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Quality


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QUALITY

When Jimmie L. Mayhew popped into his boss's office in 1988 and announced that he was heading to Disney World on business, Terrence L. Rock's jaw dropped. "How am I going to explain that to management?" he shot back. "That's my benchmark," replied Mayhew, the facilities manager at Convex Computer Corp. Rock, then senior vice-president for operations and now chief operating officer, pondered what an amusement park might teach a computer maker about quality--and quickly realized the trip was no lark: In the realm of facilities management, Walt Disney Co. is king.

So, Mayhew spent a week in Orlando, picking the brains of his Disney counterpart. He returned brimming with ideas, several of which have improved manufacturing at Convex, a $198 million company in Richardson, Tex. Among the many it adopted: empower workers to make spot decisions rather than waiting for a manager's ruling. Another: develop fixed patterns for routine maintenance chores and reinforce them through constant repetition. By taking these lessons to heart, Convex has slashed electrical breakdowns in its factory by 80% since 1990, saving millions of dollars.

Convex is just one of a growing minority of small companies that are learning what a difference quality makes. Several little auto-parts suppliers, for instance, have won spots on the quality honor roll at multiple carmakers, including at least one Japanese transplant (page 70). Last year, all three winners of the Malcolm Baldrige National Quality Award were small or midsize companies: Marlow Industries, Solectron, and Zytec. Two more won this year--Granite Rock Co. and Ritz-Carlton Hotel Co.

In fact, small companies now vie for a Baldrige in unprecedented numbers. Their participation has grown from 18% of entries in 1988 to 48% of this year's aspirants, and the trend isn't likely to abate: Large companies increasingly are pressuring their suppliers to prove their quality credentials by aiming for the Baldrige. Motorola Inc. has given its suppliers until 1994 to apply or risk being dropped. And 16 states have launched programs to help local companies boost quality or productivity, with 16 more states about to do so. Most such efforts are designed to be stepping stones to a Baldrige, and small businesses are the primary targets (page 69).

Such efforts are long overdue, precisely because U.S. competitiveness depends so much on them. Small and midsize companies account for half the total value added by U.S. manufacturing, according to the National Coalition for Advanced Manufacturing. They also produce nearly half of all U.S. exports and employ more than half of all factory workers. Moreover, large manufacturers often rely on smaller suppliers for 50% or more of the value of finished products, from computers to industrial machinery.

What worries the experts is that these industrial linchpins have become more vulnerable in recent years because their managers haven't taken the time to learn quality techniques. And even when they have, tighter bank-lending rules have made it harder to upgrade factories. These are two significant reasons why the productivity of manufacturers with fewer than 500 employees didn't grow as fast as that of their larger cousins in the 1980s. "Time is fast running out" for the laggards, argues V. Daniel Hunt, president of Technology Research Corp., a Springfield (Va.) consulting firm. He advises companies that hope to survive into the 21st century to launch a total quality initiative soon.

NO SINGLE FORMULA. Trouble is, the task isn't simple. An all-out quality commitment requires companies to uproot entrenched habits and business methods and virtually start over. That's usually harder than coming up with the necessary resources: time for sure, and usually money, too. Worse, no single formula works for everyone. In fact, simply aping what quality leaders such as Xerox Corp. are doing may waste time and money on the wrong things. That's one startling insight uncovered by the International Quality Study (IQS), a ground-breaking new project by Ernst & Young and the American Quality Foundation.

If its findings are right, total quality management (TQM)--making customer satisfaction the No. 1 priority--could soon face an even more violent backlash than the one that surfaced last spring. In March, consultant Arthur D. Little Inc. announced that a survey of 500 manufacturing and service companies that use TQM turned up only 36% that felt it was significantly boosting their competitiveness. That same month, consultant Rath & Strong Inc. asked 95 companies to analyze whether their TQM efforts had met such goals as raising market share or increasing customer satisfaction. Rath & Strong gave more than half of those initiatives Ds and Fs, and only 26% rated an A or a B.

This argues for careful planning as small companies embark on quality crusades. One common mistake, says Joshua Hammond, president of the American Quality Foundation (AQF) in New York, is a failure to link quality efforts to the bottom line. Often, he adds, quality proselytizers confuse ends and means. They believe that merely implementing quality techniques, including seemingly ubiquitous employee empowerment and benchmarking strategies, will produce benefits. "Take teamwork training, which is usually the first thing that consultants sell. If you then ask them how things are going," says Hammond, "what you get as a measure is how many people are being trained, not what difference it's making in performance."

CAUSE AND EFFECT. To nail down which practices boost the bottom line, Ernst & Young collected extensive data on 945 business practices from 580 companies in the auto, computer, banking, and health-care industries in Japan, Germany, Canada, and the U.S. For two years, two research teams led by William H. Schmidt, a professor of applied statistics at Michigan State University, have been independently combing through the data, searching for correlations. "Where their analyses converged, we then dug in and looked for cause-and-effect relationships," says the AQF's Hammond.

Some of the discoveries are stunners--including new insights on benchmarking. From the publicity it's getting, this strategy of copying the so-called best practices of companies that excel at a given business process or function would seem to be the cornerstone of any quality program. It's certainly the foundation of the Baldrige award. Of a possible 1,000 points on the Baldrige scorecard, more than half stem from comparisons of how a company stacks up against its competitors.

Yet the IQS data indicate that benchmarking won't improve performance unless a company already has a comprehensive quality program. In fact, for low and medium performers--companies with returns on assets of under 7% and less than $74,000 value added per employee--it can hurt. Information supplied by low achievers shows that when they used benchmarking to try to improve marketing, for example, they usually ended up worse off than they were before. "Think about it, and it makes sense," says Hammond. If a company doesn't have a quality-oriented infrastructure in place and hasn't trained its employees in quality principles, "trying to imitate the best of the best will just disrupt operations."

Curt W. Reimann, who heads the Baldrige award program at the National Institute of Standards & Technology, doesn't argue with that. Some companies, he says, think benchmarking is "instant pudding." Wrong, says Ronald D. Schmidt, chairman of Zytec Corp., a 1991 Baldrige winner that posted $74 million in sales of so-called power supplies for electronics gear last year. Until a company has built a culture of quality, he adds, it won't know how to exploit the insights gleaned from benchmarking.

Such warnings have helped persuade the Minnesota Council for Quality, a state-sponsored group of which Schmidt is a board member, to go beyond sponsoring an annual "Baldrige Jr." competition. It also provides $5,000 grants to local groups, such as chambers of commerce, so they can set up community quality councils where business people can learn how to build a TQM program from scratch. In neighboring Wisconsin, the Wisconsin Quality Network consists of 14 regional networks, each with scores of members. They sponsor seminars, luncheons, and other activities for swapping ideas. But not a contest. "We didn't want to promote competition over the sharing of information," says James Paetsch, director of a regional group, Milwaukee First in Quality. The goal, he adds, is to help companies get started on the right foot.

The International Quality Study should help on that score. Based on empirical data, its findings contradict the notion that there's some magic quality formula. Instead, the research shows that companies advance in stages along a learning curve. "At each level of performance," says Hammond, "you pull a different set of levers to reap the maximum payoff" (table, page 66).

So where should a beginner start? Fred Wenninger, chief executive of Iomega Corp. in Roy, Utah, suggests focusing on cycle time. This means speeding up the total time, start to finish, that it takes to complete a given business process, be it handling customer complaints or producing Iomega's Bernoulli disk drives. When Wenninger took the helm in 1989, Iomega needed 28 days to make a drive--and the onetime highflier was still recovering from a flirtation with disaster. In 1987, its fourth year in business, sales plunged by a third from 1986's record $126 million, and the company had a $37 million loss. Today, its production cycle has been trimmed to 1.5 days--and last year, Iomega earned $14 million on sales of $120 million.

Reducing cycle time is an ideal tool for a small business because the concept is easy to grasp, its effects on quality and performance show up quickly, and it's cheap. "We did it on a shoestring--we had to," says Wenninger. The idea, he explains, is to "find your main bottleneck and attack it relentlessly." To reduce time wasted in shuttling work-in-progress among machines, Iomega grouped its equipment in clusters of related operations. This eliminated so-called buffer inventories, so assembly became one continuous operation and products weren't parked for hours or days in holding zones.

The reason for concentrating on some kind of easy fix is to get quick, positive feedback. Step Two is to repeat the problem-solving cycle, and keep repeating it, until the process improves to the point where something else surfaces as the biggest bottleneck--then go after that. This technique is often called the Deming circle, because it has long been a favorite strategy of quality guru W. Edwards Deming.

MURKY MAZE. Wenninger zeroed in on the production cycle for two reasons. There was an enormous investment tied up in 28 days of work-in-progress--in purchased parts and materials, plus unsold inventories of finished goods. Pulling that money out of the factory saves Iomega $6 million a year. Then, there's the quality of the product itself. "When your cycle is 28 days and you spot a defect at the end of the line," explains Wenninger, "you can imagine how hard it is to isolate the problem." Iomega was spending perhaps $20 million a year to find and repair defective drives when it should have been "mistake-proofing" the manufacturing process.

Iomega's comeback was honored last May with a Shingo Prize for Excellence in American Manufacturing. Named for the late Shigeo Shingo, a Japanese consultant who was instrumental in developing just-in-time (JIT) manufacturing, the award is sponsored by industry groups, including the Association for Manufacturing Excellence and the National Association of Manufacturers, and administered by Utah State University.

Iomega's new day-and-a-half production cycle is exceptional--but only marginally so. Solectron Corp., a San Jose (Calif.) manufacturer with sales last year of $265 million, won its 1991 Baldrige award partly by cutting the production cycle for a computer disk drive by 80%, to two days. In the process, it also reduced the product's annual inventory costs by 80%, to $3.5 million, and chopped defects from 100 parts per million to 2. In fact, most manufacturing shops that haven't tackled cycle time can trim it by 80% to 90%, estimates Steven M. Hronec, head of manufacturing consulting at Arthur Andersen & Co.

The benefits extend beyond cost savings. "If you reduce the design cycle from 20 weeks to 12 days, now you can be far more responsive to customers," says Terrance R. Ozan, director of manufacturing services at Ernst & Young. Such a level of service can also command premium prices and give a company the flexibility to tailor products for more niche markets. Reducing time to market and inventory costs has proved so valuable to U.S. Robotics Inc., an $80 million maker of modems, that the company is phasing out contract production in Mexico and moving the work to Skokie, Ill.

THE BALLGAME? The cycle-time approach can be applied to paperwork procedures as well. A recent McKinsey & Co. study of the procurement process turned up incredible gaps between world-class practice and that of ordinary companies (table, page 72). In fact, Iomega's Wenninger believes cycle time is so vital that it's more than just a good place to start--it can be the entire ballgame. "I'm not sure you need anything else," he says.

Well, not quite. Exploiting the technique to its fullest means that engineers and managers must be trained to function in teams. Workers need to be given responsibility for making decisions that affect their performance, and policies must be developed for rewarding contributions to quality progress. These things take time, and the International Quality Study indicates that it's unwise to push too fast.

"The last thing you want to do is reward people out of their jobs," says Wenninger. "If a work team is bright enough to figure out a way to reduce the number of people they need, and we don't have an opening somewhere else, we'll tell the extra worker to go think about other improvements."

Once such steps have been taken, practically any small company can achieve quality levels that once would have seemed unrealistic. Take L.L. Bean Inc., the Freeport (Me.) retailer of outdoor gear. During one stretch last spring, it mailed 500,000 packages--and claims to have correctly filled every order. Its fill-rate, as the measure is called, hasn't dropped below 99.9% in the past year, even during the Christmas season, when the company mailed as many as 134,000 packages a day.

Manchester Stamping Corp., an automotive-parts supplier in Manchester, Mich., tells a similar story. It now sneers at a record that many companies would envy: In 1989, it shipped 540,000 parts to Honda of America Manufacturing Inc. in Marysville, Ohio--of which seven were bad. President Wayne T. Hamilton isn't content. His new goal is perfection.

AMAZING SAVINGS. Much of the time, that level of quality produces healthy financial rewards. The first small company to win a Baldrige award, in 1988, was Cleveland's Globe Metallurgical Inc. Its chief executive, Arden C. Sims, estimates that Globe's investments in quality have produced a 40-to-1 return. From 1986 to 1988, Globe cut operating expenses by a hefty $11.3 million, and its quality efforts continue to pare operating costs by about $4 million a year. Recently, Sims told the Harvard Business Review that annual savings from quality efforts for his $115 million company should increase to about $13 million by 1995. "If you had told me back in 1985 that we would be able to get these kinds of savings from quality," he added, "I never would have believed you."

Still, as TQM cynics are quick to observe, collecting a Baldrige is no guarantee of success. For Houston's Wallace Co., in fact, the award may not even ensure survival. A family-run distributor of pipes and valves, Wallace won a Baldrige in 1990. But then, Wallace went overboard in complying with the Baldrige requirement that winners share their knowledge. It granted so many of the subsequent flood of requests for help that its own business suffered. That compounded financial problems stemming from the Texas oil-field bust of the early 1980s and helped force the company into Chapter 11 early this year. Now, Wallace is on the block. "We probably should have been concentrating more on our own business rather than trying to help other people's," concedes John W. Wallace, son of the founder and former chief executive. But he has no regrets about the quality crusade: "It's the only reason we're still here," he says.

Citing Wallace as a warning, consultants are trotting out new recipes for success. Arthur D. Little's is named "the High Performance Business." It calls for "reengineering" business processes to forge the link with the bottom line that AQF's Hammond says is so often lacking. Rather than betting everything on customer satisfaction, ADL advises aiming for balanced satisfaction among customers, employees, and shareholders. Declares P. Ranganath Nayak, an ADL senior vice-president: "You have to think about all the factors all the time." McKinsey offers the "Horizontal Organization," which also leans heavily on reengineering, or restructuring the organization around the flow of value-adding processes. Some experts think the reengineering approach championed by consultant Michael Hammer, president of Hammer & Co. in Cambridge, Mass., will displace TQM at many companies.

SMALL IS SPEEDY. How much new substance there is in such strategies is unclear, since total quality has always been holistic, including everything from rethinking business processes to satisfying a company's internal divisions or departments to winning over customers. No matter how the terminology changes, believers such as Iomega's Wenninger stress one point: "This quality stuff is absolutely critical."

Once small-businesses are convinced of this, NIST's Reimann thinks they'll push forward quickly. In fact, he says, quality programs seem to take an extra year to implement for each additional layer of management. Therefore, "small companies can make impressive gains in a short time." A. Blanton Godfrey, chairman of the Juran Institute Inc. in Wilton, Conn., the quality consulting firm founded by pioneer J.M. Juran, sees another reason to be upbeat: Small companies, he thinks, haven't drifted very far from TQM's "native state." In tiny organizations with only a couple of dozen people, teamwork, empowerment, and the other hallmarks of total quality come naturally.

Many will even come up with some clever twists. Early this year, for example, Dallas Semiconductor Corp. figured it was ready for some benchmarking. "Nobody can afford not to look outside," says Chief Executive C. Vin Prothro. But instead of sending a team to inspect the target--the product-development process at Silicon Graphics Inc. in Mountain View, Calif.--Prothro persuaded Silicon Graphics engineers to come to Dallas and evaluate his company's methods on the spot. That may be just one of many innovations that America can expect from its entrepreneurs.Otis Port in New York, with John Carey in Washington, Kevin Kelly in Chicago, Stephanie Anderson Forest in Richardson, Tex., and bureau reports


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