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BUSINESS MANAGEMENT
New Quality Management Paradigm

by Greg Hutchins
gregh@europa.com

The quality profession has been very successful over the last 15 years.  .  American Society of Quality (ASQ) surged in membership, national prominence, and public policy influence.  Quality and six sigma became synonymous with competitiveness and flawless execution. 

All of this success came at a significant cost and now begs the question: “What’s the role of a quality professional, when everyone is responsible for the quality of his or her efforts.  Today, there is much soul searching what it means to be a quality professional and even where quality management is going.

In this article, we look at the state of quality today, illustrate how management makes key decisions, offer a new definition of quality and offer a future direction for quality management and the quality professional.

STATE OF QUALITY

The quality profession and ASQ have had a profound and lasting effect on US competitiveness, quality of life, and organizational competitiveness.  ASQ, almost single-handedly took the lead on this and has done a remarkable job.  But, we have been more successful than our fondest wishes; quality has been institutionalized in most organizations, as most process owners are responsible for their own work and for their quality.  This calls into question the role of the quality professional and in a larger sense the future of quality.

Quality has evolved through the following distinct stages:

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Conformance focused

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Market focused

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Excellence focused

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Value focused

A brief explanation of various stages and definitions of quality can be seen in the sidebar on the next page ‘Stages of Quality.’

WHAT’S THE NEW, NEW THING?

The challenge is that quality movement and engagement seem to have stalled.  Quality doesn’t seem to be part of national competitive or business strategic discussions any more.  ASQ has lost membership.  ISO 9000 – 2000 transition numbers are low.  Energy level at many ASQ local sectional meetings is low and we’ve seen a significant diminution in ISO and consulting business.

The question becomes: What’s the next step in the evolution of quality as a discipline and as an improvement methodology in the new millennium?  We saw these trends several years ago and massively reinvented ourselves.  We believe that the next major movement in the evolution of quality and quality management is risk and risk management.  Risk and its mitigation is the one topic that keeps senior management awake at nights – both in the private and public sectors. 

The bottom line for quality professionals is they should reframe their definition of quality around risk, develop career core competencies in this area, and add value to their employers and clients by offering risk management solutions.  Let’s look at today’s business model.

STAGES OF QUALITY

 

Conformance Definitions:

1.Quality means conformance to requirements.  Source: Crosby, P., Quality is Free, NY: New American Library, 1979, p. 15.

2. Quality is the degree to which a specific product conforms to a design or specification. Source:  Gilmore, H. L., "Product Conformance Costs," Quality Progress, June, 1974, p. 16.

Market Definitions:

3. Quality is the degree to which a specific product satisfies the wants of a specific consumer.  Source: Gilmore, H. L., "Product Conformance Costs," Quality Progress, June, 1974, p. 16.

4. To practice quality control is to develop, design, produce, and service a quality product, which is most economical, most useful, and always satisfactory to the consumer.  Source: Ishikawa, K. What is Total Quality Control?, Englewood Cliffs, NJ: Prentice Hall, 1985, p. 44.

5. Product integrity consists of a predetermined optimum balance of performance; aesthetic appeal; reliability; ease, economy, and safety of operation; ease, economy, and safety of maintenance; and consistency‑‑all at a given cost, of course.  Source: Carruba, E.; Gordon, R.; Spann, A.; Assuring Product Integrity, Lexington, MA: Lexington Books, 1975, p. 9.

6. Quality is fitness for use.  Source: Juran, J.ed. Quality Control Handbook, NY: McGraw-Hill, 1979, p. 2-2.

Excellence Definitions:

7. Quality is achieving or reaching for the highest standard as against being satisfied with the sloppy or fraudulent.  Source: Tuchman, B. W., "The Decline of Quality," New York Times Magazine, November 2, 1980, p. 38.

8.Quality is commitment made real.  It is not perfection.  But, rather, the dedication to perfection.  Source: Copy in advertisement for Shearson Lehman Brothers, Wall Street Journal, November, 1987, p. 26.

9.(Quality) are traits that most people call measurable intangibles...on the perceptual attributes, technical, and nontechnical traits, that go from design conception through service and the development of customer relations.  Source: Peters, T. "It's Time to Get Back to Basics," Quality, May, 1986, p. 15. 

Value Definitions:

10. Quality is the degree of excellence at an acceptable price and the control of variability at an acceptable cost.   Source: Broh, R. A., Managing Quality for Higher Profits, NY: McGraw-Hill, 1982, p. 3.

11. Quality is the relative excellence of the composite of all product attributes in fulfilling the needs and reasonable expectations of those whom the product serves, as they perceive such fulfillment from time of offering throughout product life.   Source: Utzig, L. J., "Quality Reputation - A Precious Asset," 34 Annual Quality Congress Transactions, Milwaukee, WI: ASQC, 1980.

 CHANGES IN MANAGEMENT DECISION MAKING

As recently as ten years ago, quality was the primary filter for much management decision-making.  It probably started in the mid 1980s when quality interest reached its apex.  Malcolm Baldrige National Quality Award, six sigma, ISO 9000, and many other quality initiatives were launched with tremendous international success.  But, things changed over the last 10 years.  When quality was in its apex, most companies still made products and the only insignificant products and services were outsourced.  Quality was considered the KEY ingredient to competitive success.  Well times and business models change. 

About 5 years ago, the primary decision making filter for senior management became low price so companies started outsourcing more non core activities.  Management focused on price in making capital budget, acquisitions, make/buy or other critical decisions.  As management became smarter, they focused on the total cost of ownership of a product.  In other words they looked at the total lifecycle cost of a product, acquisition, supplier, or product development.  Companies started developing new business models.

CHANGING BUSINESS MODELS

Today’s Original Equipment Manufacturers (OEMs) regardless of the industry have adopted a new business model involving the following:

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Manage the brand

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Design products

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Source noncore products and services

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Assemble and test products

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Sell products

The model is Darwinian in its focus on intellectual property and outsourcing.  Today’s business model has certain key implications:
 

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Companies stick to their knitting, focus on what they do best, and outsource all other activities, including services and products.  Highly standardized internal processes, often called ‘build to order’ or ‘mass customization, are adopted. 

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Companies focus on their intellectual property, which is often design based.  Generating new intellectual property is what creates new business opportunities and generates continuing returns.

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Companies focus on core, differentiated processes/products, and value adding processes.  Jack Welch, the former CEO of GE, said its business units will be #1 or #2 in each market segment, otherwise GE would merge or sell its business unit.  Tough words for tough economic times.

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Outsourcing is the key execution strategy to ensure that non core products and services can be integrated seamlessly into product development.  Many OEMs commonly outsource up to 85% of their manufacturing dollar.  Outsourcing with multiple suppliers has created additional uncertainty. 

MORE UNCERTAINTY

September 11, 2001 was epochal in how it changed society as well as business decision-making.  There has been a sustained recession.  The Internet bubble burst.  The NASDAQ lost trillions of dollars in market capitalization.  Major companies went into massive tailspins because of financial fraud.  There is now massive uncertainty. 

Uncertainty exists because of globalization, technology, mergers, acquisitions, saturated markets, and global competition.  Uncertainty and risk arise from an inability to plan, execute, and ultimately control events.  Also, the likelihood and consequences that potential events may occur are now part of every management discussion in companies as well as government.

Post 9/11, there has been a major shift in board of directors and senior management decision making both in the private and public sectors.  Most senior management decision-making today is filtered through a risk filter.  In the government arena, all Federal, state, and local agencies are focusing on risk and homeland security.  In publicly held companies, board level and senior management decisions are based on a risk analysis because of a rise in personal accountability for the financials, lack of financial reporting transparency, lack of due diligence, Sarbanes/Oxley Act, SEC/NYSE regulations, and a number of other reasons. 

Bottom line: Quality as it has been traditionally defined is no longer on the radar screen of many boards and senior executives.  What can be done about the uncertainty?

UNCERTAINTY AND RISK

In Against the Gods : The Remarkable Story of Risk, the author says the mastery of risk is the foundation of modern life and is what divides modern from ancient times.  By consciously or unconsciously calculating probabilities, auditors make intelligent decisions about business processes.[i]  First let’s look at a few definitions of risk.

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Risk – The possibility that an event will occur and adversely affect the achievement of objectives.[ii]

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Risk – A situation or circumstance, which creates uncertainties about achieving program objectives.[iii]

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Risk - Uncertainty of outcome, whether a positive opportunity or negative threat, of actions and events.  It is the combination of likelihood and impact, including perceived importance of a positive and negative event, which may involve a hazard, improvement, or new opportunity.[iv]

There are a several critical points to remember regarding these risk definitions:
 

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Risk represents an upside of capitalizing on an opportunity and a downside of an unwanted event.

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Risk has two critical elements, magnitude and likelihood.

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Risk is all about uncertainty, chaos, instability, out of control, and unusual.

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Risk is tied to not meeting business objectives.

RISK AND QUALITY

As you read, the above elements of most definitions of risk, you’ll start seeing there are common elements with ‘conformance’ and ‘value’ based definitions of quality.  In other words, the essence of risk is variation, variance, or variability away from an objective, target, specification, or standard. 

 

 

 

 

 

 

 

 

 

 

Let’s look at some risk and quality parallels:

Quality professionals understand variation.  Variation is a state of nature, whether in business, economic behavior, and business.  Variation at the business objective, specification target, or process objective is the general condition of all systems.  Variation outside of specification, business, or process controls limits represents a risk event waiting to occur.  In fact, variations outside of control limits or specification limits are risks or nonconformances already occurring.  This is illustrated in the figure on the next page, ‘Higher Risk On Target with More Variation.’

Statistical Process Control (SPC) is an example of risk and how it can be detected, measured, and controlled.  Risk can be defined as a variance or distance from a business objective, metric, or standard, all of which indicate risk waiting to occur or already occurring.  For example, quality that can be specified in terms of a dimensional tolerance or a surface finish is a variable that can be controlled and ensured. If a target product dimension can be kept in the middle of the specification spread and the variation of measurements are distributed inside the specification limits and process control limits, then the risk of a hazardous event or a nonconforming product can be controlled. 

Reliability has always been considered a critical product quality attribute.  Look at reliability metrics, such as mean time between failures and mean time to first failure.  These are essentially probabilistic risk concepts. 

Also, the six sigma methodology to define, measure, analyze, improve, and control (DMAIC) is fundamentally a risk management methodology. 

WHAT IS RISK MANAGEMENT?

Risk like quality can be managed.  Let’s look at the following definitions of risk management:

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Risk Management – An organized, systematic, decision-support process that identifies risk, assesses or analyses risks, and effectively mitigates or eliminates risks to achieving the program objectives.[v]

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Risk management - All the processes involved in identifying, assessing and judging risks, assigning ownership, taking actions to mitigate or anticipate them, and monitoring and reviewing progress.

As risk decision-making has increased, there is now a sense of realization that activity, process, or project based risk mitigation does not work.  Much like fixing or correcting the symptom of a quality problem results in recurring problems.  Many managers realize that the root cause solution to a chronic or systemic quality problem is through enterprise risk management (ERM).  Enterprise risk management (ERM) in many ways is analogous to Total Quality Management (TQM). 

ERM AND TQM SIMILARITIES

Enterprise risk management (ERM) and total quality management (TQM) share some similarities. 
 

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Both grew to prominence as a result of policy circumstances, quality as a result of Japanese competitiveness and risk as a result of financial excesses in corporate America and homeland security

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Both share common concepts and techniques, but use different words for them

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Both have similar methodologies

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Both follow a similar deployment mechanism

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Both follow a capability maturity model (CMM) curve

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Both rely on the board of directors and senior management to set the example and lead the initiatives

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Both focus on variance from targets or objectives

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Both emphasize that ultimate responsibility for quality and risk rest with process owners

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Both are company wide initiatives

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Both focus on achieving business objectives

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Both are process based

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Both have a hard technical side and soft people side. 

ERM AND TQM DIFFERENCES

The differences between the two are also compelling:

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Risk management is relatively in its infancy, while quality is a mature technology

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Quality, even six sigma, has tactical focus, largely emphasizing execution and metrics

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Risk management is a board level, CEO, and CFO concern

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Risk management is largely driven by financial regulatory and statutory compliance concerns

As you can see the similarities between ERM and TQM are more pronounced than the differences.

LEVEL OF RISK AND ASSURANCE

The trend for good corporate governance is to focus on enterprise risk management.  Internal controls and documentation will have to support the ERM system.  The rationale for ERM is straightforward, which is to provide value for all stakeholders.  The question then becomes how much risk can or should an organizational assume?

The underlying premise of enterprise risk management is that every entity, whether for-profit, not-for-profit, or a governmental body, exists to provide value for its stakeholders. All entities face uncertainty, and the challenge for management is to determine how much uncertainty the entity is prepared to accept as it strives to grow stakeholder value. Uncertainty presents both risk and opportunity, with the potential to erode or enhance value.  Enterprise risk management provides a framework for management to effectively deal with uncertainty and associated risk and opportunity and thereby enhance its capacity to build value.

WHAT DO QUALITY PROFESSIONALS NEED TO DO AND KNOW?

Benefits of ERM include:

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Develops integrated and aligned internal control structure

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Provides a rational template for determining which opportunities should be seized

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Aligns risk sensitivity with enterprise strategy

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Controls processes and projects

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Results in fewer surprises and less uncertainty

Quality has fundamentally changed.  Therefore quality professionals must take a hard look at their role in this new business environment, assess their current skill set, determine what they need to learn to be relevant contributors of value, and make a decision of where they will be in the near future.  Here are but a few suggestions of what we need to do:

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Become career resilient and learn enterprise risk management

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Understand Sarbanes/Oxley Act, which incorporates new accounting and reporting requirements

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Understand enterprise risk management methodologies

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Understand how to conduct risk assessments or audits

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Learn how to establish a risk control structure or system

We all need to be career resilient and most importantly know how to add value.  Quality has been very adaptable over the years.  The body of knowledge has grown and the quality discipline has evolved from basic inspection to six sigma.  The applications have expanded far beyond the manufacturing floor to providing quality in healthcare, education, and now homeland security.  The contemporary business environment has morphed into one of greater expectations in the quality of corporate governance along with senior management personal accountability. 

Risk and risk management are the next evolution in quality.

BIOS:

Greg Hutchins is a principal with Quality Plus Engineering in Portland, Oregon.  Greg is the author of numerous books in process and supply management.  This material is excerpted from Value Added Auditing, see www.ValueAddedAuditing.com.for more information

 

[i] Bernstein, Peter, Against the Odds: The Remarkable Story of Risk, John Wiley, 1996.

[ii] COSO, Enterprise Risk Management Framework, web, 2003.

[iii] “FAA Programmatic Risk Management, 2002, p. 6.

[iv] “Public Spending and Services, HM Treasury (UK) website, 2003.

[v] “FAA Programmatic Risk Management, 2002, p. 6.

COSO, Enterprise Risk Management Framework, web, 2003.

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