How Has Improved Quality Affected Corporate Performance Accounting Essay

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Total Quality Management is an approach widely credited to W. Edwards Deming who believed that the key to successful quality improvement was the attitude of workers and by respecting them this would create a positive attitude in the workplace and improve the quality of their output (Proctor 2012). Deming (1986, pg. 23-24) produced 14 points which he believed were the basis of effective implementation of TQM and would help with the "transformation of American industry" (Deming 1986, pg. 23). As well as the 14 points for successful implementation, Deming also included his cycle of "1. Plan, 2. Do, 3. Check, 4. Repeat" (Proctor 2012, pg. 505) as the basis of using the TQM model. The aim of TQM overall is the continuous improvement of quality within the products and processes of a business through the "involvement of management, workforce, suppliers, and customers, in order to meet or exceed customer expectations" (Cua et al 2001, pg. 676) or "the requirements of the customer" (Proctor 2012, pg. 506). As can be seen from this, a key component of TQM is satisfying the need of the customer, this can sometimes be hard as "customers are not always explicit about their requirements" (Proctor 2012, pg. 507) and therefore this can have a negative impact on the costs of a company as they waste unnecessary expense by exceeding the requirements of the customer. The figure below shows some examples of how customer satisfaction can be satisfied (Drury 2004, pg. 14).

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As well as involving customers into the process in order to satisfy their needs, TQM also encourages the collaboration between a variety of other stakeholders in order to find ways to improve the quality of the businesses products. Cua et al (2001) list nine practices that are commonly part of a TQM system, as well as the improvement of employees and customers these also include "cross-functional product design, process management, supplier quality management,…, information and feedback, committed leadership, strategic planning, cross-functional training" (Cua et al. 2001, pg. 676). These practices shows the extent to which TQM aims to ensure quality products, considering all aspects of a company to make sure that everything in the company is doing what it can to meet the target quality.

When considering a business's stakeholders; employees are considered to be of upmost importance. Therefore, a key part of the TQM model is to allow employees "to use their first-hand knowledge to intervene and improve production processes" (Proctor 2012, pg. 504). This works as the TQM philosophy means that if employees think of a way in which quality can be improved at any stage of production they would be able to implement their idea without the need for management approval no matter how small the improvement was. These small improvements might not seem to have much of an effect, however as employees started noticing many of these small improvements, together they could have a significant effect on the quality of the final output.

Another key part of the TQM model is that of continuous improvement, under Deming's initial 14 points, point 5 stated "improve constantly and forever the system of production and service, to improve quality and productivity" (Deming 1986, pg. 23, this point explains that in order to help improve quality and productivity you need to constantly improve the production system which is an underlying part of TQM. By continuously improving the various processes of production, you will be able to drive down the costs involved in the overall product due to a number of reasons including; reduction in waste and increased customer satisfaction (therefore less time spent dealing with complaints and also customers order more from the company) (Dean and Bowen 1994, pg. 395). Two main ways in which TQM aims to deal with helping with continuous improvement are firstly via standardisation, which aims to promote consistency within the production line meaning that all products produced will be identical. Secondly is using measurement systems such as statistical process control and six sigma, which I will explain in detail later in this essay (Collier 2012). These measurement systems aim to help reduce the variation that occurs within the products therefore reducing the amount of defects that occur during production, by continuously reducing this figure is one example of continuous improvement occurring.

When looking at TQM one important thing to consider is the costs involved, as a company will not have endless sources of funding which that can use to continually improve the quality of their products. They therefore need to consider how much they can spend by looking at the cost of quality; which is the difference between what they need to spend to improve quality (e.g. product design, employee training and maintenance) and what they may have to spend in order to deal with problems that occur with poor-quality items after production (cost of waste, warranty claims, product recalls) (Proctor 2012, Drury 2004). This leads to the "trade-off between the costs of prevention and those of cure" (Proctor 2012, pg. 506) as the more a company spends on improving quality and therefore preventing poor-quality, the less they will need to spend dealing with problems. When dealing with the cost of quality we can look at the figure below which shows how an optimum degree of quality can be found (Proctor 2012, pg. 507).

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Six Sigma

Six Sigma is another performance improvement technique, which some consider to be of similar nature to Total Quality Management with Six Sigma being sometimes called "TQM on steroids" (Proctor 2012, pg. 521) and TQM being something that "contributes greatly to the Six Sigma approach" (Tennant 2001, pg. 7). Six Sigma is something that was started and developed by Motorola in 1980s as a tool that could be used in manufacturing environments to reduce the number of defects and variation in their production (Anand et al 2010) and since has evolved over time to become an approach for improving the performance of a business and increasing its profitability. Especially over the last decade and during the 2000's it has gained extensive popularity, which can be said to be due to its use by companies such as General Electric whom have said it saved $8 billion during 2001 due to Six Sigma approaches and Bank of America who saved over $2 billion due to the methodology (Shafer and Moeller 2012).

Six Sigma can be defined as "an organised and systematic method for strategic process improvement and new product and service development that relies on statistical and scientific methods to make dramatic reductions in customer-defined defect rates" (Linderman et al. 2003, pg. 195), this definition highlights the fact that it Is trying to meet the customer's target of quality similar to TQM. The main measurement that Six Sigma uses in order to achieve its aim is defective parts per million opportunities (DPMO), an improvement rule of 10x is then often set for defective reduction (Linderman et al. 2003), meaning that if current defective part rate was 5% this would equate to a DPMO of 50,000 and 10x improvement rule would set a goal of 5,000 DPMO (a defective part rate of 0.5%). The process will then continue with its overall aim to achieve 'zero defects' and variations of output that are within 6 standard deviation/sigma from the mean, with a DPMO of 3.4 (meaning that 99.99966% or 100.00% to 2 d.p. of outcomes were non-defective). The graph below shows how the DPMO varies with process sigma assuming a standard deviation. If a process is at a level of two or three sigma is usually relatively easy and cheap to get to a four sigma level, however it takes much more sophisticated statistical analysis and effort in order to reach a Six Sigma level. (Linderman et al. 2003, pg. 194)

In order to improve the performance of a business the Six Sigma methodology follows a structured method based upon the "plan, do, check, act (PDCA) cycle" or Deming cycle (Linderman et al 2003, pg. 195). The most popular method associated with Six Sigma a five-step process to improve the processes (Lin et al 2013, pg. 97):

Define - Identify what the project is and its objectives

Measure - Gather data to quantify the problem and describe the current performance levels

Analyse - Identify the root causes by enhancing the understanding of the processes and identifying what is behind the problem

Improve - Eliminate the problem by developing solutions and modifying the process to include these solutions

Control - Ensure the solution has an impact on the way people work by monitoring the changed that have been made as it becomes normal activity of the business

This DMAIC procedure is then repeated when a new target level of DPMO has been set. With the DMAIC process being used for existing processes and services, it can be easily modified for new processes. The first 3 steps remain the same, with the procedure becoming DMADV to reflect this: (Proctor 2012, pg. 522).

Design - Create a new process that meets the objectives of the project

Verify - Implement the design produced and compare the actual outcomes to those predicted

This DMADV approach is also known as "Design for Six Sigma" (Linderman et al. 2003, pg. 195), as the process that is being made is specifically designed for use with Six Sigma. No matter which method is used those involved require extensive training in order to familiarise themselves with the Six Sigma toolkit, these specialist are often referred to as "Black Belts, Master Black Belts, Green Belts and Project Champions" (Linderman et al. 2003, pg. 195) depending on their position and level of training received.

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Is Six Sigma really just 'Total Quality Management on steroids'?

As you may already be able to tell there are some common similarities between Total Quality Management and Six Sigma, which may make you think that Six Sigma is just an advanced form of TQM. However, there are also a number of differences between the two, such as Six Sigma's statistical focus and the wide approach that TQM takes unlike Six Sigma. One key similarity that is noticeable between the two performance improvement techniques is their focus on continuous improvement of the quality of outputs, with TQM main principals being "customer satisfaction, employee involvement, and continuous improvement in quality" (Curkovic et al. 2000, pg. 766), Six Sigma is also something that has a focus on continuous improvement with the target DPMO being continuous raised once the pervious target has been reached. However, the key difference is that with Six Sigma there is a clear target, which is to reach DPMO of 3.4 and near perfection.

Another similarity between TQM and Six Sigma as mentioned earlier is how both of these performance improvement techniques focus on the needs of the customer. When looking at the definition by Linderman et al. (2003) which states that Six Sigma aims "to make dramatic reductions in customer defined defect rates" (pg. 195), this clearly shows how important the needs of the customer are. Customer focus is also evident in TQM as the first major principle of the model given by Curkovic et al. (2000, pg. 766) is "customer satisfaction" and the major aim of TQM is to improve quality "in order to meet or exceed customer expectations" (Cua et al. 2001, pg. 676). Both of these techniques therefore show how important it is to consider the customer when trying to improve the performance of the company which is most likely due to the fact that it is the customer that will be buying the goods and services and so in order to increase sales, companies need to make sure their goods and services are what the customer wants.

As well as these similarities, there are also a number or differences between TQM and Six Sigma that shows why Six Sigma can be considered as a performance improvement technique of its own and not just an advanced form of TQM. Firstly is Six Sigma's heavy focus on statistics, something which is absent from the TQM model. Six Sigma's use of statistics is evident from the unique metrics it uses which includes "Process Sigma measurements, critical-to-quality metrics, defect measure and 10x improvement measures" (Linderman et al. 2003, pg. 195) as well as "Pareto Chart and control charts" (Lin et al. 2013, pg. 96). These statistical tools make Six Sigma a much precise method of quality improvement that helps to "accurately remove hindering issues" (Lin et al. 2013, pg. 96) compared with the much more general TQM and it is through Six Sigma measuring and analysing the data which allows it to reduce defects so significantly. This is compared to the main focus with TQM, which aims to encourage collaboration between a company's various stakeholders and creating cross-functional procedures in order to help improve performance.

Another difference that makes Six Sigma stand out is the approach that it takes to quality control compared to that of TQM. Six Sigma aims to improve quality by reducing the number of DPMO that occur in production and using the process in order to "approach 'zero defects'" (Lin et al. 2013, pg. 96). This is also known as a 'top-down' approach (Lin et al. 2013) as Six Sigma aims to firstly look at how they want to improve quality (reduce the DPMO) and then look at how to achieve this. While the collaborative approach which TQM takes, aims to improve quality by changing the culture of a business and encouraging everyone that is part of the business to commit to quality improvement.

These differences between Six Sigma and TQM in my opinion shows that Six Sigma is perhaps a more specific technique focusing on one area which is to reduce the number of defects that occur in order to improve quality, enabling it to be more specific in the area it focuses on and perhaps suggests why Six Sigma is known to produce better results. TQM is more of an overall approach that aims to improve quality in a business by changing the culture of that business to TQM. So therefore, even though Six Sigma is said to be an advanced form of TQM, it perhaps may be better suited to be considered a part of TQM instead and be used as one of the measurement systems that TQM can often include.

How has improved quality affected corporate performance?

TQM and Six Sigma as improvement techniques have been tried and tested around the world by various companies with many claiming great success from using them such as GE who estimated they achieved savings of $8 billion between 1998 and 2001 due to Six Sigma (Shafer and Moeller, 2012). While TQM and Deming are known as something that played a key role in Japan becoming the world leader in quality during the 1970s (Samson and Terziovski 1999). However there have also been instances where there have failed to bring such success to businesses.

Deming's TQM model is something that is known to have helped "rebuild the industries of Japan which had been devastated in the Second World War" (Proctor 2012, pg. 505) by improving the quality of their products and allowing them to become much more competitive compared with products from the United States or Europe. TQM has also been used by a number of large corporations such as Xerox, Harley Davidson and Ford, who have all claimed that TQM managed to restore their market share and increase their profits (Samson and Terziouvski 1999).

Research has shown that "successful implementation of TQM does indeed result in better business performance" (Yang 2012, pg. 9) with some examples of the benefits TQM can bring including "cost reduction, increased market share, increased profit and enhanced business competitiveness" (Yang 2012, pg. 9). The key phrase here is successful implementation as it is quite easy for the implementation of TQM to go wrong with Yang (2012, pg. 9) stating that "approximately two-thirds of companies in the United Sates have either failed or stalled in their attempts to implement TQM", this is mainly due to the fact that it is not always easy to get everyone required to support the implementation of TQM, which affects TQM as the model is based on that of collaboration between everyone in the business. This perhaps is just one of the reasons that can explain the decline in popularity of TQM over the recent year.

Six Sigma a much more recent technique, is also something that has been used by companies to great success; the inventors of Six Sigma, Motorola over the 20 years since using the technique have achieved savings of over $20 billion and the technique was a key reason behind them winning the Malcom Baldrige Award for Quality in 1988 (Shafer and Moeller 2012). Companies such as Honeywell, Raytheon, Caterpillar and Sony who have successful used Six Sigma in recent years to "improve customer satisfaction, reduce variability and waste, ensure product quality and provide better processes and reliability" (Lin et al. 2013, pg. 97) which shows the many areas that Six Sigma can help a business in. Other companies which have been able to achieve savings with Six Sigma include The Dow Chemical Company who gained savings of $1.5 billion in three years due to Six Sigma and Bank of America who had savings of $2 billion over a similar period. As with TQM there are also cases where implementation of Six Sigma has not resulted in improved corporate performance. Businessweek (2007) shows one example where it states that when techniques such as Six Sigma are used "creativity can easily get squelched", and it may only be suited for manufacturing processes and a Fortune Magazine (2006) article shows that out of 58 companies that had adopted Six Sigma, 91% of them had gone down in the S&P 500 since. These examples show that even with the success stories showed by some companies using Six Sigma, it may not always be the best thing for the company.

Conclusion

In conclusion, we have seen how Total Quality Management and Six Sigma have become two of the most famous performance improvement techniques in the world with Six Sigma still being highly relevant in today's day and age (Shafer and Moeller 2012, Lin et al. 2013). They are both techniques that have proven to work and improve a company's quality and used this to enhance their performance, however it is also clear that in order for this to occur they need to implemented properly as incorrect implementation can be disastrous for their performance. We can also see that even though Six Sigma and TQM do have their similarities there are also a number of differences between them. This suggests that Six Sigma may not just be 'Total Quality Management on steroids' as some may suggest and perhaps is best used in combination with Total Quality Management to give businesses the edge in regards to quality.