Magazine article Risk Management

Where Has Quality Gone?

Magazine article Risk Management

Where Has Quality Gone?

Article excerpt

In late 1999, Abbott Laboratories, a leading U.S. health care company, reached an agreement with the U.S. Food and Drug Administration (FDA) to pay $100 million for failure to comply with the Good Manufacturing Practices (GMP) regulations.

The payment marked the largest amount ever paid by an FDA-regulated company for a civil violation of the Federal Food, Drug and Cosmetic Act. One year later, Wyeth-Ayerst, a division of American Home Products, agreed to pay $30 million for similar failures.

Lost in the shadow of these historic agreements are the additional punitive damages and the business impact. Abbott was required to correct certain manufacturing processes within a time frame developed by the FDA, or pay $15,000 per day (up to $10 million) until they were corrected. In addition, if the product manufacturing processes for certain medically necessary products (which were not removed from the marketplace) were not brought into compliance within a year, Abbott was required to pay 16 percent of the gross proceeds generated by those products. The company recorded $250 million in lost sales. Wyeth-Ayerst was also provided with an extensive list of corrective actions to be taken within a finite time frame. Both companies were directed to use outside auditors to oversee the remodeling of quality assurance procedures and to certify compliance, which would be further inspected by the FDA at the end of the process.

Similarly, last year the Ford Motor Company and Firestone/Bridgestone Inc. faced unusual government scrutiny, both at home and abroad, about whether the companies--and their executives--had knowledge of a safety issue (or should have) and if they acted to fix it in time. At the core of this investigation were the quality systems, communication and business processes of the companies' product development and manufacturing operations.

The liability of such quality control defects is increasingly falling into the laps of senior executives. In the Abbott case, Miles White, chief executive officer of the Abbott Corporation, and Thomas Brown, president of Abbott Diagnostics, were the named defendants in the government's action. Jacques Nasser, CEO of Ford, was called to testify before the U.S. Congress. And a few years before, senior executives from a medical device company received prison sentences for their actions. The exposure of executives and companies is gripping the attention of senior staff. These cases highlight a larger problem: What has happened to quality control?

Prelude to Problems

In the early nineties, as part of the never-ending search for greater efficiency and increased economies of scale, management consultants created visions of future operating environments. Downsize and outsource, they said. Management seized the opportunity to make their organizations lean. Cost and head count reductions became the order of the day as personnel were replaced by new technologies. Initial returns were promising and shareholder value trumpeted the success.

But did the whole business model really need to be fixed? At the operations level, where directives from above are translated into action, capacity is finite and resources are usually constrained. The resulting hierarchical structures no longer defined reporting relationships. Suddenly, mangers had ten to fifteen people reporting directly to them. As they lost the day-to-day control over the organization, operations managers prioritized needs and efforts to resolve the immediate problems. But as "do more with less" became a prevalent philosophy, errors from the front line were creating more risk exposure to the enterprise, senior management and outside directors.

For many companies now structured this way, it seems executives espouse one philosophy while their companies practice another. For example, in a survey by PriceWaterhouseCoopers in the late 1990s, senior executives identified the need for effective approaches to integrate risk management across the enterprise by aligning objectives, risks and controls. …

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