A business organization produces goods and services to meet its customers' needs. Customers want value and quality has become a major factor in the value of products and service. Customers know that certain companies produce better-quality products than others, and they buy accordingly. That means a firm must consider how the consumer defines quality. The customer can be a manufacturer purchasing raw materials or parts, a store owner or retailer purchasing products to sell, or someone who purchases retail products or services over the Internet. W. Edwards Deming, author and consultant on quality, says that "The consumer is the most important part of the production line. Quality should be aimed at the needs of the consumer, present and future." From this perspective, product and service quality is determined by what the customer wants and is willing to pay for. Since customers have different product needs, they will have different quality expectations. This results in a commonly used definition of quality as a service's or product's fitness for its intended use, or fitness for use; how well does it do what the customer or user thinks it is supposed to do and wants it to do?

• Fitness for use: is how well the product or service does what it is supposed to.

Products and services are designed with intentional differences in quality to meet the different wants and needs of individual consumers. A Mercedes and a Ford truck are equally "fit for use," in the sense that they both provide automobile transportation for the consumer, and each may meet the quality standards of its individual purchaser. However, the two products have obviously been designed differently for different types of consumers. This is commonly referred to as the quality of design—the degree to which quality characteristics are designed into the product. Although designed for the same use, the Mercedes and Ford differ in their performance, features, size, and various other quality characteristics.

• Quality of design: involves designing quality characteristics into a product or service.

The dimensions of quality for manufactured products a consumer looks for include the following^[5]:

Dimensions of manufactured quality for which a consumer looks.

These quality characteristics are weighed by the customer relative to the cost of the product. In general, customers will pay for the level of quality they can afford. If they feel they are getting what they paid for (or more), then they tend to be satisfied with the quality of the product.

The dimensions of quality for a service differ somewhat from those of a manufactured product. Service quality is more directly related to time, and the interaction between employees and the customer. Evans and Lindsay^[6] identify the following dimensions of service quality.

Dimensions of service quality.

A Mercedes and a Ford pickup truck are equally "fit for use," but with different design dimensions for different customer markets that result in significantly different purchase prices.

Now we need to look at quality the way a producer or service provider sees it: how value is created. We already know that product development is a function of the quality characteristics (i.e., the product's fitness for use) the customer wants, needs, and can afford. Product or service design results in design specifications that should achieve the desired quality. However, once the product design has been determined, the producer perceives quality to be how effectively the production process is able to conform to the specifications required by the design referred to as the quality of conformance. What this means is quality during production focuses on making sure that the product meets the specifications required by the design.

Quality of conformance: is making sure the product or service is produced according to design.

Examples of the quality of conformance: If new tires do not conform to specifications, they wobble. If a hotel room is not clean when a guest checks in, the hotel is not functioning according to the specifications of its design; it is a faulty service. From this producer's perspective, good-quality products conform to specifications—they are well made; poor-quality products are not made well—they do not conform to specifications.

Achieving quality of conformance involves design, materials and equipment, training, supervision, and control.

Achieving quality of conformance depends on a number of factors, including the design of the production process (distinct from product design), the performance level of machinery, equipment and technology, the materials used, the training and supervision of employees, and the degree to which statistical quality-control techniques are used. When equipment fails or is maladjusted, when employees make mistakes, when material and parts are defective, and when supervision is lax, design specifications are generally not met. Key personnel in achieving conformance to specifications include the engineering staff, supervisors and managers, and, most important, employees.

An important consideration from the customer's perspective of product quality is product or service price. From the producer's perspective, an important consideration is achieving quality of conformance at an acceptable cost. Product cost is also an important design specification. If products or services cannot be produced at a cost that results in a competitive price, then the final product will not have acceptable value—the price is more than the consumer is willing to pay given the product's quality characteristics. Thus, the quality characteristics included in the product design must be balanced against production costs.

L.L. Bean's first product was the Maine Hunting shoe, developed in 1912 by company founder, Leon Leonwood Bean, a Maine outdoorsman. He initially sold 100 pairs to fellow sportsmen through the mail, but 90 pairs were sent back when the stitching gave way. However, true to his word L.L. Bean returned their money and started over with an improved boot. In years to come L.L. Bean operated his business according to the following belief: "Sell good merchandise at a reasonable profit, treat your customers like human beings, and they will always come back for more." L.L. Bean also guarantees their products to "give 100% satisfaction in every way." If they don't, L.L. Bean will replace the item or refund the purchase price "at any time."

We approached quality from two perspectives, the customer's and the producer's. These two perspectives are dependent on each other as shown in Figure 2.1. Although product design is customer-motivated, it cannot be achieved without the coordination and participation of the production process. When a product or service is designed without considering how it will be produced, it may be impossible for the production process to meet design specifications or it may be so costly to do so that the product or service must be priced prohibitively high.

Figure 2.1 depicts the meaning of quality from the producer's and consumer's perspectives. The final determination of quality is fitness for use, which is the customer's view of quality. It is the consumer who makes the final judgment regarding quality, and so it is the customer's view that must dominate.

Figure 2.1. The Meaning of Quality

A handful of prominent individuals summarized in Table 2.1 have had a dramatic impact on the importance of quality in the United States, Japan, and other countries. Of these "quality gurus" W. Edwards Deming has been the most prominent.

In the 1940s Deming worked at the Census Bureau, where he introduced the use of statistical process control to monitor the mammoth operation of key punching data from census questionnaires onto millions of punch cards. During World War II, Deming developed a national program of 8- and 10-day courses to teach statistical quality-control techniques to over 10,000 engineers at companies that were suppliers to the military during the war. By the end of World War II he had an international reputation.

In 1950 Deming began teaching statistical quality control to Japanese companies. As a consultant to Japanese industries and as a teacher, he was able to convince them of the benefits of statistical quality control. He is a major figure in the Japanese quality movement, and in Japan he is frequently referred to as the father of quality control.

In the 1950s, W. E. Deming began teaching quality control in Japan.

Deming's approach to quality management advocated continuous improvement of the production process to achieve conformance to specifications and reduce variability. He identified two primary sources of process improvement: eliminating common causes of quality problems, such as poor product design and insufficient employee training, and eliminating special causes, such as specific equipment or an operator. Deming emphasized the use of statistical quality-control techniques to reduce variability in the production process. He dismissed the then widely used approach of final product inspection as a means of ensuring good quality as coming too late to reduce product defects. Primary responsibility for quality improvement, he said, was employees' and management's. He promoted extensive employee involvement in a quality improvement program, and he recommended training for workers in quality-control techniques and methods.

Deming's overall philosophy for achieving improvement is embodied in his 14 points, summarized in Table 2.2.

Deming is also credited for development of the Deming Wheel, or plan-do-check-act (PDCA) cycle, although it was originally formulated by Walter Shewhart and renamed by the Japanese.

W. E. Deming is the most famous of all "quality gurus." He introduced statistical quality control to the Japanese, which served as the catalyst for a worldwide quality movement. His "14 points" were the foundation for modern TQM and QMS processes.

The Deming Wheel—plan, do, check, act.

The Deming Wheel is a four-stage process for continuous quality improvement that complements Deming's 14 points, as shown in Figure 2.2.

Deming's approach to quality embodied in his 14 points and PDCA cycle are the foundation for today's quality management systems employed by many successful companies.

Figure 2.2. The Deming Wheel (PDCA Cycle)

A process flowchart is a diagram of the steps in a job, operation, or process. It enables everyone involved in identifying and solving quality problems to have a clear picture of how a specific operation works and a common frame of reference. It also enables a process improvement team to understand the interrelationship of the departments and functions that constitute a process. This helps focus on where problems might occur and if the process itself needs fixing. Development of the flowchart can help identify quality problems by helping the problem solvers better understand the process. Flowcharts are described in greater detail in Chapter 6 ("Processes and Technology") and Chapter 8 ("Human Resources").

A flowchart is a diagram of a job operation or process.

• process flowchart: a diagram of the steps in a job, operation, or process.

A cause-and-effect diagram, also called a fishbone or Ishikawa diagram, is a graphical description of the elements of a specific quality problem and the relationship between those elements. It is used to identify the causes of a quality problem so it can be corrected. Cause-and-effect diagrams are usually developed as part of brainstorming to help a quality team of employees and managers identify causes of quality problems.

• Cause-and-effect diagram or fishbone diagram: a chart showing the different categories of problem causes.

Figure 2.4 is a cause-and-effect diagram for a Six Sigma project at a hospital to reduce delays in patient bed turnaround time, which creates a patient flow problem throughout the hospital. The primary cause of the problem is suspected to be related to the "bed tracking system" (BTS), an electronic system that indicates the status of each bed to the registered nurse (RN) who admits patients and assigns them to a room. (See the "Along the Supply Chain" box for the North Shore University Hospital on page 79.)

The "effect" box at the end of the diagram is the quality problem that needs correction. A center line connects the effect box to the major categories of possible problem causes, displayed as branches off of the center line. The box at the end of each branch (or fishbone) describes the cause category. The diagram starts out in this form with only the major categories at the end of each branch. Individual causes associated with each category are attached as separate lines along the length of the branch during the brainstorming process. Sometimes the causes are rank-ordered along the branches in order to identify those that are most likely to affect the problem. The cause-and-effect diagram is a means for thinking through a problem and recording the possible causes in an organized and easily interpretable manner.

Figure 2.4. A Cause-and-Effect Diagram

Figure 2.5. A Cause-and-Effect Matrix

A complementary tool related to the fishbone diagram is the cause-and-effect matrix, which is used to prioritize the potential causes of quality problems in a process that might first be identified using a cause-and-effect diagram. The output (or Y) variables are listed along the top of the matrix. These are also referred to as CTQs or CTQCs, (i.e., "critical-to-quality characteristics") and they are measurable characteristics that express the key requirements defined by a customer. CTQCs are what the customer expects from a product, and accordingly they have a significant impact on customer satisfaction. The input (or X) variables that might affect the outcome of process, (i.e., the potential causes of an outcome) are listed along the left side of the matrix (or grid). The CTQCs are ranked or weighted in terms of importance to the customer; then, the relationship between causes and effects (CTQs) are weighted or ranked; and finally, an overall score is calculated for the causes (or X variables). The causes with the highest score should be addressed first in improvement efforts because they will have the largest impact on customer satisfaction. Figure 2.5 shows a cause-and-effect matrix for the hospital bed turnaround time example. Note that staff communication has the highest score, and thus, the greatest impact on how satisfied the customers are with the overall process.

• Cause-and-effect matrix: a grid used to prioritize causes of quality problems.

Checksheets are frequently used in conjunction with histograms, as well as with Pareto diagrams. A checksheet is a fact-finding tool used to collect data about quality problems. A typical check sheet for quality defects tallies the number of defects for a variety of previously identified problem causes. When the check sheet is completed, the total tally of defects for each cause can be used to create a histogram or a Pareto chart, as shown in Figure 2.6.

A check sheet is a list of causes of quality problems with the number of defects resulting from each cause used to develop a bar chart called a histogram.

Pareto analysis is a method of identifying the causes of poor quality. It was devised in the early 1950s by the quality expert Joseph Juran. He named this method after a nineteenth-century Italian economist, Vilfredo Pareto, who determined that a small percentage of the people accounted for most of the wealth. Pareto analysis is based on Juran's finding that most quality problems and costs result from only a few causes. For example, he discovered in a textile mill that almost 75% of all defective cloth was caused by only a few weavers, and in a paper mill he studied, more than 60% of the cost of poor quality was attributable to a single category of defects. Correcting the few major causes of most of the quality problems will result in the greatest cost impact.

• Pareto analysis: most quality problems result from a few causes.

Pareto analysis can be applied by tallying the number of defects for each of the different possible causes of poor quality in a product or service and then developing a frequency distribution from the data. This frequency distribution, referred to as a Pareto diagram, is a useful visual aid for focusing on major quality problems.

Figure 2.6. Pareto Chart

The quality problem for hospital bed turnaround time described in the previous section on cause-and-effect diagrams (Figure 2.4) in this case a defect is anytime the turnaround time exceeds 150 minutes for a patient out of a sample of 195 patients. Some of the causes of this problem are as follows.

For each cause of poor quality, the number of defects attributed to that cause has been tallied. This information is then converted into the Pareto chart shown in Figure 2.6 above.

This Pareto chart identifies the major cause of poor quality to be poor staff communication. Correcting the problem will result in the greatest quality improvement. However, the other problems should not be ignored. Continual quality improvement is the long-term goal. The Pareto diagram simply identifies the quality problems that will result in the greatest immediate impact on quality improvement.

Scatter diagrams graphically show the relationship between two variables, such as the brittleness of a piece of material and the temperature at which it is baked. One temperature reading should result in a specific degree of brittleness representing one point on the diagram. Many such points on the diagram visually show a pattern between the two variables and a relationship or lack of one. This diagram could be used to identify a particular quality problem associated with the baking process.

A scatter diagram is a graph showing how two process variables relate to each other.

We discuss control charts and other statistical quality-control methods in Chapter 3, "Statistical Process Control." For now, it is sufficient to say that a control chart is a means for measuring if a process is doing what it is supposed to do, like a thermostat monitoring room temperature. It is constructed with a horizontal line through the middle of a chart representing the process average or norm. It also has a line below this center line representing a lower control limit and a line above it for the upper control limit. Samples from the process are taken over time and measured according to some attribute. In its simplest form, if the measurement is within the upper and lower control limits, the process is said to be in control and there is no quality problem, but if the measurement is outside the limits, then a problem probably exists and should be investigated and corrected.

Process control involves monitoring a production or service process using statistical quality-control methods.

Statistical quality-control methods such as the process control chart are important tools for quality improvement. Employees who are provided with extensive training in statistical quality-control methods, are able to identify quality problems and their causes and to make suggestions for improvement. (See the "Along the Supply Chain" box on page 79 to see how a control chart is used to monitor hospital bed turnaround times).

Most companies not only have customers they want to satisfy, but they are also customers of other companies, their suppliers, within a company's supply chain. Companies know that to satisfy its customers requires not only their own commitment to quality, but also the support and resources of its suppliers. This is especially true of companies that outsource many of their activities to suppliers. Companies and their suppliers joined together in a supply chain must work together to meet the needs of the company's customers. A partnership exists between the supplier and its customer wherein the supplier is expected to manage its own quality effectively so that the company it supplies can count on the quality of the materials, parts, and services it receives.

Many companies reduce their number of suppliers in order to have more direct influence over their suppliers' quality and delivery performance, which was one of Deming's 14 points. It is based on the notion that if a company has a major portion of a supplier's business, then the supplier is more willing to meet the customer's quality standards. The company and supplier enter into a business relationship referred to as partnering, in which the supplier agrees to meet the company's quality standards, and in return the company enters into a long-term purchasing agreement with the supplier that includes a stable order and delivery schedule.

Partnering: a relationship between a company and its supplier based on mutual quality standards.

In order to ensure that its supplier meets its quality standards, a company will often insist that the supplier adopt a QMS similar to its own, or a company's QMS will include its suppliers. Still other companies require that their suppliers achieve ISO 9000 certification (see page 95), an international quality standard that ensures a high industry standard of quality as its QMS; some companies require their suppliers to follow Baldrige National Quality Award guidelines or even enter the Baldrige Award competition as their QMS.

At the other end of a company's spectrum from its suppliers is its direct relationship with its own customers. An important component of any QMS is the company's ability to measure customer satisfaction; to "hear" what the customer wants. The company needs to know if its QMS is effective. Is the company meeting customer expectations? Are its products or services meeting their fitness for use definition? Is it what the customer wants, does the customer like it, does the customer need it, would the customer like it changed? A QMS requires that some form of measurement system be in place to answer these questions and provide data about the customer's level of satisfaction. It is a well-established fact of consumer behavior that unhappy customers will tell almost twice as many others about their quality problems as they will tell others about satisfactory products or services.

For most companies, figuring out what satisfies customers (i.e., what they want and need) is easier said than done. It requires that a company somehow gather information on what the customer wants and needs, disseminate that information throughout the company, use that information to improve its products and processes and develop new products, and then monitor customer satisfaction to ensure that the customer's needs are being met. The primary means for garnering information from customers, and measuring customer satisfaction is the customer survey. The customer survey is a means for companies to listen to what is often referred to as the "voice of the customer (VoC)." Applicants for the Malcolm Baldrige National Quality Award are expected to provide measures of customer satisfaction typically through customer surveys. Motorola, a two-time Baldrige Award winner, contracts with an independent survey firm to conduct regularly scheduled surveys with its customers around the world to help Motorola determine how well it's meeting its customers' needs.

J.D. Power and Associates is an independent, third-party, company that provides companies in the automotive, energy/communications, travel, financial, and home-building industries with feedback from their customers based on surveys that they conduct. They also annually present awards to companies that have excelled in their industry based on independently financed consumer opinion studies. Award-winning companies are allowed to license the use of J.D. Power and Associates awards in advertising. For example, their 2006 automotive performance award winner for the "large car" was the Hyundai Azera; their 2006 award winner for the "highest guest satisfaction among mid-scale hotel chains" was Hampton Inns.

The American Customer Satisfaction Index (ACSI) was established in 1994 through a partnership of the University of Michigan Business School, the American Society for Quality (ASQ), and the international consulting firm, CFI Group. The ACSI is funded in part by corporate subscribers who receive industry benchmarking data and company-specific information about financial returns from improving customer satisfaction.

ACSI measures customer satisfaction with the goods and services of 7 economic sectors, 39 industries (including e-commerce and e-business), and more than 200 companies and 70 federal and local government agencies. The ACSI reports scores on a 0 to 100 scale, which are based on econometric modeling of data obtained from telephone interviews with customers. From random-digit-dial (RDD) telephone samples (and Internet samples for e-commerce and e-business), more than 65,000 consumers are identified and interviewed annually.

ACSI scores are posted on their Web site at www.theacsi.org. For example, in 2008 Amazon.com had an ACSI score of 86, one of the highest scores ever recorded in any service industry. Apple was the leading company in the computer industry with a score of 85. Lexus and BMW were the highest-scoring car companies at 87, followed by Toyota and Honda at 86.

Kaizen is the Japanese term for continuous improvement, not only in the workplace but also in one's personal life, home life, and social life. In the workplace, kaizen means involving everyone in a process of gradual, organized, and continuous improvement. Every employee within an organization should be involved in working together to make improvements. If an improvement is not part of a continuous, ongoing process, it is not considered kaizen. Kaizen is most closely associated with lean systems, an approach to continuous improvement throughout the organization that is the subject of Chapter 16.

• kaizen: involves everyone in a process of continuous improvement.

Employees are most directly involved in kaizen when they are determining solutions to their own problems. Employees are the real experts in their immediate workspace. In its most basic form, kaizen is a system in which employees identify many small improvements on a continual basis and implement these improvements themselves. This is actually the application of the steps in the Deming Wheel (Figure 2.2) at its most basic, individual level. Employees identify a problem, come up with a solution, check with their supervisor, and then implement it. This works to involve all employees in the improvement process and gives them a feeling that they are really participating in quality improvement, which in turn keeps them excited about their jobs. Nothing motivates someone more than when they come up with a solution to their own problem. Small individual changes have a cumulative effect in improving entire processes, and with this level of participation improvement occurs across the entire organization. No company-wide quality management program can succeed without this level of total employee involvement in continuous improvement.

With today's foucs on healthcare costs, quality in healthcare is a major issue in the service sector. Its importance is signified by the fact that it is one of five categories in which the Baldrige National Quality Award is annually given.

Employees at Dana Corporation's Spicer Driveshaft Division, North America's largest independent manufacturer of driveshafts and a 2000 Malcolm Baldrige National Quality Award winner, participate in a kaizen-type program. On average, each employee submits three suggestions for improvements per month and almost 80 percent of these ideas are implemented. The company also makes use of kaizen "blitzes" in which teams brainstorm, identify, and implement ideas for improvement, sometimes as often as every three or four weeks. Company-wide, Dana Corporation employees implemented almost 2 million ideas in one year alone.

One of the first team-based approaches to quality improvement was quality circles. Called qualitycontrol circles in Japan when they originated during the 1960s, they were introduced in the United States in the 1970s. A quality circle is a small, voluntary group of employees and their supervisor(s), comprising a team of about 8 to 10 members from the same work area or department. The supervisor is typically the circle moderator, promoting group discussion but not directing the group or making decisions; decisions result from group consensus. A circle meets about once a week during company time in a room designated especially for that purpose, where the team works on problems and projects of their own choice. These problems may not always relate to quality issues; instead, they focus on productivity, costs, safety, or other work-related issues in the circle's area. Quality circles follow an established procedure for identifying, analyzing, and solving quality-related (or other) problems. Figure 2.8 is a graphical representation of the quality circle process.

•Quality circle: a group of workers and supervisors from the same area who address quality problems.

Figure 2.8. The Quality Circle Process

A process improvement team includes members from the interrelated functions or departments that make up a process.

Process improvement teams, also called quality improvement teams (QIT), focuses attention on business processes rather than separate company functions. It was noted previously that quality circles are generally composed of employees and supervisors from the same work area or department, whereas process improvement teams tend to be cross-functional or even cross-business between suppliers and their customers. A process improvement team would include members from the various interrelated functions or departments that constitute a process. For example, a process improvement team for customer service might include members from distribution, packaging, manufacturing, and human resources. A key objective of a process improvement team is to understand the process the team is addressing in terms of how all the parts (functions and departments) work together. The process is then measured and evaluated, with the goal of improving the process to make it more efficient and the product or service better. A key tool in helping the team understand how the process works is a process flowchart, a quality tool we discussed in greater detail in the section on "Quality Tools."

Timeliness, or how quickly a service is provided, is an important dimension of service quality, and it is not difficult to measure. The difficulty is determining what is "quick" service and what is "slow" service. How long must a caller wait to place a phone catalogue order before it is considered poor service? The answer, to a large extent, depends on the caller's expectations: "too long" is not the same for everyone. Varying expectations make it difficult to determine an exact specification.

Timeliness is an important dimension of service quality.

Professional football player Drew Brees and wife Brittany check in as the first guests of the Ritz-Carlton in New Orleans when it reopened after Hurricane Katrina. The Ritz-Carlton is the only twotime winner of the Malcolm Baldrige National Quality Award in the service category and its goal is a totally defect-free experience for its guests.

Quality management in services must focus also on employee performance related to intangible, difficult-to-measure quality dimensions. The most important quality dimensions may be how correctly and pleasantly employees are able to provide service. That is why service companies such as Federal Express, Starbuck's, Avis, Disney, and Ritz-Carlton Hotels have well-developed quality management programs that focus on employee performance, behavior, and training, and serve as "benchmarks" for other companies. Service companies lose more customers because either their service is poor or their competitor's is better, than for any other reason, including price.

The principles of TQM apply equally well to services and manufacturing.

• Benchmark: "best" level of quality achievement in one company that other companies seek to achieve.

McDonald's has a reputation for high-quality service resulting from its application of established quality management principles. It provides fresh food promptly on demand. Restaurant managers meet with customer groups on a regular basis and use questionnaires to identify quality "defects" in its operation. It monitors all phases of its process continuously from purchasing to restrooms to restaurant decor and maintenance. It empowers all employees to make spot decisions to dispose of unfresh food or to speed service. The McDonald's workforce is flexible so that changes in customer traffic and demand can be met promptly by moving employees to different tasks. Food is sampled regularly for taste and freshness. Extensive use is made of information technology for scheduling, cash register operation, food inventory, cooking procedures, and food assembly processes—all with the objective of faster service. All of these quality improvement procedures are standard and similar to approaches to quality improvement that could be found in a manufacturing firm.

The "Ladies and Gentlemen of the Ritz-Carlton" are the key factor in Ritz-Carlton's receipt of two Malcolm Baldrige National Quality Awards and the highest guest satisfaction level in the luxury hotel industry.

Six Sigma is a process for developing and delivering virtually perfect products and services. The word "sigma" is a familiar statistical term for the standard deviation, a measure of variability around the mean of a normal distribution. In Six Sigma it is a measure of how much a given product or process deviates from perfection, or zero defects. The main idea behind Six Sigma is that if the number of "defects" in a process can be measured, then it can be systematically determined how to eliminate them and get as close to zero defects as possible. In Six Sigma "as close to zero defects as possible" translates into a statistically based numerical goal of 3.4 defects per million opportunities (DPMO), which is the near elimination of defects from a process, product, or service. This is a goal far beyond the quality level at which most companies have traditionally operated. Through the reduction of variation in all processes (i.e., achieving the Six Sigma goal), the overall performance of the company will be improved and significant overall cost savings will be realized.

•Six Sigma measure of how much a process deviates from perfection.

Figure 2.9. Six Sigma

As implemented by Motorola, Six Sigma follows four basic steps—align, mobilize, accelerate, and govern. In the first step, "align," senior executives create a balanced scorecard (see Chapter 1) of strategic goals, metrics and initiatives to identify the areas of improvement that will have the greatest impact on the company's bottom line. Process owners (i.e, the senior executives who supervise the processes) "champion" the creation of high-impact improvement projects that will achieve the strategic goals.

•Six Sigma process: the four basic steps of Six Sigma—align, mobilize, accelerate and govern.

In the second step, "mobilize," project teams are formed and empowered to act. The process owners select "black belts" to lead well-defined improvement projects. The teams follow a step-by-step, problem-solving approach referred to as DMAIC.

In the third step, "accelerate," improvement teams made up of black belt and green belt team members with appropriate expertise use an action-learning approach to build their capability and execute the project. This approach combines training and education with project work and coaching. Ongoing reviews with project champions ensure that projects progress according to an aggressive timeline.

In the final step, "govern," executive process owners monitor and review the status of improvement projects to make sure the system is functioning as expected. Leaders share the knowledge gained from the improvement projects with other parts of the organization to maximize benefit.

In the next few sections we describe some components of the Six Sigma process in greater detail.

The first step in the Six Sigma process is the identification of improvement projects. These projects are selected according to business objectives and the goals of the company. As such, they normally have a significant financial impact. These projects are not one-time, unique activities as projects are typically thought of, but team-based activities directed at the continuing improvement of a process.

Once projects are identified, they are assigned a champion from upper management who is responsible for project success, providing resources and overcoming organizational barriers. Champions are typically paid a bonus tied to the successful achievement of Six Sigma goals.

Champion: an executive responsible for project success.

At the heart of Six Sigma is the breakthrough strategy, a five-step process applied to improvement projects. The five steps in the breakthrough strategy are very similar to Deming's four-stage PDCA cycle (Figure 2.2), although more specific and detailed. The breakthrough strategy steps are define, measure, analyze, improve, and control, (DMAIC) shown in Figure 2.9.

Breakthrough strategy: define, measure, analyze, improve, control.

The project leader who implements the DMAIC steps is called a Black Belt. Black Belts hold fulltime positions and are extensively trained in the use of statistics and quality-control tools, as well as project and team management. A Black Belt assignment normally lasts two years during which the Black Belt will lead 8 to 12 projects from different areas in the company, each lasting about one quarter. A Black Belt is certified after two successful projects. Black Belts are typically very focused change agents who are on the fast track to company advancement. Figure 2.10 describes some of the most important tools used by black belts at Motorola.

• Black Belt: the project leader.

Master Black Belts monitor, review, and mentor Black Belts across all projects. They are primarily teachers who are selected based on their quantitative skills, and on their teaching and mentoring ability. As such, they are a resource for project teams and Black Belts. They also hold full-time positions and are usually certified after participating in about 20 successful projects, half while a Black Belt and half as a Master Black Belt.

• Master Black Belt: a teacher and mentor for Black Belts.

Project team members are Green Belts, which is not a full-time position; they do not spend all of their time on projects. Green Belts receive similar training as Black Belts but somewhat less of it.

•Green Belts: project team members.

At General Electric employees are not considered for promotion to any management position without Black Belt or Green Belt training. It is part of the Six Sigma overall strategy that as Black Belts and Green Belts move into management positions they will continue to promote and advance Six Sigma in the company. A generally held perception is that companies that have successfully implemented Six Sigma have one Black Belt for every 100 employees and one Master Black Belt for every 100 Black Belts. This will vary according to the size of the company and the number of projects regularly undertaken. At GE, black belt projects typically save $250,000 or more and green belt projects frequently yield savings in the $50,000 to $75,000 range.

In Six Sigma all employees receive training in the Six Sigma breakthrough strategy, statistical tools, and quality-improvement techniques. Employees are trained to participate on Six Sigma project teams. Because quality is considered to be the responsibility of every employee, every employee must be involved in, motivated by, and knowledgeable about Six Sigma.

An important element of the Six Sigma system is Design for Six Sigma (DFSS), a systematic methodology for designing products and processes that meet customer expectations and can be produced at Six Sigma quality levels. It follows the same basic approach as the breakthrough strategy with Master Black Belts, Black Belts, and Green Belts and makes extensive use of statistical tools and design techniques, training, and measurement. However, it employs this strategy earlier, up front in the design phase and developmental stages. This is a more effective and less expensive way to achieve the Six Sigma goal than fixing problems after the product or process is already developed and in place.

•Design for Six Sigma (DFSS): a systematic approach to designing products and processes that will achieve Six Sigma.

A recent trend in quality management is Lean Six Sigma (also known as Lean Sigma), that integrates Six Sigma and "lean systems." Lean systems is the subject of Chapter 16 so we do not offer a detailed presentation of it at this point; rather we will discuss lean systems in general terms and how it relates to Six Sigma.

•Lean Six Sigma: integrating Six Sigma and lean systems.

Figure 2.10. Six Sigma Tools

Lean is a systematic method for reducing the complexity of a process and making it more efficient by identifying and eliminating sources of waste in a process (such as materials, labor, and time) that hinder flow. Lean basically seeks to optimize process flows through the organization in order to create more value for the customer with less work; i.e., get the product through the process faster. The lean process management philosophy was derived mainly from the Toyota Production System (including push and pull production, JIT and kanbans; see Chapter 16) that has been very effective in manufacturing. As in the case of TPS, lean is basically a more sophisticated extension of earlier efforts to achieve efficiency (i.e., speed) in a manufacturing process by OM pioneers like Henry Ford and Frederick R Taylor.

The lean approach to process improvement includes five steps. First it is determined what creates value for the customer, i.e., quality from the customer's perspective discussed earlier in this chapter. Second, the sequence of activities (in the process) that create value, called the "value stream," is identified, and those activities that do not add value are eliminated from the production process. Third, waste (such as inventory or long process times) along the value stream is removed through process improvements. Fourth, the process is made responsive to the customer's needs; i.e., making the product or service available when the customer needs it. Finally, lean continually repeats the attempt to remove waste (non-value activity) and improve flow; it seeks perfection. As such, lean is more of a philosophical approach to continuous improvement by eliminating waste throughout the organization everywhere along the value stream by involving everyone in the organization.

Lean Six Sigma attempts to combine the best features of lean and Six Sigma. As we have discussed, Six Sigma is a disciplined and very organized approach for improving processes and preventing defects. It employs a specific program (DMAIC) to identify and eliminate waste and achieve perfection (no defects). By focusing on reducing and controlling variation in targeted processes in an organization (via projects), Six Sigma improves the organization's performance. Through process improvement methods lean attempts to eliminate waste and accelerate process efficiency and flow times, thus increasing value to the customer. Lean improvements cause products to flow through processes faster while Six Sigma improves quality and prevents defects by reducing variation through individual projects. Six Sigma identifies the key factors in the performance of a process and sets them at their best level. Lean reduces the complexity of processes everywhere by eliminating waste that can slow down process flow. Lean focuses on what should not be done in a process and removes it; Six Sigma considers what should be done and how to get it right for all time.

The common link between the two is that they both seek to improve processes and provide value to the customer; however they go about it in different ways. The proponents of Lean Six Sigma believe the two approaches complement each other, and that combining them can result in greater benefits than implementing them separately. However, others consider lean and Six Sigma to be mostly incompatible; Six Sigma is considered to be more of a management tool (i.e., a program), whereas lean is a philosophical approach to process improvement that, like the Toyota Production System, is most effective in a mass manufacturing setting.

The criterion for selecting Six Sigma projects by executives is typically based on the financial impact of the improvement expected from the project—how it will affect the bottom line. This focus on profitability for initiating quality improvement projects is one of the factors that distinguishes Six Sigma from TQM.

In Quality Is Free, Philip Crosby states that, "Quality is not only free, it is an honest-to-everything profit maker." Gary L. Tooker, former CEO and vice chairman of Motorola, in response to the question, "Is there a link between quality and profitability?" responded that "We've saved several billion dollars over the last year because of our focus on quality improvement and the Six Sigma initiative . . . . there is no doubt about the fact that it has enhanced our bottom line."

This is only the tip of a mountain of conclusive evidence that quality improvement and profitability are closely related. As quality improves, the costs associated with poor quality decline. Quality improvements result in increased productivity. As the quality of a company's products or services improve, it becomes more competitive and its market share increases. Customers' perception of a company's products as being of high quality and its competitive posture enables the company to charge higher prices. Taken together, these things result in higher profitability.

Example 2.1 describes a scenario that illustrates that impact of profitability that can result from a Six Sigma project.

The Impact of Six Sigma on Profit

The Medtek Company produces parts for an electronic bed tracking system (BTS) it sells to medical suppliers and hospitals. It contracted for and sold 1,000 units of one of its products during the past quarter for $1,000 each resulting in total sales of $1,000,000. During the quarter the company incurred variable costs (e.g., direct labor, materials and energy) of $600,000, thus the unit variable cost was $600. The company also incurred fixed costs of $350,000 (for items such as plant and equipment, and management salaries) during the quarter. This resulted in a (before-tax) profit of $50,000, as shown in the following income statement:

Sales	$1,000,000
Variable costs	600,000
Fixed costs	350,000
Profit	$50,000

However, now let's consider another factor—the company currently operates with a 10% defects rate and the defective products cannot be reworked. Since the company sold 1,000 products it actually had to produce 1,111 units (i.e., 1,000/0.90 = 1,111), or 111 extra units to compensate for the scrapped units. The variable cost includes this cost of making scrap so the unit variable cost is really $540.05 (i.e., $600,000/1,111 = $540.05). The company has paid a "quality tax" (sometimes called the "hidden factory") of $59,946 (i.e., 111 scrap units × $540.05 per unit = $59,946).

Now let's assume that the company implements a successful Six Sigma improvement project and it achieves a defect level of 3.4 DPMO, or virtually zero defects. The elimination of defects will (at a minimum) erase the variable costs consumed by making those 111 scrap units. The effect of the elimination of this "quality tax" is shown in the following revised income statement:

Sales	$1,000,000
Variable costs	540,054
Fixed costs	350,000
Profit	$109,946

The company's profit has more than doubled! An approximate 10% reduction in variable costs because of Six Sigma has resulted in a 120% increase in profit. And, the company has actually increased its capacity to 1,111 units without spending more on plant and equipment.

Next assume that the company spent, $120,000 on the Six Sigma project to eliminate defects. If the project was completed in one quarter and the company expects to benefit from the project for 3 years, or 12 quarters, the company should add $10,000 to fixed costs on its income statement:

Sales	$1,000,000
Variable costs	540,054
Fixed costs	360,000
Profit	$99,946

The increase in profit is $49,946 (i.e., $99,946 – 50,000 = $49,946), which is still almost double the profit before Six Sigma. Ignoring interest rates this represents about a 33% return on the company's investment in the Six Sigma project:

Source: S. Bisgaard and J. Freiesleben, "Six Sigma and the Bottom Line," Quality Progress 39 (9: September 2004), pp. 57–62.

The costs of a quality management program are prevention costs and appraisal costs. Prevention costs are the costs of trying to prevent poor-quality products from reaching the customer. Prevention reflects the quality philosophy of "do it right the first time," the goal of a quality management program. Examples of prevention costs include:

• Prevention costs: costs incurred during product design.

The costs of preventing poor quality include planning, design, process, training, and information costs.

Appraisal costs are the costs of measuring, testing, and analyzing materials, parts, products, and the productive process to ensure that product-quality specifications are being met. Examples of appraisal costs include:

• Appraisal costs: costs of measuring, testing, and analyzing.

Costs of measuring quality include inspection, testing, equipment, and operator costs.

Appraisal costs tend to be higher in a service organization than in a manufacturing company and, therefore, are a greater proportion of total quality costs. Quality in services is related primarily to the interaction between an employee and a customer, which makes the cost of appraising quality more difficult. Quality appraisal in a manufacturing operation can take place almost exclusively inhouse; appraisal of service quality usually requires customer interviews, surveys, questionnaires, and the like.

The cost of poor quality (COPQ) is the difference between what it actually costs to produce a product or deliver a service and what it would cost if there were no defects. Most companies find that defects, rework and other unnecessary activities related to quality problems significantly inflate costs; estimates range as high as 20 to 30% of total revenues. This is generally the largest quality cost category in a company, frequently accounting for 70 to 90% of total quality costs. This is also where the greatest cost improvement is possible.

The cost of poor quality can be categorized as internal failure costs or external failure costs. Internal failure costs are incurred when poor-quality products are discovered before they are delivered to the customer. Examples of internal failure costs include:

• Internal failure costs: include scrap, rework, process failure, downtime, and price reductions.

• External failure costs: include complaints, returns, warranty claims, liability, and lost sales.

External failure costs are incurred after the customer has received a poor-quality product and are primarily related to customer service. Examples of external failure costs include:

Internal failure costs tend to be low for a service, whereas external failure costs can be quite high. A service organization has little opportunity to examine and correct a defective internal process, usually an employee–customer interaction, before it actually happens. At that point it becomes an external failure. External failures typically result in an increase in service time or inconvenience for the customer. Examples of external failures include a customer waiting too long to place a catalogue phone order; a catalogue order that arrives with the wrong item, requiring the customer to repackage and send it back; an error in a charge card billing statement, requiring the customer to make phone calls or write letters to correct it; sending a customer's orders or statements to the wrong address; or an overnight mail package that does not arrive overnight.

Collecting data on quality costs can be difficult. The costs of lost sales, of responding to customer complaints, of process downtime, of operator testing, of quality information, and of quality planning and product design are all costs that may be difficult to measure. These costs must be estimated by management. Training costs, inspection and testing costs, scrap costs, the cost of product downgrading, product return costs, warranty claims, and liability costs can usually be measured. Many of these costs are collected as part of normal accounting procedures.

Management wants quality costs reported in a manner that can be easily interpreted and is meaningful. One format for reporting quality costs is with index numbers, or indices. Index numbers are ratios that measure quality costs relative to some base value, such as the ratio of quality costs to total sales revenue or the ratio of quality costs to units of final product. These index numbers are used to compare quality management efforts between time periods or between departments or functions. Index numbers themselves do not provide very much information about the effectiveness of a quality management program. They usually will not show directly that a company is producing good- or poor-quality products. These measures are informative only when they are compared to some standard or other index. Some common index measures are:

Example 2.2 illustrates several of these index numbers.

•Index numbers: ratios that measure quality costs against a base value.

•Labor index: the ratio of quality cost to labor hours.

•Cost index: the ratio of quality cost to manufacturing cost.

•Sales index: the ratio of quality cost to sales.

•Production index: the ratio of quality cost to units of final product.

An Evaluation of Quality Costs and Quality Index Numbers

The H&S Motor Company produces small motors (e.g., 3 hp) for use in lawnmowers and garden equipment. The company instituted a quality management program in 2006 and has recorded the following quality cost data and accounting measures for four years.

	Year
	2006	2007	2008	2009
Quality Costs
Prevention	$27,000	41,500	74,600	112,300
Appraisal	155,000	122,500	113,400	107,000
Internal failure	386,400	469,200	347,800	219,100
External failure	242,000	196,000	103,500	106,000
Total	$810,400	829,200	639,300	544,400
Accounting Measures
Sales	$4,360,000	4,450,000	5,050,000	5,190,000
Manufacturing costs	1,760,000	1,810,000	1,880,000	1,890,000

The company wants to assess its quality management program and develop quality index numbers using sales and manufacturing cost bases for the four-year period.

Solution

The H&S Company experienced many of the typical outcomes when its quality management program was instituted. Approximately 78% of H&S's total quality costs are a result of internal and external failures, not unlike many companies. Failure costs frequently contribute 50 to 90% of overall quality costs. The typical reaction to high failure costs is to increase product monitoring and inspection to eliminate poor-quality products, resulting in high appraisal costs. This appeared to be the strategy employed by H&S when its quality management program was initiated in 2006. In 2007, H&S was able to identify more defective items, resulting in an apparent increase in internal failure costs and lower external failure costs (as fewer defective products reached the customer).

During 2006 and 2007, prevention costs were modest. However, prevention is critical in reducing both internal and external failures. By instituting quality training programs, redesigning the production process, and planning how to build in product quality, companies are able to reduce poor-quality products within the production process and prevent them from reaching the customer. This was the case at H&S, because prevention costs increased by more than 300% during the four-year period. Since fewer poor-quality products are being made, less monitoring and inspection is necessary, and appraisal costs thus decline. Internal and external failure costs are also reduced because of a reduction in defective products. In general, an increase in expenditures for prevention will result in a decrease in all other quality-cost categories. It is also not uncommon for a quality management program to isolate one or two specific quality problems that, when prevented, have a large impact on overall quality cost reduction. Quality problems are not usually evenly distributed throughout the product process; a few isolated problems tend to result in the majority of poor-quality products.

The H&S Company also desired to develop index numbers using quality costs as a proportion of sales and manufacturing costs, generally two of the more popular quality indexes. The general formula for these index numbers is

For example, the index number for 2006 sales is

The quality index numbers for sales and manufacturing costs for the four-year period are given in the following table.

Year	Quality Sales Index	Quality Manufacturing Cost Index
2006	18.58	46.04
2007	18.63	45.18
2008	12.66	34.00
2009	10.49	28.80

These index numbers alone provide little insight into the effectiveness of the quality management program; however, as a standard to make comparisons over time they can be useful. The H&S Company quality index numbers reflect dramatically improved quality during the four-year period. Quality costs as a proportion of both sales and manufacturing costs improved significantly. Quality index numbers do not provide information that will enable the company to diagnose and correct quality problems in the production process. They are useful in showing trends in product quality over time and reflecting the impact of product quality relative to accounting measures with which managers are usually familiar.

In Example 2.2 we showed that when the sum of prevention and appraisal costs increased, internal and external failure costs decreased. Recall that prevention and appraisal costs are the costs of achieving good quality, and internal and external failure costs are the costs of poor quality. In general, when the cost of achieving good quality increases, the cost of poor quality declines.

Philip Crosby's fourth absolute from his 1984 book Quality Without Tears, explains that the dollar cost of quality is the difference between the price of nonconformance, the cost of doing things wrong (i.e., the cost of poor quality), and the price of conformance, the cost of doing things right (i.e., the cost of achieving good quality). He estimates that the cost of doing things wrong can account for 20 to 35% of revenues, while the cost of doing things right is typically 3 to 4%. As such, managers should determine where the cost of quality is occurring and find out what causes it.

The cost of quality is the difference between the price of nonconformance and conformance.

Companies committed to quality improvement know that the increase in sales and market share resulting from increased customer satisfaction offsets the costs of achieving good quality. Furthermore, as a company focuses on good quality, the cost of achieving good quality will be less because of the improvements in technologies and processes that will result from the quality improvement effort. These companies are frequently the ones that seek to achieve zero defects, the goal of Six Sigma.

The Japanese first recognized that the costs of poor quality had been traditionally underestimated. These costs did not take into account the customer losses that can be attributed to a reputation for poor quality. The Japanese viewed the cost associated with a reputation for poor quality to be quite high. A General Accounting Office report on companies that have been Baldrige Quality Award finalists has shown that corporate wide quality improvement programs result in higher worker motivation, improved employee relations, increased productivity, higher customer satisfaction, and increased market share and profitability.

Productivity is a measure of a company's effectiveness in converting inputs into outputs. It is broadly defined as

• Productivity: the ratio of output to input.

An output is the final product from a service or production process, such as an automobile, a hamburger, a sale, or a catalogue order. Inputs are the parts, material, labor, capital, and so on that go into the productive process. Productivity measures, depending on the outputs and inputs used, are labor productivity (output per labor-hour) and machine productivity (output per machine-hour).

• Quality impact on productivity: Fewer defects increase output and quality improvement reduces inputs.

Improving quality by reducing defects will increase good output and reduce inputs. In fact, virtually all aspects of quality improvement have a favorable impact on different measures of productivity. Improving product design and production processes, improving the quality of materials and parts, and improving job designs and work activity will all increase productivity.

Product yield is a measure of output used as an indicator of productivity. It can be computed for the entire production process (or for one stage in the process) as follows:

• Yield: a measure of productivity.

Yield = (total input)(% good units) + (total input)(1 – % good units)(% reworked)

or

Y = (I) (%G) + (I) (1 – %G) (%R)

where

In this formula, yield is the sum of the percentage of products started in the process (or at a stage) that will turn out to be good quality plus the percentage of the defective (rejected) products that are reworked. Any increase in the percentage of good products through improved quality will increase product yield.

Improved quality increases product yield.

Now we will expand our discussion of productivity to include product manufacturing cost. The manufacturing cost per (good) product is computed by dividing the sum of total direct manufacturing cost and total cost for all reworked units by the yield, as follows:

or

where

Computing Product Cost per Unit

The H&S Motor Company has a direct manufacturing cost per unit of $30, and motors that are of inferior quality can be reworked for $12 per unit. From Example 2.3, 100 motors are produced daily, 80% (on average) are of good quality and 20% are defective. Of the defective motors, half can be reworked to yield good-quality products. Through its quality management program, the company has discovered a problem in its production process that, when corrected (at a minimum cost), will increase the good-quality products to 90%. The company wants to assess the impact on the direct cost per unit of improvement in product quality.

Solution

The original manufacturing cost per motor is

The manufacturing cost per motor with the quality improvement is

The improvement in the production process as a result of the quality management program will result in a decrease of $2.46 per unit, or 7.1%, in direct manufacturing cost per unit as well as a 5.5% increase in product yield (computed in Example 2.3), with a minimal investment in labor, plant, or equipment.

In Examples 2.3 and 2.4 we determined productivity measures for a single production process. However, it is more likely that product quality would be monitored throughout the production process at various stages. Each stage would result in a portion of good-quality, "work-in-process" products. For a production process with n stages, the yield, Y (without reworking), is

where

Computing Product Yield for a Multistage Process

At the H&S Motor Company, motors are produced in a four-stage process. Motors are inspected following each stage, with percentage yields (on average) of good-quality, work-in-process units as follows.

Stage	Good Quality Average Percentage
1	0.93
2	0.95
3	0.97
4	0.92

The company wants to know the daily product yield for product input of 100 units per day. Furthermore, it would like to know how many input units it would have to start with each day to result in a final daily yield of 100 good-quality units.

Solution

Y = (I)(%g₁)(%g₂)(%g₃)(%g₄)

= (100)(0.93)(0.95)(0.97)(0.92)

Y = 78.8 motors

Thus, the production process has a daily good-quality product yield of 78.8 motors.

To determine the product input that would be required to achieve a product yield of 100 motors, I is treated as a decision variable when Y equals 100:

To achieve output of 100 good-quality motors, the production process must start with approximately 127 motors.

Another measure of the effect of quality on productivity combines the concepts of quality index numbers and product yield. Called the quality–productivity ratio (QPR),^[7] it is computed as follows:

This is actually a quality index number that includes productivity and quality costs. The QPR increases if either processing cost or rework costs or both decrease. It increases if more good-quality units are produced relative to total product input (i.e., the number of units that begin the production process).

•Quality–productivity ratio (QPR): a productivity index that includes productivity and quality costs.

Computing the Quality Productivity Ratio (QPR)

The H&S Motor Company produces small motors at a processing cost of $30 per unit. Defective motors can be reworked at a cost of $12 each. The company produces 100 motors per day and averages 80% good-quality motors, resulting in 20% defects, 50% of which can be reworked prior to shipping to customers. The company wants to examine the effects of (1) increasing the production rate to 200 motors per day; (2) reducing the processing cost to $26 and the rework cost to $10; (3) increasing, through quality improvement, the product yield of good-quality products to 95%; and (4) the combination of 2 and 3.

Solution

The QPR for the base case is computed as follows.

Case 1. Increase input to production capacity of 200 units.

Increasing production capacity alone has no effect on the QPR; it remains the same as the base case.

Case 2. Reduce processing cost to $26 and rework cost to $10.

These cost decreases caused the QPR to increase.

Case 3. Increase initial good-quality units to 95 percent.

Again, the QPR increases as product quality improves.

Case 4. Decrease costs and increase initial good-quality units.

The largest increase in the QPR results from decreasing costs and increasing initial good-quality product through improved quality.

The Malcolm Baldrige National Quality Award is given annually to one or two companies in each of five categories: manufacturing, services, small businesses (with less than 500 full-time employees), health care, and education. It was created by law in 1987 (named after former Secretary of Commerce Malcolm Baldrige, who died in 1987) to (1) stimulate U.S. companies to improve quality, (2) establish criteria for businesses to use to evaluate their individual quality-improvement efforts, (3) set as examples those companies that were successful in improving quality, and (4) help other U.S. organizations learn how to manage quality by disseminating information about the award winners' programs.

The Baldrige Award was created in 1987 to stimulate growth of quality management in the United States.

The award criteria focus on the soundness of the approach to quality improvement, the overall quality management program as it is implemented throughout the organization, and customer satisfaction. The seven major categories of criteria by which companies are examined are leadership, information and analysis, strategic planning, human resource focus, process management, business results, and customer and market focus.

The Baldrige Award has had a major influence on U.S. companies, thousands of which request applications from the government each year to obtain a copy of the award guidelines and criteria for internal use in establishing a quality management system. Many companies have made the Baldrige criteria for quality their own, and have also demanded that their suppliers submit applications for the Baldrige Quality Award. Since its inception in 1987, it has been estimated that the economic benefits of the Baldrige award to the U.S. economy is almost $30 billion. Companies that have won the Baldrige Quality Award and have become known as leaders in quality include Motorola, Xerox, Cadillac, Milliken, Federal Express, Ritz Carlton, and IBM. These and other Baldrige Award winners have become models or benchmarks for other companies to emulate in establishing their own quality management systems.

The Malcolm Baldrige National Quality Award is given each year to companies in .ve categories—manufacturing, services, small businesses, health care and education. The award criteria and guidelines have become a template for a successful quality management system.

The creation and subsequent success of the Baldrige Award has spawned a proliferation of national, international, government, industry, state, and individual quality awards. Table 2.3 provides information about selected national and international quality awards. (Internet addresses for these awards can be found on the Chapter 2 Web links page on the text Web site.) The American Society for Quality (ASQ) sponsors a number of national individual awards, including, among others, the Armand V. Feigenbaum Medal, the Deming Medal, the E. Jack Lancaster Medal, the Edwards Medal, the Shewart Medal, and the Ishikawa Medal.

The President's Quality Award was established in 1989 to recognize federal government organizations that improve their overall performance and capabilities, demonstrate mature approaches to quality throughout the organization, and demonstrate a sustained trend in high-quality products and services that result in effective use of taxpayer dollars.

Prominent international awards include the European Quality Award, the Canadian Quality Award, the Australian Business Excellence Award, and the Deming Prize from Japan. The countries from which these four awards are administered plus the United States account for approximately 75% of the world's gross national product. The European Quality Award, established in 1991 to recognize outstanding businesses in 16 European countries, is similar in criteria and scope to the Baldrige Award, as are most of the other international awards.

Standards are documented agreements that include technical specifications or other precise criteria to be used consistently as rules, guidelines, or definitions to ensure that materials, products processes, and services are fit for their purpose. For example, the format for credit cards and phone cards was derived from ISO standards that specify such physical features as the cards' thickness so that they can be used worldwide. Standards, in general, increase the reliability and effectiveness of goods and services used around the world and as a result make life easier for everyone.

ISO 9000 is a set of procedures and policies for the international quality certification of suppliers.

The ISO 9000 series of quality management standards, guidelines, and technical reports was first published in 1978, and it is reviewed at least every five years. It was most recently revised and updated in 2008. ISO 9000:2008, Quality Management Systems—Fundamentals and Vocabulary, is the starting point for understanding the standards. It defines the fundamental terms and definitions used in the ISO 9000 family of standards, guidelines, and technical reports. ISO 9001:2008, Quality Management Systems—Requirements, is the requirement standard a company uses to assess its ability to meet customer and applicable regulatory requirements in order to achieve customer satisfaction. ISO 9004:2008, Quality Management Systems—Guidelines for Performance Improvements, provides detailed guidance to a company for the continual improvement of its quality management system in order to achieve and sustain customer satisfaction. The ISO 9000 family includes 10 more published standards and guidelines; however, these three are the most widely used and applicable to the majority of companies.

Many companies around the world require that companies they do business with (e.g., suppliers) have ISO 9001 certification. In that way, despite possible language, technology, and cultural differences, a company can be sure that the company it's doing business with meets uniform standards—that is, they are "on the same page." ISO 9001:2008 is the only standard in the ISO 9000 family that carries third-party certification (referred to as registration in the United States). A third-party company called a registrar is the only authorized entity that can award ISO 9001 certification. Registrars are accredited by an authoritative national body and are contracted by companies to evaluate their quality management system to see if it meets the ISO 9001 standards; if the company does, it is issued an ISO 9000 certification, which is recognized around the world. The worldwide total of ISO 9001 certifications at the end of 2004 was over 670,000 in 154 countries. This was a 35% increase over the total at the end of 2003.

ISO 9001:2008 primarily serves as a basis for benchmarking a company's quality-management system. Quality management, in ISO terms, measures how effectively management determines the company's overall quality policy, its objectives, and its responsibilities, as well as its quality policy implementation. A company has to fulfill all of the requirements in ISO 9001:2008 to be certified (except for activities and functions it does not perform at all). Customer satisfaction is an explicit requirement. Thus, to be certified a company must identify and review customer requirements, ensure that customer requirements are met, and be able to measure and monitor customer satisfaction. The company must also be able to show that measuring and monitoring customer satisfaction leads to corrective and preventive actions when nonconformance (to the standards) is found—that is, continual improvement. This type of analysis of customer satisfaction requires a large amount of data collection and processing.

Originally, ISO 9000 was adopted by the 12 countries of the European Community (EC)—Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,

Thousands of businesses have improved their operations by fully implementing a quality system based on the international standards known as ISO 9001:2008. When a company has met all the requirements of the standards, a registrar will certify/register them. This status is represented by a certificate, such as this sample.

Monarcas Morelia (shown in the yellow jersey with red stripes) went from last place in the Mexican Football Federation First Division league to champions in just two years after developing its QMS based on its ISO 9001 certification process.

Portugal, Spain, and the United Kingdom. The governments of the EC countries adopted ISO 9000 as a uniform quality standard for cross-border transactions within the EC and for international transactions. The EC has since evolved into the European Union (EU) with 25 member countries.

Many overseas companies will not do business with a supplier unless it has ISO 9000 certification.

These EU countries and many others are specifically acknowledging that they prefer suppliers with ISO 9000 certification. To remain competitive in international markets, U.S. companies must comply with the standards in the ISO 9000 series. Some products in the EU, for example, are "regulated" to the extent that the products must be certified to be in ISO 9000 compliance by an EU-recognized accreditation registrar. Most of these products have health and safety considerations. However, companies discovered that to remain competitive and satisfy customer preferences, their products had to be in compliance with ISO 9000 requirements even if these products were not specifically regulated.

The United States exports more than $200 billion annually to the EU market, much of it to France, Germany, Italy, Spain, and the United Kingdom. Most of these exports are affected in some way by ISO 9000 standards.

Companies are also pressured within the United States to comply with ISO 9000 by more and more customers. For example, the U.S. Department of Defense, and specifically the Department of the Navy, as well as private companies like DuPont, 3M, and AT&T, adopted ISO 9000. They recognize the value of these standards for helping to ensure top-quality products and services and required that their suppliers comply with ISO 9000.

In the EC registration system, the third-party assessors of quality are referred to as notified bodies; that is, the 12 EC governments notify one another as to which organization in their country is the officially designated government-approved quality assessor. The notified bodies ultimately certify a company with a European Conformity (CE) mark. The CE mark must be on any product exported from the United States that is ISO 9000-regulated. It is illegal to sell a regulated product in a store in the EC without the CE mark. For a supplier in the United States to export regulated products to an EC country, it must be accredited by European registrars—notified bodies within the EC. However, more and more EC companies are requiring ISO 9000 certification for suppliers of products that fall in the unregulated categories, and eventually all products exported to the EC will probably require certification. It is also important that U.S. companies obtain accreditation with a notified body that has widespread positive recognition in the EC so that they will have broad access to markets in the EC.

The U.S. member of the ISO, the American National Standards Institute (ANSI), designated the American Society for Quality (ASQ), as the sponsoring organization for ISO 9000 in the United States. ASQ and ANSI created the Registrar Accreditation Board (RAB) to act as an accrediter of third-party registrars in the United States.

A registrar is an organization that conducts audits by individual auditors. Auditors are skilled in quality systems and the manufacturing and service environments in which an audit will be performed. The registrar develops an audit team of one or more auditors to evaluate a company's quality program and then report back to the registrar. An organization that wants to become a registrar must be accredited by RAB. Once RAB accredits a registrar, the registrar can then authorize its registered suppliers to use the RAB certificate in advertising, indicating compliance with ISO 9000.

ISO certification, or registration as it is called in the United States, is accomplished by a registrar through a series of document reviews and facility visits and audits. The registrar's auditors review a company's procedures, processes, and operations to see if the company conforms to the ISO quality management system standards. The registrar looks at a variety of things, including the company's administrative, design, and production processes; quality system documentation; personnel training records; management reviews; and internal audit processes. The registration process might typically include an initial document review that describes the company's quality management system, followed by the development of an audit plan and then the audit itself. This is usually followed by semiannual or annual surveillance audits to make sure the quality system is being maintained. The registration process can take from several weeks up to a year, depending on how ready the company is for registration. A RAB accredited registrar does not "help" the company attain certification either by giving advice or consulting.