l1 - does quality pay

8/12/2019 L1 - Does Quality Pay

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Does quality pay?

An empirical study of the automotive supplier industry inEurope and J apan uncovers wide differences in managementpractice and in results

Gnter Rommel, Rolf-Dieter Kempis, and Hans-Werner Kaas

DOE S QUALITY PAY?

THE McKINSEY QUARTERLY 1994 NUMB ER 1 51

Sample companiesby sales volume, 1991US$ million

>700

200700


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DOE S QUALITY PAY?

52 THE McKINSEY QUARTERLY 1994 NUMB ER 1

Product quality

Fulfilling previo uslya ccepte d custo merrequirements w ithea ch single productmanufac tu red a nd

delivered to thecustomer

Process capability

Ensuring safe an dcapa ble process, i.e.keeping key processparamet ers w ithinto leran ce limits

Logistics quality

Delivering t he rig htvolume o f products ont ime to the r ight p lace

Service quality

Solving prob lems/failures in productan d logistics qua litysusta inably in a nacceptable t ime

Design quality

Meeting customerrequirements w iththe designed productor service

Process quality Company quality

Conducting anycusto mer/supplier o rinternal interaction in

a professional ma nner,i .e. communica tionqual i ty

50%

50

Goa l sin R&D

To o lsin R&D

DQI *

50%

35

15

PQIpp m (OEM) p roduct s logistics service

Scrap

Rework

* Scoring models Not measured due

to non-availab ili tyof indicators

Total qualityExhibit 2

Definitions ofquality

Exhibit 3

Ranking ofcompanies

Com bin ing pro cess

and design qu al i ty

ind ica to rs in to to t a l

qual i t y resul t s in

4 ph ases of qual i t ymanagement

1

18

19

53

54

105

106

141

53 higherqual i tycompanies

52 a vera gequal i tycompanies

36 low erqual i ty

companies

Phase IV

Phase III

Phase II

Phase I

Quality performances1991 averages

240

887

4,812

1.1

3.2

5.6

1.2

2.5

3.1

ppm(OEM)

Scrap% of u nits

Rework % of hrs

To ident ify the key success fa ctors of q uality ma na ge ment, w e g rouped the compa nies inour sam ple by tw o mea sures: a process q uality indicat or (PQI) an d a design q ualityindica to r (DQI). We de ned process q ua lity a ccord ing to industry-w ide, clearlyqua nt ia ble mea sures, both in ternal and external , which w e calcula ted for ea ch companyso as to ta ke into account t he complexities of d ifferent processes an d prod ucts. Because nocorrespon ding m ea sures exist for design q ua lity, w e de veloped a scoring system t o a ssessea ch compa nys qua lity g oa ls, as w ell as the too ls tha t i t used in t he d esign pha se. Thishelped us understa nd its ability to design products that meet custo mer needs an d t oproduce them w ith low defect ra tes .

We th en used PQI an d DQI to arrive a t a comprehensive view of to ta l q ua lity.

The comb inat ion of t hese ranking s resulted in four diffe rent pe rfo rman ce clusters, wh ichw e refer to a s the phases of qua lity mana gement .


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DOE S QUALITY PAY?

THE McKINSEY QU ARTERLY 1994 NUMB ER 1 53

Tot a l custo me ror ienta t ion;*system at ic qua litymanagement activit iesalong ent i re value-add ed chain

Zero-defe ct an d internal customer/supplier p rinciple

Usag e of QFD; role o f marke te r

Cross-bo rder q ua litym a n a g e m e n t

No R&D t ie -in

Qual ity throughinspection

Process improvementdriven by production

Quality to ols mainlyproduction oriented

Emerging custo meror ienta t ion

Design tomanufacture

Quality to ols a reprevention oriented

(R&D)Rob ust p rocesses

Exhibit 4

The path toexcellence

Characteristics

Core processes Manufa cture and del iver w ith zero defects

Design to zero defects

Design to final customer

Phase IInspection

Phase IIAssurance

Phase IIIPrevention

Phase IV Perfec t ion

Initia l implement at ion Fine tun ing

27

34

25

14

Share of sample

* OEM an d fina lcustomer

This ent a ils th e internal supplierunderstand ing theneeds of its direct

internal customer the individua l ordepar tment w i th inthe organizat ion tow hich it provides aprod uct o r service.

Impact of qualityBy ana lyzing th ese performa nce clusters, we discovered four d ifferent an d prog ressive levels of q uality ma na ge ment, ea ch of w hich ha s acorresponding ma nag ement approach:

Phase I: Inspectio n. An inspection d epa rtmen t is responsible fo rproduct control, mainly at the e nd o f th e process.

Phase II: Assurance. The production de partme nt strives for b ette runderstand ing o f a nd control over the prod uction process, usingto ols such a s sta tistical process con tro l (SPC). The se compa nies ha vebeg un to orient themselves tow ard zero de fects.

Phase III: Preven tion. Trying to design to zero d efects, Phase IIIcompa nies encoura g e intense cross-fun ctiona l coope rat ion, especiallybetw een R&D a nd the production de partme nt. According ly, they usecross-comp a ny prob lem-solving t ra ining . The y also use preven tiveq ua lity to ols like design review , as w ell a s prod uct an d pro cess fa iluremod e a nd e ff ects ana lysis (FMEA) techniq ues in th e de sig n pha se.

Phase IV: Perf ection. Pha se IV compa nies strive consta ntly fo rperfection, a nd t heir q uality prog rams cross internal and e xternalbo rders. Inte rna lly, they a re cha racte rized b y reliance on cross-fun ctiona l tea ms, fa r-rea ching d eleg a tion of d ecision respon sibility,a nd a n inte rna l custom er/supplier principle. The y fo cus sha rply oncustom ers during the design pha se, and they use the q uality functionde ployment (QFD) to ol a system a tic a pproa ch to de tecting OEMan d custo mer w ishes an d translat ing them into products, services,a nd pro cesses bef ore prod uction. Externa lly, they ha ve la sting a ndmutu a lly trusting relat ionships with t heir suppliers, a nd t hey

integ rate bo th OEM and na l custome r into t heir q ualitymana gement ac t iv it ies to bet ter understa nd t he needs of both .


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Performance The higher the phase of q uality mana ge ment,the bet t er on a verag e the corporateperformance. Indeed, the grow th jump f romPha se III to Pha se IV is rema rkab le.

Moreover, the tw o elements of q uality ea chaffect a d i fferent a rea of corporate performance:

process q ua lity in uences return on sa les; designq uality, sales grow th.

This distinction is impo rta nt beca use as ma nycompanies aro und the w orld have rea lized simply ha ving a q uality prog ram is not e noug h.Wha t ma tt ers is which output -oriente d g oa ls acompany pursues. Unfortuna tely, mo stcompanies have a long w ay to g o before theyrea ch Phase IV (on ly 13 percent o f a llpa rticipating compa nies ha d a chieved t his). TheJapa nese compa nies in our sample do minate

Pha ses III and IV due ma inly to the ir superiorprocess quality performance.

DOE S QUALITY PAY?


Return on salesPercent p.a .

Sales growthPercent p.a .

Phase IInspection 0.5 5.1

Phase IIAssurance 7.3

Phase IIIPrevention 6.7 8.1

Phase IV

Perfect ion9.3% 16.0

Exhibit 5

Corporateperformance by

phase, 198791

Sa mple a vera g e 4.0% Sa mple a vera g e 8.0%

4.7

+ 3 1 3

%

+ 1 , 8 6

0 %

Process ca pa bility*CpK > 1.67

ppm < 400

Scrap a nd rew ork(ind ex) < 4.5

Sample a verag e

Sample a verag e

Return on salesPercent p.a .

Sales growthPercent p.a .

QFD usag e

Sa les share o f superiorproducts > 40%Products wi th a ddi t iona lbenef i t for the custome rProducts with improvedbene fit for the OEM

Design qualityindicators

Process qualityindicators

* Sma ll sam ple size(10 compa nies)

Stat istical me asure fo rprocess cap a bility

Including low estperformers

11.4%

8.3

7.2

4.0

8.0

14.7%

13.3

12.7

Exhibit 6

Top performers process anddesign quality

8.6


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DOE S QUALITY PAY?


Phase IV companyPhase II companyCharacteristics

Qual ity plan a nd g oa lsAdditiona l benefit fo r custo mersPreventio n costs (% of q ua lity costs)

Numb er of hierarchy levelsQA depa rtment (% of employees)Final te sting

End-customer orientationR&D vo lume con tro lled (%)R&D in jo int supp lier pro jects (%)

Process ca pa bility (CpK)Workers in self-ma na g ing te a ms (%)Workers pa rticipa ting in job rot a tion (%)

Strategy

Organization

Design

Production

Production o riente dNone

8

86

Auto ma tic an d by QA sta ff

Weak750

1.672817

Exhibit 10

How companystyles differ *

* On a g ivencomponent

Different ma na ge ment practices in strat eg y and o rga nization, as w ell as in the tw o coreprocesses of design an d production, resulted in en ormous variat ions in pe rforman ce.

35

68

91

82

69

44

37

94

91

84

90

53

70

R&D

Purchasing

Production

QA

Logistics

Sales/ma rket ing

Customer service

Percent of companies

77%

Sample goal tree

Compan y aspirat ion/overall g oa l

R&DProcess

capabili ty>1.3

PurchasingPurchased

par t s


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Top ma na ge ment involvement for insta nce, spending a da y helping to designimprovement concepts in a w orkshop f or sub-supplier developme nt is crucia l inengend er ing qua lity th inking throughout a n orga nizat ion.

The bet ter perfo rmers live b y a n a ctive int erna l custome r/supplier principle, bo th w ithin

an d bet w een functions, w hich instil ls in them a new q uality aw arene ss.

On the orga nizationa l side, high er q uality compan ies require at lea st one less level ofhierarchy to run a company o r production fa cility th an do their low er q uality counterparts.

DOE S QUALITY PAY?


PreventionPercent of to ta l

High er qua litycompanies

Lower qualitycompanies

25

45

30

14%

34

52

Tot a l spendingPercent of sales 3.6% 0.8%5.0%

Test ing

Defects

Bestpractice

Exhibit 12

The cost ofquality

QA manag er

Tea m w i t h o u t t o pm a n a g e m e n tTea m w i t h t o pm a n a g e m e n t *

Quality program responsibilityDevelopment Implementation

23%

19

58

42

25

33

12

5757

31

29

14

Percent o f compan ies

* For exa mple,participat ion inproduct ion tea m o rq ua lity cont rol circlemeet ings

Hig h er q u a lit y co m pa n ie s Lo w e r q u a lit y co m pa n ie s

Exhibit 13

Top managementgets involved

Number of levels in vertical organziation*

Higher quality companies Avera g e: 5.3 levels

Goal: Four-levelhierarchy

Lower quality companiesAverage: 6.4 levels

Overlapof dut ies Overlap

of dut ies

CEO

Head o f product ion

Main depar tmen t manag er

Depar tmen t manag er

Supervisor

Operato r

CEO


Departmen t mana ger Supervisor

Operato r

CEO


Department manag er

Supervisor

Forema n

Operat or* Compa rable compa ny

size (approxima tely1,000 e mployee s)

Exhibit 14

Levels ofhierarchy

Pha se III and IV compa nies,the refo re, spend less on q ua litytha n their Pha se I counte rparts.


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OEM and nal customers, and can be ma nufactured w ith a minimalnumber of de fects.

To meet the rst g oa l, highe r q uality compa nies focus their marketingan d d esign activit ies on the na l custo mer, an a ctivity tha t d oes notcome na turally in a n industry w here OEMs trad itiona lly carry the na l-custo mer responsibility. In pa rticular, the y use na l-custo mer a nddea ler surveys, an d protot ype te sts involving na l customers, to developnew product fea tures fo r example, ergon omically improved seats andhea te d exte rior mirrors th a t improve visibility. Because such fea turesprovide a dd itiona l bene ts to na l custo mers, they give a signi cantboost to sa les grow th.

In o rder to develop superior products, the best perfo rming companiesconcentra te o n resea rch a nd pre-development, w here they identifyproduct concepts that reconcile nal custom er w ishes w ith tho se o f OEMs.Not surprising ly, they a lso allocat e a higher percentag e o f t heir engineersto t hese a reas than d o t he lower q ual ity performers even though theyspend less overa ll on R&D a s a percent a g e o f sales.

Throug h the ir demo nstrated R&D competence, they ea t into a n OEMsR&D bud ge t, th ereby playing the role o f a n R&D supplier instead of apure blueprint supplier.

Neverthe less, highe r qua lity compa nies a lso coo pera te inte nsively w iththe ir OEMs, especia lly in the a rea o f simulta neo us eng ineering. Oft en th eya chieve this by pla cing the ir ow n eng ineers a t t he R&D cent er of t he OEM.They caref ully select an d t rain (for examp le, in th e a pplication of SPC orFMEA) the ir ow n sub-suppliers, an d t hen involve the m a s com pet entdevelopment pa rtners.

In a dd ition, they use preventive QA too ls in t he d esign phase mo reintensively tha n d o their low er q uality count erparts. Generally, the y use

such to ols ea rlier and in a mo re fo cused m a nne r, such as cond ucting FMEAsfo r critical parts or QFD in ca se of signi cant ly chang ing custo mer needs or

DOE S QUALITY PAY?


Return on sales Sales growthQuality goal

6.9%

7.4

4.1

12.7%

8.0

2.2 5.9

Percent p.a ., 198791

Improved bene fit tofinal custo mer

Improved b enef it to OEM

Low er defect ra te a ndtoug her to lerances

No q ual ity go al addi t ionalto custo mer requirementSa mple a ve ra g e 8.0%4.0%

8.6

Higher qua l i ty

com panies involve

th e f inal custo merin develop ing new

produc t fea tu res

Exhibit 17

Goals affectperformance

R&D costsPercent of sales

Pre-developmentas share of totalR&D budgetPercent o f to ta lR&D e mplo yees

7.6 1.913.5

4.9%

9.57.5 21.0%

6.4

Pre-d evelo pment o f co ncept s Resea rch

*Subsyste ms/systems

Exhibit 18Research anddevelopment *



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Higher quality companyLow er q ual ity company

Percent o f processes w ith CpK > 1.33

73%45

Exhibit 21

Stable machineprocesses *

* Activities includestat istical pro cess

control, kaizen , andpoka yoke

DOE S QUALITY PAY?


Sto p prod uction line

Act to elimina te de fects

Reject incoming consignments

Sto p de livery to external custo mer

72%21

6646

5021

13

8

Exhibit 19

Workers act onquality issuesDecision-makingcompetences

Percent o f compan ies


100

1994

1991

1988

20 30 40 50 60 70 80 90 100%

Percent share of total testing effort

Production wo rkers Hig h er q u alit y co mpa n ie s Lo w e r q u alit y co mp a nie s

Exhibit 20

Workersself-inspection

technolog ies. They know tha t t he ma na gerial key to success in th e d esign phase is to a ssureq uality th rough persona l responsibility, clea r go al sett ing, a nd ong oing design review s.

The p rod uction pro cess Similarly, qua lity compa nies esta blish clea r, mea surable go a ls a nd comm unicate t hem t oeveryone involved in th e prod uction process. They a ssign explicit persona l responsibilities,such as req uiring the reduction o f rew ork t ime a nd scrap fo r a prod uction l ine by30 percent w ithin six mon ths. This trig g ers an a mbitious prob lem-solving process, fo rw hich the y w ill previously ha ve trained t heir employees. In ad dition, th ey ap ply the se

same procedu res to the ir sub-suppliers.

The best perfo rmers stress entrepren eurship, respon sibility, a nd a ccoun ta bility. Theyempow er w orkers to ta ke action w hen q uality issues arise. Decentralizat ion of this kind,combined w ith need -ba sed tra ining, a lso helps to insti tutionalize continuous q ualityimprovement prog rams, for exa mple, in th e fo rm of q ua lity circles. The b est compa niesuse self-ma na g ed t ea ms, w ho se responsibilities include q ua lity cont rol, machine set-up,logistics, preventive mainte na nce, a nd short-term production plann ing.

Our ndings indicat e tha t integ rating such indirect qua lity a ctivit ies can yield asigni cant productivity jump. High er q uality compa nies rely on short feed ba ck loops tha topera te throug h comprehensive w orker self-inspection to minimize w orker-relat ed def ects.

They low er ma chine-relate d d efe cts by rig oro usly improving t hecapa bility of prod uction pro cesses, mea sured by so-called CpK values.

The high er these values, the h igher th e stat istical prob a bility tha t aspeci c prod uct cha racte ristic (such a s diam ete r) can be m a nuf a ctured


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Japan versus EuropeThe Ja pa nese compa nies in o ur sa mple ha ve a sizab le lea d in process q ua lity,clea rly at tr ibuta ble to t heir mana ge ment pra ctices.

Rework Percent

ScrapPercent

Rejected partsppm ra tes

Japan Euro pe Difference fa cto rs

1,9651.90 2.60 0.95 3.30 25

Breakdown of causesPercent

55

25

15

5

Kaizen inproduction M a n a g e m e n t o f

interfaces*

Quality m a n a g e m e n t in desig n

Specifications

* Mana ging improvement w ith both suppliersand customers

Possible differences in tolerances

x1.4 x 3.5 x78.6

Exhibit 24

The gap between Japan and Europe

to a ta rget ed value. These gures are determined by examining t he internaland external fac tors of a machine tha t inuence the deg ree to w hich productspeci cation s mig ht va ry. Top pe rfo rmers also rely to a much higher de g ree onsub-supplier q ua lity th an do low er q ua lity compa nies.

They a chieve t his throug h m uch high er investment in sub-supplierdevelopment, thus reducing the number o f purchased-part def ects.

DOE S QUALITY PAY?


Sub-supplierperformancepp m

Direct delivery to theproduction line *Percent of sub-suppliers

* No incoming inspection

9,6002,10023

59%

Exhibit 22

Reliance on sub-supplier quality


Improvement of productqual i tyTraining in th e use o fQA instrumentsImprovement of deliveryreliability

18.63.9

5.31.9

2.00.9

Ma n-mon ths pe r US$100 million p urchasing volume, 1991

Hig h er q ua lit y co m pa n ie s Lo w e r q ua lit y co m pa n ie s

Exhibit 23

Common projects

with sub -suppliers


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The re ma rkab le success of th eir kaizen (continuousimprovement) activit ies is the most important fa ctor

complemented by s igni cant ly st ronger cooperat ionw ith th eir sub-suppliers a nd w ith th eir custome rs.

DOE S QUALITY PAY?


Sha re of productionw orkers involved inkaizen activities

PercentProposals implemente dper q ua lity circleNumber p.a .

Sa ving s per hea d*US$ p.a.

$6,450135

1

78%43

8

19048

10

* Based on to ta l employees

Japanese companies

European higher qua lity companies

European low er qua lity companies

Exhibit 25

Japans workersproblem solve

13925

20

3935

18

171010

Averag e com pa ny ma n-da ys per core sub-supplier, 1991

Japanese companies

European higher qua lity companies

European low er qua lity companies

Examples of results

Japane se companies have arejected purchased parts rate o f1,000 ppm, compared w ithEuropes 4,400.

In Japa n, purcha sed pa rts of29% of sub-suppliers are te stedin incoming inspection,compa red w ith 71% in Europe .

General q ual ity*

Simultaneousengineering

Cost an d time

Exhibit 26

Shared projectswith sub-suppliers

* Productionoptimization,improvement of

product q uality,training on QAinstruments

Improvement o fdelivery reliability,throughput t imes,cost structures

of shrinking ma rkets a new situa tion. Un til 199091 thepotent ia l of kaizen largely manifested i tself as ad ditionalgrow th. Japa nese efforts to improve na l custom er-orienteddesign q uality tradit ionally hindered b y strong keiretsu structures a re now furt her curta iled b y declining ROS a ndshrinking na ncia l resources.

Orga nizationa l restructuring, ho w ever, could providesome oppo rtunities for improvement: the typical Japa nesea uto mot ive supplier ha s eight levels of h ierarchy as

compa red w ith Europe s ve or six. But, Europe a ncompanies ha ve no room f or complacency about their

Neverthe less, Japa nesecompanies face several ne w cha llen g es. The m ost criticalone is to ma inta in the

momentum of kaizen in times


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ad vantag e here , as Japanese companies have shown they canimprove very q uickly.

Any w orkable progra m for rapid improvement must start w iththe d esign of a company-speci c qua lity prog ram th at assessesthe compa nys ma na ge ment pro le along the 15 key leversfoun d to be the strong est drivers of q uality performa nce.

Gnt er Romm el is a m an a ging partn er in McKinseys Japa n of ce;

Rolf -Dieter Kem pis is a principa l in t he Dusseldorf o f ce; and Hans-Werner

Kaas is a con sulta nt in th e Fran kfurt o f ce. Cop yrig ht 1994 McKinsey &Company, Inc. All rights reserved.

DOE S QUALITY PAY?


Visions/goals

Core processproduction and

design

Energizing

12345

6789

10

1112131415

Top ma na g ement involvemen tQua lity g oa ls in the business syste mQA as consultantFlat hierarchiesPrevent ion focus

Opera to r self-inspectionPa rtne rship w ith sub-suppliersUse o f preventive QA too lsR&D inf luen ce o n OEMLink to custo mer

Decision compet ence on shop f loorProblem-solving empo w ermentQual ity g oa ls deployment to shop f loorJob enrichment (tea ms, job rot at ion)Worker job satisfa ction

IPhaseKey levers II III IVExhibit 28

A plan for actionSa mple prof ile

1986 1991 1996*

Percent o f units

Japane se compa nies

3.95%

2.442.78

1.20

1.95

0.84

* Projected

30%

51%

30%

30%

Necessary improvement:70% in f ive yea rs

European companies

Exhibit 27

Japans challengeto EuropeScra p ra te, 1986 96

l1 - does quality pay

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