Quality: Recession's antidote

The soaring national budget deficit hovering around 10 percent of the GDP, reduced consumer demand, unemployment at 9.7 percent and the jittery world economy are making everyone cost conscious, and the search is on for a panacea that would reduce costs but not lead to more layoffs.

Even though nascent signs of economic recovery are visible, it will still take some time for the consumer demand to reach the pre-recession levels.

In the absence of robust consumer demand for manufactured goods and services, economic recovery is painfully slow, leading to continued layoffs that in turn lower the demand, thereby completing a vicious circle.

Manufacturers and service providers are primarily resorting to job-cutting and inventory reductions to cope with the reduced demand. These actions typically have a cascading effect on the other players in the supply chain, exacerbating the problem. For example, if an auto manufacturer brings down the inventory level in tune with the current demand, it will force all the upstream players -- steel, transmission systems, upholstery -- to bring down their inventory levels as well.

One way to come out of this vicious circle is to improve competitiveness by focusing on the appropriate "order winners" and the "order qualifiers." Simply put, order winners are those characteristics of a product or a service that win orders for a manufacturing firm or a service provider in a competitive environment. For example, delivery speed and delivery reliability could serve as possible order winners for a company such as UPS. Quality of service could be a possible order winner in the health care industry.

Qualifiers are those characteristics that allow a firm entry into the market to compete with other players. For example, cost to the customer could be one of the qualifiers in both the above-mentioned examples. Usage of the appropriate quality tools to improve upon the order winners enhances the competitiveness of the organization, resulting in better market shares and improved profits.

Enhancing the quality of the manufacturing and service processes not only allows improving upon the preset order winners, but also facilitates improved overall performance. It is a known fact that improvement in quality leads to efficient use of resources and improved competitiveness. Focusing on quality is particularly relevant for Southeast Missouri to bring it on par with other better performing regions in Missouri. Even though quality-related concepts have gained a lot of prominence these days, the usage of even simple quality tools is not that widespread in the medium- and small-scale sector.

Typically, there is a notion that quality costs a lot of money, and it is a bottom-up approach. When internal failure costs -- repairs, reworks -- and external failure costs -- warranty service cost, product liability cost, loss of customer goodwill -- on account of poor quality are taken into consideration, initial investment on quality is typically quite reasonable. Also, the introduction and the consequent monitoring of the quality systems is the responsibility of the top management. Unless the top management is committed to the quality concept any quality management system is bound to fail.

Focusing upon kaizen (Japanese for continuous improvement) could be a good strategy for cost-effective operations, which would counter the current bleak economic scenario. The following tools that aid in continuous improvement of the operating processes also serve as a foundation for future or ongoing strategies for achieving quality, and best of all it takes little or no investment to get started.

* Cause-and-effect diagram, also called the fishbone diagram or Ishikawa diagram, is one such tool that helps an organization to identify the important causes that result in a better or worse outcome through cross-functional brainstorming sessions.

For example, the problem of long customer waiting times at a local bank branch could be analyzed, and problem areas could be identified. Cause-and-effect diagram will facilitate identifying all the possible causes and provide pointers if further data collection is required to address the issue.

* Check sheet is a data-collection tool typically used to identify the frequency for the variable of interest. One could use tally marks to collect data, which on summarizing would shed light on the important aspects of a process. For example, a pizza place may collect data on customer complaints. Using a pie chart would facilitate prioritizing the complaints in the order of their frequencies.

* Pareto chart is another popular quality-enhancement tool, which works on the principle of "vital few and trivial many" -- a majority of the quality-related problems will be typically on account of a few important causating factors, and only a few problems will be on account of numerous but not-so-important factors.

A Pareto chart is simply a bar chart representing different categories arranged in the decreasing order of their frequencies along with a cumulative percentage chart. In these economically hard times, a Pareto chart facilitates an organization to decide upon the few important factors to spend their limited resources on to realize significant improvements in product quality. For example, a Pareto chart can be used by a health care provider for identifying the important contributory factors for the increasing cost of health care and devise an appropriate strategy for addressing the same.

* Histogram is a simple yet powerful tool to shed light on the central location and variability for a data set. It will give a rough indication as to whether or not a manufacturing process is capable of producing within the specs for a product. If the histogram is skewed, as opposed to being symmetrical, it indicates the presence of extreme values either on the lower side or on the higher side. For example, a left-skewed histogram for customer satisfaction for a car dealer may indicate that even though a majority of customers are happy with the service, there are a few who award very low scores on customer satisfaction. A customer care-conscious manager might want to focus on those issues identified by the customers who awarded poor customer satisfaction ratings for strategizing appropriate corrective action.

* Control charts are very popular for monitoring a manufacturing process over time. Control charts allow us to identify trends and out of control situations with respect to the process mean and variability so that appropriate preventive action can be taken before a lot of defective product is produced. One of the biggest drains on the resources in a manufacturing setting is repairing, reworking and scrapping of the nonconforming material. A control chart not only ensures better quality, but saves on valuable resources that could help save some jobs what with the current high rates of unemployment.

* A scatter plot helps bring out the relationship, if any, that exists between two variables. Identification of the appropriate relationship between the variables facilitates better decision making. For example knowing the relationship between the new house starts and the sales of furniture will allow a furniture retailer to stock appropriate amounts of inventory thereby preventing either overstocking or under stocking.

The use of advanced statistical tools will further improve quality and operational efficiency, but the simple quality tools presented here can be used in any organization of any size to start reaping the benefits of improved quality and reduced costs right away.

Even though data from different sources indicate that recession might be over, we are not there yet on account of the high unemployment rate, subdued consumer demand and the poor recovery in housing sector. It is particularly incumbent on the manufacturing and the service sectors to improve the competitiveness to stay afloat and excel in the highly competitive domestic and global markets.

Renewed focus on quality could be the silver bullet to bring us out of the current economic turmoil.

Dr. Gangaraju Vanteddu is assistant professor of quantitative methods in the Department of Accounting and Management Information Systems at Southeast Missouri State University's Harrison College of Business.