Editor's Note: "Rebalancing Quality Priorities" is a three-part series describing a new approach to quality management from a customer and risk management perspective that involves the entire organization. This is part 1. Also see part 2,"Quality Equals Risk Management" and part 3, "Transforming Quality Culture."
This past winter's continuous news cycles surrounding accelerator pedals on Toyota vehicles were disturbing, and even tragic, on several levels. People had been affected by seemingly inexplicable car crashes, emotional tragedies that changed their lives. There was the loss of nearly $30 billion in market value and the potential long-term damages to the reputation of a leading global automaker -- fueled by the realization that, as Toyota chair Akio Toyoda said in an April 10 Guardian News & Media article, "Over the last few months, we really learnt that we were not close enough to the customers. "There also was the ripple effect on people in a wide variety of industries. They realized -- or should have realized -- that if such a full-blown crisis can happen to Toyota, with its deserved reputation for extraordinarily high quality, it could happen to just about any company.
Quality issues routinely gain high media profiles. Whether in the food, toy, or construction industries, dozens of recent examples demonstrate the potential high costs of poor quality, which have been estimated at 5% to 30% of gross sales for manufacturing and service firms. Yet many people have been tempted to dismiss the past crises, often with the notion that fault can be quarantined in some remote supplier in the developing world. We believe, however, that the Toyota crisis raises the ante. It is not yet clear where Toyota's quality problem arose (or, as some argue, if there even was one at all), but nobody is yet blaming a single supplier, a weak link in the value chain. Even Toyota acknowledges a systemic quality issue, and has already started organization-wide initiatives to address it.
We believe other companies will, wisely, want to follow Toyota's lead. They will seek to redefine their quality functions and rebalance their quality priorities. Furthermore, we believe that tomorrow's successful quality organizations will look different from yesterday's. This article will examine how. First, we'll discuss the benefits that any company can gain by addressing quality. Then we'll look at the new role of quality organizations in the enterprise, and the ways that successful companies are pursuing quality improvement by focusing on customers. We'll continue this examination online with a look at risk management and organizational culture.
The Benefits of Better Quality
Today, when most businesspeople think about quality, they do so by asking, Does our company have quality? Unfortunately, given the role played by today's globalized scandal-seeking media, that's the wrong question. The better (though more troubling) question is: Is our company susceptible to quality issues?
Quality issues can take many forms: in addition to products or services that malfunction, there can also be customer dissatisfaction issues arising out of poor design, user-unfriendliness, or insufficient customer service. Fifty years ago, products had simple designs and functions, and defects were easier to identify. In today's more complex world, there are multiple types of quality issues, and multiple locations and processes in which they can arise. Susceptibility is spread wide.
However, many companies today still sadly follow a tactical approach to quality. They react to unsatisfied customers or frequent defects. Some do so better than others -- in many cases the find-and-fix methodologies developed over decades have become both refined and successful. But they are nevertheless a reactive mode of operation. Thus, no matter how fast the reaction, the company faces some form of the escalating costs of poor quality, which may be manifested in underutilization, scrap/rework, warranty costs, and/or lost sales. Reactions in the form of large-scale recalls drive added administration, return logistics, product replacement costs, and significant damage to brand equity.
We recently quantified these costs for one of our clients. We examined what would happen if the company drastically reduced customer quality defects. The results: Warranty and recall costs were expected to drop by nearly half. But even more significantly, the relationship between quality and repurchase behavior indicated that the quality improvement would drive a sales increase of 12% over the next few years.
We derived two distinct lessons from this experience. First, it's worth investing in quality. Second, not all quality investments are the same. If you simply pour more money into find-and-fix, you reach a point of diminishing returns. But if you reconceptualize your quality function to proactively engage with customers with a strategic cross-enterprise focus and a rejuvenated quality culture, you can reap far-reaching benefits.