Quality Programs in Banking: A Critical View

By Hindi, Nitham M.; Helmi, Medhat A. | The Journal of Bank Cost & Management Accounting, January 1, 1999 | Go to article overview

Quality Programs in Banking: A Critical View


Hindi, Nitham M., Helmi, Medhat A., The Journal of Bank Cost & Management Accounting


A well-known banker believes that successful companies in the 21 st century will operate against three fundamental components of success: an unshakable commitment to quality control, strategic investment in human resources, and productive and creative application of technology. He further emphasized that of these three components, quality control may be the most visible, and carry the potential for the greatest returns.1

These remarks are supported by real experience of banks and financial institutions which come to realize that although quality initiatives require significant investment, the benefits reaped from them by far outweigh the investment.2 Demanding higher quality for lower costs, customers in recent years have been pressuring companies to shape their processes to meet the higher standards of excellence. The themes for the 1980s and 1990s include total quality management (TQM), customer satisfaction, cost, quality, and time, technology, market globalization, reengineering, outsourcing, availability of capital and markets, and finally costs of quality. Although costs of quality concept is usually applied to the manufacturing industry, the thesis of this paper is that the banking industry would also benefit from such application. The purpose of this study is to discuss the feasibility of applying costs of quality concepts to the banking industry. This study is divided into seven sections: the meaning of quality, reasons to implement quality programs, materiality of quality costs, calculating costs of quality, methods to identify quality problems, key success factors for successful quality programs, and summary and conclusions.

THE MEANING OF QUALITY

There are many ways to define quality. M.L. White, for example, defines quality as "performance leadership in meeting customer requirements by doing the right things right the first time. Doing the right things means focusing work processes on essential tasks which add value to customers, both internal and external. Doing them right the first time means working as efficiently and accurately as possible avoiding the wasted efforts required to correct mistakes."3 Therefore, quality should be defined to include customer perception, eliminating non-value added activities, continuous improvement (Kaizen in Japanese), greater market penetration, sales performance, customer retention, meeting or exceeding customers' expectations, and future market prospects. With the wide spread of TQM in the 1980s and continuing in the 1990s, more businesses have added quality programs to enhance their competitive positions. TQM plays a very important role in achieving quality. Some TQM concepts include customer orientation, do it right the first time, train and retrain, empower employees, continuous improvement, use of statistical analysis to understand and continually improve the process, and concentrate on long term and team concepts. Many companies (such as Hewlett-Packard, Ford Motor Company, and Toyota) list TQM as one of their key success factors. There are many awards (such as the Malcolm Baldrige Quality Award, the Deming Prize, and the Premio Nacional de Calidad) to recognize exceptional quality.

To implement quality programs, it is essential that companies be made aware of the cost of quality. Cost of quality includes costs of compliance and costs of non-compliance (failure). Compliance costs include prevention costs and appraisal costs. Prevention costs are the costs of quality assurance efforts. They are incurred to prevent errors from occurring, and include such items as do it right the first time, and that services meet customer expectations. It sounds easy, but what investments have to be made to prevent defective products or services from occurring in the first place? Necessary are quality hiring and training of workers, quality circles, better designs and engineering, better production systems and equipment, technical support to suppliers or vendors, inspection, statistical process control, shelf-life programs to prevent spoilage, design review, vendor certification programs, quality orientation training, and preventive maintenance. …

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