X-10 Formula for Business Advantage

So we hear the Chinese are creating economic havoc in India.  Their strategic posture: low(est) price, in spite of higher distribution costs.  They have already penetrated the battery, motorcycle, flavoured milk markets and more!  Is this an opportunity for India?  Yes.  We have vast investments in manufacturing infrastructure that need to be exploited for business advantage.

Quite simply, we need to set stretch goals to reduce our costs of poor quality (COPQ), and make quality improvement a way of life, top-down.  The COPQ in any manufacturing organization ranges between 20 to 40 per cent of total costs.  The lower end of the range applies to continuous process industries whereas the upper end to batch mode engineering and auto companies.  These high costs cannot be ignored when survival is at stake.

I recommend a stretch strategic goal of “Halve the costs of poor quality in ten months”.  The business implications are “(more than) double your profit, with no capital investment, in ten months! ”.  This is how it works for a hypothetical organization:
Sales: Rs 100 crores
Investment: Rs 200 crores
Profit: Rs 10 crores
COPQ: Rs 20 crores

To double profit, the first option is to double sales and, perhaps, investment.  This is almost impossible as we race against time.  The second option is to halve the COPQ,  that goes straight to the bottom-line, without capital investment.  The means to attain permanent bottom-line gains is to identify chronic problems that create costs of poor quality in manufacturing and non-manufacturing processes, and solve these problems using a structured quality improvement methodology developed and perfected by the legendary quality guru, Dr Joseph M Juran.

As a first step, upper management should personally assess the COPQ for the organization.  The broad heads for COPQ, as explained by Dr Juran are:

• Internal Failure Costs.  These are costs associated with defects that are found prior to transfer of the output to the customer.  Examples: scrap, rework in manufacturing and non-manufacturing processes.
• External Failure Costs.  These are costs associated with defects that are found after the output is shipped to the customer.  Examples: warranty charges, returned material, complaint adjustment.
• Appraisal Costs.  These are costs incurred in determining the degree of conformance to quality requirements.  Examples: incoming inspection and testing, in-process inspection and testing, maintaining accuracy of testing equipment.
• Prevention Costs.  These are costs incurred in keeping failures and appraisal costs to a minimum.  Examples: quality planning, new product review, training.

An exercise for an Indian steel manufacturer revealed that their COPQ was Rs 100 crores. Most of the total (79 per cent) was concentrated in failure costs. Further, failure costs were about five times the appraisal costs. A very small amount (4 per cent) was spent on prevention. Strictly defined, the COPQ is the sum of the internal and external failure costs categories. Some appraisal costs also qualify in this strict definition.

Numerous companies have adopted structured quality improvement methodologies. They typically work on a few chronic problems and then get consumed in new center-stage or survival activities. I have studied several organizations to understand why quality improvement fails. The highpoints are:

• Upper management does not integrate quality improvement into the business strategy
• Upper management delegates too much
• Upper management confuses activity with results
• Upper management organizes company-wide training without planning action
• Teams select problems instead of problems selecting teams
• Teams misuse tools
• Teams ignore data
• Upper management does not provide “time” for teams to work on quality improvement.

My proposed stretch strategic goal demands correcting the above limitations, enlarging the scale of problem solving, and crashing the traditional problem solving elapsed time ten-fold!  Lets call this the X-10 formula.

To turbo-charge strategic results with X-10, we also need to think and organize strategically.  I recommend:

• Out-sourcing of all team management and monitoring effort
• Teams mandatorily using creativity tools, in addition to quality and planning tools
• Upper management investing a quarter of their time reviewing progress on the X-10 formula.

With this, we can contain and counter the Chinese invasion.