Quality risks of products and services are often counted as operational risks. Operational risk is defined as the weakness or fallacies in the organisational processes and transactions (Ruin 2001). Managing operational risks not only ensures the comfort that the desired product or service is achieved, but also ensures that the required product or service is constantly of the quality that an organisation can boast of, for customer satisfaction and value for money.

Quality risks arise due to quality problems in products or services. Smith (2000) classified quality problems into performance problems and design problems. These were then categorised into five specific types of quality problems:

Poor quality of goods and services can also lead to quality related risks which represents an impact on the survival of any economic unit. Figure 13.1 summarises the risks due to poor quality.

BM Trade Certification Ltd (Ambrose 2005) stated that it is often found that organisations such as professional services are reluctant to admit that there is any risk of non-conformity in what they do. They are therefore reluctant to allocate resources to controlling something they believe could not exist in their organisation. Non-conformities can often be present but are continually corrected in the course of work, not recorded and therefore repeated.

Feigenbaum (1983) defined a non-conforming unit as ‘a unit or service containing at least one departure of a quality characteristic from its intended level or state that occurs with a severity sufficient to cause an associated product or service to not meet a specification requirement’.

ISO 9000 series was developed by the ISO Technical Committee (TC) 176. It was published in 1987 and is updated approximately every five years. The series consists of five documents whose focus is quality assurance systems: ISO 9000, ISO 9001, ISO 9002, ISO 9003 and ISO 9004 (Lamprecht 1993):

ISO 9001:2000 identifies a set of outcomes to be achieved and is not specific about how the requirement is met, thus the fundamental responsibility for the design of the management system lies with the organisation creating it. Therefore for the quality system to be truly effective an organisation must consider all the influences on the system – including cultural – especially where this has a direct effect on the customers’ experience (Lawson 2003).

Al-Khalifa (2000) stated that the benefits of ISO series certification are:

Jacobs (2004) noted that optimists will argue that ISO 9001 certificated companies have a better survival rate than non-certificated ones. That may be a statistical fact but it is irrelevant to the fledging business just trying to survive in a relentless market with customers squeezing down prices and pushing up quality demands.

Garvin (1987) provides a well-known framework for thinking about product quality that is based on eight dimensions: performance, features, reliability, conformance, durability, serviceability, aesthetic, and perceived quality. Yet, product quality is a complex, multidimensional factor for which a global definition does not exist.

Building customer satisfaction is the next logical step in a chain that leads from product and process quality towards a complete, mutually beneficial relationship of loyalty and trust between customer and supplier (Hampshire 2003). The consequence of faulty products was that the level of customer satisfaction was low, profit margins were being eroded and administration staff spent a disproportionate amount of time and effort correcting these errors, in effect bad practice. Therefore, companies must contain potential quality problems before the product leaves the plant, while providing detailed product genealogy information to trading partners.

To be fair, even organisations with the highest quality reputation might be taken off guard by the emergence of a new quality problem; however, it is presupposed they will soon begin to search for the cause of the defects.

Juran (1988) defined defect as ‘any state of unfitness for use, or non-conformance to specification, such as, oversize, low mean time between failures, illegible invoice’. Typical examples of defects are found in products constructed with materials of insufficient strength or durability. The consequence of design defect can be crippling: massive recalls, costly modifications, loss of reputation and sales, even going out of business.

The following deals with the consequences of product defect or non-conformance.

Companies which have the highest standards of quality in design and manufacturing may on occasions find it necessary to withdraw products from service for replacement, modification or refit (Dale and Plunkett 1990).

Recall is a costly and time-consuming event that should be avoided entirely, but without adequate quality programmes of process traceability, too many customers will receive defective products and too many products will be recalled for repair or replacement even though they are not defective. This has enormous implications for the quality-conscious manufacturer that gets rated on the number of recalls it performs, not to mention the risks associated with the direct and indirect costs.

The managing director of Aon’s Crisis Management, Harrison (2005), mentioned that ‘In addition to obvious food safety risks, many food manufacturers have begun to outsource the production and distribution of their products – lending recipes, production techniques and brand names to third parties. This high level of outsourcing has generated product recall and contamination exposures for third parties and their suppliers. Most suppliers are fully aware of general risks, but many fail to consider the damage their products could do to another company’s reputation or its bottom line. The lack of awareness about this exposure means that many small companies are at risk for losses that could put them out of business altogether.’ One of the supposed benefits of outsourcing is the risk transfer element. However, many organisations increase the risks associated with their product or service by outsourcing to suppliers. In some cases organisations outsourcing elements of work will mitigate their own risks by insisting on their own personnel being involved and their QMSs are adhered to by the supplier. This is evident in the manufacture of materials for pharmaceutical products.

To decide if a recall is necessary a firm must:

Reasons for the existence of re-work include:

Figures on the amount of re-work do not provide a signpost on how to reduce it. They do provide, however, a basis for understanding the magnitude of the problem. Moulis (1992) indicated that excessive and repetitive re-work usually results in the following:

Scrap generation and defect origins are one of the major, basic concepts of evaluating manufacturing performance. They are the criteria and major contributors to the realisation of profit, productivity, quality, on time delivery, maximisation of capabilities, acceptable vendor performance, product redesign, scheduled preventive maintenance, and the list goes on. Since undue scrap losses may reflect poorly on individuals and groups, including supervisors responsible, a temptation to hide scrap losses may often presume to exist (Lester et al. 1985).

The major causes of scrap include:

Wastage, on the other hand, is all the activities associated with doing unnecessary work or holding stocks as a result of errors, poor organization, the wrong materials, exceptional as well as generally accepted losses (Oakland and Porter 1995).

Generally speaking, waste is generated due to different types of causes. The following six types of waste are very common, according to Samaddar and Heiko (1993):

Waste costs companies money. The more waste that can be eliminated or reduced the greater the opportunity to create an effective and profitable manufacturing operation.

Consumer complaints come from a wide variety of sources. Many are made by unsatisfied users of the product. However, many also come from consumers who are satisfied users of the product, non-users of the product, and even non-purchasers of the product (Jacoby and Jaccard 1981). The reason underlying complaints differ between each type of consumer; it thus becomes necessary to identify who is complaining and why, in order to determine if the complaints received are indicative of product defect.

There are a number of factors that influence whether the consumer complains:

Unfortunately, interest and research in service quality seems to be running about 60 years behind interest in product quality (Gummesson 1988). One emerging view argues that service purchases are probably perceived as riskier than product purchases (Turley 1990). Since researchers have recognised that services tend to be less uniform than products, quality risk appears to be an issue that service managers need to be aware of when setting strategies.

Service quality perceptions are caused by: professionalism and skills, attitudes and behaviour, acceptability and flexibility, reliability and trustworthiness, recovery reputation, and control (Gronroos 1988). However, an understanding of how consumers evaluate quality is vitally important. It is, after all, the consumer’s perception of quality that counts, not management’s.

Turley (1990) reviewed a study in which it was concluded that the highest quality-risk service was savings and loans/banks. Therefore, managers of such services need to be particularly concerned with quality-risk perceptions.

Harrow (1997) indicated that public service managers know that, whatever attitude to managing and assessing risk they adopt, there is always the likelihood of public rejection, not only when decisions go disastrously wrong but also when outcomes are not quite as planned. From a competitive point of view, service firms that implement quality-risk reducing approaches should have an advantage over firms that do not.

Dr Joseph Juran, quoted by Hetland (2003), stated that if you continue to do the same thing you will get the same result. Improvement will require changes in the processes. The risks associated with changes, particularly in terms of quality, can result in loss of profit and loss of customers.

Hillier (2004), quoted in Elliott and Atkinson (2007), notes that price falls in recent years have not been what they seemed stating that a new phenomenon, ‘stealth inflation’, in which the quality of goods and services decline along with price is now prevalent in global markets. The authors suggest that the risks associated with this must be addressed by organisations in the same way as destructive technology. Customers will always seek value for money; however, most customers will have a minimum benchmark and should quality drop below that benchmark they seek alternatives. Similarly with destructive technology customers will seek more efficient ways of meeting specification by insisting on the latest technology available, usually at a more competitive price and with greater efficiency and reliability.

Improvement of quality shifts waste of man-hours and of machine time into the manufacture of good products. The result is lower costs, better competitive position, and hence better reputation as represented in Figure 13.2.

Early in the twentieth century, the term ‘quality control’ began to be used as a synonym for ‘defect prevention’ (Juran 1988). However, later on, the term included tools, skills and techniques through which quality is carried out. Quality control is defined as ‘activities designed to minimise the incidence of non-conformance during and after production. Specifications and tolerances are established, process capabilities ascertained, and tests and inspections performed to compare actual against standard performance’ (Enrick 1985).

The seven well-known tools of quality control are as follows (Mizuno 1988):

A quality aware company can eliminate most of the cost caused by a quality problem by directly and immediately focusing on quality improvement (Freiesleben 2004). Continuous improvement of processes and systems can be effectively achieved using statistical and associated techniques that help identify, predict and reduce process variation, and so improve consistency and quality (Grigg 2004).

Although we must accept the fact that variability does exist, there are methods to control it within satisfactory boundaries. Statistical tools are available to identify quality problems but must have support of management to improve quality. Deming has stated that 85% of the causes of quality problems are faults of the systems which will remain with the system until they are reduced by management. The following is a list of the more common statistical tools used in quality control application (Hubbard 2003). These tools have specific applications in industry, and care should be taken to select proper one, as shown in Table 13.2.

Tassoglou (2006) identifies both qualitative and quantitative tools and techniques that are used to determine quality related issues. These include decision collecting tools, decision assessing tools and statistical process control tools which he concludes can be used in the data collection and data processing stages of a risk assessment.

Above all, the focus should be on eliminating core issues that cause problems, and taking steps to re-engineer processes and continuously monitoring and reviewing operational procedures. Management must accept any potential or known problem as a challenge and, more importantly, an opportunity to improve and control deficiencies.

Cost of poor quality measurement has proven to be a useful tool for focusing management attention on the profit impact of poor quality. Figures 13.3 and 13.4 illustrate a general representation of the relationship between defects and profit.

These defects lead to quality risks which consequently affect the cash flow negatively as illustrated in Figure 13.5.

Clearly, the costs associated with pure risk, that being negative effects, can have a major affect on a project’s or investment’s cash flow. The QMS helps to mitigate risks associated with quality and provides the first step to avoiding inherent risks in an organisation.

All organisations require QMS. The ISO Standards form a framework for creating best practice and traceability. The processes associated with any service or product or project can not only be addressed in terms of conformance but also assessed in terms of the risks associated with each process.