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Impact of total quality management on productivity

Article  in  The TQM Magazine · December 2003


DOI: 10.1108/09544780310502705

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What has changed?
Perspective
Intense global competition and diminishing
Impact of total quality trade barriers are making it more and more
management on difficult for companies to maintain their
market share. Competition from companies
productivity operating in different markets has increased as
advancements in telecommunications and
Jamshed H. Khan information technology have broken down
traditional barriers to entry (e.g. geographical
and trade barriers).
Export-based Pakistani industries are faced
with increased threats from new entrants for
example, over the past five years Bangladesh
has surpassed Pakistan in knitwear-garment
exports, while India and China are posing a
The author serious threat to Pakistani exports in other
textile markets. All other categories of
Jamshed H. Khan is Associate Dean, Business School,
Lahore University of Management Sciences (LUMS),
Pakistani exporters are facing similar
Lahore, Pakistan. situations.
With increasing pressures from the
Keywords international community to meet the
Total quality management, Productivity rate, Pakistan guidelines of the World Trade Organization
(WTO), the Pakistani Government will not be
Abstract in a position to maintain protectionist policies
The twenty-first century harbors intense global
(import restrictions, tariffs and different types
competition where the playing field and the rules of the of subsidies) for local industries.
game have changed. There is an urgent need for Pakistani The consolation is that the pressure to excel
businesses to change the way they operate. This paper is not only upon industries in Pakistan, but
introduces the total quality management (TQM) concept upon every single business the world over.
and argues that its implementation is the critical need of The breaking of traditional barriers provides
the hour for the survival of our industries both locally and our domestic industry an opportunity to enter
internationally. The paper is divided into four segments: new international markets in the same way as
the first discusses the changed environment in which it provides other countries access to our
businesses are operating; the second gives a brief
domestic markets. The “threat” can thus be
introduction to the TQM philosophy and discusses TQM
regarded as an “opportunity”. However,
systems and tools; the third discusses the effect of TQM on
before taking advantage of this opportunity,
productivity and explains what is meant by “effective
productivity”; and the fourth presents some of the benefits we must answer two very important
that were realized by international and local firms questions:
implementing TQM. (1) Are we providing our customers the best
value for their money?
Electronic access (2) Are we competitive enough to contest for
The Emerald Research Register for this journal is market share with the best producers in
available at the world?
http://www.emeraldinsight.com/researchregister
Our performance to date clearly indicates that
The current issue and full text archive of this journal is the answers to the above questions are “no”. If
available at we had been providing the best value for
http://www.emeraldinsight.com/0954-478X.htm money we would not have lost market share in
the textile and knitwear markets. For the most
part, we are not productive enough to
compete for market share in the international
arena.
In a competitive environment, a business
The TQM Magazine
must persuade a customer to buy its products
Volume 15 · Number 6 · 2003 · pp. 374-380
q MCB UP Limited · ISSN 0954-478X rather than those of competitors at a price that
DOI 10.1108/09544780310502705 is more than its cost of production. A rational
374
Impact of total quality management on productivity The TQM Magazine
Jamshed H. Khan Volume 15 · Number 6 · 2003 · 374-380

customer, however, would like to maximize (1) absolute customer focus;


value for his money. Therefore, a successful (2) employee empowerment, involvement
producer must enhance the total value of his and ownership;
products so that the price is acceptable to the (3) continuous improvement; and
customer while his own costs are low enough (4) use of systematic approaches to
to allow him to make a profit. management.
How can a business maximize “total value”
The core of the TQM philosophy is “absolute
of a product for the customer while
customer focus”. Belief in “employee
minimizing the real cost to produce it? The
empowerment, involvement and ownership”,
key to success for businesses in the future lies
“continuous improvement” and the “use of
in the answer to this question.
systematic management” help the
Total quality management (TQM) is all
organization achieve continual increase of
about fostering a culture that is continuously
customer satisfaction at a continually lower
oriented towards increasing customer
real cost.
satisfaction while minimizing the real cost of
Figure 2 describes the individual
production.
components of the TQM philosophy and their
inter-relationships, which are further,
discussed in subsequent sections.
TQM model

A simple model for TQM is depicted in


Figure 1. The model consists of two main TQM and productivity
components:
(1) TQM philosophy; Increasing competition in the global market
(2) TQM systems and tools. necessitates that productivity should not be
considered as an indicator of efficiency only; it
TQM cannot exist without a complete
must also measure effectiveness. Yet the
acceptance of its philosophy by at least the top
distinction between the two is often
management. Once the basic TQM
overlooked. For example, a company that
philosophy is accepted by the top
produces according to process specifications
management then different systems and tools
may be using its resources efficiently, but
can be initiated to propagate and facilitate a
unless it is producing what its customers want
culture based on such a philosophy.
it may not be using them effectively. There is

TQM philosophy
Figure 2 Components of TQM philosophy and their interrelationships
TQM philosophy consists of four basic
beliefs, which are as follows:

Figure 1 Structure of TQM

375
Impact of total quality management on productivity The TQM Magazine
Jamshed H. Khan Volume 15 · Number 6 · 2003 · 374-380

no point in churning out well-made products Productivity and employee


that nobody wants. To be profitable, a empowerment, involvement, ownership
company must judge productivity and value
from the perspective of the customer, not Quality can’t be delegated. It must be assumed
from the engineer. Hence, internal processes and lived by everyone on the payroll (Harari,
must only be geared towards producing 1993).
products and services that the customers find According to Evans and Lindsay (1996), 60
useful and valuable. per cent to 90 per cent of the costs of total
The TQM philosophy ensures “effective quality are difficult to control by management
efficiency” by encouraging companies to plan alone. When workers themselves are
products and develop systems that deliver
committed to delivering quality, they take
products only according to the expectations of
greater initiative towards meeting product and
the customer. Several studies have validated
process specifications; detecting and
that in the long run, companies that adopt
eliminating bottlenecks; improving product
TQM achieve greater effective productivity,
and process designs and setting realistic yet
profitability and market share for most kinds
challenging performance targets. Diversity in
of products and market situations. A look at
views and experiences encourages creative
the individual components of the philosophy
ideas for “serving the customer” and this
shows why.
invariably fosters productivity.

Productivity and absolute customer


focus Productivity and continuous
improvement
Delighted customers are the prime
determinant of sustainable competitive The ever-changing tastes of customers and
advantage for any organization. To retain pressure from competitors induce firms to
customers and entice new ones a company adopt proactive strategies to retain and/or gain
needs to focus on providing value to the market share. Hence, continuous
customer and that too in a manner that is improvement is essential for the very survival
more effective than that of its competitors. of a company. Both incremental and
Customer satisfaction transforms into breakthrough improvements enhance
customer delight when goods or services productivity by decreasing costs and/or
exceed customers” expectations. Thus, improving performance. Performance is
understanding what the customer wants is
enhanced through greater responsiveness,
crucial. When a company directs all its efforts
shorter cycle times for new products or
towards this goal, it automatically produces
services, better products, shorter throughput
only what is required by its customers. This
time and unique marketing, engineering or
leads to higher sales and operating profits for
production strategies. Costs decline by
the company as customers pay more and buy
reducing errors, defects and wastage.
more when it comes to quality products that
they want. It also curbs inventory pileup of
both unsold and returned/rejected inventory
as well as recall costs, warranty claims and
product liability costs. When care is also taken Productivity and systematic
to satisfy the requirements of internal management
customers, items are produced according to
specifications thereby minimizing defective The systematic management approach
items, the cost of rework and subsequently ensures that whatever we produce is
throughput time. Hence, customer focus consistent with what we wanted to produce,
enhances effective productivity by reducing thereby reducing wastage. It also ensures that
internal and external failure costs along with all the resources are appropriately utilized and
ensuring that only those goods are produced efficiency is gained by increasing output while
that are in demand. reducing input.
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Impact of total quality management on productivity The TQM Magazine
Jamshed H. Khan Volume 15 · Number 6 · 2003 · 374-380

Benefits obtained by organizations TQM and profitability


embarking on the TQM journey In seven out of ten years, the firms in the
sample showed higher increase in percentage
A number of awards have been instituted to changes in the operating income as compared
recognize organizations and individuals for to the control group with the magnitude of
commitment to quality. Two of the more changes in positive years being higher than
famous are the Deming Prize and the those in negative years. Furthermore, the
Malcolm Baldrige National Quality Award changes in operating income-based measures
that have been presented to more than a 100 are more significant over longer intervals.
organizations since 1951 and 37 organizations Over a period of ten years (2 6 to +3) the
since 1988 respectively. We will use receipt of average percentage change of the test sample
over the control group is 107 per cent.
a quality award as a proxy for successful
Other operating income-based measures
implementation of TQM in that organization.
also provide strong evidence that firms with
Empirical evidence from businesses that have
effective TQM have outperformed other firms
won the Malcolm Baldrige National Quality
in the control group and thus proves the
Award also supports the belief that hypothesis that TQM efforts improve the
implementing TQM improves productivity. operating income of organizations. For
example, the control adjusted percentage
changes in operating income/employee,
operating income/assets and operating
income/sales over the ten-year period from
Effects of TQM on performance
(2 6 to +3) are 22.09 per cent, 20.92 per cent
Hendricks and Singhal (1997) carried out a and 19.82 per cent respectively.
study to empirically prove that TQM
improves the performance of organizations. TQM and revenues
Based upon the concepts of TQM the study Firms in the test sample have performed
tried to prove that “implementing an effective better than firms in the control group with
TQM” would: significant increase in sales over the years. The
.
improve the profitability of the firm; control adjusted percentage change in sales
.
increase revenues; and over a period of ten years (2 6 to +3) is 63 per
.
reduce costs. cent; whereas, percentage change in sales/
assets is 5.6 per cent over the same ten-year
The sample for the study consisted of 463 period. The percentage changes are higher
firms. All the firms had won “quality awards” when measured over longer intervals. This
and had financial data available for a period of evidence supports the second hypothesis that
ten years – starting from six years before the TQM efforts result in increase in sales.
year in which they had won the award. The
performance of these firms was compared TQM and costs
with that of a control group that had not made Cost per dollar of sales of the test sample is
any efforts towards TQM. The results were lower in seven years out of ten, whereas over a
adjusted for the performance of the firms in period of ten years (2 6 to +3) the change is
the control group. The results of broad 2 1.27 per cent, the change, though negative,
parameters studied are given in Table I. is weakly significant at 10 per cent level.

Table I Effects of TQ efforts on performance of organizations


Percentage change Percentage change Percentage change Percentage change Percentage change
From year in operating income in sales in total cost/sales in number of employees in assets
2 6 to 2 1 10.41 6.21 0.27 0.35 2 1.93
2 4 to 2 1 8.88 2.8 2 0.45 2.33 1.8
2 1 to +1 14.77 6.26 2 0.39 5.56 8.24
2 1 to +3 35.06 18.15 2 0.94 13.69 17.52
2 6 to +3 107.12 63.74 2 1.27 17.00 45.46
Source: Hendricks and Singhal (1997)

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Impact of total quality management on productivity The TQM Magazine
Jamshed H. Khan Volume 15 · Number 6 · 2003 · 374-380

In comparison with percentage changes over Xerox had reduced its average manufacturing
the ten year period (2 6 to +3) of profitability costs by 20 per cent. There was an increase in
(107.12 per cent), sales (63.75 per cent), the average revenue produced by each person
growth in employment (17 per cent) and in in the business products and systems group by
total assets (45.46 per cent); a negative change 20 per cent, and the time required to bring out
in total costs/sales (2 1.27 per cent) is quiet new products to market was reduced by an
insignificant. average of 25 per cent. More than 70 per cent
Some examples of organizations benefiting of the company’s workforce participated in
from incorporating a TQ culture in their about 2,500 problem solving and quality
organization are given below. improvement teams around the world. The
supplier base also declined to 350 as
compared to 5,000 at one time.
Individual examples of TQM effects on Xerox’s revenues and profits have increased
international firms by more than 30 per cent per annum since
1991 and its share of the US document-
Granite Rock Inc. outsourcing market has risen to 40 per cent;
In 1993 after four years of TQ efforts, almost three times the share of its nearest
customer accounts at Granite Rock, increased competitor.
by 38 per cent, when overall construction
spending in its market area declined by over
40 per cent.
Individual examples of TQM effects on
local firms
Motorola
Due to TQ efforts Motorola’s employee Consumer product company
productivity improved 100 per cent from Within three years of implementing the TQM
1988 to 1994 at an annual compound rate of philosophy, the company experienced a
12.2 per cent. Motorola has driven down progress of 107 per cent in its return on
manufacturing time for pagers from 40 days employees whereas the revenue per employee
to less than one hour. had increased to 25 per cent. Consequently
the total revenues of the company rose to an
3M impressive 130 per cent.
3M dental products division, a Minnesota- The impact of TQM on company
based supplier of dental products competing operations was clearly exhibited by the
in a $4 billion global market with over 100 inventory turnover ratio, which improved by
competitors, has doubled global sales and 56 per cent (an increase from 8.7 times to 13.6
market share over the past 10 years and, from times).
1991 to 1996, doubled its rate of profit.

Solectron
Solectron, a worldwide producer of Engineering service company A
electronics design, manufacturing and TQM helped this company reduce the defect
support services to leading original equipment rate of its products by 8 per cent (from 12 per
manufacturers, has, on average, experienced cent to 4 per cent) within three years. Its
revenue growth of 47 per cent per annum, well operations became highly efficient in terms of
above the electronics manufacturing services a reduced lead-time from ten weeks to six
industry’s 10 per cent. Consequently, the weeks and the inventory turnover ratios
company has doubled its market share since showed an increment of 63 per cent (from
1992. In addition, from 1991 to 1997, 1.66 times to 2.71 times).
Solectron’s stock has significantly The company became adept at asset
outperformed its largest competitor and even utilization and experienced an increase in
S&P500. return on assets by 7 per cent whereas its
return on employees rose to 219 per cent. The
Xerox output per employee grew to 57 per cent,
Four years after having introduced the which consequently pushed the revenue per
“Leadership through Quality” program, employee to a substantial 102 per cent.
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Impact of total quality management on productivity The TQM Magazine
Jamshed H. Khan Volume 15 · Number 6 · 2003 · 374-380

Engineering service company B implemented TQM successfully, there is little


In a time span of three years the company doubt that the TQ culture if applied correctly,
utilized TQM to experience fruitful gains in yields significantly better results in all the
terms of a reduced lead-time by four weeks performance categories of financial results,
(from 20 weeks to 16 weeks), and employee customer satisfaction, and employee
turnover by 10 per cent (from 24 per cent to satisfaction. TQM also provides a long term
14 per cent). sustainable competitive advantage in an
The most significant affect of TQM on the increasingly competitive global market. As
company was in terms of on-time delivery of discussed, this philosophy is not alien to the
products to its customers, which stood at a Pakistani cultural and religious values.
remarkable rate of 99 per cent by the end of TQM is the harbinger of a paradigm shift
the three years. The operations of the from a reactive culture to a proactive one with
company showed tangible results translated the overriding emphasis on delighting the
through the improvement in the inventory customer. Involvement and empowerment of
turnover by 26 per cent (from 1.9 times to 2.4 every single employee within the organization
times). - from the most humble to the most powerful
is essential in order to develop ownership of
Knitwear exporter the culture and to stem conflict of interest. As
The company experienced an increase in the scope is company wide, everyone is
revenues of 42 per cent within three years of responsible for ensuring quality.
implementing TQM. It was also successful in
reducing its cost per employee by nearly 24
per cent (from Rs.792,324 to Rs.604,365) References
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Conclusion

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