Royal Bank LetterPublished by Royal Bank of Canada

The Quality Imperative 1991Doing business today is radically different QUALITYfrom in the past, when customers could be

taken for granted. In a global marketplacewhere quality is the soul of competition,

Canadian business needs to rededicate CANADA

itself to excellence by world standards ...

It says much for the propensity of sophisticated mindsto overlook the obvious that the fortunes of nationsshould stand or fall on something your mother couldhave told you. This is that good quality saves moneyand poor quality costs money in the long run. Yourmother, of course, would be looking at thephenomenon from the consumer’s point of view,stressing that it is worth paying a little extra for high-quality goods because they can be expected to remainin service long after their cheaper counterparts havefound their proper home in the junk heap. Businessconsultants who have newly hit upon this home truthproclaim it from the producer’s point of view, butthe principle is the same.

They say that many of the problems facing NorthAmerican companies in international competitiontoday arise from the misconception that it is moreprofitable to produce indifferent quality than topquality. This fallacy is rooted in western commercialtradition. The chief menace to North Americanbusiness, they insist, lies not so much in foreigncompetition as in its own attitudes.

Among these attitudes is a faith in the superiorityof size. In business, sport, and war, North Americansare inclined to believe that sheer bulk will infalliblyprevail over other attributes such as skill or tenacity.Carried into the marketplace, this form of "thinkingbig" tends to overshadow considerations of quality.

It leads to a kind of overkill, perhaps bestexemplified by restaurants where diners, groaning overtheir heaped-up plates, might wish that themanagement had placed the quality of the cookingahead of the quantity of the servings. Overkill at theexpense of quality occurs in other service outlets,notably hotels where fancy toiletries and other nicetiesfail to compensate for the dripping taps that keep youawake.

Similarly, bigness and a superfluity of bells andwhistles may attempt to take the place of durabilityand reliability in manufactured goods. The leadingexamples of this phenomenon were the boat-likeautomobiles with their useless ornamental portholesand fins known during their heyday in the 1950s andearly ’60s as "Detroit iron."

They now stand in antique car shows as symbolsof the confusion between ostentation and quality.They also stand for the historic economic lesson,learned the hard way in the North American autoindustry, that the power to assign value in atransaction does not rest with the vendor, but withthe customer. Offered better value for their moneyin smaller and plainer vehicles of more practicaldesign, customers consigned these behemoths to themuseums. The rise of imported autos in the NorthAmerican market showed that quality is notnecessarily expensive -- that it can occur in any pricerange as long as the basic integrity and workmanshipare there.

If North American business once lost sight of theimportance of quality, it was because many of itscollective attitudes were formed in the days ofseemingly limitless seller’s markets. The pent-up desirefor scarce goods immediately after World War II wasfollowed by the bubbling demand of the baby boom.When everything made could be sold quickly andeasily, volume came to dominate business thinking.Production control departments were staffed bypeople called "chasers," who ran around trying tokeep machines running full-out regardless of thequality of the output. The really bad stuff couldalways be thrown away.

Such was the hunger for durable goods in theabsence of imported alternatives that consumersconsidered it merely the luck of the draw if something

didn’t work properly or if service was lacking.Advertising enlisted them into an endless pursuit of"new and improved" products which gave rise to thepractice of planned obsolescence. When householdgoods, clothing and the like were replaced long beforethey began wearing out, there was no particular needto worry about durability or long-term reliability.

This is not to say, however, that reputablemanufacturers did not care if they produced defectiveproducts. They tried to hold down the number ofdefects through quality control. Standards wereenforced, after a fashion, by frequent checks andsampling. Instead of quality being built into a productin the first place, it was "inspected in." (Much thesame thing happened in large-scale service outlets,where supervisors were expected to maintainstandards, rather than the employees serving the publicthemselves.)

What actuallycosts is a lack

of quality

The system of putting quality considerations at theend rather than at the head of the line was in the"land of plenty" tradition. Until relatively recently,

the resources of NorthAmerica seemed solimitless that we couldabsorb a great deal ofwaste. No one seemed tothink twice about thecost of cranking out ahigh proportion of

defects. Nor did anyone seem to consider thepsychological effect within a company of routinelytolerating faulty workmanship.

Psychology aside, The system of "inspect andreject" is a backward way of doing things. As writerLloyd Dobyns described it in Smithsonian magazine,"you build a whole lot of widgets, inspect them andseparate the good from the bad. The bad can’t besold, but they cost a lot. Not only must all thoseinspectors be paid, but a bad widget takes the sameamount of raw material, machinery, work time, andattention as a good widget. That explains why,typically, about 25 per cent of any manufacturingplant’s budget goes into repair and rework. That’swhy so many manufacturers think quality costs more,but what actually costs is a lack of quality."

Dobyns wrote and narrated the script for a now-famous television documentary in 1980 which madean unlikely American hero of W. Edwards Deming,then a 79-year-old consultant in statistical studies. The90-minute NBC "White Paper" bore a self-explanatory title: If Japan Can, Why Can’t We?

Deming was already a hero in Japan, where theannual prize for productivity is named after him. Hehad received a high award from the late Emperor

Hirohito. The citation said that the Japanese peopleattribute the rebirth of their industry to this lankyAmerican who first arrived on their shores at the in-vitation of the Union of Japanese Scientists and En-gineers in 1950 at the age of 49.

Japanese efficiencywas thought to be

a manifestationof the Mysterious

East

It was Deming’s work in helping to defeat theJapanese in World War II that brought him to their

attention. During thewar, Dr. Deming OtisPh.D. is in mathematicalphysics) applied his ex-pertise in statistical anal-ysis to set up programswhich enabled Americanengineers and technicians

to improve the quality of war mat6riel. At the sametime, they boosted productivity.

The theory of statistical quality management whichhe taught to Japanese engineers and managers wasessentially the same as what he had taught to his com-patriots. But his new pupils took it to heart while hisold ones apparently forgot it in the post-war marketbinge.

Even if Japanese industry had not been devastat-ed by American bombing, it was at a disadvantageon world markets. Japanese manufactured goods wereinfamous for their atrocious quality. The idea thatthe producers of such shoddy and derivative productscould become a force in world trade was laughable.A story went the rounds that the Japanese had re-named a city "Usa" so that they could label cheapcopies of American goods "MADE IN USA."

Yet, sometime in the early 1970s, managers in avariety of industries in the West woke up to find thatthe Japanese were delivering much better value formoney than their own companies. At first, western-ers tried to shrug this off as a temporary blip in thepreordained scheme of things. Then, when it becameobvious that the competitive threat was major andreal, some concluded that it was a manifestation ofthe Mysterious East -- that something in the Japaneseculture made it possible to achieve levels of qualityplus productivity which westerners (apart, perhaps,from the West Germans) could not hope for. If anyexplanation was attempted, it was that Japanese wor-kers were virtual slave labour. (They are now amongthe highest-paid blue collar workers in the world.)

As the competition heated up, North Americancorporations responded in the tried-and-true adver-tising tradition of saying they were producing betterquality without actually doing it. Later on, the word"quality," along with "excellence," became a kindof incantation; evidently it was hoped that if the words

were repeated frequently enough, the actual condi-tion would materialize.

Coming from a cultural tradition which prizes ac-tion and sees the world in terms of win-or-lose,western companies instinctively sought quick and deci-sive solutions to their competitive problems. Ac-customed to aiming for objectives, they found it hardto digest the idea that there can never be a finishingline to achieving quality -- that improvement is anever-active process which stretches into infinity.

It should be noted that improvement does notmean the same to the Japanese as it does to peoplebrought up thinking in terms of "new improved"products. As Deming’s fellow quality guru, J. M.Duran, has pointed out, improvement in Japaneseindustry means an improvement in the entirecompany-customer process, including marketing,design, manufacturing, and servicing.

A television set manufacturer who made a largerand more elaborate set would not have made an im-provement, but an enhancement. If the defect rate,the number of repair employees, and the cost of serv-ice calls dropped by several times, that would consti-tute an improvement to the Japanese way of thinking.And the improvement in quality would also be an im-provement in productivity, an apparent paradoxwhich many western executives f’md difficult to grasp.

The ideal is to getthings right the

first time,every time

Deming teaches that you can use statistics to de-termine what any process will do, and then designimprovements to get the best results from that process.

But though he appliesstatistics to productionmodels, he objects torunning businesses byarithmetic. He believesthat a short-sighted con-centration on the bottomline distracts attention

from a company’s long-term constancy of purposeand leads to neglect of the process of continual im-provement which results in lasting profitability. Hehas no use for performance measures which pitmanagers against one another and spread insecurity.These tend to set floors, not ceilings, of acceptablequality, he says.

Among the cultural traits in western business whichthe quality gurus deplore is the tendency to adver-sarial relationships. The Economist recently noted, forinstance, that European auto producers were havingdifficulty implementing just-in-time inventory systemsbecause they play off several subcontractors againstone another to bring down the prices of parts. InJapan, each part for an auto plant is made by a sin-gle supplier who is a virtual partner of the auto firm

in the design and manufacture of the component. Thisenables Japanese automakers to undertake "syn-chronous manufacturing," in which the componentleaves the supplier’s plant and goes directly into theproduction line. It saves enormous sums in storagecosts and financing charges for inventories.

Just-in-time delivery theoretically furthers the guid-ing ideal of quality management, namely "gettingthings right the first time, every time." With nocushion of inventories to fall back on, operations needto be as close as possible to error-free. The causesof inferior quality -- shortcomings in raw materials,training, specifications or machines -- must be giveninstant attention to prevent their recurrence and keepthe system running. JIT obliges executives, plannersand analysts to get out of their offices and grapplewith real problems on the shop floor.

Creating workteams in which

everybody isthe boss

Ground-floor management goes against the grainof the grand old western business tradition of pass-

ing the buck. In Japan,the tradition of account-ability which once causedleaders to commit hara-kiri lingers on amongmanagers, who take theirresponsibilities very per-sonally. In the mean-

time, their western counterparts may be found blam-ing suppliers, the government, the educational sys-tem or the labour force for their companies’deficiencies. A survey in California a few years agoasked managers who they thought was accountablefor quality. Fifty-five per cent said the worker; 25 percent said the supervisor; 12 per cent said engineersand other specialists. Only 8 per cent saidmanagement.

Deming has harsh words for managers who blamefailings in products and performance on labour. "Eversince there was anything such as industry," he oncewrote, "the factory worker has known that qualityis what will protect his job. He knows that poor qual-ity in the hands of the customer will cost him his job.He knows it and he lives with that fear every day.Yet he cannot do a good job. He is not allowed todo it because the management wants figures, moreproduct, and never mind the quality."

Under quality management systems, the onus is onthe workers themselves to inspect their own outputor delivery of service. According to Tom Peters andNancy Austin in their book, A Passion for Excellence,the fact that people inspect their own work is just asimportant psychologically as it is practically.

"Quality is not a technique, no matter how good,"they write. "Any device to maintain quality can be

of value. But all devices are valuable only if managers-- at all levels -- are living the quality message, pay-ing attention to quality, spending time on it as evi-denced by their calendars. And if managers, at alllevels, understand that no matter where technologyleads, quality control comes from people (starting inthe mail room) who are committed."

Adversarial relationships between management andlabour, in which each side suspects the other of theworst, have exerted a special drag on North Ameri-can quality and productivity. The admirable Britishretailer Marks and Spencer has gone out of its wayto establish an atmosphere of partnership betweenmanagers and line employees, showing trust in itspeople by eliminating inspections. Marks and Spencerhas removed the manager entirely in some situationsby creating work teams in which no one person isin authority. Everyone on them is responsible forproductivity, as well as scheduling, hiring, training,resource allocation, budgeting and other "manage-ment" tasks.

The organizationalsystem must notchoke off quality

Without changing the system so radically, othercompanies have recognized the wisdom of movingauthority down the ladder. "All decisions should

be made as low as pos-sible in the organiza-tion," the maverickexecutive Robert Town-send wrote. "The Chargeof the Light Brigade wasordered by an officerwho wasn’t there look-

lng at the territory."Being close to the action in business necessarily me-

ans being close to the customer, who is the final ar-biter of whether or not a business is doing its jobproperly. To spread the perception that there is al-ways a living human being out there on the receiving-end of a business’s activities, consultants urge thatpeople throughout the organization be encouraged toregard the next person who receives their work as theircustomer. He or she is to be served just as efficientlyand thoughtfully as the customer out on the street.

Quality in anything is associated with depth, andthis certainly applies to efforts to improve the quali-ty of goods and services. To be a purveyor of quali-ty, an organization must have quality back-up -- inthe supply of parts and materials, in communicationsand transportation, and finally in the educational andtraining system which determines the quality of thelabour force.

Quality must also run deep within the company.

It must be something that is seen and experienced inevery corner of the organization, and not just talkedabout in buzz-words. It is futile to give pep talkspromoting quality while the organizational processmilitates against it by discouraging initiative and per-petuating internal rivalries. Quality-first thinking mustpermeate the whole organizational system, from theway employees are evaluated and compensated, to theway the accounting is done, to the way work unitsare organized and deployed.

While achieving quality in an organization may becomplicated in detail, it is really the most basic ofconcepts. When all is said and done, it is a matterof mentality. In any business from a multinationalcorporation to a corner store, quality is a reflectionof the care, integrity, and respect for the customerthat goes into the goods or services being offered. Andthat care, integrity and respect cannot exist only onthe outside of the organization where it is seen by theconsumer. To sustain a reputation for quality in themarketplace, an organization has to make it an every-day fact of life on the inside as well.

In this case, as business organizations go, so goesthe nation. With the globalization of business overthe past few years, it has become crucial to improveCanada’s international competitiveness if this nation’sstandard of living is not only to be maintained, butimproved.

Yet, in an earlier Royal Bank Letter on the sub-ject (November/December 1988) we quoted these un-settling words from Robert Ferchat, then presidentof Northern Telecom Canada Ltd.: "We in NorthAmerica do not yet have throughout our culture --outside or inside the corporation -- a real, deep, un-shakable conviction that quality is the key to com-peting, the key to survival, the key to growth andprofitability."

Have there been changes in the situation sinceMr. Ferchat spoke? Certainly there has been moretalk about quality in business circles of late, but itis an open question whether the talk has been backedup by action. If Canadian business collectively hasnot become substantively committed to quality, it hadbetter do so soon.

During Quality Month in Canada in October thisyear, the message will be spread that world-class qual-ity is a national necessity. It is not a message for bus-iness alone. It affects every Canadian who works,teaches or goes to school, because the sum of theirperformance will ultimately determine the level ofCanadian quality.