Co$t Vs Quality

Must quality take a haircut when manufacturers aggressively trim costs?

What is the cost of quality? To Ford Motor Co. and Bridgestone/Firestone Inc., one of the costs of quality is the inestimable damage to both companies' reputations as wary consumers think twice about purchasing Ford Explorers or Bridgestone/Firestone tires.

What is the cost of quality? DaimlerChrysler AG may find out when results are in from its decision earlier this year to require suppliers to reduce costs by a fixed percentage.

"Whether DaimlerChrysler's decision will have a quality impact is uncertain, but it may affect the quality of what they demand from suppliers," observes Joe Ivers, partner and executive director of quality and customer satisfaction research at J.D. Power & Associates, Agoura Hills, Calif.

Cost reductions alone need not translate to a lower-quality product. According to IndustryWeek's 2000 Census of Manufacturers, which surveyed some 3,000 companies, manufacturers that were able to cut their costs by reducing scrap and waste tended to show more improvement in quality than those whose costs increased.

Manufacturers over the last 20 years have invested billions of dollars in various quality-improvement efforts. Among the most popular today are the principles of lean manufacturing as pioneered by Toyota Motor Corp. and the Six Sigma standards that help companies refine their quality efforts to achieve still greater improvements. In most cases, investments in these programs have been more than recovered by lower production costs, less scrap, fewer defects, and reduced warranty expense.

Even with these gains, the costs associated with badly designed, poorly made products continue to haunt the manufacturing community. "The cost of poor quality in terms of rework, scrap, and warranty expense is still a big number," says Bonnie Smith, director of the LeanSigma program at TBM Institute, a training and consulting firm in Durham, N.C.

But most companies haven't got a clue as to what that cost is. "I've never walked into a plant where anybody knew the cost of quality," says Kevin Smith, president, Productivity Group, Div. Productivity Inc., Portland, Oreg.

"It's amazing what design engineers don't know about manufacturing," says Jane Algee, producibility manager for the Comanche helicopter electro-optical sensor system program at Lockheed Martin Missiles and Fire Control in Orlando.

Currently on a leave of absence in Tokyo, Algee, immediate past president of the Institute of Industrial Engineers, agrees that most product designers have little or no idea of the impact a poor design can have on both quality and cost.

"It's eye-opening that a lot of these designers have been in industry over 30 years, yet they don't understand the cost of quality-how pinching a penny now can cost you a hundred times over in the future," Algee says. "It's kind of the American mistake."

Complicating matters, the rampant cost-cutting over the last two decades has caused manufacturers to take a hard look at just what level of durability and material quality they are willing to design into their products. Toyota, for instance, may have gone overboard with quality, some observers believe.

Quality was Too Good

"Toyota looked at their products and discovered their quality was too good," says Jeffrey Liker, professor of industrial and operations engineering at the University of Michigan, Ann Arbor.

"They didn't need stainless steel parts in the engine area. They saved $100 billion by commonizing parts-using less expensive materials that perform the same function," says Liker, who wrote the book Becoming Lean (1998, Productivity Press).

While it's common for manufacturers to pay lip service to quality, it's clear to anyone who has ever bought a screwdriver that broke the first time it was used, discovered the rear-door lock on a brand-new SUV was defective, or had the transmission on a new car fail after less than 10,000 miles, that there is quality, and then there is quality. In sum, all products are not created equal.

Take the Bridgestone/Firestone-Ford controversy. Ford president and CEO Jacques Nasser has stated that Ford's research into its former supplier's tires indicates that "customer safety would be at risk" if Ford customers were to continue to ride on Bridgestone/Firestone tires. Likewise, John Lampe, chairman, president, and CEO of Firestone, says an expert hired by his firm concluded that the Ford Explorer could be unusually prone to skidding out of control in the event of a sudden tire failure, and that the vehicle's design, not the tires, put its occupants at risk.

Despite the charges, both companies continue to claim their own products are safe.

The unusual public brouhaha raises serious concerns about the quality of two of America's foremost brands. During a recent Congressional investigation, Deputy Transportation Secretary Michael Jackson said the National Highway Traffic Safety Administration may investigate the Explorer's tendency to roll over.

And U.S. Rep. John Dingell (D, Mich.) questioned whether Firestone had shaved the quality of its tires as part of cost-trimming efforts in the mid-1990s.

In what was perceived by some observers as an admission of poor quality in manufacturing at one of its plants, Bridgestone/Firestone in June announced plans to close its Decatur, Ill., tire facility, the main source of tires prone to suffer tread separations that led to more than 200 rollover fatalities, most of them involving Explorers.

Executives said the decision to close the plant and idle close to 1,500 workers was not related to quality problems but rather to the need to reduce capacity. That may be, but Ford's analysis of the tires that failed on its Explorers showed that an inordinate number that suffered tread separations were made at the Decatur plant, calling into question the quality procedures at the 59-year-old facility.

The plant would have required substantial capital investment to upgrade. By closing it down, Bridgestone/Firestone will save more than $100 million a year.

Sales of Bridgestone/Firestone replacement tires were down 50% in the first half of this year, compared with sales for the first six months of 2000, as wary consumers, concerned about quality, avoided the brand in droves.

Industry-wide, automotive manufacturers are notorious for cutting corners on their products to save a buck. For example, many motorists remember the days when all new cars came with a full-size spare tire. Today, most new cars come with a skinnier, cheaper wheel and tire combination that looks as if it belongs on a bicycle, not an automobile. These "donut" spares typically come stamped with a warning that they are not intended to be driven over 50 mph nor for more than 50 miles.

By instituting this subtle change, auto manufacturers reaped huge savings on tens of millions of vehicles, because the smaller units cost less to make. Unfortunately, the switch -- of which buyers were never informed -- resulted in reduced quality for the consumer.

Clearly, careful attention to the design of a product -- in terms of its manufacturability as well as its functionality and durability in the field -- is critical. The flip side is poor design and engineering that, in the auto industry, leads to recalls and higher warranty costs for automakers.

"Warranty costs are huge in this industry," says Ivers of J.D. Power. "When not enough attention is paid to design in terms of manufacturability and engineering, you wind up with vehicles that need a lot of fixing."

He cites the spate of problems owners had a few years ago with automobiles equipped with "T-tops"-sunroofs that leaked as a result of poor design that caused a lack of adequate weatherproofing.

Too Many Recalls

Recalls are common. Every month, automakers announce recalls to replace products or parts that fail. These include such things as fuel lines that rupture, components that melt due to proximity to a hot manifold, or electronic failures that may cause the vehicle to stop dead in traffic for no apparent reason. "Every auto executive in Detroit knows they're hurting because of quality," observes Martin Piszczalski, president of Sextant Research, an Ann Arbor, Mich., IT consulting firm. DaimlerChrysler recently announced that 16,000 owners of its 2000 Mercedes-Benz M-Class vehicles should replace their rear-middle-seat belt anchor plate because it does not meet specifications. In the same week, Isuzu recalled 3,100 of its 2001 Rodeo Sport vehicles to replace fuel return hoses that crack and leak. Last April, an Alameda County, Calif., judge ordered Ford to replace defective ignition devices on an estimated two million 1983-1995 vehicles prone to stalling. A class-action suit charged that Ford had placed its thick-film-ignition module, which regulates electric current to the spark plugs, too close to the engine block where it was exposed to high temperatures, thus causing the module to fail. Documents introduced in court showed that Ford confirmed the problem in its internal studies and could have moved the module to a cooler location at an added cost of $4 per vehicle. Ford denied the devices are defective, but the automaker has settled numerous other suits related to allegations of vehicles stalling. In August Ford reached a tentative settlement, agreeing to double the warranty protection to 100,000 miles on 5 million vehicles to cover the estimated $1 billion cost of fixing them. In the last year or so, Ford has been plagued with quality problems, and CEO Nasser has publicly admitted the company's quality is "about average." Its Escape mini-SUV has suffered five product recalls. Overall, the automaker came in last among the top seven auto manufacturers in J.D. Power's latest ranking. Through its lean initiative, Ford this year plans to cut 4% out of the cost of making its vehicles, for about $800 million in savings. Perhaps most embarrassing for Ford was a pair of recalls the automaker announced earlier this year on its redesigned 2002 Explorer. The first was for over 50,000 vehicles built at the company's Louisville, Ky., plant, where a jagged edge along a section of the assembly line may have sliced tires. The second was for 56,000 new Explorers, built at both Louisville and at a St. Louis plant, which may have loose rear-hatch windows that can shatter when shut. Despite all these well-publicized slip-ups in quality, J.D. Power says overall quality of cars is improving. One reason for the apparent disparity may be that J.D. Power's annual survey of automobile owners focuses on their experience during the first three months of ownership of a new vehicle. It does not address durability or any problems that may arise when a vehicle has been owned for six months, a year, or five years. In just the last three years the number of problems reported by new owners dropped from 176 per 100 vehicles in 1998 to 147 in 2001. "Things gone wrong, what we call TGWs, are evidence of a lack of quality," Ivers says. Toyota and its Lexus luxury brand dominated the J.D. Power quality rankings for 2001, grabbing the top spots in seven of 16 different vehicle market segments. The Toyota Corolla ranked as the compact with the fewest complaints in the first three months of ownership. Similarly, the Toyota Avalon took first among premium midsize cars. Likewise, the Lexus ES 300 was the number-one-ranked entry luxury vehicle, while its big sister, the Lexus LS 430, rolled off with gold honors among premium luxury cars. It comes as no surprise that the chief reason Ford, GM, and Chrysler continue to lose market share to Japanese and German automakers, analysts say, is the public's perception of the quality of American vehicles. Quality Payback To be sure, quality-improvement efforts are big in manufacturing today. For instance, Caterpillar Inc. is investing $20 million this year to train 2,700 employees in Six Sigma theory and practice. "It's a massive investment, and our goal this year is to at least break even on documented savings as a result," says Jim Owens, group president and executive office member. "We see it as an investment in quality that will yield a return in terms of reduced reliability problems and improved warranty performance," Owens says. He is quick to point out that "the back-end cost of poor quality is only the tip of the iceberg. Quality affects the customer's buying decision in the future." While some companies, such as DaimlerChrysler and Toyota, have ordered their suppliers to trim a fixed percentage of cost out of their operations, Owens says Caterpillar doesn't take that route. "I flinch when I hear blanket demands for cost reductions, as if those suppliers are going to take that out of their margins. We are cognizant that our suppliers are our partners who are committed to working with us to manage the cost of parts down." The bottom line, though, as Owens puts it, is, "Our quality is only as good as our supplier quality." Caterpillar keeps close tabs on its certified suppliers in order to maintain quality. For instance, suppliers are prohibited from making changes in materials or processes without its concurrence. "The reason is that we have been burned a couple times when that happened," Owens says. It's no secret that many manufacturers have succeeded in linking cost-cutting with quality improvement. Toyota, for instance, expects a 3% reduction in costs each year from its supplier firms, says Dan Cavanagh, plant manager at Dana Corp.'s automotive frame plant in Stockton, Calif. Producing 150,000 frames annually, the sprawling facility is a captive supplier to its sole customer, the General Motors-Toyota joint venture New United Motor Manufacturing Inc. (NUMMI) plant 60-plus miles away in Fremont, Calif. Workers at the plant, which performs 115 ft of welds on each 300-lb frame, are constantly looking for ways to improve quality and reduce costs. Each worker is expected to come up with three ideas per month, and in a recent month the average was 3.8, Cavanagh says. In one work area, cycle time was reduced by 10 to 18 seconds by adding another welder, thereby reducing defects and eliminating a buildup of parts in that area. That one change led to both reduced costs and improved quality. Unfortunately, it's a lot easier for managers under the gun to trim costs by exchanging one supplier's part for another's lower-priced one. After all, who's going to notice or care that a set of seals on a pump or valve came from a different manufacturer, or that substandard steel was used to make a part that otherwise would cost half again as much? Toyota notices. "You shouldn't compromise quality for other issues, including cost-saving initiatives," says Ed Mantey, former chief engineer for the 2000 Avalon who is based at the Toyota Technical Center in Ann Arbor, Mich. "It's not a tradeoff-we want quality to increase and cost to come down. Toyota's reputation for quality differentiates our product from our competitors'." Mantey says that when he ran the 2000 Avalon project, the company analyzed what buyers perceived were the strengths and weaknesses of the car's predecessor. "One thing people wanted us to improve was the front-door wind noise," he says. In response, Toyota engineers completely redesigned the way the door was manufactured. Instead of what is known in the industry as a press-type door, they switched to a frame-type door. The first type of door is made from a one-piece stamping, while the latter requires that the steel section that forms the channel to hold the window glass be welded to the door's sheet metal. The new type of door has a stiffer upper section that offers a better sealing surface for the weatherstripping that seals out wind and noise. Despite the need for welding, which is done both robotically and with hand-finishing, the frame-type door costs less to make. One reason is that with the press-type door, sections of metal have to be cut away for the guts of the door mechanism, and this metal becomes waste. The end result, says Mantey, is that "the customer gets better quality at lower cost." Toyota also saved money without sacrificing quality by using local U.S.-made materials over those made in Japan. "We saved millions of dollars this way, and the part performance we found was at least equal or better to the original part but at a lower cost," Mantey adds. Those within the auto industry are well aware of the tradeoffs that often occur between quality and cost, Mantey confides. "At one point a competitor said to me, 'It's less expensive to pay warranty claims than to overdesign the part.' All too often we have suppliers say to us, 'It's good enough for the Big Three, why isn't it good enough for you?'" Mantey confirms that Toyota requires its suppliers to cut costs 2% to 3% each year. Even so, he says Toyota works with them to help them achieve these reductions while improving quality, as opposed to sacrificing it. He says one of the benefits of forcing suppliers to make such efforts is that "they don't keep cranking out the same parts year after year-they must continually improve them." Mantey notes he just approved a supplier's request to use a new formula for electrodeposition coating on metal. "It's lower cost and gives better protection than the previous coating," he says. Toyota prohibits suppliers from arbitrarily changing processes or parts suppliers without seeking and obtaining approval from Toyota. "We do not allow them to compromise the quality of our vehicles for cost reductions," he says. Supply-Chain Partnerships Other industries are using similar approaches to improve quality while reining in costs. "We work with our supply chain, forming partnerships with the producers of component parts," says Brad Miller, senior manufacturing engineer at Medeco High Security Lock Co. in Salem, Va. Medeco's locks are sold only through locksmiths, primarily for commercial buildings such as government offices, banks, and convenience stores. Medeco locks cost more than other brands. A typical deadbolt set alone costs $120, five or six times an average set. Because they come with antipick technology and security keys that cannot be duplicated at a hardware store, buyers feel the extra level of security is worth the price. "If we are having trouble with a part, either dimensionally or functionally, instead of trying to accommodate a sloppy part, we'll visit the vendor to help them get back on track to provide a better part for us," says Miller. For instance, he recently had to visit a supplier to help the company redesign its process to correct a structural-integrity problem with its parts. Also, "We analyze our returns, which are really low, and attack those issues," he says. Not all manufacturers analyze their failures. "It's tricky to do that kind of analysis, and often what caused the failure is difficult to determine and it takes a lot of time," says Alice E. Smith, professor of industrial and systems engineering at Auburn University, Auburn, Ala. "And manufacturers often don't want to know." But Miller believes even one product return a year should be cause for concern. "The biggest cost of poor quality is the image of the product and the company," he says. "Poor quality costs the company hugely in lost revenues." That's the cost of quality.

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