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your salespeople, to a shipment to their location, and beyond. How-
ever, it doesn™t stop there”quality also means meeting your cus-
tomers™ expectations that you will be there for them in the future
when new technology brings new needs for them.

The Deming Approach to Quality

The inventor of Total Quality Management, W. Edwards Deming, began
preaching his gospel of quality in Japan, where he went after World War
II to help conduct a census. He had helped devise sampling techniques
first used in the 1940 U.S. census, and in Japan Deming lectured to top
148 Build Long-Term Growth

In mid-1999, the Air Transport Association, the trade group of
America™s major airlines, released a plan called “Customers First.”
The plan was the culmination of talks between the airlines, Con-
gress, and the Department of Transportation regarding the lack of
customer service among many of the airlines. Customer First was
conceived to address this problem. Most U.S. airline companies have
subsequently adopted the voluntary plan. It will be available to con-
sumers via web sites and at airport ticketing areas.
The customer service reforms in this plan call for airlines to:
• Tell passengers about the lowest fares available.
• Notify customers of delays and cancellations as early as
• Make a greater attempt to find passengers with lost luggage.
• Do a better job meeting passenger needs during long waits
aboard an aircraft.
One of the first airlines to adopt these procedures was Dallas-based
Southwest Airlines. In business since 1971, Southwest holds the air-
line industry™s best cumulative consumer satisfaction record, a
measurement kept and published by the Department of Trans-
portation. Southwest™s mission statement reads:
The mission of Southwest Airlines is dedication to the highest
quality of Customer Service delivered with a sense of warmth,
friendliness, individual pride, and Company Spirit.

Southwest outlines its Customer Service Commitment to passen-
gers in a 26-page booklet, which promises to share with its cus-
tomer how it operates. It also say, “Foremost, we want you to know
that it is never our wish to inconvenience our Customers. We tell
our Employees we are in the Customer Service business”we just
happen to provide airline transportation.”
Southwest knows that situations will arise that aren™t of its making
such as weather delays, problems at terminals, and so on. But it also
knows that Customers will look to Southwest to make sure these
problems are minimized or that they result in minimal inconven-
ience. The airline has taken a proactive stance toward serving
Customers, even when problems aren™t their fault. They anticipate
problems and have worked out solutions to be followed by their Em-
ployees before the unexpected happens.
Achieving Quality and Quantity

business leaders on statistical quality control. He told the businessmen
that Japan could dominate world markets if they stressed his definition
of quality in their manufacturing operations.

Deming identified three phases of change that companies go through
on the road to improved performance measurement systems:

1. Tinkering with the existing measurement system (e.g., the
cost accounting system).

2. Cutting the “knot” between accounting and performance

3. Embracing change in strategies, actions, and measures.

Deming believed in online quality control rather than end-line control.
To achieve it, analysts sample products during manufacture to deter-
mine the product™s deviation from an accepted range of errors. As Dem-
ing saw it, any deviation is the result of one of two kinds of variables,
either a special cause stemming from random events or a common cause
arising from faults in the system. Deming argued that special causes ac-
count for only 6 percent of all variations and common causes account for
94 percent. In his view, most companies spend too much time trying to
determine the nature of special causes rather than examining the system
to find out what™s behind the common causes.

Deming™s analysis relies heavily on mathematics”a product of his back-
ground as a government statistician. However, anyone can understand
Deming. One of his most simple underlying premises was that quality
improves as variability decreases. To monitor variance, he advocated a
statistical method of quality control. He argued that companies should
strive for continuous improvement using statistical methods and analy-
sis to maintain quality, instead of inspecting products en masse for de-
fects once they have been manufactured.

Deming™s work remained theoretical, but his many students have assem-
bled a body of literature and consulting advice that gives the concepts a
practical spin. His disciples identify 10 elements of total quality manage-
ment. His statistical control theories may not apply to your operations,
but you can use these points as a kind of diagnostic checklist.
150 Build Long-Term Growth

On a day-to-day basis, which of the following things do you

1. Customer orientation. Methods, processes, and procedures
are designed to meet both internal and external customer

2. Leadership. Top management understands the quality process
and supports the strategy through both words and deeds.

3. Full employee participation. Everyone in the organization is pro-
vided quality training. From top to bottom, everyone has the
perspective, goals, and the necessary tools and techniques for
improving quality.

4. A sensible reward system. There is a system in place that rewards
quality to ensure continuous support for the overall effort.

5. Reduced cycle time. There is a strong effort to reduce the cycle
times, in product or service output as well as support functions,
following the maxim: “If it cannot be done any better, focus on
doing it faster.”

6. Prevention, not detection. Quality is designed into the product or
service, so that errors are prevented from occurring rather than
being detected and then corrected.

7. Management by fact. Managers use databased feedback to mea-
sure progress; intuition and gut feeling are put on the back

8. Long-range outlook. There is a constant monitoring of the exter-
nal environment to answer the question: What level of quality
or service must we provide to customers over the next 12 to 36
months, and how can this goal be attained?

9. Partnership development. The organization promotes cooperation
with vendors as well as customers, thus developing a network
system that helps drive up quality and hold down costs.

10. Public responsibility. Corporate citizenship and responsibility
are fostered by sharing quality-related information with other
organizations and by working to reduce negative impacts on
the community by eliminating product waste generation and
product defects or recalls.
Achieving Quality and Quantity

The lesson is that operations cannot be considered alone without
looking at the interaction of all of the aspects of running a company.


A long tradition buttresses this thinking, but these days most managers
with responsibility for operations spend their time doing three things”
administering production, responding to crises, and improving perfor-
mance. In other words, this means doing the job, putting out fires, and
adding new value. However, experience suggests that we spend most of
our time doing the first two and not enough time doing the third. On the
contrary, we must do all three, and we need a great deal of information to
bring it off, including data detailing what happens and why during the
production cycle.

The just-in-time inventory control system popularized by Japanese
manufacturers shows how this information can pay off. In traditional
manufacturing, someone would deliver a big load of, for example, car
bumpers to the people on the production line who installed them”
more bumpers than the workers needed for the day™s output. Most of
the inventory would sit on racks off to one side, waiting to be used. The
thinking here was that the company gained something by making one
delivery of many bumpers. It did not consider the other side of the
equation”namely, the cost of a fat inventory. It did not measure the
benefit of the single delivery of bumpers against the cost of loading up
with more than necessary.

Japanese managers were the first to make that measurement, inventing
just-in-time inventory control and saving themselves a good deal of
money in the 1950s and 1960s. They accomplished this by measuring, by
gathering information about the production process, and asking what it
meant. American managers followed suit in the 1970s, though it took
them a while to overcome the biases of their traditional methods. For ex-
ample, one management consultant tells of working as a summer intern
at an appliance manufacturing plant in the Midwest. Detecting some in-
efficiencies in the plant™s painting methods, he implemented a simple
quality-control standard. He gathered data on the number of appliances
that passed paint inspection and plotted a defect rate chart that he
posted on a bulletin board. Workers had never seen their defect rate
graphed before and were riveted by the charts. Their defect rate dropped
from about 30 percent to about 5 percent.
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Unfortunately, the story doesn™t end there. After several weeks of im-
proved performance, an upset operations supervisor tracked down the
intern and asked about the charts. The intern, expecting praise, instead
got a hot lecture about the problems he had caused down the line. Be-
cause the defect rate in the painting operation had dropped so dramati-
cally, the company would have to lay off its rework people, who had no
screwups to fix. The supervisor told the intern to take his charts off the
bulletin board.

Information generates improvements, but not without cost. The intern™s
charts threatened the jobs of the rework people down the line”a bad
outcome to the angry supervisor. However, that doesn™t mean that you
choose not to act on the information you gather, only that you know to
expect that improvements of this sort will not always be welcomed im-
mediately by the staff.

Critical thinking and the kind of innovation of the sort required to over-
come the resistance to change are both key management duties.


To return to the idea of controlling the inventory, this makes a big target
when operations sets out to improve your company™s efficiency, but it
presents managers with some hard questions. “It™s good to think of in-
ventory as a liquid force,” says one New York-based consultant. “It pours
around the decisions you make about your business. You can™t make
hard policies about how your inventory will be. The best you can do is
have a few priorities and use inventory as a kind of ongoing barometer of
what™s going on in your business.”

With service companies, inventory is people and the hours they are
available to work with clients. Increasing efficiency leads managers to
embrace nontraditional employment and compensation structures, in-
cluding part-time or contract workers and flexible teams operating as so-
called virtual corporations.

With manufacturing companies, some studies argue that you can re-
duce operating costs by more than 25 percent by managing inventory
well. Things on shelves tie up cash; you spend money to make and
maintain them”and then face the risk of damage or loss. Managers
Achieving Quality and Quantity

keep inventory as low as they can, at the risk of revenue-killing backlogs,
spikes in supply costs, and production scheduling nightmares.

Leaving extra products on your shelves also tests the effectiveness of
your marketing efforts. A quick walk through your warehouse, for exam-
ple, tells you a great deal. Losing products accumulate, while winning
products disappear; products that don™t sell take up storage space that
could go to faster movers. If your shelves groan under products that you
expected to sell, ask your sales force and marketers why. Don™t stockpile
losers passively”which means don™t ignore your inventory mix. You can
cut inventory by 50 percent and still have piles of things in your ware-
house that no one wants”in effect, you have a permanent inventory and
an expensive one at that.

Some inventory problems have to do with the mix of products you stock,
not with quantities. Retailers learn this the hard way. They balance the
need to stay in stock against the need to turn inventory”a crucial mea-
sure of success in retailing. Most try to hit annual sales between 12 and 20
times inventory, which puts pressure on managers to keep only the best
products in stock. A big mix of products makes their problems worse by
lowering storage capacity for any single product, and retailers must re-
main open to buy”ready to purchase and stock hot items.

Managers in other businesses keep themselves open to buy by remaining
flexible and market-responsive even when it means taking less of a profit
than you want from one item to free up money and space for another.
Growth also makes for complications in inventory control. You can™t grow
faster than you can deliver product to your customers. You may have to re-
plenish inventory more often or stock more units of fewer products.

It™s hard to quantify the connection, but some managers see inventory
numbers as a reflection of accounts payable and receivable. Government
contractors, for example, wait 60 days for payment, sometimes 90 days,
and their accounts receivable run a deep negative. As a result, they rarely
keep inventories larger than the value of their receivables minus payables.
As a Maryland-based consultant to government contractors says, “You
need to figure out where all the money has to go to make the business
function and know what the timing has to be. If you™re fronting a lot of
money to payroll and product development, you™re not (going to have
much left for carrying) a big inventory. Make sure you can absorb the
growth until it is paid for.”
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Another aspect of quality control is keeping a close eye on your suppli-
ers. Over reliance on one supplier or source could be risky if it could
suddenly not provide raw materials, inventory, or something else critical
to your business. Get in the habit of monitoring with whom your com-
pany spends the most money each year as a supplier of critical materi-
als. You may be on the list of this supplier™s most important customers
and represent a relationship they would like to expand. Take advantage
of this.

You can”like some aggressive managers”tell suppliers that you know
you spent $20,000 (or more) with them in the past year and that they
might get more of your business if they™re willing to negotiate on price
discounts and/ terms. It is also a good practice to look at what you are
spending with any given supplier for a whole year. We often don™t realize
what we spend in total when we receive monthly invoices. Taking a look
at top suppliers also helped my company set limits for how much we
wanted to spend in particular categories.


In operations, as in financial matters, you can bring about a substantial
improvement by using a series of basic analytic tools. The worksheets in
this section provide the basics:

• Unit output by product.

• Units shipped.

• Average days to ship.

• Returns analysis.

• Backlog of orders.

• Inventory control report.

• Business partner (supplier) survey.

Ask yourself if you need improvement in your operations area:

• Do you self-audit your records and the maintenance of equipment?
Achieving Quality and Quantity

• Are you reliant on only one supplier for a critical element of your
business? Do you have backup plans in case that supplier goes
out of business or is otherwise unable to supply what you need?

• If you have done business with the same supplier for three years
or more, are you certain that it still produces the best value or the
most state-of-the-art product?

• Do you have adequate internal quality controls, or are your cus-
tomers the first to know if one of your processes failed?

• Are the facilities you use, which are adequate for today, also
equipped for your growth plans?

• Do you have a working just-in-time inventory system?

• Are you making the best use of available new technologies in

• Are you tailoring new operations strategies for use on the Inter-
net or for sales via e-commerce?

• Do you regularly chart and review operational performance?

• What is your biggest cost reduction opportunity?

• Have you adequately protected your intellectual property (with
patents, trademarks, or copyrights)?

• Are your operations flexible enough to change when your cus-
tomers™ needs change?

• Can you manage the operational “what ifs” of the business?

” What if a major source of supply were no longer available?

” What if suppliers increase their prices on items important to
your manufacturing?

” What if you experience the loss of a lease, tools, or inventory?

” Are your facilities and information systems prepared for a natu-
ral disaster or other physically destructive force?
156 Build Long-Term Growth


Worksheet 5.1 gives you a method by which to monitor production output
by product for each month, year-to-date, and on average. You can use this
worksheet to compare how many units you produce each month with how
many units you sell of each product. It also allows you to see for which
products you™ve increased production and for which you™ve decreased
production (presumably because of increases or decreases in sales).

If output exceeds sales by a wide margin, you are increasing your inven-
tory. If sales exceed output, you are using up inventory and run the risk of
back orders over time.

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