Often, the area above the line of visibility is referred to as the front office , and the area below the line of visibility is referred to as the back office . Many times process improvements focus on back-office activities, whereas front-office activities that involve high customer interac- tion are ignored. Services process blueprinting places the focus on front-office activities.

To understand how you could apply services blueprinting, think about a restaurant. Typi- cally, when you first enter a restaurant, you expect to be greeted at the door. Can you remember a time when you weren’t? This has happened to all of us at some point. A restaurant can install sensors or provide backups for the greeter so that this breakdown never occurs. Services blue- printing is a tool to help with brainstorming activities that lead to customer service improvement.

Moments of Truth

The fail points in the services blueprints are often referred to as moments of truth . These are the times at which the customer expects something to happen. Remember the SERVQUAL items? Expectations are a major determinant of customer perceptions of service quality. Therefore, when the customer expects something to happen, it has to happen. It is that simple! Some com- panies list these moments of truth and define fail-safes and procedures to see that they result in satisfied customers.

202 Part 2 • Designing and Assuring Quality

A CLOSER LOOK AT QUALITY 8-2 Quality in Health Care 7

Lynn Shostack’s service blueprinting and failproofing processes can be applied in a wide variety of services settings. One area is health care management. Health care quality management is a vast topic. Many contingencies affect the practice of quality management in health care. For example, look at the wide variety of settings where health care is practiced: clinics, hospitals, trauma centers, doctors’ offices, and in the field. Each of these settings requires differing approaches and has different standards for care.

Medical errors continue to be one of the leading causes of death in the United States. Medical needs are different for specific populations such as women, children, minorities, the aged, and those with chronic conditions. Delivery methods also vary with vehicles such as primary care, managed care, hospitals, health maintenance organizations, and others. Given this diversity of problems relative to health care quality management, much work is needed in this area.

Following is a list of 20 steps to improve health care from the U.S. Agency for Healthcare Research and Quality. Note how these steps appear to walk the patient through the entire health care process to isolate possible fail points.

1. Be an active member of your health provider team. 2. Make sure your doctor knows all medicines you are taking. 3. Let your doctor know about any allergies you have to medications. 4. Read the doctor’s prescriptions. 5. Understand your medications. 6. Make sure you get the right medicine from your pharmacy. An estimated 88% of medicine errors

involve the wrong drug or dosage. 7. Ask pharmacists about your medicines. 8. Ask how best to measure liquid medicines. 9. Understand your medicine’s side effects so you are aware if they occur. 10. If possible, go to a hospital where they often perform the procedures or surgeries you need. 11. Ask your health care personnel if they have washed their hands before they touch you. 12. Understand your treatment plan when you are discharged from a hospital. 13. Understand any surgical procedures you will experience. 14. Speak up if you have questions or concerns. 15. Make sure your personal doctor is in charge of your care. 16. Make sure all of your health care providers know your health history. 17. Get others involved in your health care such as family members in case you are incapacitated. 18. Know that “more is not better.” You may not need some care. 19. If you have a test, don’t assume that no news is good news. They may have failed to contact you. 20. Learn more about your condition and treatments by asking your doctor and nurse and other reliable

sources.

7 Adapted from “20 Tips to Prevent Medical Errors—Patient Fact Sheet,” Agency for Healthcare Research and Quality, 2008.

Customers’ contact with the business can occur in many different ways—face to face, over the Internet, by phone, through a machine such as an ATM, or through the mail. All these moments of truth result in either happy customers or lost customers. Moments of truth also can happen at various stages of the product life cycle, such as when the product is being used, when customer service queries arise, when the product needs repair, and when it is eventually dis- posed of. A Closer Look at Quality 8-2 considers the application of this approach in a health care process.

Chapter 8 • Designing Quality Services 203

Poka-yoke

Dr. Richard Chase and Dr. John Grout have been influential in promoting the use of poka-yokes (fail-safes) in services. 8 The idea behind fail-safing is to ensure that certain errors will never occur. Just as many processes seem to be designed to fail, they also can be designed not to fail. In services, Chase defines different classifications for fail-safe devices. These are

Warning methods

Physical contact methods

Visual contact methods

Fail-safe methods can also be defined by the “ three Ts ” (see Figure 8-7 ):

Task to be performed

Treatment provided to the customer

Tangibles provided to the customer

These poka-yoke classifications and Ts occur in many different forms. Some examples include 9 beepers in ATM machines that warn you to remove your card, toilets and sinks that automatically flush and shut off, the mechanism that stops you from inserting a disk upside- down in a computer, surgical trays that have indentations for different instruments, needle remov- ers that prevent accidental needle pokes, requirements that bank tellers enter a customer’s eye color before beginning a transaction so that identity is confirmed, or a file cabinet that locks the other drawers when any one drawer is opened so the cabinet doesn’t fall over.

Poka-yokes such as these represent a good amount of creativity and are very often used by Japanese and American companies to help ensure quality service. In a nutshell, you should iso- late fail points in a process and then fail-safe the process to make sure that errors don’t occur.

Tangibles

Task Treatment

FIGURE 8-7 The Three Ts

8 Chase, R., and Stewart, D., “Make Your Service Fail-Safe,” Sloan Management Review 35, 3 (1994): 35–44. 9 For an extensive literature review and interesting information about poka-yoke, check out Dr. John Grout’s homepage on the Internet (facultyweb.berry.edu/jgrout/pokayoke.html). He has devoted a great deal of time to developing this resource, and it is the most concise one on poka-yoke available. Grout is currently Dean of the Campbell school of Busi- ness at Berry College in Mount Berry, Georgia.

204 Part 2 • Designing and Assuring Quality

Thinking back to Lynn Shostack’s hair salon process, how would you fail-safe the process so that the wrong color would never be applied?

THE CUSTOMER BENEFITS PACKAGE

Just as many organizations have employee benefits packages, services firms can develop cus- tomer benefits packages (CBPs) . A customer benefits package consists of both tangibles that define the service and intangibles that make up the service. The tangibles are known as goods- content . Intangibles are referred to as service-content . The only difference between an employee benefits package and a services benefits package is the ultimate recipient of the ben- efits package.

CBPs are important not only in that they help define what it is that your service firm will provide to the customer but also in helping to define what will not be provided to the customer. More and more, firms are focusing on better defining the niches that they serve. As a result, the question of what they will not provide the customer is often as important as what they will pro- vide the customer. By helping to answer this question, CBPs provide a foundation for developing a service strategy. The four stages of the service benefit package design process are as follows (see Figure 8-8 ):

1. Idea/concept generation 2. The definition of a services package 3. Process definition and selection 4. Facilities requirement definition

As defined by David Collier, 10 a professor at Florida Gulf Coast University, the objectives of customer benefits package design are to

• Make sure the final CBP attributes you are using are the correct ones. • Evaluate the relative importance of each attribute in the customer’s mind. • Evaluate each attribute in terms of process and service encounter capability. • Figure out how best to segment the market and position CBPs in each market.

Idea/ concept

generation

Define services package

Select and define process

Define facility

requirements

FIGURE 8-8 CBP Design Process

10 Collier, D., The Service/Quality Solution (Milwaukee, WI: Irwin/ASQC, 1994).

Chapter 8 • Designing Quality Services 205

• Avoid CBP duplication and proliferation. • Bring each CBP, and associated process and service encounters, to market as quickly as

possible. Use the CBP framework and final attributes to design facilities, processes, equip- ment, jobs, and service encounters.

• Maximize customer satisfaction and profits.

The CBP is defined largely by the degree of freedom allowed by the firm in the customiza- tion of the services package. Deborah Kellogg and Winter Nie 11 provided a services process/ services package matrix. As shown in Figure 8-9 , firms will offer unique services packages , selective services packages , restricted services packages , or generic services packages . Generic services packages are of the one-size-fits-all variety. Unique services packages are espe- cially tailored for each customer. Your firm’s ability to custom-tailor a benefits package depends on the amount of flexibility you have as a service provider. Strategic issues such as organiza- tional flexibility, top-management skill, employee motivation, training, hiring practices, culture of the service customer, nature of the service, and technological choice affect your ability to provide unique services packages.

Table 8-3 shows a customer benefits package from the Slide-Master firm. Notice that Slide-Master has taken great care in defining tangibles and intangibles for its CBP. Slide-Master evaluates its CBP performance using monthly surveys of employees and customers.

SERVICE TRANSACTION ANALYSIS

Because we have now discussed design of services processes and improving services processes, we can now present service transaction analysis (STA) . 12 This is a service improvement tech- nique that allows managers to analyze their service processes at a very detailed level. As we stated, Crosby views service encounters as a series of transactions (or moments of truth). STA is a method for identifying these transactions and evaluating them from the customer’s perspective to determine if there is a gap between service design and what the customer perceives as the service.

Expert service

Service shop

Service factory

Unique services packages

Selective services packages

Restricted services packages

Generic services packages

Services Process Structure

Doctor’s office

Mass entertainment

Home repair

Services Package Structure

FIGURE 8-9 Service Process/Service Benefits Package Matrix Source: Based on D. Kellogg and W. Nie, “A Framework for Strategic Service Management,” Journal of Operations Management 13, 4 (1995): 323–327.

11 Kellogg, D., and Nie, W., “A Framework for Strategic Service Management,” Journal of Operations Management 13, 9 (1995): 323–337. 12 Johnston, R., “Towards a Better Understanding of Service Excellence,” Managing Service Quality 14, 2/3 (2004): 129–134.

206 Part 2 • Designing and Assuring Quality

TABLE 8-3 Final CBP Attributes for Slide-Master Tangible (Goods-Content) Intangible (Service-Content)

Slides Convenience and timeliness

Quality, durable, clean, new film, and cardboard Facility close to downtown High-resolution pictures and slides Pickup and delivery service Multiple color combinations (6 million) Telephone/fax order capability Slide properly centered and focused Standard 3-day service

Equipment/technology Latest computer hardware State-of-the-art software High-quality camera Superior maintenance of all equipment Well-maintained delivery vehicles with ads on the sides Flexible for custom designs People Clean and very well groomed Attractive uniforms

Packaging Heavy, clear, high-quality sleeves Sequenced and numbered properly Loaded in attractive boxes or slide carousels

Facilities Ample parking spaces Secure parking lot Attractive signs Clean, attractive building—outside Upscale indoor wall pictures and decor Reception area and service counter—clean and professional appearance Soft, relaxing background music Plush furniture Bright lighting Complimentary coffee and soft drinks Restrooms, soap, etc.—clean

Rush 1-day service

Really try to handle last-minute customer changes Accurate, itemized billing by fifth working day of each month

Professionalism Absolutely confidential services Emphasis on telephone courtesy Refer to client by name

Client order documentation correctly filled out and processed Flexible to customer needs

Consulting services Artistic expertise History of previous jobs Technical knowledge Nonbusiness hours on-call professional Service attitude User-friendliness Polite, responsive attitude Do exactly what we promise Script dialogues for order taking and postpurchase callbacks Confident but relaxing behavior

Source: Adapted from David Collier, The Service/Quality Solution (Milwaukee, WI: Irwin/ASQC, 1994). Used with permission of David Collier.

Figure 8-10 shows a service transaction analysis sheet. This sheet is a tool in STA. Once you have specified the service process to be studied, “mystery shoppers,” or independent consul- tant-customers, walk through the entire process. After receiving the service, they then rate each transaction in the process with either a “+” (delighting), “0” (satisfactory), or “−” (unsatisfac- tory). The rationales for these scores are entered into the right side of the sheet, and an overall evaluation is provided in the bottom of the sheet. Using these sheets, service designers, manag- ers, and staff can attempt to understand why the customer did not like certain aspects of the service and use this as an input into improving the process.

Chapter 8 • Designing Quality Services 207

Imposing oak entrance door, firmly shut.

Second door with advertisement for a lending company.

Receptionist behind desk ignores customer and continues typing.

Carpeted corridor but no sign of receptionist.

She says, “Yes?”

Phone rings, which receptionist answers.

“Trustworthy, professional but a little formidable.”

Message Score:

Process: Legal Firm:

Customer type:

SERVICE TRANSACTION ANALYSIS SHEET

Lawyer Reception Personal client

Service concept: General legal services for personal customers in a user- friendly, sympathetic, and nonintimidating way

Transaction 0+ –

“They like constructing barriers.” “They may not be impartial.”

“They don’t seem to care about me.” “They don’t think I am important.”

“Homey but is this the right place?” “Unhelpful.”

“Not very welcoming.” “I feel like I am intruding on her work.”

“I am not important.” “Other people have prority on her time.”

Overall evaluation Poor service design. Little thought or concern for clients. Unfriendly and intimidating service.

FIGURE 8-10 STA Sheet

EXAMPLE 8-3 Service Transaction Analysis in Action

In the transaction analysis sheet in Figure 8-10 , the large oak door, although professional, looks forbidding. When going to this lawyer’s office, the client is probably nervous about approaching the attorney and can find the décor daunting and scary. The message on the second door made it appear that the attorneys may not provide impartial advice due to their relationships with a lending company. The not-so-subtle message sent by the rude receptionist demonstrated a mismatch

208 Part 2 • Designing and Assuring Quality

IMPROVING CUSTOMER SERVICE IN GOVERNMENT

If customer service is the battlefield for business in the twenty-first century, then government is probably the last frontier. There are some evidences of improvement in several aspects of gov- ernment. The National Productivity Review 13 reports that some federal government agencies have adopted quality management (see A Closer Look at Quality 8-3 ). Quality professionals know that the military has long been an early adopter of statistical quality techniques. Many standards have been established. The government has developed a searchable list of 4,000 cus- tomer service standards for 570 federal departments and agencies. This effort started with an executive order for a “customer-driven government that matches or exceeds the best service available in the private sector.” In the first year, only three agencies responded with agreements to commit to service standards. These early adopters were the Social Security Administration, the IRS, and the Postal Service.

between the service design and execution . . . and so forth. The application of this technique alerted the partners to what was really going on in their own office. Changes were made to address these problems.

A CLOSER LOOK AT QUALITY 8-3 Government Service Quality: A Stop-and-Go Process 14

Quality improvement in the U.S. government has been a hit-or-miss proposition. Serious and significant efforts have been implemented since the Reagan administration. Whereas the Reagan and Bush (GHW) administrations promoted the Baldrige and Deming approaches to improvement, Clinton emphasized improvement via Executive Order. The G.W. Bush administration did little to improve government ser- vice quality.

During the Obama administration, governmental improvement has not been a top priority but has followed six main themes:

– Putting performance first with a new performance improvement and analysis framework. – Ensuring responsible spending. – Focusing on retaining and recruiting federal employees who are ready to implement twenty-first

century systems. – Partnering with private and nonprofit organizations. – Reforming federal contracting and acquisition emphasizing competition. – Increasing transparency in government .15

During the Clinton administration, the major improvement effort was called “Reinventing Gov- ernment.” Among the triumphs of reinventing government were the IRS TeleFile program and the Social Security Administration telephone answer lines. However, the reinventors also avoided contact with traditional good-government groups, such as the National Academy of Public Administration and the Council for Excellence in Government, and wanted little to do with the Office of Management and Budget, the Office of Personnel Management, the federal inspectors general, and the General Account- ing Office, all of which they viewed more as part of the problem than of the solution. Created as a quasi- independent unit appended to the vice president’s office, the campaign to reinvent the government

13 Milakovich, M., “The State of Results-Driven Customer Service Quality in Government,” National Productivity Review 17, 2 (1998): 47–54. 14 Based on “Requiem for Reinvention, Government Executive,” www.govexec.com/dailyfed/0201/021201ff.htm , 12 February, 2001. 15 Based on Balutis, A., “The Obama Agenda: Five Steps Towards Transformation,” Public Manager 38, 4 (2009): 43–47.

Chapter 8 • Designing Quality Services 209

States are also jumping on the bandwagon. By 2011, 32 states had established quality award programs. Many state agencies around the country have adopted quality techniques. How- ever, many of these implementations appear to be in the early stages. Overall, government is lagging behind the private sector in quality adoption. Although the results are mixed, it is clear that private-sector quality management practices are being adopted in government. Why is this progress occurring? Many used to question whether the government had the inclination to adopt quality techniques, given the lack of profit motive. However, several factors seem to be driving this change:

• People want and desire to do good quality work. • Because quality management is associated with improved employee satisfaction, there is a

major impetus to improve. • Government leaders are mandating standards, strategic plans, and new levels of perfor-

mance at all levels of government. These standards are being adopted in government agen- cies because of the mandates.

• Demand for government services is growing at a faster rate than funding for them. The natural reaction is to simplify processes that have become bloated.

• Finally, the threat of privatization in government has led to an improvement in service in many areas.

QUALITY IN HEALTH CARE

Another area of services that is receiving much attention is health care. Several factors have con- tributed to this phenomenon:

• Health care is facing the same “cost squeeze” that government is facing. • A move toward health maintenance organizations (HMOs) is causing hospitals to stream-

line operations. • There is increasing diversity in health care.

operated with enormous autonomy. Its leaders could not, and would not, testify before Congress, and its directives were kept in virtual space at a Web site whose days were numbered when the Bush adminis- tration arrived.

Convinced that statutory reform was either impossible or unnecessary, the reinventors were left with a number of weak devices for spurring change. Reinventing was poorly linked, if at all, to the employee performance appraisal process and carried few, if any, budgetary or personnel consequences. It simply did not matter to the things that matter to agencies—money and headcounts. Federal employ- ees could earn Hammer awards for reinventing government but not bigger budgets or a more forgiving congressional committee.

Customer satisfaction surveys were the one piece of reinvention to have survived in the Bush administration. Few would expect the administration to interview the same customers, however. The Environmental Protection Agency surveyed reference librarians under Clinton, for example, but a sur- vey of regulated parties was more plausible under Bush.

According to Paul C. Light, vice president and director of governmental studies at the Brookings Institution, the experience from reinventing government suggests at least three ingredients needed for more vibrant efforts in future administrations:

• Statutes. Although congressional action is always difficult, it outlives the ends of administrations in a way that executive directives cannot.

• Structure. The federal hierarchy is just as thick today as it was prior to reinventing government. Indeed, considerable evidence suggests that the most senior levels of the hierarchy are even thicker. This is the cost of letting a thousand flowers bloom without doing any weeding.

• Bipartisanship. Reinventing government would be alive today if it had been rooted in a bipartisan agreement on the need for big-government reforms. It is a lesson well worth remembering for future efforts.

210 Part 2 • Designing and Assuring Quality

In some cases, insurers such as Blue Cross are encouraging the use of quality management approaches. Health care workers are becoming increasingly knowledgeable about quality man- agement practices and concepts. In fact, the very nature of health care requires careful and well- planned procedures.

Many health care customers, however, are uncomfortable with these changes to govern- ment and health care. If quality approaches are applied, it is probably best that efforts not focus entirely on efficiency. Reliability and empathy are dimensions that can only be good for health care.

SUPPLY CHAIN QUALITY IN SERVICES

As we have talked about before, one of the major differences between services and manufactur- ing is the involvement of the customer in the process. As shown in Figure 8-11 , service supply chains are bidirectional. This means that service customers actually provide inputs to the supply chain. Many times, these inputs can be information or, in some cases, labor—as in the case of a self-service gas station. Therefore, effective communication is necessary between customers and suppliers to prevent inadequate fulfillment of customer expectations. The concept of gar- bage in, garbage out implies that the quality of a service supply chain will be limited by the quality of the supplied inputs. Even if customers provide poor inputs (inaccurate information), they may still expect accurate outputs. This expectation has implications for service design. In an integrated supply chain, the service provider still has greater responsibility for verifying cus- tomer inputs to ensure they are accurate. In some cases, the service provider may be able to initiate communication of customer-input delivery expectations, such as through reservation systems. This may be complicated by the fact that many times, service delivery systems are inherently just-in-time. Of course, in services, there are other suppliers besides the customers. Often, these are managed in a more traditional supply-chain manner. However, the customer- supplier linkage makes services unique.

A THEORY FOR SERVICE QUALITY MANAGEMENT

As we studied in Chapter 2 , theory development in the area of quality is an important work that continues. Dr. Scott Sampson of Brigham Young University is a researcher who is developing theory in services management. His unified theory for services management provides inter- esting insights for quality management. 16 This theory consists of several propositions. These

Material and equipment supplies

Service provider

Service customer supplying inputs

Service customer consumes outputs

FIGURE 8-11 Bidirectional Services Supply Chain Source: S. E. Sampson, “A Customer-Supplier Paradigm for Service Science,” in (refereed) Proceedings of the DSI Services Science Miniconference, Pittsburgh, PA, May 2007.

16 Sampson, S., “Understanding Service Supply Chains,” Proceedings of the 3 rd International Conference on Operations and Supply Chain Management, Wuhan, China, 2009, p. 54 .

Chapter 8 • Designing Quality Services 211

propositions are based on the definitions of services that were introduced early in this chapter. Some of the propositions are as follows:

Proposition 1: The Unified Services Theory. “With services, the customer provides sig- nificant inputs into the production process. With manufacturing, groups of customers may contribute ideas to the design of the product; however, individual customers’ only part in the actual process is to select and consume the output. Nearly all other managerial themes unique to services are founded in this distinction.”

Proposition 2: The Unreliable Supplier Dilemma. “With services, the customer- suppliers often provide unreliable inputs.” “The Unreliable Supplier Dilemma” occurs because service customers provide themselves, their belongings, and/or their information as process inputs (by the Unified Services Theory). This simultaneous relationship as supplier and customer makes it diffi- cult for the service provider to control the supplied inputs.

Proposition 3: Capricious Labor. “With services, customer-labor may ignore, avoid, or reject technologies or process improvements which are intended to increase quality and productivity. As a result, customer buy-in to process changes must be carefully addressed.” Capricious labor occurs because many services customers provide themselves as labor inputs into the production process. In manufacturing organizations, labor is expected to conform to corporate policy. If the manufacturer mandates that a quality initiative be implemented, labor is generally expected to conform, even when labor thinks the initiative is a bad idea. Imagine a manufacturer who invests in technology that will improve quality of pro- duction. Then imagine that some of the employees reject the technology, stating, “I am more comfortable doing it the old way,” even though the old way is inefficient and results in poor quality. How would management respond to those self-willed employees? Unless those employees were children of the owner, one might suspect their jobs would be in jeopardy. In services, much labor is performed by customers who coproduce. Therefore, they can adopt or reject what they don’t like. For example, customers don’t have to stand in line if they don’t wish.

Proposition 4: Everyone Presumes to Be an Expert. “With services, the customer often provides product specifications (what to make) and process design (how to make it), often without the invitation of the service provider.” “Everyone thinks they’re an expert” occurs because the necessity for customer inputs in service processes means that most customers have extensive experience with the service process. This experience breeds process knowledge and ideas for improvement. The words of Richard Chase capture this idea well: “Everyone is an expert on services. We all think we know what we want from a service organization and, by the very process of living, we have a good deal of experience with the service creation process.” 17

17 Jacobs, H., and Chase, R., Operations and Supply Chain Management (Homewood, IL: Irwin, 2010), p. 56 .

Summary In this chapter we have studied quality in services. Because services involve intangibles, they are different from manufacturing. Because of the lack of hard measures, statistical quality control techniques are not always as successful in services as they are in manufacturing. This doesn’t mean that statistical thinking is not extremely useful in services.

212 Part 2 • Designing and Assuring Quality

Services definitions and classifications were presented that help us better understand ser- vices. We have provided tools for services such as SERVQUAL, services blueprinting, moments of truth, poka-yokes, and customer benefits packages.

The bottom line is a satisfied customer. Customers pay the bills. They are the object of our efforts. At times, all the customer wants is a caring ear to bend. In our race for profits, efficien- cies, and better processes, let’s not forget the human touch.

Key Terms Contact personnel Customer benefits

packages (CBPs) Customer contact Customer coproduction Customer expectations Customer perceptions External services Gap

Gap analysis Generic services packages Heterogeneous Intangible Internal services Involuntary service Malpractice Moments of truth Poka-yoke

Product liability Reinventing government Restricted services

packages Selective services packages Service transaction

analysis (STA) Services blueprinting SERVQUAL

Three Ts Unified theory for services

management Unique services packages Voluntary services

Discussion Questions 1. Discuss the ways in which services are unique in comparison with manufactured goods. How do these

differences affect the management of service quality? 2. Provide an example of customer coproduction other than the example provided in the text. What are

the advantages and disadvantages of customer coproduction for service providers? 3. Are quality techniques in the service industry well developed or still fairly immature? If you believe

that they are immature, why do you think this is the case? 4. Why do you believe that quality techniques in the service industry are less mature than quality tech-

niques for manufactured products? What can be done to bring quality techniques for the services industry up to a higher level?

5. Discuss the distinction between voluntary services and involuntary services. Why is this distinction important in our understanding of service quality?

6. Are the Baldrige criteria applicable to service situations? If so, how? 7. List Zeithamel, Parasuraman, and Berry’s five dimensions of service quality. Is the list identical for

every service provider, or does it vary from company to company? Explain your answer. 8. Discuss some of the qualities of an effective leader in a service context. 9. What is SERVQUAL? How does SERVQUAL help a firm assess its service quality? 10. What are the advantages of the SERVQUAL instrument? 11. Discuss the concept of gap analysis in the context of a SERVQUAL assessment. 12. What is a services blueprint? How is a services blueprint developed? 13. Describe the concept of moment of truth in a service context. Describe a moment of truth that you

recently experienced as a consumer. Was your service experience satisfactory or unsatisfactory? Explain your answer.

14. How can the moment-of-truth concept be used as a training tool in a service setting? 15. What is a customer benefits package? What is the purpose of developing customer benefits packages

in a service context? 16. In what ways will the globalization of services alter the way that businesses manage their service

quality?

Chapter 8 • Designing Quality Services 213

Item Perception Average Expectation Average Differences

1 5.5 2.3 3.2 2 5.4 2.4 3.0 3 5.9 2.2 3.7 4 5.8 2.8 3.0 5 3.2 3.2 0 6 4.4 4.1 0.3 7 4.3 5.3 −1.0 8 2.5 4.9 −2.4 9 4.6 5.6 −1.0

10 6.2 3.4 2.8 11 6.5 3.2 3.3 12 6.6 3.4 3.2 13 6.8 3.6 3.2 14 3.1 3.2 −0.1 15 4.5 3.3 1.2 16 3.3 3.4 −0.1 17 3.1 3.2 −0.1 18 3.2 3.5 −0.3 19 1.6 6.5 −4.9 20 1.8 6.6 −4.8 21 1.5 6.4 −4.9 22 1.4 6.3 −4.9

17. Discuss the initiatives that the U.S. government has taken to increase its emphasis on service quality. Are they effective?

18. Discuss several of the factors that have contributed to an increase in attention directed toward quality in health care.

19. Discuss the unified theory for services management developed by Dr. Scott Sampson. Do you agree or disagree with the principles underlying Sampson’s theory? Explain your answer.

20. In your judgment, will the management of “service quality” ever progress as far as the management of “manufactured goods quality”? Make your answer as substantive as possible.

Problems 1. A national electronics retail chain charges $350 for a service contract. Of this, the company sends

$120 to an insurer. Calculate the profit margin for the service contract. 2. Using the example of the service transaction analysis (STA) worksheet in Figure 8-10 , chart and evalu-

ate the transactions for your university or college advising office. Report your findings and overall evaluation.

3. Develop a consumer benefits package for a service business in your community. Be exhaustive and explicit in your package identification.

4. Develop a services blueprint for a local car wash. Identify possible fail points, back-office processes, and fail-safes.

5. Recently, a medical office administered the SERVQUAL survey to its customers as a way to determine where it should focus the process improvement. Forty surveys were administered to customers before and after they were treated. On the basis of the 40 responses, averages were computed for each item. Using the averages in the table that follows, compute dimension averages. Based on your findings, which dimensions should be emphasized?

214 Part 2 • Designing and Assuring Quality

6. For the data in Problem 5, perform a two-dimensional differencing analysis. Do your results differ from your answer in Problem 5?

7. The averages for different dimensions of service quality were computed by averaging the items per- taining to the dimension. Use the following data to determine which dimensions to emphasize.

Perceptions Expectations

Tangibles ! 5.40 1.42 Reliability ! 3.20 6.40 Responsiveness ! 2.45 2.30 Assurance ! 5.60 3.30 Empathy ! 1.90 6.40

Lifelong Learning Teamwork Innate Abilities Cognitive Abilities

Respondent Expectations Perceptions Expectations Perceptions Expectations Perceptions Expectations Perceptions

1 8 0 8 10 2 5 3 9 2 7 4 9 9 6 5 4 8 3 9 2 9 10 4 5 2 7 4 10 5 10 9 7 4 3 8 5 5 1 8 7 5 6 4 9 6 9 1 7 9 2 7 2 10 7 9 3 9 10 2 5 3 10 8 8 2 10 10 3 6 2 10 9 7 0 9 10 2 5 4 9

Average 8.00 2 8.78 9.33 3.67 5.33 3.00 8.89

a. Using simple differencing, determine which dimensions should be emphasized. b. Use two-dimensional differencing to determine which dimensions should be emphasized. c. Based on your findings, choose the most important dimension and describe how you would develop

a process improvement program to address the dimension that needs to be improved. 8. A state university wants to perform a gap analysis to determine what student traits corporate CEOs

find most important. The exercise is to be administered to CEOs and involves two surveys: an expectations survey and a perceptions survey. All questions are answered on a 10-point scale. The attributes the CEOs are asked to rate are propensity for lifelong learning, ability to work in teams, innate ability, and cognitive ability. The results of nine surveys are synopsized in the fol- lowing table:

Perform a gap analysis by developing a two-dimensional differencing plane, and evaluate the results. 9. Following is a transaction analysis for a movie theater. Please answer the following questions:

a. Based on the service transaction analysis, what is your assessment of the movie theater? b. In what areas can the movie theater improve? c. Are there any additional customer touch points you can think of in this process? What could the

company do to make them a positive experience? 10. Following is a service transaction analysis for a lube shop. Answer the following questions:

a. Based on the service transaction analysis, what is your assessment of the lube shop? b. In what areas can the lube shop improve? c. Are there any additional customer touch points you can think of in this process? What could the

company do to make them a positive experience?

Chapter 8 • Designing Quality Services 215

Exterior façade with movie posters.

A single, windy ticket line with multiple tellers at the end.

Ticket collectors near ticket booth tell where the theater is.

Concession stand in the middle of open area and brightly lit.

“See what is playing or coming soon.” “We are showing the movies you want to watch.”

Message Score:

Process:

Organization:

Customer Type:

SERVICE TRANSACTION ANALYSIS SHEET FOR PROBLEM 9

Movie Theater

Buying Ticket Movie Goer

Service Concept: Provide comfortable experience in viewing today’s current releases.

Transaction 0+ –

“Everyone is herded together.” “Ticket booth was crammed in the corner of theater.” “They just wanted my money.”

“They want me to spend more money.” “The movie won’t be the same without snacks and drinks.”

“Employees very knowledgeable and care that I get to the correct theater.” “They want me to enjoy the movie/experience right away.”

“I feel like this is the movie I’m supposed to see next. The company doesn’t care if it is good, as long as I come and see it.” “The movie display was offensive and not appropriate for all ages.”

“Only the big items are worth our time to pick up.” “Cleanliness isn’t as important in the movie-going experience.” “Once I start watching the movie, they don’t care as much about the experience.”

Overall Evaluation: The movie theater is about selling tickets. They are helpful until I am done spending my money. More consideration is needed to keep me coming back to this theater.

Large displays of coming attractions posted at theater entrance. Some movies have offensive words and pictures.

Movie theater has food on floor and is sticky.

216 Part 2 • Designing and Assuring Quality

Open bay door.

Mechanic guides me in and walks me to waiting room.

Mechanic confirms oil change and asks about additional work.

Waiting room is plain, but has a TV, magazines, and drinks.

Reviewed work done on the car: oil change, tire pressure, and fluid check.

“I can get in quickly.” “They want me to see what is happening so I can decide if now is the right time to enter.”

Message Score:

Process:

Organization:

Customer Type:

SERVICE TRANSACTION ANALYSIS SHEET FOR PROBLEM 10

Auto Service

Oil Change Average Driver

Service Concept: Provide speedy service that keeps cars running properly. Inform customer of potential issues.

Transaction 0+ –

“They are concerned about my safety.” “My comfort is more important than starting the job and getting me out the door.”

“We want you to enjoy your stay.” “This is a time to relax while we do all the work.”

“Explaining the different oil options makes sure I am making the best choice for the vehicle.” “The upselling is annoying. They ask to do the same thing every time I come in.”

“Our service extends beyond the oil change.” “Your overall safety is the most important to us.” “We want to see you again.”

“We appreciate your business.” “Your car is important to us, too.”

“Safety is a priority.” “Our service to you doesn’t have an end point.”

Overall Evaluation: The service was very quick and professional. The focus is on the clients and having them come back—not because they have to, but because they want to.

Presented coupon for free car wash.

Walked to car and guided out of bay.

CASES

Case 8-1 Yahoo! Designs Quality Services with Customers in Mind Yahoo!: www.yahoo.com

Millions of people log on to the Internet every day and use the services of Yahoo!, one of the World Wide Web’s most popular portals. Yahoo! has evolved quickly into a firm that provides comprehensive

Internet services to a global clientele. The story of how Yahoo! started and how it has attracted such a loyal clientele in an extremely competitive industry is quite amazing.

Chapter 8 • Designing Quality Services 217

Discussion Questions

1. Think about the Internet search engine you use the most often. If it is Yahoo!, what is it about Yahoo! that attracts you as a user? If it is not Yahoo!, what could Yahoo! learn from the search engine you use that could help make it better?

2. What parallels do you see between developing a high-quality service product and a high-quality

manufactured product? Make your answer as sub- stantive as possible.

3. Is Yahoo! a company that was simply at the right place at the right time, or are many of its ser- vice innovations truly unique? Explain your answer.

Case 8-2 UPS: Delivering the Total Package in Customer Service UPS: www.ups.com

In 1907 there was a great need in the United States for private messenger and delivery services. The U.S. Postal Service was not yet offering parcel delivery, and

few offices and private homes had telephones, so mes- sages had to be delivered by hand and packages by courier. To help meet customers’ communication needs,

Yahoo! started in 1994 as a hobby of its cofound- ers, Jerry Yang and David Filo. Both individuals were doctoral students in electrical engineering at Stanford University who took time off from writing their disser- tations to surf the Web, classify the content, and create categories. As the two students started classifying more and more Web sites, the product they were developing started to attract the attention of other people. This attention provided the two individuals the motivation to continue to expand their efforts, and Yahoo! as a com- pany was born.

Yahoo! is free to its users. The company gener- ates revenue by selling advertising space on the Yahoo! search engine. What is particularly remarkable about Yahoo! is the customer base that the company estab- lished in only a few short years. Yahoo! attracts hun- dreds of millions of users per month.

How has Yahoo! established such a large cus- tomer base? Largely by trying very hard to determine what its customers want and then designing quality ser- vices to meet its customers’ needs. For example, Yahoo! follows the traffic patterns of its search engine very carefully in an attempt to determine the types of infor- mation its users are seeking. Early on, the company noticed that many of its users were searching for stock quotes by typing in either a company’s name or its ticker symbol. Yahoo! created a financial site on its search engine and partnered with the major stock exchanges to get direct feeds of stock quotes. The result—Yahoo! now gets more than 1 million queries per day just for stock quotes. Yahoo! offers similar levels of service for news, weather, and sports.

Particularly striking is the way that Yahoo! has customized its search engine to appeal to different demographic groups. The majority of Yahoo!’s offerings,

including search engines, are available in more than 25 languages. There are 44 different homepages around the world. Also, Yahoo! is tailored to specific cities. If you click on Yahoo! Seattle, for example, you instantly have at your fingertips a vast amount of information specifi- cally about the Seattle area. Yahoo! also has segmented its market by age and area of interest. Yahooligans is a search engine designed specifically for children, with kid-safe content presented in a manner that they can use. Similarly, Seniors’ Guide is a directory designed with information of interest to older users.

A challenge for Yahoo! is staying current with its customers’ preferences and demands. To accomplish this, the company encourages input from its users and gets thousands of e-mail messages per day. The users simply tell Yahoo! what they like and what they don’t like. Another thing that Yahoo! does is move very quickly to get a product to market. The corporate cul- ture does not demand that a product be perfect before it is placed on the search engine. The company is willing to take chances and will simply pull a product from its Web site if its users don’t like it.

As a result of its success, Yahoo! has attracted many competitors, such as Excite, Lycos, Infoseek, and WebCrawler. Several of these companies have now partnered with large firms (e.g., Infoseek with Disney and AOL with Time Warner), so the heat will remain on Yahoo! to continue to design high-quality Internet ser- vices and products. What other companies can learn from Yahoo! is that a thorough understanding of cus- tomer needs is the first step toward designing high- quality service products. Also, a strong follow-through and a willingness to listen to customer suggestions and complaints are key attributes to a service company’s success.

218 Part 2 • Designing and Assuring Quality

Discussion Questions

1. Based on the description of UPS, what do you believe are UPS’s strengths and weaknesses?

2. How has UPS used technology in its design of quality services? Make your answer as substan- tive as possible.

3. Describe a positive or negative experience that you have had with UPS (or one of its competitors

such as FedEx or the U.S. Postal Service). If the experience was positive, reflect on whether the experience is consistent with UPS’s new empha- sis on customer needs. If the experience was neg- ative, what could UPS have done to better satisfy your needs?

an energetic 19-year-old, James (Jim) E. Casey, started the American Messenger Company in Seattle. Although the company began with a small staff and faced stiff competition, it did fairly well, primarily because of Casey’s strict policies. He built his business on four principles: customer courtesy, reliability, around-the- clock service, and low rates.

Casey’s company eventually became United Par- cel Service, or UPS. The name United Parcel Service was chosen to draw attention to the words United , to emphasize the fact that shipments were consolidated to increase efficiency, and Service , because the company recognized that service was all it had to sell. UPS grew quickly through the years and became well known for its chocolate-colored delivery vans and courteous driv- ers. The public also liked UPS’s business concept. It was convenient to send packages by UPS, and people trusted UPS to deliver packages safely to their destina- tions. All kinds of people and businesses used UPS’s services, from pharmaceutical companies that shipped lifesaving drugs across country to grandparents who sent their grandchildren birthday presents and boxes of candy at Christmas.

Although UPS has always been a friendly com- pany, until the mid-1980s it relied primarily on technol- ogy to maintain efficiency, keep prices low, and provide new services. A major internal change took place at UPS in the mid-1980s when the company decided to

shift its emphasis from technology to satisfying cus- tomer needs. This shift represented a recognition that UPS customers were becoming more sophisticated and had a variety of needs the company was uniquely equipped to satisfy. Paramount among these were an increased need for information, a desire to move pack- ages even more quickly and efficiently, tremendous competitive pressure from Federal Express, and a demand for customized prices and services.

UPS moved quickly to satisfy its customers’ needs by developing new service products. For exam- ple, TotalTrack, which is available at UPS’s Web site, can instantly provide customers with tracking informa- tion on all bar-coded UPS packages. This service helps vendors know when their buyers have received their shipments. Inventory Express is a contract logistics management service in which UPS stores a customer’s merchandise and then ships it when it is needed, often on a just-in-time basis.

UPS also has improved its basic package pickup and delivery services. Customers with urgent shipments can telephone UPS to take advantage of On-Call Air Pick Up, which provides fast pick up at the customer’s home and overnight delivery of packages. To accommo- date customers who ship to sparsely populated areas in the United States and abroad, UPS has improved its geo- graphic reach to every address in the United States and locations in more than 185 countries and territories.

Chapter 9 • Managing Supplier Quality in the Supply Chain 219

We define a supply chain as a network of facilities that procures raw materials, transforms them into intermediate subassemblies and final

products and then delivers the products to customers through a distribution system.

—Corey Billington of Hewlett Packard 1

C H A P T E R 9

Managing Supplier Quality in the Supply

Chain

219

As you can tell from the introductory quote, a great deal of thought has gone into manag-ing the supply function at Hewlett Packard Corporation (HP). HP uses analytical, accounting, and managerial tools to improve its performance. HP is known for its com- mitment to its customers and for understanding that quality performance is closely related to supply chain activities. HP, therefore, focuses a lot of attention on those supply chain activities.

In this chapter we discuss the roles of purchasing, supplier development, logistics, and other supply chain functions. In the appendix to Chapter 9 , we also introduce some statistical quality control tools that are used to evaluate the inputs provided from suppliers. Remember that the performance of your suppliers directly affects your reliability and your ability to satisfy cus- tomers. As a result, the supplier is key. This connective relationship between suppliers, produc- ers, and consumers is both important and timely as firms are attempting to improve quality along with on-time performance. This is a major theme of this chapter.

THE VALUE CHAIN

To understand the supply chain , we first discuss the economic concept of the value chain. Michael Porter, 2 the noted economist and author, identified a systematic means for examining all the activities a firm performs and how those activities interact. The value chain is a tool that disaggregates a firm into its core activities to help reduce costs and identify sources of competi- tiveness. It is part of the value system that consists of a network of value chains. The value chain and core activities that are performed by any company include inbound logistics, operations, outbound logistics, marketing and sales, and service.

1 Billington, C., “Strategic Supply Chain Management,” OR/MS Today (April 1994): 20–26. 2 Porter, M., On Competition (Cambridge, MA: Harvard School Press, 2008).

220 Part 2 • Designing and Assuring Quality

Figure 9-1 shows Porter’s value chain. Notice that this is a chain for a single firm; however, the firm’s suppliers have value chains also. The core activities shown in the figure are termed value-chain activities because they are the tasks that add value for the customer. If a firm performs these core functions well, the result is high customer satisfaction. Non-value-chain activities typi- cally have costs but no effect on the customer and are referred to as the hidden factory . The hidden factory contains all the bureaucratic processes that are not part of the core activities in Figure 9-1 .

The Chain of Customers

From a quality perspective, an interesting variation of the value chain is the concept of the chain of customers . 3 Looking at the activities along the value chain sequentially, we see that the links in the value chain are really people performing different functions. The chain of customers is revealed when you view the step in the chain after you as your own customer. This means that if you work at workstation 4 in a process at the core of the value chain, you will make sure that the work you do is absolutely impeccable before you release it to your “customer” in workstation 5. This chain extends from raw materials through supplier firms to the producing firm, with the final link in the chain being the ultimate consumer of the product. The notion is that if each of us along a chain works to satisfy our own customer, the final customer will be very satisfied, and our products and services will be free of defects and mistakes.

Managing the Supply Chain

The concept of supply-chain management extends the economic concept of the value chain. Figure 9-2 shows a rendering of a supply chain. Notice that it includes several suppliers, plants, distribution centers, and customer groups. This is a useful extension of the value chain because it provides a more realistic picture of the value chain. Notice that the value chain focuses on activ- ities such as inbound and outbound logistics. These are supply-chain activities. One of the most significant aspects of the value chain is the linkage between a series of suppliers and consumers. This linkage is especially tenuous because it involves the complex interaction of logistics, sys- tems, and human behavior. These linkages and relationships between suppliers and customers have undergone radical changes in the past decade. Much of this chapter focuses on this linkage.

SUPPLIER ALLIANCES

Managing inbound logistics in the supply chain involves working with suppliers who provide parts, raw materials, components, and services. As we have already discussed, there has been a trend toward developing closer working relationships with fewer suppliers. Given this new

Support activities include accounting, legal, design, advertising, etc.

After- Sales Service

Inbound Logistics

Supplier Management

Transformation Processes

Outbound Logistics

FIGURE 9-1 Value Chain Activities Source: Based on M. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1995).

3 Schonberger, R., Building a Chain of Customers (New York: Free Press, 2007).

Chapter 9 • Managing Supplier Quality in the Supply Chain 221

approach to suppliers, a big part of quality improvement requires developing and assisting sup- pliers so they can provide needed products with low levels of defects, in a reliable manner, while conforming to requirements. Several approaches to improving suppliers result in what are called supplier alliances . Inspired by lean purchasing approaches learned from Japanese industry, supplier–alliance relationships have emerged that treat suppliers as de facto subsidiaries of the customer organization. We say de facto subsidiaries because as information is shared and

Raw Materials

Factory

Warehouse

Wholesale Distributors and Retailers Retailers

FIGURE 9-2 A Supply Chain

222 Part 2 • Designing and Assuring Quality

communications are improved, the relationship begins to resemble a parent/subsidiary instead of separate firms.

As shown in Table 9-1 , a number of systems are used to help develop suppliers. Single sourcing refers to narrowing down the list of approved suppliers for a single component to just one supplier. Companies that are uncomfortable with using a single supplier may use dual sourc- ing , where the number of approved suppliers is reduced to just a few. Dual sourcing reduces the exposures of having a single supplier.

Supplier evaluation is a tool used by many firms to differentiate and discriminate between suppliers. Supplier evaluations are often recorded on report cards in which potential suppliers are rated based on criteria such as quality, technical capability, or ability to meet schedule demands.

Sole-source filters that are used in many companies rely on external validation of quality programs. The external validation comes from outside examiners and registrars that are used in these processes. This gives customers the comfort that outside authorities have given your com- pany a sort of seal of approval. Two of the most commonly used filters are the Baldrige criteria and ISO 9000:2008 ( Chapter 3 ). In these cases, companies must show either that they are using the Baldrige criteria to improve or that they have become ISO 9000:2008 registered. The ISO 9000:2008 filter is used commonly in the international community.

Many companies perform lengthy inspections of their suppliers that involve long-term visits and evaluations. These programs are often called supplier certification or qualification programs if the focus is entirely on evaluation. If the focus is on helping the supplier to improve by training the supplier over long periods of time, they are termed supplier development programs .

Another tool used often is the supplier audit . This is similar to supplier certification except that a team of auditors visits the supplier and then provides results of the audit to the cus- tomer. The audits are performed to ensure that product quality and procedural objectives are being met. Supplier audits tend not to have the developmental component that is found in sup- plier development programs.

We should mention there are drawbacks to single sourcing. When there are few suppliers, there is more exposure to interruption of supply. For example, General Motors experienced a major shutdown as a result of single sourcing from a single supplier named Delphi. If labor rela- tions are not solid, single sourcing can have the effect of shifting negotiating power to unions in supplier plants. Other problems include possible interruptions because of transportation prob- lems, quality problems, disagreements concerning pricing, or global security problems (see A Closer Look at Quality 9-1 ).

TABLE 9-1 Supplier Development Approaches Single sourcing Dual sourcing Supplier evaluation Sole-source filters ISO 9000:2008 Baldrige Award Supplier certification or qualification programs Supplier development programs Supplier audits Alliances

Video Clip: Supplier Development at Nylamode

Chapter 9 • Managing Supplier Quality in the Supply Chain 223

A CLOSER LOOK AT QUALITY 9-1 Supply Chains and Terrorism 4

Since the terrorist attacks on New York and Washington in 2001, many companies are shifting their sup- ply chain priorities from squeezing costs through inventory reduction to limiting the consequences of transportation disruptions on production. The concept of lean-inventory management systems feeding directly into production lines—in other words, lean manufacturing—has been the goal of companies looking to save money through more efficient supply chains. However, the September 11 tragedy intro- duced a new reality for supply chain managers faced with grounded flights, closed borders, and lengthy inspections of truck cargoes. “People are coming to see they need contingency plans so that in case something happens, there’s a stockpile of critical parts somewhere,” says Bruce Bond, a supply chain analyst at Gartner Group, a tech-consulting leader.

To minimize the effect of such transportation disruptions, companies are reconsidering their lean inventory strategies in favor of storing larger quantities of critical parts closer to manufacturing facili- ties. Arrow Electronics, Inc., a $13-billion electronic components distributor in Melville, New York, that has 13 distribution centers around the United States, is working with customers to determine whether it can help them maintain miniwarehouses near production lines through the use of Arrow’s proprietary inventory management software. Arrow might open and manage such a warehouse, or a customer might open it, and Arrow might provide the management services.

Bill Forster, Arrow’s vice president of worldwide logistics, says that the company is increasing the inventory of parts it holds for customers and sees the same trend among some of its largest custom- ers. For Arrow, decisions about whether to increase inventory depend on a number of factors, including the importance of a given part to one or more customers and whether an inability to deliver the part could halt production.

Boosting stores of easily accessible inventory may become necessary as tighter security results in more frequent—and longer—cargo inspections by U.S. Customs at airports, on highways, and at shipping ports. “Every day we hear different requirements for the inspection of materials,” Forster says. Among those requirements are hand searches and x-ray examinations of cargo, as well as additional testing, such as passing shipments through compression chambers to make sure that no device being shipped is set to explode at reduced atmospheric pressure. One airline that before September 11 required no waiting time for cargo inspection now requires at least 24 hours, Forster says.

Ford Motor Company is one company that has adjusted its lean-inventory model. The automaker has stockpiled engines from Canada and other critical parts manufactured outside the United States. Ford is also reevaluating its global-sourcing strategy for critical parts.

Experts say that the ability to adapt quickly to sudden changes in supply chain activity and cus- tomer demand will be imperative. Hon Industries, a $2.04-billion office furniture manufacturer in Muscatine, Iowa, is an example of this adaptability. The day of the attacks, the company received a 20-truckload rush order for office furniture from a customer in the Northeast. The customer that placed the order was setting up offices for companies affected by the World Trade Center attack, and it needed the furniture within five days. Jim McKeone, Hon’s investor relations manager, says filling the order was a daunting task, considering that the company is a lean manufacturer, generally requiring two weeks to build orders and not holding inventory of its products.

Many CFOs, says Gartner’s Bond, are starting to think that it is more economical to minimize supply chain disruptions by building up inventory selectively, deploying supply chain software that allows flexibility in production scheduling, and working closely with suppliers to meet unexpected needs rather than to be forced to halt production at a factory with a lean manufacturing model. Agility once meant the ability to respond to whatever a customer wanted. Now, Bond says, people are saying it “has to include the idea of planning for disruptions in the supply chain that could keep you from serving your customer at all.”

4 Adapted from Gonsalves, A., and Konicki, S., “In Search of the Big Picture: Supply Chains,” Information Week , 8 October, 2001: 34–40.

224 Part 2 • Designing and Assuring Quality

Single-Sourcing Examples

In the 1980s, a defective rate of 5% for a supplier was acceptable. In this new century, parts- per-million levels of quality are expected from suppliers. In addition, many companies such as Mercedes-Benz are moving to single-source suppliers. However, outsourcing is not with- out its difficulties (see Quality Highlight 9-1 ). Other changes have occurred as well. Pur- chasing groups were viewed in the past as in-house experts who expedited orders and solved materials supply problems. The dollars spent on supply were not critical as long as parts were available for manufacture. Strategies are different now. The way to develop a supplier is to have adequate communications, linear production schedules, and time to make neces- sary changes. Supplier contacts are one way to ensure adequate communication. Assigning one person or a team to each supplier can reduce the potential for miscommunication. Another way to communicate is through supplier programs where the product or service producer ensures supplier access to information. This provides open communication on mutually critical issues between the customer and the supplier. Another issue of communica- tion between suppliers and customers is that production schedules must match. Suppliers constantly must be updated as to when the customers need products with lead times becom- ing shorter.

QUALITY HIGHLIGHT 9-1 A Bumpy Ride at Boeing 5

While we have discussed alliances and partnering with suppliers, if not managed correctly this practice is not without its problems. Consider the case of the Boeing 787 Dreamliner. What was initially viewed as a smooth journey to the Valhalla of energy efficiency and high-tech wizardry, the trip for Boeing has been turbulent indeed. One of the contributors to Boeing’s poor performance in this project may be poorly managed outsourcing.

Boeing’s last major aircraft, the 777, was hailed as a model of effective project management. This included a series on PBS extolling Boeing’s success on the 777. However, as of this writing, the 787 is over three years overdue and billions of dollars over budget.

The culture of Boeing was deeply ingrained in engineering and design. Most of this was centrally located in Seattle. With the 787, much of their engineering and production were outsourced to a com- plex supply chain of about 50 suppliers.

According to Tom McCarty, president of the Society of Professional Engineering Employees in Aerospace, “Plane-making is best done by a group of engineers and builders working in close proxim- ity without the distractions of language barriers, cultural differences, and bureaucracy.” While this is the expected view of labor unions, international outsourcing is very much a political as well as an operational necessity as over 80% of Boeing’s sales are outside of the United States. However, Boeing may have been overly aggressive in outsourcing two-thirds of its production. According to McCarty, “Now with the 787, management felt they knew how to outsource the design jobs. Turns out they didn’t.”

Figure 9-3 shows a picture of Boeing 787 subsystems and suppliers. As you can see, this is a large number of suppliers to manage. Often, there is not a playbook that shows the best way to manage such large networks of suppliers. Boeing has acknowledged these problems and the criticism they have received. Boeing CEO Jim McNerney stated, “In retrospect, our 787 game plan may have been overly ambitious, incorporating too many firsts all at once—in the application of new technologies, in revolu- tionary design-and-build processes, and in increased global sourcing of engineering and manufacturing content.”

5 Based on Peterson, K., “A Wing and a Prayer: Outsourcing at Boeing,” Reuters (January 2011).

Chapter 9 • Managing Supplier Quality in the Supply Chain 225

Electronic data interchange (EDI) is a system that aids customer and supplier communi- cation by linking together supplier and customer information systems. Customers now are help- ing suppliers to isolate bottlenecks in the operation, balance production systems, and reduce setup times in an effort to reduce lead times. For example, suppliers of seats to Chrysler Motor Corporation must be able to meet the schedule changes within 36 hours. Schedules are commu- nicated through an electronic data interchange link on a real-time basis.

Single sourcing has changed the landscape of purchasing. Prior to single sourcing, Xerox used 5,000 suppliers. Since implementing single sourcing, Xerox uses only 300 suppliers. Sup- pliers were chosen for their current quality practices and their willingness to work with Xerox to implement a quality improvement program. In Britain, dual or multisourcing has been chosen by many major customers, predominantly to avoid unfair pricing and the possibility of the custom- er’s production being disrupted by suppliers’ labor disputes. Having a limited set of suppliers also reduces shopping around for the best price.

The Dell Computer Company’s goal was to work with suppliers to figure out how to mini- mize the supply chain and hold the least amount of inventory. Personal computer production is characterized by a tremendous inventory control problem. Suppliers who win in this industry are suppliers who are able to help the personal computer producers to overcome this inventory con- trol problem. Dell is responding by bringing in suppliers who understand the personal computer production business. If suppliers don’t understand your business, you end up creating buffers that translate into inventory.

Lockheed-Martin was a defense contractor (now merged with Boeing) that worked closely with its suppliers. At its Aeronautics Materials Management Center, a special program for sup- pliers was developed. This program was called the Star Supplier Program. Lockheed-Martin developed criteria that each supplier had to meet. Quality was a top requirement. Each Star Sup- plier was required to use statistical process control, have a 0% rejection rate at the point of inspection for six months, and achieve zero nonconformance—documented at the Aeronautics Materials Management Center. The next requirement was to meet scheduled delivery dates. A supplier had to maintain a 98% concurrency to contract delivery schedules. Finally, the cost cri- teria were used, which showed favorably improving price trends and favorable purchase order administration.

Forward fuselage Spirit (Wichita, Kan.)

Center wing box Fuji (Japan)

Wing Mitsubishi (Japan)

Fixed and movable leading edge Spirit(Tulsa, Okla.)

Main landing gear wheel well Kawasaki(Japan)

Aft fuselage Vought (Charleston, S.C.)

Fixed trailing edge Kawasaki(Japan) Movable trailing edge Boeing (Australia)

Forward fuselage Kawasaki (Japan)

Wingtips KAL-ASD (Korea)

Center fuselage Alenia (Italy)

Horizontal stabilizer Alenia (Italy)

Tail fin Boeing (Frederickson, WA)

PARTS NOT SHOWN Landing gear Messier-Dowty (England) Wing/body fairing Boeing (Canada) Landing gear doors Boeing (Canada) Cargo access doors Saab (Sweden) Passenger entry doors Latecoere (France) Engines GE (Evendale, Ohio) Engines Rolls-Royce (England) Engine nacelles Goodrich (Chula Vista, Calif.)

FIGURE 9-3 Boeing 787 Suppliers Source: Based on www.seattlepi.com/ .

226 Part 2 • Designing and Assuring Quality

Perhaps the most extreme example of supplier partnering comes from the Bose Corpora- tion. Bose has implemented what it terms JIT II. In this effort, Bose eliminated a large part of its purchasing department and empowered suppliers to write their own purchase orders. This in effect made the suppliers responsible for managing inventories and keeping inventory costs low. This is now called vendor-managed inventory (VMI) .

SUPPLIER DEVELOPMENT

Supplier development has to do with the activities a buyer undertakes to improve the perfor- mance of its suppliers. Some of these activities may include supplier evaluation, supplier training, consultation, sharing data, and sharing processes. Companies such as Toyota and Honeywell have become very good at developing suppliers. However, recent data suggests that many companies do not have adequate supplier development programs. There is much work left to be done in this area.

There are seven steps for supplier development. First, you identify critical products and services . This involves identifying strategic products and components (those that are difficult to obtain, high costs, or high volume). Second, identify critical suppliers . These may be suppliers who provide strategic components but do not meet quality or reliability objectives or suppliers who do not meet schedules. Third, form crossfunctional teams . The buyer forms a cross- functional team to work with the supplier. Fourth, meet with supplier top management . This meeting is to discuss details of strategic alignment, performance expectations and measurement, and processes for improving. Fifth, identify key projects . These occur when there is agreement about how the supplier needs to improve and where. Projects are selected in the same way Six Sigma projects are selected, by criteria such as impact, ROI, feasibility, and required invest- ments. Sixth, define details of agreement . This definition involves cost (and benefit sharing), commitments of resources, metrics for improvement, project charters, accountability, and deliv- erables. Finally, monitor status and modify strategies . To ensure success, management must actively monitor progress and revise strategies as needed.

There are some dimensions of supplier development that have emerged in the literature. These include providing resources for development programs, trying to determine the right num- bers of suppliers to use, and finding ways to measure procurement efficacy. 6

Note that many companies confuse supplier evaluation with supplier development. These are not synonyms. Implicit to supplier development is the expenditure of resources designed to improve the performance of the supplier. This improvement may occur over a long period of time—sometimes months or years. Many companies couple this with expectations for shared cost reductions. For example, Toyota sets goals for cost reductions with its suppliers. If the target is 10%, Toyota may ask for a cost reduction of 5% and provide the other 5% benefit to the sup- plier. Suppliers who successfully complete development activities are often designated as pre- ferred suppliers due to their alignment with customer needs. Quality Highlight 9-2 shows how 3M evaluates its suppliers.

QUALITY HIGHLIGHT 9-2 Integrating Forward along the Supply Chain: 3M Dental Products Division 7

A customer satisfaction rating of “good” is no longer good enough for 3M Dental Products Division (DPD), a Minnesota-based supplier of products used around the world. The 700-employee division of 3M has determined that only by striving to earn grades of “excellent” in all product and service areas can

6 Foster, S. T., “Furthering the Study of Global Supply Chain Quality Management,” Volume 18, Number 2 Quality Management Journal pages 7–10, (2011). 7 Adapted with permission from the Malcolm Baldrige Award Profiles of Winners, 2011.

Chapter 9 • Managing Supplier Quality in the Supply Chain 227

it set clear goals for performance improvement, continue to increase sales, and boost productivity at industry-leading rates.

Pursuit of excellence explains why 3M DPD’s customer surveys no longer combine “good” and “excellent” responses in a single category, why it has developed a comprehensive network of customer “listening posts,” and why it has built an information system that tracks the purchasing decisions of dentists. It also accounts for how 3M DPD sets its priorities—by concentrating people and resources on opportunities most likely to improve products and services beyond customer expectations.

The division’s careful reading of customer requirements drives a finely tuned innovation process that delivers a steady stream of new or improved products. Products introduced within the last five years now account for 45% of total annual sales, up from 12% in 1992.

3M DPD manufactures and markets more than 1,300 dental products, including restorative materials, crown and bridge materials, dental adhesives, and infection-control products. Most of its 700 employees are based at its St. Paul, Minnesota, headquarters and at its manufacturing and distribu- tion facility in Irvine, California.

In the United States, where it has a leading share of the market, 3M DPD competes with more than 100 manufacturers of dental products. Sales and distribution to U.S. dentists are carried out through a network of independent distributors. In foreign markets, the division uses 3M subsidiaries for sales, marketing, and customer support. Sales of 3M DPD products outside the United States account for 65% of the division’s total sales.

3M DPD aims “to become THE supplier of choice” of dental professionals worldwide. Setting a clear course to achieve this aim is the objective of the division’s systematic strategic planning process, cited as an industry best practice by Fortune magazine. Led by a steering committee of top executives and senior managers, the process is designed to build consensus on what needs to be improved and how it will be accomplished. More than 20% of employees participate. The result is a 10-year vision, a detailed 5-year strategic plan, and a 1-year operating plan.

For each priority improvement, the steering committee negotiates with the appropriate depart- ment or functional unit to establish the anticipated business impact, determine resource allocations, and set metrics and target values for assessing progress.

The Employee Contribution and Development Plan is the division’s chief personnel appraisal tool. It sets individual goals in the areas of business results, team effectiveness, and employee develop- ment and is used to determine performance ratings and to guide promotion decisions.

3M DPD’s measurement system—the Business Performance Management Matrix—provides an easy-to-grasp framework for aggregating performance measures and for directly linking these measures to key business drivers and goals.

Most dentists in the United States and Europe—the division’s largest markets—already use 3M DPD products. Future growth will depend largely on expanding existing customers’ options—and spending—for 3M dental products. To do this, the division must have a thorough knowledge of cus- tomer requirements.

The division has graded the dentist market, resulting in five groups that reflect differences in satisfaction, purchasing behavior, referrals, repurchases, and number of 3M DPD products used. In- house and third-party surveys, focus groups, and hands-on evaluations are among the wide variety of methods that the division uses to listen to and learn from dentists in each segment. In addition, virtually all customer contacts—from visits by field representatives to calls to the technical hotline—provide additional information that also is entered into the division’s customer information system. This extensive database provides the information necessary to determine whether specific products and services are meeting key customer satisfaction goals and to spot opportunities for new products.

Insights into changing customer requirements—combined with knowledge of technological, societal, and environmental trends—are the starting point for product and process innovations. Dentists, distributors, and major suppliers are involved in the division’s systematic approach to translating key customer requirements into design requirements, prototypes, and—ultimately—reliable, quality products.

Continually raising the bar for performance improvement, 3M DPD is realizing benefits in nearly all facets of its business. Over the last 10 years the division has doubled global sales and market share.

228 Part 2 • Designing and Assuring Quality

Supplier Awards

Many times, companies will provide awards to outstanding suppliers. This provides an opportu- nity to celebrate supplier performance that is best of the best. Some of these awards are based on the Baldrige criteria or are decided by a committee within the buyer’s company. An example of a supplier award is the Ford World Excellence Award. Their program includes Gold, Silver, and Recognition level awards.

Supplier Relationship Management Systems (SRMS)

Elsewhere in this text, we discuss customer relationship management systems (CRMS). For upstream activities, there are similar systems called supplier relationship management sys- tems (SRMS) . These systems include spend analytics, sourcing execution, procurement execu- tion, payment, supplier scorecarding, and performance monitoring. In SAS ERP systems, the SRMSs have the following capabilities:

• Create complete spend transparency. • Develop a comprehensive, accurate profile of the supplier base. • Identify opportunities for optimal sourcing of materials, equipment, and services. • Consolidate and prioritize suppliers based on quality, performance, and on-time delivery. • Ensure contract compliance and reduce maverick spending. • Ensure the quality of purchased items. • Ensure appropriate levels of supply.

APPLYING THE CONTINGENCY PERSPECTIVE TO SUPPLIER PARTNERING

Different firms take different approaches to supplier development. Remembering the contin- gency perspective discussed in Chapter 1 , you should not be surprised. Apparently, one variable that affects what customers want from their suppliers is the customer’s position in the supply chain.

A SUPPLIER DEVELOPMENT PROGRAM: ISO/TS 16949:2009

Now that we have discussed supplier development conceptually, let’s look at a specific example of a supplier development program—ISO/TS 16949. The goal of developing your suppliers is based on the need to provide high quality to the customer. Because variability is anathema to quality, the supplier’s processes must be consistent with those of the customer. In the late 1980s, U.S. automakers developed certification programs for suppliers. The General Motors program was called “Targets for Excellence,” and Ford used a program called “Q1.” With the increase in popularity of ISO 9000, suppliers asked auto companies to adopt a single standard for certifying suppliers. The result, called QS 9000 , provided a common standard for DaimlerChrysler, Gen- eral Motors, and Ford. This standard has gone through an update and was supplanted by ISO/TS 16949. The original ISO/TS 16949 was last updated in 2009.

ISO/TS 16949

The ISO/TS 16949 standard applies only to automotive companies. ISO/TS 16949 is an Interna- tional Standards Organization (ISO) Technical Specification that aligns existing automotive quality system requirements within the global automotive industry. ISO/TS 16949 specifies the quality system requirements for the design/development, production, and, where relevant, instal- lation and servicing of automotive-related products.

ISO/TS 16949 was written by the International Automotive Task Force (IATF). The IATF consists of an international group of vehicle makers including Ford, General Motors, and

Chapter 9 • Managing Supplier Quality in the Supply Chain 229

Chrysler, as well as several automotive trade associations. Representatives and subcommittees of TC 176 also helped to prepare ISO/TS 16949. We discuss ISO/TS 16949 in more depth later.

ISO/TS 16949 is based on the model in Figure 9-4 . This model shows that ISO/TS 16949 is closely aligned with ISO 9000:2008 in that it is founded on a systems view of automotive pro- duction. This system for continual improvement involves management responsibility; resource management; product realization; and measurement, analysis, and improvement.

The sections of ISO/TS 16949 8 are shown in Table 9-2 . We discuss sections 4 through 8 in more detail.

Continual Improvement of the Quality Management System

Customers

Customers

Value-Adding Activities Information Flow

Input

Key

Output Requirements

SatisfactionResource Management

Measurement, Analysis, and Improvement

Management Responsibility

Product Realization

Product

FIGURE 9-4 Model of a Process-Based Quality Management System

8 The facts for this section are drawn from Technical Specification ISO/TS 16949, International Standards Organization, 2006.

TABLE 9-2 ISO/TS 16949 Sections 0. Introduction 6. Resource management 1. Scope 7. Product realization 2. Normative reference 8. Measurement, analysis, and improvement 3. Terms and definitions Annex—Control plan 4. Quality management system Bibliography 5. Management responsibility

230 Part 2 • Designing and Assuring Quality

Quality Management System

For the quality management system, suppliers must recognize key processes and document these processes. They must establish sequences and linkages for these processes. The organization must determine how effective their operations are; make resources and information available in sufficient quality and quantity to run the business; monitor, measure, and analyze the business to ensure effective operations; and take actions to ensure the planned results are attained and con- tinual improvements are being made.

Management Responsibility

For this section of ISO/TS 16949, the extent to which management is committed to the develop- ment and implementation of quality management and continuous improvement is documented. Management is responsible for developing policy, communicating with the organization relative to customer service, establishing quality objectives, conducting managerial reviews, and provid- ing resources. For example, managers with responsibility and authority for corrective actions will need to be informed when products do not meet specifications and see that corrective action is taken to ameliorate the problems.

Resource Management

For management to fulfill its responsibility, it must provide resources. These resources are used to maintain the quality management system and to meet customer requirements. This includes train- ing and development for human resources. Management is required to provide infrastructure such as bricks and mortar, equipment, and support systems. These must be planned and implemented properly. A safe, clean, and adequate work environment is established for worker satisfaction.

Product Realization

Product and processes should be adequately planned, including quality objectives for the prod- ucts. Customer-related processes should be designed in a way that customer needs are fully considered and regulatory requirements are met. This section considers all aspects of product and process design as well as purchasing, suppliers, control plans, setups, preventive mainte- nance, traceability, and many other aspects of designing and producing products.

Measurement, Analysis, and Improvement

For this requirement, the company needs to provide documentation that it can demonstrate prod- uct conformity, quality management system conformity, and continual improvement of the qual- ity management system. This includes aspects such as statistical tools, measurement systems, customer satisfaction measurement, internal audits, and other considerations.

ACCEPTANCE SAMPLING AND STATISTICAL SAMPLING TECHNIQUES

Although we have focused on developing standards so that the receiving firm has confidence in the quality of materials received from the supplier, there are times when the receiving firm must inspect incoming materials from its suppliers. Acceptance sampling is the technique used to verify that incoming goods from a supplier adhere to quality standards. Acceptance sampling inspection can range from 100% of the delivery to a relatively few items from which the receiv- ing firm draws inferences about the whole shipment.

Is Acceptance Sampling Needed?

Acceptance sampling is controversial. Some critics of the technique believe the assumption in acceptance sampling that a percentage will be defective or less than perfect (called acceptable

Chapter 9 • Managing Supplier Quality in the Supply Chain 231

quality level , or AQL) is counter to Deming’s concepts of continual improvement. However, there is still need for acceptance sampling in many different circumstances. See a situation where acceptance sampling and testing may be needed in A Closer Look at Quality 9-2 . Following are some examples of when acceptance sampling might be needed:

When dealing with unproven suppliers

During start-ups and when building new products

When products can be damaged in shipment

When dealing with extremely sensitive products that can be damaged easily

When products can spoil during shipment

When problems with a certain supplier have been noticed in the production process that bring the supplier’s performance into question

We have provided a short discussion of acceptance sampling in this chapter. For more detail on acceptance sampling, see the Appendix at the end of this chapter.

A CLOSER LOOK AT QUALITY 9-2 For RFID to Take Hold, Reliability Needs to Improve 9

Radio frequency identification (RFID) tags are an important technology for supply chain management. For example, consider the supply chain of a hospital where the patient flows through the process. An elderly woman dozes quietly in her hospital bed, tucked under layers of blankets. Her doctor stops by on his rounds and clicks on a wireless tablet PC, which is equipped with an RFID reader. This device trans- mits a signal to an RFID tag in the woman’s hospital bracelet, although it’s hidden by the bedding. The tag transmits information to the PC, which is integrated with the hospital’s information management system. On the display, the doctor sees the patient’s name, her previously administered medications, plus recently collected vital information, such as temperature, heart rate, and blood pressure. Without disturbing the patient or having to check back at the nursing station, the doctor has received the accurate, up-to-date information needed to monitor the patient’s progress.

The patient may not be real but the application is. The hospital, Jacobi Medical Center in the Bronx, benefits tremendously from an RFID system. According to CIO Daniel Morreale, “We get 100% accuracy in identifying patients and an overall savings of clinician time because doctors and nurses get the patient information they need at the bedside.” This is just one example of RFID usage in business. Businesses with logistics operations have been quick to embrace RFID. Large organizations such as Walmart and the U.S. Department of Defense are mandating the use of RFID in their supply chain activities. However, there are concerns about RFID. They need to be nearly 100% reliable. The current standard is that pallet labels need to have a 100% read rate. That read rate is also nearly the expectation for individual items. Cost is also a consideration with one major retailer stating that they will adopt RFID as soon as the technology cost drops below 1 cent per tag.

It is expected that “RFID will go through a process similar to what happened 20 years ago with bar-codes,” says Dan Mullen, president of AIM Global. “Initially, people thought they couldn’t afford the technology. As it became more widespread, the payback grew. Now companies couldn’t do without it. The emergence of RFID in the retail supply chain will drive further adoption. As companies imple- ment the technology deeper within their own operations, the return on investment will grow and applica- tions will expand.” However, they need to be reliable.

9 Adapted from “RFID After Compliance: Integration and Payback,” BusinessWeek, 20 November, 2004: 91–98.

232 Part 2 • Designing and Assuring Quality

BUILDING AN UNDERSTANDING OF SUPPLY CHAIN QUALITY MANAGEMENT

Recent work has been performed in the area of supply chain quality management that is helping us to understand this field better. A question remains that as business and engineering schools place more emphasis on supply chain management, what impact will this have on how we approach and teach quality management? Although our understanding is still preliminary, we are beginning to create a body of knowledge in this area. Supply chain quality management (SCQM) is defined as a systems-based approach to performance improvement that leverages opportunities created by upstream and downstream linkages with suppliers and customers. 10

In a recent study of supply chain quality practices, we asked supply chain managers to rank the quality tools they used. The ranking is shown in Table 9-3 . Note that all of these approaches and topics are addressed in this book.

10 For a review of recent research in supply chain quality, see Journal of Operations Management 26, 4 (2008) [special issue on supply chain quality], edited by S. Thomas Foster, Jr.

TABLE 9-3 Rankings of Tools for Supply Chain Professionals

Variable Ranking

Training 1 Data management 2 Supply chain management 3 Customer relationship management 4 Leadership 5 Benchmarking 6 Project management 7 Surveys 8 Complaint resolution 9 Supplier development 10

Summary In this chapter we focused on the front end of the supply chain. Supplier development holds the greatest quality-related benefit for manufacturing and services firms wishing to improve quality. After all, if you purchase components or supplies from another firm, to ensure high quality you need a process for making sure you can believe in the products and services you are receiving.

The ISO standard TS 16949 was presented here as a good example of how automakers are developing and evaluating their suppliers. Supplier development efforts have resulted in greatly improved product quality for many firms. Although this is one representative example, several firms are using approaches that are extensions of ISO 9000:2008. For newer suppliers, or where the situation dictates, acceptance sampling may be needed. This is discussed further in the appen- dix to this chapter.

As firms learn more about developing suppliers, new practices will emerge. The eventual goal of supplier development is that the supplier resembles a de facto subsidiary of your com- pany. This closer relationship between supplier and customer holds great potential for improved quality in products and services.

Chapter 9 • Managing Supplier Quality in the Supply Chain 233

Key Terms Acceptance sampling Chain of customers Dual sourcing Electronic data interchange

(EDI) Hidden factory ISO/TS 16949 QS 9000

Single sourcing Sole-source filters Supplier alliances Supplier audit Supplier certification or

qualification programs Supplier development

Supplier development programs

Supplier evaluation Supplier relationship

management systems (SRMS)

Supply chain

Supply chain quality management (SCQM)

Value chain Value-chain activities Value system Vendor-managed inventory

(VMI)

Discussion Questions 1. What is the supply value chain? How does the supply value chain help organizations manage their sup-

ply chains? 2. Describe the concept of the hidden factory. How can a realization that the hidden factory exists help

managers? 3. Think about a job you have had or an organization where you volunteered. Did this organization have

a hidden factory? If so, describe at least two activities that you would associate with the organization’s hidden factory.

4. Describe the concept of chain of customers. How does this concept benefit the ultimate consumer of a product or service?

5. What is the purpose of single sourcing? How can single sourcing help firms meet their quality objectives?

6. What are two of the most commonly used single-source filters? Do you believe these sources are appropriate? Explain your answer.

7. What is the purpose of a supplier certification or qualification program? What is the difference between a supplier certification program and a supplier development program?

8. How does electronic data interchange facilitate the supply chain process? 9. How does the contingency perspective apply to supplier partnering? 10. What is a supplier audit? How does a supplier audit differ from a supplier certification program? 11. Describe the concept referred to as supplier alliances. How does this concept differ from the tradi-

tional form of the supplier–customer relationship? 12. ISO/TS 16949 is a concept developed by Chrysler, Ford, and General Motors. Explain what ISO/TS

16949 is and how it has helped its developers. 13. Is ISO/TS 16949 a good thing for auto suppliers as well as auto manufacturers? Explain your answer. 14. How does ISO/TS 16949 differ from ISO 9000:2008? Is the distinction between the two quality con-

cepts important for the adopters of ISO/TS 16949? 15. What is acceptance sampling? Is acceptance sampling needed?

CASES

Case 9-1 AT&T: Setting High Standards for Suppliers and Rewarding Supplier Performance AT&T: www.att.com/wireless

with telephone service, the company provides a full array of wireless communications products for individ- uals and businesses.

If you live in California or frequently call someone in the California area, you have invariably done business with AT&T (formerly SBC). AT&T provides telephone service to the majority of California’s residents. Along

234 Part 2 • Designing and Assuring Quality

In an effort to increase quality and decrease costs, AT&T has been working hard to find new ways to man- age its supply chain. The result has been the develop- ment of a comprehensive program that sets high standards for suppliers and rewards exemplary supplier performance. The program begins with training. All of AT&T’s procurement managers are required to partici- pate in an Applied Total Quality program. The program consists of six 30-hour courses that teach TQM and supplier management. Suppliers also are encouraged to participate in the program at no cost.

The requirements that AT&T places on its sup- pliers are demanding but are communicated clearly to the suppliers in advance. For its top suppliers, a con- tract is negotiated on a yearly basis that defines the objectives of the relationship between AT&T and the supplier for the next year. Senior managers from AT&T and the supplier meet twice a year to discuss the performance of the relationship and iron out any problems that have occurred. AT&T’s minor suppliers receive a one-page Supplier Quality Report every month. AT&T and the supplier agree on criteria for performance in advance (e.g., on-time delivery, invoic- ing accuracy), and the supplier receives a score each month from AT&T based on its record. Both the com- pany and its suppliers take these reports very seriously. If a supplier receives a poor score, it typically calls AT&T to provide an explanation or ask for suggestions for improvement.

Although the company’s approach to supply management sounds rigid, the company works hard to develop lasting positive relationships with its suppli- ers. The company maintains a steady flow of commu- nications with its suppliers to work through any problem that might arise. For example, the company

has a toll-free 800 number that suppliers and potential suppliers can use to familiarize themselves with com- pany requirements. AT&T also asks its suppliers to tell it how it is doing, although this program has been only partially successful. According to the former executive director of contracting and supplier manage- ment at AT&T, “Suppliers are always leery of telling customers about their problems.” 11 As a result of sup- plier reluctance in this area, they are thinking about making the supplier feedback reports a requirement for certification.

To its credit, AT&T goes to great lengths to reward supplier performance. Goals are in place:

1. To communicate to suppliers that their internal quality processes and performance results are critical.

2. To demonstrate that quality pervades all aspects of the business relationship.

3. To share expectations and information to build partnerships toward world-class performance.

4. To recognize a supplier’s overall level of quality. There are three levels of recognition including the Gold Award, the Silver Award, and the Bronze Award. The Gold Award is awarded to the com- pany’s top suppliers. To win this award, a supplier must “delight” the company by providing supe- rior products/services and customer service for more than a year.

As the telecommunications industry continues to become more competitive, AT&T’s efforts to maximize the performance of its supply chain will undoubtedly intensify. Setting high standards for suppliers and reward- ing performance are the essence of this philosophy of supply chain management.

Discussion Questions

1. Do you believe that AT&T’s standards for its sup- pliers are too rigid? Why or why not?

2. Is the “Supplier Quality Report” a good idea or are monthly reports too frequent and intrusive? Explain your answer.

3. Do you believe suppliers should receive awards and designations of merit from the companies that purchase their products? Explain your answer.

Case 9-2 Managing the Supply Chain at Honeywell Honeywell: www.honeywell.com

If you own a home, work in an office building, or travel by air, the chances are excellent that a Honey-

well product has affected your life. The Honeywell Corporation is the world’s leading maker of control

11 George, S., and Weimerskirch, A., Total Quality Management (New York: Wiley, 1994), p. 190 .

Chapter 9 • Managing Supplier Quality in the Supply Chain 235

systems and related components for buildings, homes, industry, space, and aviation. The most recognizable Honeywell product is the automatic thermostat control for home heating that can be found in millions of U.S. homes. Less recognizable Honeywell products are used in commercial and military aircraft, industrial applications, home security systems, and the U.S. space program.

Like many companies, Honeywell is in a com- petitive environment that demands high-quality products at affordable prices. To meet these challenges, Honeywell has worked hard on its supply chain man- agement. In an effort to maximize the value that suppliers make to its business units, Honeywell has developed a distinctive approach to supplier manage- ment. The distinctive approach contains the following key components:

The company is shifting from a focus on price to a focus on total cost. As a result, the company does not always buy from the lowest price suppli- ers. Instead, it buys from the supplier that it believes will provide it the lowest cost in the “long term.”

The company is shifting toward longer- term relationships with its suppliers and is treat- ing its suppliers as if they are extensions of its own businesses rather than vendors.

The company is asking its suppliers to pro- vide business solutions, rather than simply drop- ping products off at the loading dock.

Rather than treating suppliers in an adver- sarial manner, Honeywell is treating its suppliers like business partners and is looking for opportu- nities to partner with suppliers in a wide variety of areas.

The motivation for these criteria is not grounded in better public relations or altruism, but in the belief that prudent supply chain management saves money and creates a competitive advantage. The company’s willingness to focus on issues other than price is cen- tral to the success of this philosophy. Commenting on this issue, a supply chain manager at Honeywell remarked, “We have to reengineer our mindset to focus on improving the benefits we can receive from the

suppliers versus just concentrating on prices. Many business organizations hold price so sacred that they miss the free things that suppliers will do for you.” 12 Good suppliers want to be closely scrutinized by their buyers, because it gives the suppliers a chance to showcase their on-time performance and other positive attributes.

The consistent theme that is reflected in all aspects of Honeywell’s approach to supply chain man- agement is an effort to maximize the value of its supplier relationships. The company asks a lot of its suppliers, from on-time deliveries to providing input on the design of Honeywell products. In exchange, Honeywell gives its preferred suppliers millions of dollars a year in business and conducts itself in a responsible manner by making payments on time and treating its suppliers with respect. This overall approach to supplier manage- ment creates what Honeywell believes is a win-win partnership between itself and its suppliers. The more Honeywell’s suppliers contribute to the profitability of its businesses, the more business Honeywell will give to its suppliers.

Although Honeywell is fully vested in its distinc- tive approach to supply chain management, the com- pany is also firmly committed to cost containment. Fortunately, supply chain management and cost con- tainment are not at odds at Honeywell. The firm is very careful about the suppliers it chooses and works hard to find the right mix of price and performance. Honeywell involves its suppliers in every aspect of improving the efficiency of the supply chain. This creates a healthy working relationship between Honeywell and its chan- nel partners.

Honeywell is firmly committed to prudent supply chain management. The company has quantified the results of its initiatives in several areas. For example, in terms of treating suppliers like business partners rather than arm’s-length vendors, the company has learned that “partners” rather than “vendors” produce more cost sav- ings, have better on-time delivery, supply better-quality products, and provide more suggestions for supply chain improvements. These results, along with positive results in other areas of the company’s approach to supply chain management, have affirmed to the company the value of its approach to supply chain management.

12 “How Honeywell Works to Gain Greater Value from Their Suppliers,” Supplier Selection & Management Report , The Institute of Management and Administration, http://www.ioma.com (2000).

236 Part 2 • Designing and Assuring Quality

Discussion Questions

1. Why does Honeywell spend so much time dealing with supply chain management issues? Wouldn’t the company be better off focusing on its own manufacturing operations? Explain your answer.

2. What aspect or aspects of Honeywell’s approach to supply chain management appear to be particularly

prudent? Can you suggest any additions to Hon- eywell’s supply chain management program?

3. Do you believe that Honeywell’s approach to sup- ply chain management creates a win-win situa- tion between the company and its suppliers? Why or why not?

CHAPTER 9 APPENDIX

Acceptance Sampling Fundamentals

Our problem is not just the outgoing; it starts with the incoming.

—S. T. Foster

In Chapter 9 , we introduced acceptance sampling. In this appendix, we start by discussing supply chain fundamentals. We then move into creating sampling plans. To understand when you should use these tools, refer to the discussion in Chapter 9 .

ACCEPTANCE SAMPLING FUNDAMENTALS

We define acceptance sampling as a statistical quality control technique used in deciding to accept or reject a shipment of input or output. When compared with statistical quality control, acceptance sampling is defined by its occurrence after production has been completed. Accep- tance sampling inspection can occur at the beginning of the process, such as when receiving components, parts, or raw materials from a supplier. Or it can occur at the end of production, as in the case of final inspection. Again, we focus here on inspection of incoming materials. One interesting application of acceptance sampling occurs with seed producers. Because of the bio- logical nature of seed, a supplier can place the seed on a truck in perfect condition, and the seed can arrive in an unsuitable state. Therefore, large bulk purchasers of seed and other agricultural products are avid users of acceptance sampling techniques.

Note that there are different methods for developing sampling plans. We discuss how to develop sampling plans using Dodge and Romig tables and OC curves.

PRODUCER’S AND CONSUMER’S RISK

Producer’s risk is the risk associated with rejecting a shipment of materials that has good qual- ity. Think of it this way. You are the producer of a product that has high quality. However, your customer has concluded that your product has poor quality and returns the product to you. In this case, you have been judged inaccurately. Consumer’s risk is the exact opposite. As a consumer, you receive a shipment of poor-quality product and believe it has good quality. Therefore, you pay for the product, use it in your production process, and suffer the consequences.

Producer’s risk is denoted by alpha (!) and is called a type I error . Consumer’s risk is denoted by beta (") and is referred to as a type II error . Table 9A-1 contrasts alpha and beta risk. The goal of acceptance sampling is to reduce producer’s risk to low levels while maintaining consumer’s risk at acceptable levels.

TABLE 9A-1 Alpha and Beta Risk

State of Nature

Product Is Good Product Is Defective

Outcome Consumer accepts product OK Consumer’s risk "

Consumer rejects product Producer’s risk ! OK

9A-1

9A-2

ACCEPTABLE QUALITY LEVEL

The acceptable quality level (AQL) is the maximum percentage or proportion of nonconform- ing items or number of nonconformities in a lot or batch that can be considered satisfactory as a process average. The AQL concept has been troublesome to many who consider it to condone an acceptance of less-than-perfect quality. To statisticians, AQL simply denotes an economic deci- sion that is associated with producer’s risk.

LOT TOLERANCE PERCENT DEFECTIVE (LTPD)

Lot tolerance percent defective (LTPD) is the level of poor quality included in a lot of goods. The difference between AQL and LTPD is sometimes confusing to students. Lots of AQL or bet- ter usually should have an alpha (that is, for example, a 5%) or less chance of rejection. AQL relates to type I error or producer’s risk. Producer’s risk is the probability that good products will be rejected by the consumer. For example, if a consumer concludes that an automobile is a lemon even though it is a great vehicle, a type I error has occurred. Lots of LTPD or worse should have a beta (that is, say, a 10%) or less chance of acceptance. LTPD relates to type II error or con- sumer’s risk. Conversely, consumer’s risk is the chance that an automobile that seems perfect is really a lemon. There is, theoretically, only one combination of sample size ( n ) and acceptance number ( c ) that meets both conditions simultaneously. In practice, we will be unable to meet both conditions precisely and must choose a combination of n and c that approximates both con- ditions simultaneously.

n AND c

For the most part, the assignment of AQL, LTPD, alpha (!), and beta (") is a management deci- sion. Once these values have been determined, n and c can be determined; these values in turn define the sampling plan. The bottom line in acceptance sampling is that acceptance sampling plans are designed to give us two things: n and c , where

n # the sample size of a particular sampling plan

c # a number that, if exceeded by the number of defectives in the sample, causes rejection of the lot (acceptance number)

The average sampling plan can be stated in simple terms: n # 20 and c # 2. This clearly communicates the bounds of the sampling plan. That is, take a sample of 20 items, and if more than 2 are defective, reject the lot of materials. Remember that you should always randomize when selecting products from a supplier to be inspected.

OC CURVES

The operating characteristic (OC) curve provides an assessment of the probabilities of accep- tance for a shipment, given the existing quality of the shipment. An OC curve is constructed to show the probability of accepting individual lots when the percent defective of the various indi- vidual lots is known or assumed to be at a given level. These curves also can be used to develop sampling plans.

Figure 9A-1 shows an OC curve for an optimal sampling plan. This ideal sampling plan shows that given a probability of acceptance of 98%, this sampling plan should be used. In this example, the probability of accepting a lot of goods with less than 3% defective is 100%. This means the customer has considered the trade-offs and has determined that a lot of materials with only 3% defective is acceptable given the circumstances.

However, OC curves never appear like the ideal case. Figure 9A-2 shows OC curves for a sample size of n # 100 and c # [0, 1, 2, 3]. Notice that as c gets smaller, the OC curve gets

Chapter 9 • Appendix 9A-3

steeper. Generally speaking, this means that higher values of c lead to higher probabilities of accepting bad shipments (consumer’s risk). Also, higher values of n affect the OC curves in such a way that we have greater confidence we have accepted a good shipment.

Figure 9A-3 shows an OC curve for n # 50 and c # 2 (for a lot of size 200; N , the entire population # 200). This shows that the probability of accepting (Pa) a lot with 2% defective product is 92%. Also, the chance of accepting a lot of 12% defective product is 6%. This means that if a lot has 2% defective, and this sampling plan is used (i.e., n # 50, c # 2), then the pro- ducer’s risk is 8%. Notice that if the lot really has much poorer quality—say, 8% defective—the chance of acceptance is quite low, about 24%. This means that there is a consumer’s risk of 24% with the poor-quality lot.

Pr ob

ab ili

ty o

f a cc

ep ta

nc e

Lot fraction nonconforming

P'

Pa

.01

1.00

.02 .03 .04

FIGURE 9A-1 Perfect Operating Characteristic (OC) Curve

Sample size n = 100

c = 3

c = 2 c = 1

c = 0

1.0

.8

.6

.4

.2

0 .10 .20 .30 .50 .60 .70 .80 Quality of shipment

Pr ob

ab ili

ty o

f a cc

ep tin

g sh

ip m

en t

.40

FIGURE 9A-2 Various OC Curves

9A-4

BUILDING AN OC CURVE

There are two ways to construct OC curves. The first uses the binomial distribution, and the sec- ond, the Poisson distribution. For simplicity, we use the Poisson distribution. Using a sample size n and average percent defective p , we can develop an OC curve using a Poisson approximation of a binomial distribution.

EXAMPLE 9A-1 OC Curves

Problem: Let’s suppose we use a sampling plan with N # 200, n # 50, and c # 2. In the past, good-quality shipments from suppliers had about 1% defective, and poor-quality shipments had about 6% defective. We desire to know producer’s and consumer’s risk. Using Figure 9A-3 , compute these probabilities.

Solution: From Figure 9A-3 , it appears that the probability of acceptance of a good lot is 99%. This translates to a producer’s risk of 1%. It also appears that the probability of accepting a poor lot is 42%. This is consumer’s risk.

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14

Pr ob

ab ili

ty o

f a cc

ep ta

nc e,

P a

Fraction nonconforming

Good quality (AQL)

Poor quality (LTPD)

Producer’s Risk = = .08

Consumer’s Risk = = 0.24

α

β

FIGURE 9A-3 OC Curve for the Sampling Plan N ! 200, n ! 50, c ! 2

Chapter 9 • Appendix 9A-5

Rather than computing the distributions from formulas, we rely on tables that have been developed for simplicity in computing single-sampling plans . Single sampling means that we use only one value of c to make a decision. Multiple-sampling plans are discussed later. The Dodge–Romig table 1 in Figure 9A-4 shows a table that was developed to simplify such calcula- tions. While holding c and n constant, we can vary the percent defective p to calculate various points on the OC curve.

Steps in using Figure 9A-4 to develop an OC curve:

1. Select values of p for percent defective in a shipment. 2. Multiply these values of np (where n is your sample size). 3. Using these values of np , go to Figure 9A-4 and find Pa (probability of acceptance). 4. Draw the OC curve.

1 Dodge, H., and Romig, H., Sampling Inspection Tables (New York: Wiley, 1959).

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 2 3 4 5 6 7 8 9 10 20 30 0.00001

0.0001

0.001

0.01 0.1

0.2 0.3 0.4 0.5 0.6 0.7 0.8

0.9

0.99

0.999

0.9999

0.99999

0.00001

0.0001

0.001

0.01 0.1

0.2 0.3 0.4 0.5 0.6 0.7 0.8

0.9

0.99

0.999

0.9999

0.99999 c = 50c = 3

c = 2

c = 1

c = 0

c = 5

c = 0 c = 5

c = 6

0

1 2

3 4

5 6 7

89 10

15

20

30

40

30

20

15

10

4030201510987

10 9

8 7

6 5

5

4

4

3

3

2

2

1

1

0

4 Pr

ob ab

ili ty

o f a

cc ep

tin g

sh ip

m en

t w ith

c or

fe w

er d

ef ec

tiv e

un its

. P a

Value of np

50

FIGURE 9A-4 Probability Curves for Poisson Distribution Source: H. F. Dodge and H. G. Romig, Sampling Inspection Tables (New York: John Wiley & Sons, 1959). Reprinted by permission of John Wiley & Sons, Inc.

EXAMPLE 9A-2 Developing Single-Sampling Plans Using OC Curves and the Dodge-Romig Table

Problem: We would like to develop an OC curve for a good single-sampling plan using the Dodge-Romig table provided in Figure 9A-4 . Our sample size n is 60 and maximum c is 2.

Solution: Table 9A-2 shows the resulting values needed to construct the OC curve. The values of P a are drawn from the Dodge-Romig graph ( Figure 9A-4 ). Figure 9A-5 shows the resulting OC curve.

9A-6

ESTIMATING AQL AND LTPD

OC curves can be used to estimate both AQLs and LTPDs. MIL STD 105 (also known as ANSI/ ASQC Z1.4) is a military standard for sampling procedures and tables for attributes that state that AQLs and LTPDs of sampling plans should always be documented. Figure 9A-6 shows an OC curve for a single-sampling plan with n # 50 and c # 1. The AQL is generally stated with a 95% chance of acceptance (! # 0.05). In Figure 9A-6 , the AQL value is 72%. The LTPD is gen- erally stated at a 10% chance of acceptance. In this case, the LTPD value is 7.6%. At the LTPD, 90% of the lots are rejected. 2

2 Taylor, W., “Selecting Statistically Valid Sampling Plans,” Quality Engineering 10, 2 (1997): 365–370.

TABLE 9A-2 OC Curve Probabilities ( c # 2)

p n np P a p n np P a

.005 60 0.30 .996 .055 60 3.30 .460 .015 60 0.90 .940 .065 60 3.90 .340 .025 60 1.50 .840 .075 60 4.50 .200 .035 60 2.10 .680 .085 60 5.10 .160 .045 60 2.70 .550 .095 60 5.70 .120 .050 60 3.00 .500 .105 60 6.30 .080

1.00

.90

.80

.70

.60

.50

.40

.30

.20

.10

0 .01 .02 .03 .04 .05 .06 .07 .08 .09 .10 .11 .12

Pr ob

ab ili

ty o

f a cc

ep ta

nc e

of s

hi pm

en t

Quality of shipment (in fraction defective)

.080 .120

.160 .200

.340

.460 .500

.550

.680

.840

.940 .996

FIGURE 9A-5 Resulting OC Curve for n = 60, c = 2

Chapter 9 • Appendix 9A-7

MORE COMPLEX SAMPLING PLANS

So far we have focused on sampling plans for single samples. This is not the limit of sampling plans. More complex sampling plans are referred to as multiple-sampling plans or sequential- sampling plans. With these sampling plans, the acceptance sampling rules might occur as follows:

n 1 # sample size for sample 1

n 2 # sample size for sample 2

n n # sample size for sample n

c 1 # acceptance number for sample 1

c 2 # acceptance number for sample 2

c n # acceptance number for sample n

r 1 # rejection number for sample 1

r 2 # rejection number for sample 2

r n # rejection number for sample n

Multiple-sampling plans have advantages over single-sampling plans. The sample size used in multiple-sampling plans will be smaller, on average, with the same amount of protection as a single-sampling plan. The decision to use multiple-sampling plans usually will be made in the first phase of the sample. Example 9A-3 provides an illustration of a double-sampling plan.

1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0 1 2 3 4 5 6 7 8 9 100

Percent defective LTPD = 7.6%3%AQL = 0.72%

0.56 Pr

ob ab

ili ty

o f a

cc ep

ta nc

e

EXAMPLE 9A-3 Demonstrating a Double-Sampling Plan

Problem: An engineer adopted a double-sampling plan with the following values: n 1 # 40, c 1 # 1, n 2 # 60, c 2 # 5. r 1 and r 2 are 5 and 6, respectively. Explain to management how this double- sampling plan works.

Solution: Forty items from the incoming lot are drawn at random. If one or zero defective pieces are found, accept the lot. If five or more defective pieces are found, reject the lot. If between two

FIGURE 9A-6 OC Curve of Single- Sampling Plan n ! 50 and c ! 1 Source: Adapted from W. Taylor, “Selecting Statistically Valid Sampling Plans,” Quality Engineering 10, 2 (1997): 365–370.

9A-8

DEVELOPING DOUBLE-SAMPLING PLANS

Although OC curves can be used to develop double-sampling plans, the calculations to develop the OC curves are much more complex than for single-sample plans. For this reason, we use a standard approach that is used by many practitioners. The main limitation of this plan is that sample sizes must be specified, as well as AQL, LTPD, producer’s risk, and consumer’s risk.

The double-sampling plan we develop has the following parameters:

AQL # 0.020

LTPD # 0.040

Producer’s risk # 0.05

Consumer’s risk # 0.10

n 1 # .5 n 2

First, we start by computing the ratio (R in Table 9A-3) of LTPD to AQL:

LTPD/AQL # 0.040/0.020 # 2 (9A.1)

The parameters for the appropriate double-sampling plan are found in Tables 9A-3 and 9A-4. Table 9A-3 is used when n 1 # n 2 , and Table 9A-4 is used when n 1 # 0.5 n 2 . For this example, we use Table 9A-4 because n 2 is twice the size of n 1 .

and four pieces inclusive are found defective, perform a second sample with 60 pieces. If the combined number of defective pieces in both samples is less than or equal to five, the lot can be accepted.

TABLE 9A-3 Values for Constructing a Double-Sampling Plan Having a Specified p $ 1 and p $ 2 ( n 1 # n 2 , ! # 0.05, " # 0.10)

Plan Number R ! p" 2 /p" 1

Acceptance Numbers

Approximate Values of p "n 1 Approximate

(ASN)/n 1 for 0.95 Point a c 1 c 2 0.95

1 11.90 0 1 0.21 1.170 2 7.54 1 2 0.52 1.081 3 6.79 0 2 0.43 1.340 4 5.39 1 3 0.76 1.169 5 4.65 2 4 1.16 1.105 6 4.25 1 4 1.04 1.274 7 3.88 2 5 1.43 1.170 8 3.63 3 6 1.87 1.117 9 3.38 2 6 1.72 1.248

10 3.21 3 7 2.15 1.173 11 3.09 4 8 2.62 1.124 12 2.85 4 9 2.90 1.167 13 2.60 5 11 3.68 1.166 14 2.44 5 12 4.00 1.215 15 2.32 5 13 4.35 1.271 16 2.22 5 14 4.70 1.331 17 2.12 5 16 5.39 1.452

a ASN is without curtailment on the second sample.

Source: Chemical Corps Engineering Agency, Manual No. 2: Master Sampling Plans for Single, Duplicate, Double and Multiple Sampling (Edgewood Arsenal, MD: Army Chemical Center, 1953).

Chapter 9 • Appendix 9A-9

Because LTPD/AQL was 2, in Table 9A-4 we find we will use double-sampling plan num- ber 15 (because 1.97 is closest to our value of 2). We see immediately that c 1 and c 2 are 4 and 20, respectively. Next, we compute the sample size by using either column 5 or 6 from the table. If we want to use a probability of acceptance of 0.95, we use column 5. For sample plan 15, the value of p$ n 1 is 4.75. Then we compute n 1 as

n1 # p'n0.95/AQL # 4.75/0.020 # 237.5 ! 238 (9A.2)

As we can see, n 1 # 238 and n 2 = 475 (remember that n 2 is twice the size of n 1 ). These are rather large sample plans. We may want to reconsider our parameters to reduce these sample sizes.

We also can use this approach to determine a double-sampling plan if we want to maintain consumer’s risk at a low level. To do this, we use column 7 of Table 9A-4 . If we wish to hold that value of consumer’s risk to 0.10, we can use the column 7 value of plan number 15 of 9.35. Using Formula 9A.2:

n 1 # p$ n 0.95 /AQL

9.35/0.020 # 467.5 or 468 (rounding)

n 2 # 935 (remember that n 2 is twice the size of n 1 , before rounding)

c 1 and c 2 are 4 and 20, respectively

Again, because this sampling plan has large sample sizes, we may be wise to experiment with other parameters to find alternative sampling plans that meet targets for acceptance.

TABLE 9A-4 Values for Constructing a Double-Sampling Plan Having a Specified p $ 1 and p $ 2 ( n 1 # .5 n 2 , ! # 0.05, " # 0.10)

Plan Number R ! p$ 2 /p$ 1

Acceptance Numbers

Approximate Values of p "n 1 Approximate

(ASN)/n 1 for 0.95 Point a c 1 c 2 0.95

1 14.50 0 1 0.16 1.273 2 8.07 0 2 0.30 1.511 3 6.48 1 3 0.60 1.238 4 5.39 0 3 0.49 1.771 5 5.09 1 4 0.77 1.359 6 4.31 0 4 0.68 1.985 7 4.19 1 5 0.96 1.498 8 3.60 1 6 1.16 1.646 9 3.26 2 8 1.68 1.476 10 2.96 3 10 2.27 1.388 11 2.77 3 11 2.46 1.468 12 2.62 4 13 3.07 1.394 13 2.46 4 14 3.29 1.472 14 2.21 3 15 3.41 1.888 15 1.97 4 20 4.75 2.029 16 1.74 6 30 7.45 2.230

a ASN is without curtailment on the second sample.

Source: Chemical Corps Engineering Agency, Manual No. 2: Master Sampling Plans for Single, Duplicate, Double and Multiple Sampling (Edgewood Arsenal, MD: Army Chemical Center, 1953).

9A-10

Summary The single- and double-sampling plans we have discussed are called lot-by-lot sampling plans . As we perform separate samples, we receive additional lots of materials. Sometimes it is not feasible to collect products into lots because they are produced in a continuous manner. In these cases, acceptance sampling procedures for continuous production are used. These procedures typically involve alternating between 100% inspection and sampling inspection. Although we did not develop a methodology for continuous acceptance sampling here, MIL STD 1235C (1988), named “Single and Multiple-Level Continuous Sampling Procedures and Table for Inspection by Attributes,” is available from the Department of Defense. Any of the military stan- dards mentioned in this appendix can be ordered from the Department of Defense directly by accessing the DOD SSP on the Internet (Department of Defense Single Stock Point for Specifi- cations and Standards). The URL is http://dodssp.daps.dla.mil/ .

Key Terms Acceptable quality level

(AQL) Consumer’s risk

Lot tolerance percent defective (LTPD)

Operating characteristic (OC) curve

Producer’s risk Sampling plan

Discussion Questions 1. Define producer’s risk and consumer’s risk. 2. Define the concept of acceptable quality level. Why has this concept been troublesome to many

people? 3. What is the term used to designate the level of poor quality included in a lot of goods? Describe the

role of this term in the quality management process. 4. What is an operating characteristic curve? What is the function of this curve in the quality manage-

ment process?

Problems 1. Using Figure 9A-2 , with a sample size of n # 100 and an acceptance number c # 1, if a good shipment

has no more than 0.05 defective, what is the probability of acceptance? What type of risk is this? 2. Using Figure 9A-2 , with a sample size of n # 100 and an acceptance number of c # 2, if a bad ship-

ment has 40% defective, what is the probability of acceptance? What type of risk is this? 3. Using Figure 9A-2 , with a sample size of n # 100 and an acceptance number of c # 3, if a good ship-

ment has no more than .02 defective, what is the probability of acceptance? What type of risk is this? 4. Using Figure 9A-2 , with a sample size of n # 100 and an acceptance number of c # 1, if a good ship-

ment has no more than .30 defective, what is the probability of acceptance? What type of risk is this? 5. Develop an OC curve using Figure 9A-4 , a sample size of 100, and the following p values: .01, .02,

.03, .05, .07, .09, .11, .13, .15, .17, .19, .21. The maximum acceptance number is c # 2. 6. From the OC curve developed in Problem 5, if a good shipment is 0.02 defective, what is the probabil-

ity of a type I (producer’s) error? 7. From the OC curve developed in Problem 5, if a bad shipment is defined as having at least 10% defec-

tive, what is your estimate of type II (consumer’s) risk? 8. Develop an OC curve using Figure 9A-4 , a sample size of 100, and the following p values: .01, .02,

.03, .05, .07, .09, .11, .13, .15. The maximum acceptance number is c # 4.

Chapter 9 • Appendix 9A-11

9. From the OC curve developed in Problem 8, if a good shipment is .04 defective, what is the probability of a type I (producer’s) error?

10. From the OC curve developed in Problem 8, if a bad shipment is defined as having at least 15% defec- tive, what is your estimate of type II (consumer’s risk) error?

11. Develop an OC curve using Figure 9A-4 , a sample size of 100, and the following p values: 0.01, 0.02, 0.03, 0.05, 0.07, 0.09, 0.11, 0.13, 0.15, 0.17, 0.19, 0.21. The maximum acceptance number is c # 3.

12. From the OC curve developed in Problem 11, if a good shipment has 5% defective, what is the prob- ability of type I error? How is type I error defined?

13. From the OC curve in Problem 11, if a bad shipment has more than 20% defective, what is the proba- bility of accepting a bad shipment?

14. Interpret the following sampling plan in plain English:

n 1 # 50 c 1 # 2 n 2 # 100 c 2 # 5 r 1 # 4 r 2 # 6

15. Interpret the following sampling plan in plain English:

n 1 # 125 c 1 # 3 n 2 # 150 c 2 # 6 n 3 # 200 c 3 # 12

16. We wish to develop a double-sampling plan where n 1 # n 2 (see Table 9A-3 ). Here are the needed parameters:

AQL # .010 LTPD # .030 Producer’s risk # .05 Consumer’s risk # .10

17. Rework Problem 16 where n 2 is twice the size of n 1 (see Table 9A-4 ). 18. We wish to develop a double-sampling plan where n 1 # n 2 ( Table 9A-3 ). Here are the needed

parameters:

AQL # .020 LTPD # .080 Producer’s risk # .05 Consumer’s risk # .10

19. Rework Problem 18 where n 2 is twice the size of n 1 ( Table 9A-4 ). 20. Your boss wants you to develop a double-sampling plan where n 1 # n 2 (using Table 9A-3 ). Here are

some parameters for your use:

AQL # .015 LTPD # .040 Producer’s risk # .05 Consumer’s risk # .10

21. Rework Problem 20 where n 2 is twice the size of n 1 ( Table 9A-4 ).

P A R T T H R E E

Implementing Quality

Everyone will tell you that the conceptual stuff is nice, but how do you actually implement quality throughout your supply chain? Once you understand and have planned and designed where you want to go, the tools of quality provide an important basis for improvement. More than 90% of successful quality implementations involve the basic tools of quality. These should be used and commonly practiced in most companies. Chapter 10 introduces the seven managerial tools for quality improvement. These tools are behavioral and help managers to optimize the use of team processes.

In Chapters 11 and 12 you will learn about an efficient and effective method for teaching statistical quality and x

_ R, p, np, u , and c charts (among others). Many of the

behavioral implications of statistical process control are also discussed. Chapter 13 introduces Lean-Six Sigma. This is a widely adopted method for

improving the designs of products and processes to assure quality.

When we introduce a particular method of doing a job, it is natural to consider whether the method is appropriate or not. The decision is

usually based on past results and experience, or perhaps on conventional methods. Procedures will be most effective if a proper evaluation is

made, and on-the-job data are essential for making a proper evaluation.

—Kaoru Ishikawa,

Quality Tools Inventor 1

C H A P T E R 1 0

The Tools of Quality

238

Quality improvement in manufacturing or services, to be effective, should address the needs of the system as a whole. In this book we have addressed quality management from an integrative perspective. This perspective has encompassed the many functional areas of business, including supply chain management, marketing, accounting, human resources, operations, engineering, and strategy. None of these fields of endeavor operate in a vacuum. They are all interrelated and interdependent.

IMPROVING THE SYSTEM

To be successful, a business or organization must balance the needs of these different functional areas around a coherent business vision and strategy. The objective of the system is to satisfy the customer. Customer satisfaction means higher customer retention, which leads to improved profitability.

A quality system ( Figure 10-1 ) uses the business model with a focus on the customer and includes the dynamics of continual improvement, change, planning, and renewal. Continual improvement is necessary for a company to learn to grow. Companies that are unable to adapt find themselves with stagnant cultures and labor forces. Many managers, on discovering that their organization has reached this point, believe they must resort to draconian measures such as layoffs and organizational reengineering to achieve change. If they had pursued continual improvement and learning in the first place, they might not have reached this juncture.

1 Ishikawa, K., “Guide to Quality Control,” Asia Productivity Organization, Tokyo, Japan, 1985.

Chapter 10 • The Tools of Quality 239

This quality system (which is discussed in greater depth in Chapter 15 ) is not just a series of variables and relationships. It is an interconnected, interdisciplinary network of people, tech- nology, procedures, markets, customers, facilities, legal requirements, reporting requirements, and assets that interact to achieve an end. The most important aspect of the system is the people. People are the engine of creativity and innovation. Technology is very good at performing rote tasks; however, technology in and of itself cannot innovate. Therefore, how we manage people may be the most important key in this system to unlock an organization’s potential. W. Edwards Deming was always adamant that we should continually and forever improve the system of pro- duction. The system includes people.

In this chapter we introduce the basic seven (B7) tools of quality and the new seven (N7) tools (also referred to as the managerial tools ). The seven basic tools are simple to use in con- tinuous improvement efforts. The tools often are used by individuals and in teams, are useful at all levels of the organization, and can be applied by people of different educational levels. As you learn and apply the tools of quality, you, too, will appreciate their wide application and usefulness.

ISHIKAWA’S BASIC SEVEN TOOLS OF QUALITY

The basic seven tools of quality may be used in a logical order. Note that this is only a “typical” order of use for these tools. They can be used in almost any order. Figure 10-2 shows this order. The flowchart gives the team the big picture of the process to be improved. Process data are col- lected using a check sheet. The data are analyzed using either histograms, scatter plots, or control

Processes

Information and Finance

Closeness to Customers

Culture

Organizational Learning and Knowledge

People

Customer Service

Enterprise Capabilities Quality

Planning and

Management

Quality Control

Quality Assurance

Integrative Approach

FIGURE 10-1 Quality System Model

240 Part 3 • Implementing Quality

charts. The root causes of the problems associated with the process are identified using a cause- and-effect diagram. Finally, causes are prioritized using Pareto analysis. These tools are dis- cussed in more depth on the following pages.

Process Maps

A process map is a picture of a process. The first step in many process improvement projects is to create a map of the process as it exists. This useful step also determines the parameters for process improvement. The concept is that we must know the process before we can improve it.

The language of process maps can vary from the simple to the complex. A simple set of symbols is provided in Figure 10-3 . The diamond indicates there is a decision to be made. Often these identify different paths of sequences in the process map. The parallelogram appears when- ever materials, forms, or tools enter or leave the process. The rectangle is the processing symbol— the work that is actually performed. The start/stop symbol and the page connector are used for the convenience of the people using the process map. A few simple rules for process maps follow:

• Use these simple symbols to chart the process from the beginning, with all arcs in the pro- cess map leaving and entering a symbol. The arcs represent the progression from one step to the next. (See A Closer Look at Quality 10-1 .)

• Develop a general process map and then fill it out by adding more detail or a subflowchart to each of the elements.

Process Maps

Check Sheets

MediumEarly Stages Final Stages

Histo- grams

Scatter Plots

Cause &

Effect Diagrams

Control Charts

Pareto Analysis

FIGURE 10-2 Logical Map of the Order for the Basic Seven (B7) Tools Source: Based on M. Brassard, The Memory Jogger II , published by GOAL/QPC, 2 Manor Parkway, Salem, New Hampshire, 2004. Reprinted with permission of GOAL/QPC.

Decision

Input/Output

Flowline

Processing

Start/Stop

Page connector

FIGURE 10-3 Basic Mapping Symbols

Chapter 10 • The Tools of Quality 241

• Step through the process by interviewing those who perform it—as they do the work. • Determine which steps add value and which don’t in an effort to simplify the work. • Before simplifying work, determine whether the work really needs to be done in the first

place.

The process map in Figure 10-4 shows a simple process used in a city planning department to issue permits allowing applicants to take possession of newly built homes. Figure 10-4 shows the current process. In Figure 10-5 the process is simplified because the front desk is given more authority and training to process the forms without assigning them for analyst review. The analyst review does not add value for the organization or the customer. Therefore, it can be eliminated. Steps in process mapping include

1. Settling on a standard set of process mapping symbols to be used. 2. Clearly communicating the purpose of the process map to all the individuals involved in

the exercise.

Start

Customer submits

application

Complete? No

Yes

Log-in by department specialist

Action letter

Analyst reviews

Deputy director assigns

Action? No

Yes

Site visit

Appealed

Back to beginning depending on appeal

Withdrawn by applicant

Research

FIGURE 10-4 Process Mapping: Home Occupation Process— Current

242 Part 3 • Implementing Quality

3. Observing the work being performed by shadowing the workers performing the work. 4. Developing a map of the process. 5. Reviewing the process map with the employees to make needed changes and adjustments

to the process map. (Note that it is often helpful to chart processes from the customer’s point of view in addition to the worker’s point of view.)

6. Develop a map of the improved process.

A special type of process map is called a SIPOC diagram. SIPOC is an acronym for sup- pliers, inputs, processes, outputs, and customers. This type of diagram is useful when it is not clear who are your customers, where specifications for inputs exist, and in clarifying customer requirements. SIPOC diagrams are often used in Six Sigma projects.

Start

Customer submits

application

Complete? No

Front desk

reviews

Action letter

Front desk for decision

Department specialist

logs in

Action? Denied

Yes

Yes

Appealed

Back to beginning depending on appeal

Withdrawn by applicant

FIGURE 10-5 Process Mapping: Home Occupation Process— Proposed

Chapter 10 • The Tools of Quality 243

C le

ri ca

l S ta

ff A

pp lic

an t Drilling permit application submitted to Department of Water

Resources by owner, representative, or driller (application package may include other documents such as maps

and schematics)

Application for drilling permit received with fee

Receipt printed

Fee processed

Is fee required?

Yes

Yes

No

No

Application reviewed for completeness

Pull tag Scan permit documents

and enter data into required fields

Send e-mail to professional staff that permit documents are available

on computer for review

Box paper permit documents for storage

Send tag and receipt to professional staff A

Return to applicant

Application complete?

FIGURE 10-6 Process Map with Responsibility of Existing Process

EXAMPLE 10.1 Process Maps

Problem: The well construction unit of a state department of water resources entered into a mul- tiyear project to update its database management system. As part of the process, the well con- struction staff was asked to document its current process flows.

Solution: The resulting process map is shown in Figure 10-6 . Through a brainstorming process, the well construction team was asked to rethink its processes to simplify the work- flow and to take advantage of new technology. The team worked together to develop the new process. This resulted in a streamlined flow that required less time for drillers to receive permits.

244 Part 3 • Implementing Quality

P ro

fe ss

io na

l S ta

ff A

Review application package images on computer for regulatory compliance

Check drill site location relative to ADC, GWMA,

or CGWA using spatial computer tools

Is monitoring the well program required by government

or in an ADC?

Send back for certification

Are documents certified

by P.E. or P.G.? Develop conditions for permit approval

Prepare draft permit for management review

Approve? Yes

No

Yes

No

Yes

Print permit copies for applicant signature;

original to files

Paper files Prepare letter

of denial Return to applicant

Petition for reconsideration

St af

f M

an ag

er

No

FIGURE 10-6 (Continued)

A CLOSER LOOK AT QUALITY 10-1 Extended Value Stream Mapping of Supply Chains

Process maps are being used in the improvement of supply chain processes. Customers and suppliers can collaborate to improve supply chains. This type of mapping has been referred to as extended supply chain mapping. Figure 10-7A shows a supply chain map for Global Corp. This includes supplier processes, receiving, internal processes, shipping, and customer service processes.

Figure 10-7B shows a map of the improved process. Some comparisons of the existing and improved processes are as follows:

Results Metrics Prior State Improved State % Improvement

Lead time (days) 54 18 60 WIP (days) 11 1 91 Flexibility Limited 9% increase per week 300/year Unit price $12,000 $10,000 16

Chapter 10 • The Tools of Quality 245

Global Corp. Mexico

Assembly Distribution

Assembly Distribution Global Corp.

Central American HQ

8 Wk Forecast

Monthly

5 Wk Forecast

Global Corp. Warehousing

Twice Weekly

Daily

INTER MODAL CHANGE

Central American Supplier

Assembly Plant USA

Distance Traveled: 70 miles

Lead Time = 54 days12 days

6X/YR

3 days

4 days

35 days

Travel

Distance Traveled: 2000 miles Transport Time: 12 days

Distance Traveled: 700 miles, Transport Time: 3 days

3 days

Weekly

Lead Time = 23.0 days VA/T = 118.0 seconds RM = 10.0 days WP = 3.0 days FG = 10.0 days PCE = 0.0194%

FIGURE 10-7A Global Corp. Prior-State Extended Value Stream Map

Central American

Aluminium Company

Once Weekly

3 days

5 days

Mexico

Distribution USAGlobal Corp.

C.A. PROD CTRL

Sales

PROD CTRL

Daily

Daily

Daily

Assembly Plant USA

Global Corp. Canada

(Ontario)

Global Corp. Mexico

14 days

3 days 1 day Lead Time = 18 days

FIGURE 10-7B Global Corp. Ideal-State Extended Value Stream Map

246 Part 3 • Implementing Quality

Check Sheets

Check sheets are data-gathering tools that can be used in forming histograms; they can be either tabular, computer based, or schematic. An example of a tabular check sheet for a Pareto chart is shown in Figure 10-8 . This provides a chart for copier operators to mark each time a delay occurs in setting up new jobs.

Setting up a check sheet involves the following steps:

1. Identify common defects occurring in the process. 2. Draw a table with common defects in the left column and time period across the tops of the

columns (see Figure 10-8 ) to track the defects. 3. The user of the check sheet then places checkmarks on the sheet whenever the defect is

encountered.

EXAMPLE 10.2 Check Sheets

Problem: A copying company desires to set up a check sheet so that it can keep track of the sources of errors. Below are the major error types with frequencies.

Solution: Figure 10-8 showed a check sheet for these data. The check sheet will be kept to monitor how well workers are adhering to the new procedures.

Problem Type

Setup routines not standardized

M on

da y

Tu es

da y

W ed

ne sd

ay

T hu

rs da

y

Fr id

ay

To ta

l

Missing equipment for setup

Failure to separate internal and external tasks Extensive machine resetting and paper change

Other

FIGURE 10-8 Copier Problem Check Sheet

Type of Problem Frequency Percentage

Setup routines are not standardized 315 52.1% Equipment needed for setup is missing 124 20.5 Internal and external setup tasks are not separated 87 14.4 Extensive machine resetting and paper change are needed 56 9.2 Other 23 3.8 Total 605 100%

Chapter 10 • The Tools of Quality 247

Histograms

As shown in Figure 10-9 , histograms are simply graphical representations of data in a bar format. (Note that a frequency chart is used for categorical data, while histograms are used for continuous numerical data.) Histograms are also used to observe the shape of data (see Figure 10-9 ). For example, how are the data in an interval scale distributed? There are several rules for developing histograms:

• The width of the histogram bars must be consistent (i.e., class widths are the same where each bar contains a single class).

• The classes must be mutually exclusive and all-inclusive ( or collective exhaustive) . • A good rule of thumb for the number of classes is given by the model

2k ! n (10.1)

where n is the number of raw data values and k is the number of classes. Solving this equa- tion for k , we obtain

k ! log n/ log 2 (10.2)

Using this formula, we find

0.75 2.15 3.55 4.95 6.35 7.75 9.15

FIGURE 10-9 Histogram from Example 10.3

Number of Observations Number of Classes

9 to 16 4 17 to 32 5 33 to 64 6 65 to 128 7 129 to 256 8

EXAMPLE 10.3 Histograms

Problem: The Big City Cafeteria wants to determine the distribution of its sales during lunch- time. On a given day the manager randomly selects 40 sales from the sales register receipt. The following table shows the sales (in dollars):

248 Part 3 • Implementing Quality

Develop a histogram of the sales.

Solution: It is helpful to compute the mean, standard deviation, maximum value, and minimum value when developing a histogram because the histogram is often used to determine if the data are normally distributed. Following are these statistics from the previously given data:

Mean " 4.20 Maximum value " 8.95 Minimum value " .79 Difference " 8.16 Sum " 168 Using Formula (10.2)

k ! log 40/log 2 k ! 5.32

The number of classes is 6. Therefore, Classes " 6 Class width " 8.16/6 " 1.36 # 1.40 Classes " 0.76–2.15; 2.16–3.55; 3.56–4.95; 4.96–6.35; 6.36–7.75; 7.76–9.15

The histogram is displayed in Figure 10-9 . Thus the manager finds that sales occur in a skewed distribution with a mean of $4.20.

Scatter Diagrams

The scatter diagram or scatter plot is used to examine the relationships between variables. These relationships are sometimes used to identify indicator variables in organizations. For example, in a hospital, the postoperative infection rate has been found to be associated with many different factors such as the sterile procedures used by the doctors and nurses, cleanli- ness of the operating rooms, and sterile procedures in handling the utensils used in surgery. Therefore, the postoperative infection rate is an important variable for hospital quality measurement.

It is quite easy to develop scatter plots using the charting facilities in spreadsheet packages such as Excel. Figure 10-10 shows a scatter plot of the relationship between conformance data and prevention and appraisal quality-related costs in a real firm. Note that the figure shows the unexpected outcome of higher quality costs with higher levels of conformance. Later analysis showed that this firm was trying to “inspect in” quality, meaning that it was throwing a lot of in-process work away as a result of more rigorous inspection. Use the following steps in setting up a scatter plot:

1. Determine your x (independent) and y (dependent) variables. 2. Gather process data relating to the variables identified in step 1.

4.51 0.79 4.19 2.29 5.96 3.49 2.25 3.45 2.24 5.25 5.36 1.15 7.28 5.25 4.29 5.25 3.96 6.79 4.66 3.56 8.22 2.56 5.25 3.33 5.55 2.24 8.95 2.49 5.25 2.26 0.79 5.25 4.11 6.11 5.25 4.56 1.15 5.25 2.21 5.25

Chapter 10 • The Tools of Quality 249

3. Plot the data on a two-dimensional plane. 4. Observe the plotted data to see whether there is a relationship between the variables.

(Note that it is helpful to plot the data in Excel or another spreadsheet and to perform a correlation test to determine whether the variables have a statistically significant relationship.)

EXAMPLE 10.4 Scatter Diagrams

Problem: Healthy People, Inc., a company specializing in home health care solutions for U.S. consumers, was a growing company. The company wished to study the relationship between absenteeism and the number of overtime hours worked by employees. Thirty employees were randomly selected, and numbers of overtime hours were graphed against numbers of days absent for the previous year (see Figure 10-11 ).

100

80

60

40

20

0 60 70 80

Conformance 90 10050

Pr ev

en tio

n an

d ap

pr ai

sa l c

os ts

FIGURE 10-10 Prevention Costs and Conformance

7

6

5

4

3

2

1

0 100500 150 200 250 300

Hours of overtime 350 400 450 500

D ay

s ab

se nt

Series 1

FIGURE 10-11 Scatter Plot of Overtime Hours versus Days Absent

250 Part 3 • Implementing Quality

This analysis showed that there appeared to be a positive relationship between number of days absent and hours of overtime. Subsequent analysis showed that, in fact, these variables were significantly related. This led management to recalculate the actual cost of overtime.

Control Charts

Control charts are used to determine whether a process will produce a product or service with consistent measurable properties. Because control charts are discussed in Chapters 11 and 12 , they will not be presented in detail here. Figure 10-12 illustrates two control charts usually used together.

Cause-and-Effect (Ishikawa) Diagrams

Often workers spend too much time focusing improvement efforts on the symptoms of prob- lems rather than on the causes. The Ishikawa cause-and-effect or fishbone or Ishikawa diagram is a good tool to help us move to lower levels of abstraction in solving problems. The diagram looks like the skeleton of a fish, with the problem being the head of the fish, major causes being the “ribs” of the fish, and subcauses forming smaller “bones” off the ribs.

Employee Hours of Overtime Days Absent

1 243 3 2 126 2 3 86 0 4 424 6 5 236 3 6 128 0 7 0 0 8 126 2 9 324 3 10 118 0 11 62 0 12 128 3 13 460 6 14 135 1 15 118 1 16 260 2 17 0 1 18 126 1 19 234 2 20 246 3 21 120 1 22 80 0 23 112 1 24 237 3 25 129 2 26 24 1 27 36 0 28 128 2 29 246 3 30 326 6

Chapter 10 • The Tools of Quality 251

A facilitator or designated team member draws the diagram after questioning why certain situations occur. It has been said that for each circumstance, the facilitator should ask “Why?” up to five times. This is sometimes referred to as the “five whys.” Fishbone (cause- and-effect) diagrams are created during brainstorming sessions with a facilitator by follow- ing these steps:

1. State the problem clearly in the head of the fish. 2. Draw the backbone and ribs. Ask the participants in the brainstorming session to identify

major causes of the problem labeled in the head of the diagram. If participants have trouble identifying major problem categories, it may be helpful to use materials, machines, people, and methods as possible bones.

3. Continue to fill out the fishbone diagram, asking “Why?” about each problem or cause of a problem until the fish is filled out. Usually it takes no more than five levels of questioning to get to root causes—hence the “five whys.”

4. View the diagram and identify core causes. 5. Set goals to address the core causes.

Figure 10-13 shows an Ishikawa diagram prepared for a wood mill that was experiencing problems with wobbling blades in its saws. The symptom of the problem was the wobbly blades. The major causes were associated with machines, materials, people, and methods. Concerning people, it was found that workers were not properly trained. For machines it was found that the blades were being incorrectly set up off-center.

50

40

30

20

10

60

40

20

0

0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 29

.0 0

(A )

56 .0

0 (A

)

3. 00

2. 00

10 .0

0

3. 00

29 .0

0 (A

)

12 .0

0

7. 00

20 .0

0

0. 00

22 .0

0

3. 00

36 .0

0 (A

)

6. 00

10 .0

0

7. 00

40 .2

0 (A

)

32 .8

0 (A

)

22 .8

0 (A

)

35 .6

0 (A

)

29 .8

0 (A

)

28 .8

0 (A

)

32 .8

0 (A

,D )

41 .8

0 (A

,D )

14 .2

0

15 .0

0

20 .6

0

11 .8

0 (A

)

18 .2

0

20 .2

0

13 .8

0

15 .6

0

18 .0

0

X chart

LCL = 12.55

Mean = 19.94

UCL = 27.33

Range chart

LCL = 0

Mean = 12.81

UCL = 27.08

FIGURE 10-12 Partial X _ and R Charts for a Process

252 Part 3 • Implementing Quality

EXAMPLE 10.5 Ishikawa Diagrams

Problem: A team of employees from the adjudication team at a department of water resources was assigned to improve its process. Adjudication is a process of going through the courts to settle legal disputes, in this case concerning water rights. Prior to brainstorming improvements for the process, the employees were asked to brainstorm some of the causes of problems with the existing system. A fishbone (Ishikawa) diagram was used to help to identify causes of problems they were experiencing.

Solution: Figure 10-14 shows the resulting fishbone diagram. The fishbone diagram shows that three major areas of concern are contractors, region office–state office communication, and database management. The facilitator used the “five whys” to get team members to reach lower levels of abstraction. After reaching these lower levels of abstraction, participants were asked to identify what they felt were major causes of the problems. This fishbone diagram was later complemented with further brainstorming for issues relating to the adjudication process.

Pareto Charts

Pareto charts are used to identify and prioritize problems to be solved. These are actually fre- quency charts that are aided by the 80/20 rule adapted by Joseph Juran from Vilfredo Pareto, the Italian economist. As you may remember, the 80/20 rule states that roughly 80% of the problems are created by roughly 20% of the causes. This means that there are a vital few causes that create most of the problems. This rule can be applied in many ways, and 80% and 20% are only esti- mates; the actual percentages may vary.

In a positive sense, a store manager could understand that 20% of the stock in a store holds 80% of the value of the store inventory; 20% of the customers might provide 80% of the revenue. In a grocery store, a small number of quality problems created 80% of the complaints. The good

Machines Materials

Methods People

Saw Blade Wobbles

Lubrication Off-center Loose connectors

Bearings out

Crooked blade

Shaft wear

Tilt

Technique

Tool

Wet wood

Wrong size washers

Vision

Lack of proper training Judgment

Me asu

rem ent

Ins pec

tio n

Axle hole wrong size

Health

Attitude

New worker Content

Quantity

Training

FIGURE 10-13 Cause-and-Effect Diagram: Wobbling Saw Blade Example Source: Patrick Shannon, Boise State University, 2011.

C

hapter 10 • T he Tools of Q

uality

253

Contractors

Don't Know Expectations More Technical

Reviews

Communication Loss of Control

Stuff Not Entered on Database Hard to Know

Which Records Are "in Play"

Too Many Tools

Database Management

Cost/expectations QC for data

GIS Collection, analysis,

field examsAccountability

QC monitoring

Not clear who should do it

Get lost in other work

Low priority

Storing and filtering tough

Can't know everything

No documentation or help

Can't keep up

Training

GIS and WR

Two Databases

Training Not at Office

Length of contract

Need minimum qualifications

Disparate Sources

Differences between

Region Offices

Tech Sec Mgr Bottleneck

Progress a Moving Target

Technical People and Lawyers

Laws and Rules Differ by Region

Region Offices/ State Offices

Lack of coordination/ consistency

No central focal point

Not availableCommunication mostly through section manager

Hard to stay current

TrainingOverlap in activities

Don't have region managers compare

practices

No liaisons with region

offices

Preferences

Not defined

No process to deal with this

ADJUDICATION CONCERNS

FIGURE 10-14 Adjudication Fishbone Diagram [Example 10.7]

254 Part 3 • Implementing Quality

news is that by focusing on the vital few , inventory can be controlled, satisfaction of the most important customers can be increased, or 80% of the complaints can be eliminated. There are some rules for constructing Pareto charts:

• Information must be selected based on types or classifications of defects that occur as a result of a process. An example might be the different types of defects that occur in a semiconductor.

• Data must be collected and classified into categories. • A frequency chart is constructed showing the number of occurrences in descending order.

The steps used in Pareto analysis include

1. Gathering categorical data relating to quality problems. 2. Drawing a frequency chart of the data. 3. Focusing on the tallest bars in the frequency chart first when solving the problem.

EXAMPLE 10.6 Pareto Charts

Problem: A copying company is concerned because it is taking too long for operators to set up new printing jobs. They decide to use Pareto analysis to find out why setup times are taking so long. The data gathered reflect the following major causes:

Type of Problem Frequency (Number of Times)

Equipment needed for setup is missing 124 Internal and external setup tasks are not separated 87 Setup routines are not standardized 315 Extensive machine resetting and paper change are needed 56 Other 23

Solution: First, order the problems by frequency, and compute the percentage of problems related to each cause:

Type of Problem Frequency Percentage

Setup routines are not standardized 315 52.1% Equipment needed for setup is missing 124 20.5 Internal and external setup tasks are not separated 87 14.4 Extensive machine resetting and paper change are needed 56 9.2 Other 23 3.8 Total 605 100%

Next, draw a frequency chart of the results ( Figure 10-15 ). This Pareto chart shows that nonstan- dardized procedures for setting up copying jobs are the most frequently occurring problem causing slow setups. Therefore, the company can institute a training program to routinize its setups. This program will result in a significant reduction in setup slowdowns.

Two points should be made. We also could analyze these data from a number of different perspectives, such as average time per type of delay or cost per type of delay. Also, this chart shows graphically that the law of diminishing marginal returns does have a place in quality

Chapter 10 • The Tools of Quality 255

thinking. As the group addresses each problem, the savings from correcting the problems decreases. There is no guarantee, however, that addressing the fourth problem will take any less effort than the first.

THE SEVEN NEW TOOLS FOR IMPROVEMENT

In addition to the basic seven tools of quality there is another set of tools that focuses on group pro- cesses and decision making. These are the new tools for management. The new seven (N7) tools were developed as a result of a research effort by a committee of the Japanese Society for QC Tech- nique Development. They are shown in Figure 10-16 and are discussed in the following pages.

350

Frequency

300

250

200

150

100

50

0 Setup routines

are not standardized

Equipment needed for setup

is missing

Internal and external setup tasks are not

separated

OtherExtensive machine resetting and paper change are needed

FIGURE 10-15 Pareto Analysis

Affinity diagram

Matrix diagram

Interrelationship digraph

1 2 3 4 5 6

a b c d e f g h

FIGURE 10-16 Seven New Tools for Management Source: From M. Brassard, “The Memory Jogger™ Plus+,” GOAL/QPC, Boston, 2004. Reprinted with permission of GOAL/QPC.

256 Part 3 • Implementing Quality

GOAL/QPC, the consulting firm, is a major force for disseminating information about the N7 tools. GOAL/QPC recommends that the N7 tools be used in a “cycle of activity,” 2 in which one tool provides inputs to another tool. One possible cycle is shown in Figure 10-17 , where the affinity diagram or interrelation digraph is being used as inputs to the tree diagram, and so forth. Let us discuss each of these tools and the purposes they serve.

Tree diagram Prioritization matrices

Process decision program chart Activity network diagram

a b c d

X X 0

FIGURE 10-16 (Continued)

2 Brassard, M. “The Memory Jogger II,” GOAL/QPC, Boston, 2004. Reprinted from “The Memory Jogger Plus+” with permission of GOAL/QPC, 12B Manor Parkway, Salem, NH 03079, www.goalqpc.com .

Known

Activity network diagram

Affinity diagram Interrelationship digraph

Tree Diagram/ systems flow

Prioritization matrices

Matrix diagram

Process decision program chart

Creative Logical

Unknown

FIGURE 10-17 Seven Management and Planning Tools: Typical Flow Source: From M. Brassard, “The Memory Jogger™ Plus+,” GOAL/QPC, Boston, 2004. Reprinted with permission of GOAL/QPC.

Chapter 10 • The Tools of Quality 257

The Affinity Diagram

When we are solving a problem, it is often useful to first surface all the issues associated with the problem. A tool to do this is the affinity diagram , which helps a group converge on a set number of themes or ideas that can be addressed later. An affinity diagram creates a hierarchy of ideas on a large surface, as shown in Figure 10-18 . The steps used in establishing an affinity diagram are as follows:

1. Identify the problem to be stated. Create a clear, concise statement of the issue that is understood by everyone.

2. Give the team members a supply of note cards and a pen. Ask them to write down issues that relate to the problem. There should only be one idea per card. Ask them to use at least four or five words to clearly explain their thinking.

3. Allow only about 10 minutes for this writing activity. 4. Place the written cards on a flat surface. 5. Lay out the finished cards so all participants can see and have access to all the cards. 6. Let everyone on the team move the cards into groups with a similar theme. Do this work

silently because it does not help to discuss your thinking. Work and move quickly. 7. If you disagree with someone else’s placement of a note card, say nothing, but move it. 8. You reach consensus when all the cards are in groups, and the team members have stopped

moving the cards. Once consensus has been reached concerning placement of the cards, you can create header cards.

9. Draw a finished affinity diagram, and provide a working copy for all participants.

As illustrated in Figure 10-18 , you should have a table with an issue statement, subissue header cards, and note cards with ideas. This will provide the basis for further discussion and brainstorming.

Zoo personnel at a zoological park used an affinity diagram to help develop a mission statement. The problem was stated as “Issues surrounding the mission of the Metropolitan City Zoo.” The managers and zoo workers filled about 80 sticky notes with issues concerning the zoo’s mission. Next, the team members placed the sticky notes into groups and ultimately defined a mission with six major elements. This provided a foundation for a final mission statement.

Issue

Ideas

Subissue 1

Ideas

Subissue 2

Ideas

Subissue 3

IdeasIdeas

Subissue 4

FIGURE 10-18 Affinity Diagram

258 Part 3 • Im

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uality

Evaluation

Important to do it close to right the first time, but be flexible to

make changes later.

How do we know people are using it?

We should have a party when it starts working well.

Does it solve the problem of

not being able to find documents

needed?

Testing guide before it's

implemented for everyone.

Process for feedback for fine-tuning

guide.

Evaluate it once it's in

place.

Do we need additional hardware/ software to

build it? Cost?

Support

We'll need a backup

system to administer.

What do we do if the system goes down?

What about system

crashes and availability?

Available in print when systems are

down?

What do we do if the network

is down?

What costs are involved?

Training

What is the best way to train?

Train backups for administrative

support of guide (i.e., Sheilah).

Selecting someone to

provide training.

Amount of training time needed for learning.

Train backups to update for all teams having ownership of

links.

Training staff, both on-site and off-site

(owners who use it).

Remote users: Enabling them. Making it work

for them. Want more than

sales stuff.

Affinity Diagram: Issues with Implementing the Sales Reference Tool

Current Information

Becoming confident that

data/documents are current.

Maintaining it: Who will

maintain it and keep it

current? Will it be done on

a regular basis?

Purging out-of- date or obsolete

information.

Getting other departments to update out-of-

date documents.

Process to avoid

duplication.

Is it clear and concise?

Is it cluttered with items that

aren't sales tools?

Keeping the links current.

Group versus individual training.

Buy-In

Avoid perception of taking

creativity from salesperson.

Getting support from internal

systems.

Getting other departments to

keep information current, put

documents in our directory,

and utilize similar

development tools.

Get buy-in and support from users (other teams and

information suppliers).

How to introduce?

Will people use?

Building in ramifications if old or bad

data used from another

source.

Size

Keeping scope limited to sales tools

and processes.

It is more accessible for

senior management to make changes.

Keeping the size and scope manageable.

Users will want write- access to it.

We can't be too fancy (i.e.,

graphics).

Features

Keeping search engine as a

priority.

Finding a format

everyone likes.

Building in the solution selling

process and making sure the

guide has all the tools

people need.

Needs to be fast and

responsive.

Do we have resources to build it in a

timely manner?

How does it fit with other

programs being

developed?

Making resources

available on demand.

How can we get

international to duplicate or use as is?

Timing

Timing to implement and get the work

done.

Allotting enough

resources to build the

tool.

FIGURE 10-19 Affinity Diagram: Issues with Implementing the Sales Reference Tool

Chapter 10 • The Tools of Quality 259

EXAMPLE 10.7 Affinity Diagrams

Problem: The sales team at HealthPeople Corporation, a supplier of medical information, decided to develop a sales reference tool (SRT) as a means of improving its training processes for new sales people in the field. It was decided that this SRT would be available on the company intranet. A team of experienced salespeople was assembled who cataloged all the current sales material in many different locations. These materials were then reviewed by the team. Prior to performing preliminary design work for the SRT, the team members had to identify issues relat- ing to the implementation of the SRT. The results are shown in Figure 10-19 .

Solution: This analysis helped team members identify key issues in the design and implementa- tion of the SRT. It was discovered that they needed to focus on eight issues in implementation: evaluation, support, training, current information, buy-in, size, features, and timing. The notes underneath the headers present some of the issues identified by the participants.

The Interrelationship Digraph

After completing the affinity diagram, it might be useful to understand the causal relationships between the different issues that surfaced. Also, it is helpful to identify the most important issues to be focused on in pursuing the solution to a problem. A finished interrelationship digraph is shown in Figure 10-20 . This interrelationship digraph shows the relationships between different issues. We will address how to develop this digraph, but note that the shaded boxes are major

Many simultaneous

jobs Poor needs definition

Customers don’t know

what they want

Lack of communications

What are issues with missed

delivery dates?

Marketing forecasts

inaccurate

Difficult to phase in jobs

Too many options

Frequent updates to editions

Short of staff

Too many hands in pot

FIGURE 10-20 Interrelationship Digraph

260 Part 3 • Implementing Quality

issues that need to be addressed in developing improvement strategies. The steps to complete the interrelationship digraph are as follows:

1. Construct an affinity diagram to identify the issues relating to a problem. After you have done this, place the cards with related issues in columns with gaps between the cards. It is helpful to use sticky notes on a large piece of flipchart paper.

2. Create the digraph by examining the cards one by one, asking, “What other issues on this digraph are caused or influenced by this issue?” As team members identify issues that are related, draw a one-way arrow from the first issue (the cause) to the second issue (the one influenced by the cause). Do this until all the issues have been discussed.

3. After reviewing the arrows and making needed revisions, count the numbers of arrows pointing to each note, and write the numbers on the notes.

4. Identify the cards with the most arrows as the “key factors.” Experience has shown that there should not be more than 5 to 10 key factors, depending on the issue being discussed. Some cards may have several arrows, but for one reason or another they are not really key factors; these can be dropped from consideration at this point. Boxes with the most outgo- ing arrows tend to be root causes; those with incoming arrows tend to be performance indicators.

5. Draw a double box around the key factors and brainstorm ways to address these issues.

EXAMPLE 10.8 Interrelationship Digraphs

Problem: For the issues relating to sales reference tools in Figure 10-19 , team members were interested in knowing what issues had the greatest effects on other issues. This would help them to know where to focus their efforts in coming weeks.

Solution: The cards from the affinity diagram in Example 10.7 were used to identify the relation- ships between the different issues. For presentation purposes, we only used the cards from the first four columns in the affinity diagram (these were evaluation, support, training, and current information). The relationships were outlined using sticky notes and markers on a large piece of paper. The results, shown in Figure 10-21 , reveal that the need for a backup system, training, and keeping the links current were key issues in developing the SRT. The team paid special attention to these aspects of the project. On a larger project, they might have established subteams to monitor these aspects of the project.

Tree Diagrams

The tree diagram is useful to identify the steps needed to address the given problem. Figure 10-22 shows a tree diagram. A tree diagram is very similar to a work breakdown structure used in plan- ning projects. The following steps should be used to complete a tree diagram.

1. Assemble the header cards from the affinity diagram. From these cards, choose the header card that represents the most important issue.

2. Once the goal statement has been determined, ask, “What are the steps required to resolve or achieve this major objective or goal?”

3. Once the major tasks have been identified, move to the next level under each task, and ask for the second level tasks, “What are the steps required to resolve or achieve this objective or goal?”

4. Continue doing this for successive levels until you have exhausted your ideas for steps.

C

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261

Important to do it close to right the first time, but be flexible to

make changes later.

How do we know people are using it?

We should have a party when it starts working well.

Does it solve the problem of

not being able to find documents

needed?

Testing guide before it's

implemented for everyone.

Process for feedback for fine-tuning

guide.

Do we need additional hardware/ software to

build it? Cost?

What do we do if the system goes down?

Available in print when systems are

down?

Group versus individual training.

What is the best way to

train?

Train backups for

administrative support of guide (i.e., Sheilah).

Selecting someone to

provide training.

Amount of training time needed for learning? Train backups

to update for all teams having ownership of

links. Training staff, both on-site and off-site

(owners who use it).

Remote users: Enabling them. Making it work

for them. Want more than sales

stuff.

Becoming confident that

data/documents are current.

Maintaining it: Who will

maintain it and keep it

current? Will it be done on

a regular basis?

Purging out-of-date or

obsolete information.

Getting other departments

to update out-of-date documents.

Process to avoid

duplication.

Is it clear and concise?

Is it cluttered with items that

aren't sales tools?

Keeping the links current.

What costs are involved?

Evaluate it once it's in place.

We'll need a backup

system to administer.

FIG U

R E 10-21

A ctual Interrelationship D

igraph

262 Part 3 • Implementing Quality

Prioritization Grid

A prioritization grid is used to make decisions based on multiple criteria. For example, in choos- ing a technology, we might have a variety of alternative options. Also, the decision criteria vary as to how to choose possible desired outcomes. When there are multiple alternatives and multiple criteria, a prioritization grid is a good method to inform your decision making without resorting to more sophisticated analysis. Following are the steps required to make a prioritization grid:

1. Determine your goal, your alternatives, and the criteria by which a decision is to be made. 2. Place the selection criteria in order from most important to least important. 3. Apply a percentage weight to each of the criteria for each option. Apply a weight to each

of the criteria such that all the weights add up to 1 (for example, [criteria] A = .40, B = .30, C = .25, D = .05).

4. Average the individual ratings for each criterion, then rank those average scores, with the highest average ranked as 1, to determine final criteria rankings.

5. Rank each alternative with respect to the criteria. Add the rates for each alternative and rank the sum of the scores for each alternative to determine final criteria rankings.

6. Multiply the final criteria ranking (from Step 4) by each corresponding alternative’s rank (from Step 5). The result in each cell of the grid is called an importance score .

7. Add the importance scores for each alternative. 8. Rank each alternatives according to importance. (The lower the score, the better.)

EXAMPLE 10.9 Prioritization Grid

A company had to choose between five possible machines for a service process with five criteria. The criteria were ease of use, necessary maintenance, cost of the machine, expected life of the machine, and reputation for the quality of the machine (see Table 10-1 ).

The three team members provided subjective importance ratings for each of the different decision criteria. These are in Table 10-2 .

TABLE 10-1 Decision Criteria

Alternatives Criteria

Machine A Ease of use Machine B Maintenance Machine C Cost Machine D Expected life Machine E Reputation

Major Issue

Other minor tasks

Topics Topics

Subissues

Topics Topics Topics

Subissues

Topics Topics Topics

Subissues

Topics

FIGURE 10-22 Tree Diagram

Chapter 10 • The Tools of Quality 263

TABLE 10-2 Importance Ratings

Criteria Person 1 Person 2 Person 3 Average Score Final Criteria Ranking

Ease of use 0.4 0.2 0.5 0.366 1 Maintenance 0.3 0.3 0.3 0.300 2 Cost 0.2 0.2 0.1 0.166 3 Expected life 0.05 0.1 0.05 0.066 5 Reputation 0.05 0.2 0.05 0.100 4

1 1 1

TABLE 10-3 Final Rankings

Ease of Use

Alternatives Person 1 Person 2 Person 3 Sum of Scores Final Ease of Use Ranking

Machine A 1 1 1 3 1 Machine B 2 3 2 7 2 Machine C 4 4 4 12 4 Machine D 5 5 5 15 5 Machine E 3 2 3 8 3

Maintenance Final Maintenance Ranking Alternatives Person 1 Person 2 Person 3 Sum of Scores

Machine A 2 2 1 5 1 Machine B 1 3 2 6 2 Machine C 5 5 4 14 5 Machine D 4 4 5 13 4 Machine E 3 1 3 7 3

Cost

Alternatives Person 1 Person 2 Person 3 Sum of Scores Final Cost Ranking

Machine A 4 4 5 13 5 Machine B 5 3 4 12 4 Machine C 1 1 2 4 1 Machine D 2 2 1 5 2 Machine E 3 5 3 11 3

Expected Life Final Expected Life Ranking Alternatives Person 1 Person 2 Person 3 Sum of Scores

Machine A 1 2 1 4 1 Machine B 2 3 2 7 2 Machine C 3 4 5 12 4 Machine D 4 5 4 13 5 Machine E 5 1 3 9 3

Reputation

Alternatives Person 1 Person 2 Person 3 Sum of Scores Final Reputation Ranking

Machine A 4 4 5 13 5 Machine B 5 3 4 12 4 Machine C 1 1 2 4 1 Machine D 2 2 1 5 2 Machine E 3 5 3 11 3

The team members then provided ratings for each of the different machines as they related to each criterion (see Table 10-3 ).

264 Part 3 • Implementing Quality

The final rankings were computed by multiplying the various rankings by their impor- tance. It looks like alternative C is the best choice. Note that the lowest score is the best (see Table 10-4 ).

Matrix Diagram

The matrix diagram is similar in concept to quality function deployment in its use of symbols, its layout, and its application. Because the matrix diagram is one of the N7 tools, we mention it here. However, the prior presentation of QFD is much more complete, so we will keep this short. Like the other N7 tools, the matrix diagram is a brainstorming tool that can be used in a group to show the relationships between ideas or issues. Matrix diagrams are simple to use and can be used in two, three, or four dimensions. The steps are as follows:

1. Determine the number of issues or dimensions to be used in the matrix. 2. Choose the appropriate matrix. 3. Place the appropriate symbols in the matrix.

Figure 10-23 shows a responsibility matrix diagram. The legend at the bottom of the figure shows the extent of responsibility among the different people. No example is provided here because we discussed QFD earlier in Chapter 7 . This grid in Figure 10-23 gives a simplified ver- sion of a QFD matrix.

TABLE 10-4 Combining Rankings

Final Criteria Ranking

Final Ease of Use Ranking

Final Maintenance Ranking

Final Cost Ranking

1 1 1 5 2 2 2 4 3 4 5 1 5 5 4 2 4 3 3 3

Final Expected Life Ranking Final Reputation Ranking

1 5 2 4 4 1 5 2 3 3

Scores

Machine A: 1(1) + 2(1) + 3(5) + 5(1) + 4(5) = 43 Machine B: 1(2) + 2(2) + 3(4) + 5(2) + 4(4) = 44 Machine C: 1(4) + 2(5) + 3(1) + 5(4) + 4(1) = 41 Machine D: 1(5) + 2(4) + 3(2) + 5(5) + 4(2) = 52 Machine E: 1(3) + 2(3) + 3(3) + 5(3) + 4(3) = 45

Final Rankings

1 C 2 A 3 B Machine C is the best choice. 4 E 5 D

Chapter 10 • The Tools of Quality 265

Process Decision Program Chart

A process decision program chart is a tool to help brainstorm possible contingencies or prob- lems associated with the implementation of some program or improvement. Figure 10-24 shows such a chart in tree form (the outline form is not presented here). The steps are as follows:

1. In developing the tree diagram, place the first-level boxes in sequential order. (These are the boxes in the first column in Figure 10-24 .)

2. Moving to the second level, list implementation details at a fairly high level. Try to be all- inclusive at a macro level.

3. At the third level, ask the questions “What unexpected things could happen in this imple- mentation?” or “What could go awry at this stage?”

4. At the fourth level, brainstorm possible countermeasures to the problems identified at the third level.

5. Evaluate the countermeasures for feasibility, and mark those that are feasible with an O and those that are not feasible with an X .

Activity Network Diagram

The activity network diagram is also known as a PERT (program evaluation and review tech- nique) diagram or critical-path (longest path in time from beginning to end) diagram and is used in controlling projects. Figure 10-25 shows an activity network PERT diagram with its nodes and times. The nodes are circles and the times are given in days. Activity network diagrams are dis- cussed in depth in Chapter 14 .

Reducing the Number of Billing Errors

Layout engineers

Software designers

Engineers

Human resources

Options

People needed

Systems

18

22

24

4

6

Total

Si m

pl if

y pr

oc es

s

R ev

is e

pr ic

in g

L es

se n

op tio

ns

Sp ec

if y

co st

s

Im pr

ov e

de fi

ni tio

n

Im pr

ov e

da ta

ba se

High (9) [Prime responsibility]

Medium (3) [Secondary responsibility]

Low (1) [Kept informed]

FIGURE 10-23 Responsibility Matrix Diagram

266 Part 3 • Implementing Quality

Update job descriptions

Define job requirements

Develop new pay scales

Payroll systems need to be updated

It is difficult to differentiate job grades

Could result in a redefinition

of departments

Refuse to make changes

Get early consensus

Employees fear changes in job assignments

Have an employee meeting

Establish a no-grade-change

policy

Budget allocations need to be revisited

No budget available

Violates budget cycle

X

O

X

X

O

O

FIGURE 10-24 Process Decision Program Chart

b 4

f 4

a 10

d 8

e 15

i 3

j 9

h 6 k

10

c 6

g 8

FIGURE 10-25 Activity Network Diagram

Chapter 10 • The Tools of Quality 267

Reflections on the Managerial N7 Tools

As you can see, the N7 tools are useful for managing long projects that involve teams. With the B7 and N7 tools, you have a reasonably good set of skills that will help in managing many projects. They have been used successfully in many different settings and for many different purposes.

The power of these tools is that with The Plan–do–check–act (PDCA) cycle , they give companies a simple, easy-to-understand methodology for solving unstructured problems. They are especially useful when used in teams. Many of these tools are also fun to use. By using them effectively, managers can reduce unproductive meeting time to a minimum and make good, fact- based decisions.

OTHER TOOLS FOR PERFORMANCE MEASUREMENT

There are other tools used in communicating performance to employees. The justification for these tools is to present data in an economical and understandable way. We present three such tools.

Spider Charts

Spider charts are graphs that present multiple metrics simultaneously in a two-dimensional plane. Figure 10-26 shows a spider chart. In this case, we show six different metrics (A–F) and report goals and results. A quick review of the figure shows that the firm has not met perfor- mance goals on metrics A, B, D, and E. The firm has met the goal relative to metric C and has exceeded the goal on metric F.

Other values that might be included on spider charts besides current performance and results are baseline performance measures and benchmark values. At times, this information can be found in QFD matrices.

Balanced Scorecards

A very important tool for measuring performance is a balanced scorecard . Balanced scorecards are usually spreadsheets that are communicated to management on a regular basis—weekly, monthly, quarterly, and annually. The usefulness of the balanced scorecard comes from integrating financial measures of business success, such as key metrics, along with nonfinancial, operational information about the business, such as customer satisfaction and process performance measures.

Metric A

Metric D Goal

Current

Metric F

Metric E

Metric B

Metric C

FIGURE 10-26 Spider Chart Example

268 Part 3 • Implementing Quality

Objectives Measurement Target Initiative

Financial Performance Profitability

More Customers Less Investment

Market Value Truckload Rev.

EVA Charge

Increase Market Share by 5%

Increase Truck Revenue by 10%

Promote Delivery Service

Establish Specific Delivery Routes

by Customer

Optimize Order Prestaging Process

Teamwork and Communication Skills Training

Exceed Customer Expectations 95%

85% by June 20XX

90% by June 20XX

Number of Orders Delivered on

Date Promised

Number of Orders Prestaged on

Time for Loading

Percent of Staff Trained in Teamwork

Orders Delivered on Time

Lowest Prices

Efficient Staging and Loading of Customer Orders

Improved Communication

Channels

Customer Satisfaction

Process Improvement

Employee Satisfaction

Strategic Theme

FIGURE 10-27 Balanced Scorecard Example

Financial

Customer

Satisfaction

Process

Improvement

Performance

Employee

Satisfaction

Overall

Performance

Revenue $

200,000,001

FIGURE 10-28 Dashboard Example

Figure 10-27 shows a very simplified layout for a balanced scorecard. Notice that this balanced scorecard combines financial, customer, process, and employee information into a single form. Often these forms are color-coded to show if goals are being met or if performance is unsatisfactory. Scorecards, if used effectively, can be used to monitor and drive improvements in performance.

Chapter 10 • The Tools of Quality 269

Dashboards

Dashboards look like electric meters or car dashboards. Figure 10-28 shows a dashboard that looks like an electric meter. Each of the “gauges” on the dashboard shows a different metric.

Notice in this case that the gauges in Figure 10-28 match the metrics reported in our bal- anced scoreboard discussed in Figure 10-27 . This dashboard quickly communicates performance levels. Again, the focus is on easy, clear communication.

Summary In this chapter we have briefly introduced the basic tools of quality. These tools should be adapted to the specific needs of your company. You also do not need always to use all the tools in a single project.

The B7 and N7 are useful in their simplicity and power. It is an easy undertaking to train employees to use these tools. However, many companies provide the training and then wonder why the employees don’t use them. The reason is that along with the tools, cultural change is needed to ensure that implementation can be successful. Also, if management doesn’t support the use of the tools in all possible situations, they do not become inculcated in the organization. In the following chapters, we discuss the context within which these tools can be successful.

Key Terms Activity network diagram Affinity diagram Balanced scorecard Basic seven (B7) tools

of quality Cause-and-effect (or fishbone

or Ishikawa) diagram

Check sheets Control charts Dashboards Histogram Interrelationship digraph Matrix diagram New seven (N7) tools

Pareto charts Plan–do–check–act (PDCA)

cycle Prioritization grid Process decision

program chart Process map

Scatter diagram or scatter plot

SIPOC Spider charts Tree diagram

Discussion Questions 1. Why is it important to pursue quality management from a systems perspective? 2. Why is continual improvement necessary for a business organization? 3. The statement has been made that “A quality system is not just a series of boxes and arrows. It is an

interconnected, interdisciplinary network of people, technology, procedures, markets, customers, facilities, legal requirements, reporting requirements, and assets that interact to achieve an end.” What does this statement mean to you?

4. How do the basic tools work within W. E. Deming’s plan–do–check–act (PDCA) cycle as a process for continual improvement?

5. What are the seven basic tools of quality? Who developed these tools? 6. Describe the purpose of a histogram. 7. Describe the purpose of a Pareto chart. Describe an instance (other than the one in the book) in which

a Pareto chart could be effectively used. 8. What are the three basic rules for constructing Pareto charts? 9. What is the purpose of a cause-and-effect (Ishikawa) diagram? 10. Describe the purpose of a check sheet. Describe an instance (other than the ones in the book) in which

a check sheet could be effectively used. 11. Describe the purpose of a scatter diagram. 12. Describe the purpose of a flowchart. What are three of the rules for designing and using flowcharts? 13. What is the purpose of a control chart? 14. Which of the seven (Ishikawa) tools of quality described in the chapter have been the most helpful to

you in your experiences? Make your answer as substantive as possible. 15. What is the purpose of an affinity diagram?