In today's hypercompetitive economy, manufacturing products that meet customer quality standards should be considered table stakes. If a company stumbles and delivers products that don't deliver what customers expect, the manufacturer has a reputational problem that may translate into large financial losses and huge amounts of senior management time.
Consider Toyota and Johnson & Johnson during 2009-2010, and a GlaxoSmithKline plant from 2001-2005: Some of Toyota's cars appeared to suffer from unintended acceleration, possibly resulting in deaths. While the company's acceleration electronics were recently exonerated as the cause, the problem may have been mechanical or as simple as improperly designed or placed floor mats that entangled the gas pedal.
Whatever the cause, Toyota has recalled more than 11 million vehicles, paid an embarrassing fine to the U.S. government for failing to promptly report the problem, been downgraded by credit rating agencies and was the only major auto manufacturer in the U.S. to suffer a 2010 decline in sales. It is investing millions more in quality monitoring systems, and even more in sales incentives to rebuild U.S. sales.
For Johnson & Johnson, a frequent "most admired company" by American consumers and investors, impurities in the manufacturing process at its Ft. Washington, Pennsylvania plant (as well as two other plants) tainted a number of over the counter products such as children's Tylenol. These products were delivered to retail locations and ended up in consumer homes, sometimes giving off distasteful odors. The situation forced the company to conduct multiple recalls and the plant was temporarily closed.
The consequence to J&J: In the third quarter of 2010, the company reported that U.S. sales of over-the-counter medicines and nutritional products declined by 40%, and it faces a shareholder lawsuit and loss of consumer trust. In March, J&J signed a consent decree with the FDA putting the three plants under tight regulatory scrutiny for several years.
GlaxoSmithKline had a quality problem at a single plant in Puerto Rico, where, among other problems, different doses of prescription drugs were allegedly intermingled in the same containers that were shipped to U.S. pharmacies. The Justice Department filed a criminal case against the company, which resulted in it paying a $750 million fine during 2010, as well as generating a 60 Minutes segment in early 2011. The company noted in its fourth-quarter 2010 earnings release that it has also received "civil investigative demands and a subpoena from several State Attorneys General offices relating to matters at issue in the federal investigation."
In Barron's 2011 "Most Respected Companies" annual survey of the world's 100 largest public companies as seen by money managers, Johnson & Johnson, which had previously always been No.1 or No. 2, declined to No.25. Toyota declined from No.6 to No. 46, and GSK fell from No. 36 to No. 51. Quality in manufacturing does matter, but it seems as though these companies forgot about it in certain operations in recent years.
Back in the 1980s, the U.S. experienced a tidal wave of fear that Japanese companies were "eating the lunch" of U.S. companies in many industries. The fear seemed justified: Japanese companies had vanquished American companies in consumer electronics and major segments of the automotive and semiconductor industries. In response, the U.S. Commerce Department launched the Malcolm Baldrige National Quality Award to encourage U.S. companies to improve the quality across their entire organizations, ultimately yielding higher quality, more competitive products and services. The Baldrige program was designed to be rigorous; it takes a huge commitment by a company to compete.
In that fear-laden environment, the initial Baldrige competitions became inspirational events, and media celebrated Motorola, Xerox and IBM, which won consecutively in the first three years in the manufacturing category. An acclaimed 1992 book, The Silverlake Project, highlighted how IBM rebuilt the competitiveness of its midrange computer operations, culminating in the Baldrige Award effort.
But somewhere in the two subsequent decades, perhaps because of our love affair with technology and the Internet and the belief we were becoming a service economy, the Baldrige Award lost its luster with the media and the general public. But they are still around and awarded each year to manufacturers, service companies and health and educational institutions.
Meanwhile, the Japanese continue to honor "quality companies" with their own annual Deming Prize (ironically named after American quality pioneer W. Edwards Deming). National TV in Japan broadcasts the Deming Prize awards ceremony each year.
Maybe it's time for U.S. companies again to pay more attention to the Baldrige Award. It's unlikely the award ceremony will ever end up on national TV here, but it would be valuable if the media gave the program more recognition. Meeting the program's precision standards can help make the U.S. more competitive. I bet the person in charge of quality at Toyota, Johnson & Johnson and GSK would agree.
Andy Tannen is director, strategy & development, Corporate Practice at MSLGroup.