Economics of Quality and Activity-Based Management: The Bridge to Continuous Improvement

Article excerpt

Tremendous opportunities for improvement still exist in many organizations. Here is an approach for seeking them out.

It is important that the effectiveness of a quality system be measured in financial terms.(1)

Quality is becoming widely recognized as a key success factor in long-term organizational performance. However, many organizations that are implementing quality systems will see little return on their investment in terms of performance improvement. The reason: managers generally remain unaware of the tremendous opportunities for improvement that yet exist.

Management and cost systems have failed to keep pace with the need for organizational restructuring for the next century. This article examines how an economics-of-quality approach can be integrated with activity-based management in order to maximize return on investment and begin long-term continuous improvement.

Quality management or quality system?

The key to understanding this issue is to recognize the difference between total quality management (TQM) and a quality system. TQM is a philosophy under which an organization operates. The philosophy is pervasive, applying to everything (total). Its aim is to satisfy all customers, including investors and users of the customers' products and services (quality). And it focuses on the example set and reinforced by every area of the organization (management). Continuous improvement is part of the culture needed to support TQM: this is a long and never-ending journey.

A quality system is a building block for this process. It is a "tool" through which management structures the organization's operations. It ensures that all team members understand the activities needed to achieve first-free quality. The quality system establishes a process for identifying deviations from this goal and a process for analyzing the root causes so that the organization can take long-term corrective action. For example, one such tool is registration to an international standard such as ISO 9001.(2)

Quality: an organizational issue

Quality systems have evolved from their traditional focus on engineering and manufacturing operations. At one time, most quality practitioners came out of a technical background, emphasizing quality in physical activity. In these areas, losses from scrap, rework, and other "product" costs were clearly visible. Thus, the evolution of quality thinking tends to relate to systems that pertain only to direct costs, not administrative and support activity. For many organizations that implement quality systems, this is still the case.

Management is now demonstrating greater interest in implementing quality systems. But it often justifies this interest on the basis that "customers demand that suppliers be registered" rather than on any understanding of the internal benefits. Organizations that do implement a quality system are often driven by the feeling that this is simply the right area to address for the sake of the customer. The opportunity to target concrete performance measures for improvement is often overlooked.

Economics-of-quality measurement(3)

"Total quality costs represent the difference between the actual cost of a product or service, and what the reduced cost would be if there were no possibility of substandard service, failure of products, or defects in their manufacture."(4)

The above quotation is an alarmingly simplistic one: it recognizes quality costs alone as the total opportunity. But most quality systems address only some of the areas that affect an organization's cost structure. If the organization applies a quality system only to engineering and manufacturing, then it ignores the significant impact of quality on both cost structure (i.e., long-term, competitive advantage) and customer satisfaction elsewhere. Three examples can illustrate this problem:

* In creating quality system documentation, a distributor of electrical products and services ignored "process control" in the belief that a non-manufacturing business was exempt from process control. …