Volume 6 · Issue 11 · November 2001

Contents

How Quality Professionals and Programs Are Faring in Recession
Can You Afford to Cut Quality in a QMS/Six Sigma World

Is a severe economic downturn an excuse for companies to disproportionately cut their quality professionals and programs or an opportunity to strengthen their quality management systems (QMSs) and programs? And are customers helping or hurting themselves when it comes to supplier relationships?

The headlines in the second half of 2001 have declared that the US and much of the world economy is in a recession. While some sectors have continued to prosper, many that were not feeling the impact of the downturn–particularly services–are catching up with traditional manufacturing and telecommunications, which have been in a downturn for more than a year.

More Americans are now unemployed than at any time since at least the last recession in the early 1990s, and many employees who had been going at 110% during the boom times find themselves with some free time on a typical workday.

Adding to the difficulty of reduced business is the pressure on most tier 1 suppliers from customers in many industries to reduce their per unit costs. THE OUTLOOK has received several calls from subscribers requesting that their subscriptions be switched to home addresses or someone else in their companies because they were being laid off. These unfortunate occurrences leaves THE OUTLOOK to wonder how quality professionals and programs overall are faring in this downturn, when companies may be cutting quality disproportionately to deal with lost business and meet cost reduction targets demanded by customers.

This is also the first recession since the use of ISO 9001/2 and Six Sigma programs became popular in the US corporate culture. The fact is that ISO 9001/2 registration is a customer requirement for many suppliers and both ISO 9001/2 and Six Sigma are built on satisfying the customer and improving process and product quality while also reducing costs by increasing efficiency. So the question is: Can a company afford to cut its programs and staff dedicated to quality management and Six Sigma to reduce costs at a time of lost business and pressure on prices?

To determine if companies are cutting quality disproportionately or using freed-up staff to improve quality and plan effectively for the future, THE OUTLOOK conducted a survey of company representatives and consultants who work with clients in a cross-section of industries. The survey asked 11 questions designed to get a better sense of what is happening in the marketplace. Of those contacted, 6 responded to all the questions while several answered a few questions, issued a general statement or indicated that their company or client base has not been affected by the downturn.

The responses pointed out two key facts:

• Organizations that have implemented effective QMSs and/or Six Sigma programs are using the downturn to prepare their operations for the next period of growth. Organizations that have not are likely to make no improvements to their processes and make random staffing cuts while blaming ISO 9001/2 and Six Sigma for their problems.
  
• Most customers offer little help to their suppliers in reducing process inefficiencies that would cut per unit costs by 5-10% annually and improve the product and customer satisfaction. Thus, few customers ever see cost reductions approaching 5%.

The World of Customer-Demanded Price Cuts

The survey asked if companies are requiring their suppliers to reduce prices on an annual basis. The responses confirmed this was a fairly common practice in the automotive and other sectors. "Yes, 5% across-the-board price reductions to cash in on savings from using a management system," responded John Broomfield, President and CEO of Quality Management International, Inc., a firm that helps companies develop management systems. He indicated that his clients have been able to meet these targets through productivity improvements.

However, this cost-cutting practice is not new. "I see no greater pressure than there has been for the last decade or more," replied Jack West, Chair of the US Technical Advisory Goup and the lead US delegate to ISO/TC 176, the technical committee responsible for the ISO 9000 standards, and a quality professional who has helped companies implement internal TQM assessment processes based on the Baldrige Award criteria and Cost of Quality processes. "This is a common practice, and some purchasing companies have done it for years."

One point that became apparent in the answers is that such cost cutting is not effective unless an organization has an effective QMS and the customer manages and enhances its relationship with the supplier. "Reaction has been negative, something that has been publicized over the past few years," claimed Stanley Marash, Chairman and CEO of STAT-A-MATRIX, a consulting firm that assists clients with QMS, environmental management system (EMS) and Six Sigma program implementation. "However, some OEMs [original equipment manufacturers] that are ‘partnering’ on Six Sigma projects with their suppliers are able to meet these cost-cutting goals."

"I may have a biased view here, but it is my experience that the intelligent suppliers that meet year-over-year reduction targets actually use their QMSs to achieve the targets," commented West. "As far as customers helping suppliers reduce costs, I think this is a mixed bag. Some customers help while others only set the targets and provide no assistance. I think the most successful programs are those in which the buying organization does provide some help and these customers are willing to address issues in their own systems that cause suppliers to bear additional costs."

Representatives of two companies seemed to indicate that their customers’ programs were not among the "most successful". Joe Green is Vice President of KVF Quad Corporation in East Moline, IL, a tier 3 supplier of value-added metal finishing services to tier 1 and 2 production part suppliers that supply OEMs in the agricultural machinery, automotive and hardware industries in the Midwest. John A. Bruman is the Quality Assurance Manager of Precision Die and Stamping, Inc., in Tempe, AZ, primarily a tier 1 and 2 supplier of sheet metal stamping and electrical arrays to the aerospace, automotive and electronic sectors. Both Green and Bruman saw these programs as targeting tier 1 suppliers and potentially representing a failure by OEMs to build trust with their suppliers.

Green indicated that KVF’s tier 1 and 2 customers are not enforcing deeper cost reductions than those already built into the OEMs’ so-called "Partner" relationships. "These partner relationships appear to be one-sided and serve only the customer’s half of the partnership," remarked Green. "They seldom resemble ‘mutually beneficial’ relationships, so suppliers are not going to trust customer promises to work with them to further reduce prices when these customers already appear suspect in terms of their fidelity to these planned relationships."

In fact, claims of savings from the partnerships appear to be exaggerated. "When speaking of the subject in public, the customers and suppliers describe gigantic savings represented in ‘real dollars’ but convey little factual information," stressed Green. "The true savings and/or reductions are often ‘soft side’ dollars. Behind the claimed savings usually exists a new quotation with revised product criteria and adjusted prices. The adjusted prices usually reflect a trade-off between the customer and supplier, allowing both to claim significant savings."

The Right Way to Pursue Price Cuts

In other words, changes to most contracts involve modifying specifications that increases the cost of the product to the customer due to the changes and/or reduces the cost of producing the product. "The fact that customers will change criteria after the original contract is as trustworthy as gravity, and suppliers rely on this event," admitted Green. An effective QMS also helps the supplier. "Mature suppliers conforming to ISO 9001/2:1994’s Contract Review processes or ISO 9001:2000’s Customer-Related Processes will document instances where customers have changed criteria in the middle of the planned, long-term, mutually beneficial relationship.

"The supplier then delivers a proposal for less than the planned percentage price reduction based on the records of changes to a contract. Sometimes it works, sometimes it doesn’t, but thanks to ISO 9001/2- and QS-9000-based QMSs, suppliers have the ammunition of quality records. By comparison, immature organizations with no evidence of changed conditions simply roll over and deliver some token price reduction."

Such price reduction targets are most common among Precision’s automotive customers in the initial bidding process, according to Bruman, who noted a troubling change in customer-supplier relationships. "Confidential, competitive bidding is being abandoned in lieu of blatant ‘whipsawing’ of suppliers against each other in the guise of ‘target pricing’. As a result, my company’s leadership is ‘no-bidding’ more automotive work in spite of the general business slowdown. When the engineering and quality departments of some of our automotive customers ask why we are ‘no-bidding’ in light of our preferred quality and delivery performance, our leadership tells the customers that it’s because of their purchasing policies."

This relates to ISO 9001:2000, Subclause 7.2.2, Review of Requirements Related to the Product, which requires an organization to review product requirements to ensure "c) the organization has the ability to meet the defined requirements." "Having the ability" includes surviving as a supplier if the organization accepts work at too low a price. "In rare cases where we actually bid on automotive work, any price concession is financed from our profit margin," acknowledged Bruman. "The philosophy is to get the work in the hope that future volume will justify the reduced margin. When future volume doesn’t develop, we lose."

However, there is a right way for a customer to pursue price reductions from suppliers that fits perfectly with an ISO 9001-conforming QMS or a Six Sigma program, which is more likely to be implemented in a major OEM or large tier 1 supplier. In today’s marketplace, many tier 1 suppliers and their customers will be making the transition from ISO 9001/2:1994 to ISO 9001:2000 within two years. This represents an opportunity to do things the right way when pursuing cuts.

ISO 9001:2000 does have an Evaluation of Subcontractors subclause in 7.4.1, Purchasing Process, that requires an organization to "evaluate and select suppliers based on their ability to supply product in accordance with the organization’s requirement" (using selection criteria).

This is accepted to mean that suppliers will have an ISO 9001-conforming QMS in place to ensure process consistency and overall quality. The final draft of TS 16949:2002 goes further, requiring an organization to ensure its suppliers are registered to ISO 9001:2000 and to perform supplier QMS development "with the goal of supplier compliance with this Technical Specification" (although a NOTE permits customers to set alternative requirements, such as approved second-party audits).

Thus, if your organization is a supplier to a customer registered to ISO 9001:2000 or TS 16949:2002 in the future, the customer will be obliged to work with you to improve your QMS while improving its own system. In the automotive field, the customer must "develop" its supplier’s QMS beyond mere ISO 9001:2000 registration.

Further, Six Sigma requires an organization to investigate nonconformities up and down the value stream, and it is common for a Six Sigma project to involve Black Belts working with suppliers to identify root causes and solve problems that affect the organization’s processes and/or products.

To succeed, the Black Belts will need to communicate and cooperate with the supplier’s personnel so as to take corrective and preventive actions and make the improvements that will prevent problems "downstream". "Clearly, partnering on Six Sigma projects has been used effectively to identify issues together and solve them together," emphasized Marash. "Without that partnering, the projects will produce no changes at the supplier and those issues will continue to negatively impact on the customer’s operations."

Another consultant, Ronald G. Berglund, CQ Manager of Management Resources International, Inc. (MRI), reported that his firm is working with a major tier 1 automotive supplier and its suppliers. This tier 1 has mandated price reduction targets for its suppliers. But MRI’s mission will be to revise the client’s existing training and education system to create a comprehensive management system and, more importantly, help its suppliers improve their QMSs to achieve efficiency gains that will make will make fulfillment of price targets a natural byproduct.

"It’s an unusual contract, but it shows that the customer in this case is thinking ahead," said Berglund. "The organization has a large number of suppliers and knows it must be able to improve relationships and the quality of the product and services its suppliers deliver. Not every customer has tier 1 suppliers willing to work with them like this."

"In most cases, our customers don’t know our processes," lamented Bruman. "And they don’t know even the principles surrounding what they are promoting. They send entry-level engineers to a three-day seminar and then send them to show us how to apply things like SPC (statistical process control), Six Sigma or Lean Manufacturing without any profound knowledge of our processes, systems or culture. Such practices are adding cost to the supply chain without any improvement or value added. When we suggest alternative ways to do what they want, their bureaucracy and institutionalized distrust of suppliers prevents them from seeing the forest for the trees. Compliance to a standard is more important than effectiveness."

"Most suppliers do not need help from their customers except on processes that cross the interface between supplier and customer," concluded Broomfield.

The Impact on the QMS World

Is there an impact on quality professionals and programs as a result of price cutting pressures and the recession? There is evidence that many organizations have made some program modifications to reduce costs while disproportionate staffing cuts are rare. "I have seen personnel reductions, some drastic, and several of my clients have changed their ISO 9001/2 and/or QS-9000 surveillance audit schedules from semi-annual to annual," confirmed Melissa Syerson, President of Syerson Consulting, who has more than 9 years of experience and an academic background in quality, QMS stardards, document control and quality engineering. She added that others have take more effective steps. "I have seen other clients implement Lean Manufacturing techniques instead."

"Organizations are not so much cutting as ‘holding’," described Green. "Basically, programs and their projects are often being maintained, but the persons responsible for them are being assigned additional tasks to be accomplished simultaneously." Since many organizations have seen a sizable reduction in orders, these additional tasks may not be outrageous, but they may require enough time to prevent a quality program or project from moving forward.

However, "management by objectives" is alive and well when it comes to dealing with a recession, according to Bruman. "In many organizations, upper management sets a bottom-line reduction target without any analytical alignment to strategic direction or long-term effectiveness. Naïve financial people then take over the process and set simplistic, across-the-board headcount reduction targets, regardless of strategic need. Quality is right behind R&D [research and development] in being subjected to these directives. In these companies, compliance to objectives is more important than organizational effectiveness or the long-term health of the organization."

Fortunately, few organizations are singling out their quality professionals and programs for disproportionate cuts. It may very well be because a large number of suppliers are required to maintain QMS registration to satisfy customer requirements. However, it may also be because few organizations have traditional "quality managers" any more.

"There have not been typical ‘quality personnel’ on staff in any significant number since the late 80s and early 90s," recalled Green. "Some organizations do have a few ‘project managers’ or ‘process professionals’, and those who have proven to be qualified are not being cut from the payroll yet. Often their jobs are not just ‘product realization’, but overlap into issues more frequently associated with ‘sales’ or determination of customer requirements. Remember, ‘everyone is responsible for quality’ with ISO 9001, so who are you going to call quality personnel?"

"The well-designed and well-used QMS enables leaders to deploy the responsibility for quality to the people who do the work and their managers," advised Broomfield. "True quality professionals work selflessly to make sure that everyone really understands the principles of quality (what quality is, how to predict and prevent losses, how quality is measured and what its fundamental importance is) and of working systematically (PDCA) to establish and meet requirements. This reduces the need for quality professionals to be the sole guardians of quality. These days, Quality Managers can see that they have to become competent System Managers."

"The layoffs I have observed have been across-the-board," offered Syerson, who viewed the impact of process professional layoffs as varying. "In those organizations that have moved to implement Lean Manufacturing in connection with the layoffs, they will benefit by refocusing the responsibilities of remaining employees on building a stronger organization. In many organizations, the disadvantage of any staffing cuts is that the QMS programs suffer and, at times, so does the quality of the product as a result."

Among the Fortune 500 companies in certain fields, including the agriculture-implement and construction equipment fields, layoffs in today’s marketplace appear to actually be protecting the true process professionals. In these large corporations, a lower percentage of qualified "quality" professionals are facing layoffs than other personnel. In a well-managed organization, there may be an understanding that Six Sigma Black Belts and process professionals represent a way to keep a business stable–and even improve operations–when staff is being cut.

The situation among suppliers in these fields is slightly different, although the policies appear to be influenced by the maturity of the organization’s QMS. Green provided the following description of the two levels of layoff policy he has seen among tier 2 and 3 suppliers:

1. Mature organizations have made proportionate cuts between "quality" and production staff.
   
2. Less mature organizations dumped their "quality managers" in the first round of layoffs, along with any temporary production help. "It should be noted that most of those being let go are quality professionals in name only," inferred Green.

Cutting as a Chance to Improve or Degrade Quality

In reality, few organizations can afford to maintain their process professional staffing while cutting R&D, production, marketing and management staff. However, many organizations have maintained more employees than they need, often because previous cuts have been across-the-board, not targeted at keeping the best and brightest. Thus, subsequent increases in staffing have given the least productive seniority and security. So, if an organization has to make cuts, are there opportunities to improve quality or only short- and long-term disadvantages?

Table 1 below lists potential improvements as well as short- and long-term disadvantages that can result from staff cutting, even if reductions in process professional staffing are done to keep the most effective QMS supporters. "In companies where there is a real quality mentality, benefits vs. disadvantages is less of an issue," espoused Marash. "If employees feel that undertaking tasks often perceived of as the responsibility of the ‘Quality Department’ is everybody’s job, then ‘Quality’ does not get lost or suffer. However, if the ‘Quality Department’ is perceived of as the cops, then quality activities are not followed–there are fewer cops around to catch them after staff cuts."

"A downturn may be used to flatten the organization, improve its efficiency and get it set up for the next period of growth," summed up West.

However, Bruman painted a darker scenario that he expected to be more common:

In a less mature organization, the QMS focus will regress into the "Inspect and Fix" mode, which will increase costs and cycle times and reduce inventory turns. By eliminating the people who can design and implement proactive strategies for improving cycle times, inventory turns, product quality/reliability and other vital organizational strengths, the organization emasculates itself. The things that create customer delight and demand disappear, causing the organization’s product and services to regress into a commodity status wherein its prices are dictated by competitive pressures rather than operating costs. Bankruptcy is then merely around the corner.

There have been anecdotal reports of organizations that have laid off the personnel responsible for managing the QMS and relying instead on consultants. It evidently does occur but is not a common method of quality management. "I think the trend to use contract workers is evident for lots of functions," acknowledged West, who cautioned, "I actually see it less in the quality function than in some others, such as accounting."

It is also viewed as a bad idea because it is a short-term technique for reducing staffing costs during a business contraction, with a later need to hire and train new process professionals who lack the corporate knowledge and history.

"Although I am a QMS consultant, I do not recommend this strategy," declared Syerson. "A consultant can be used to help drive or guide a system, but there should be full-time personnel on staff to maintain the management system."

"There are situations where we are brought in because of staff layoffs," responded Marash. "Unfortunately, often we end up saying the same thing that the laid-off manager has! But, because we are from the outside, we are listened to. Experienced consultants can cost as much as a full-time employee but may bring more experience, which is to the benefit of the firm. The risk is that the improvements/gains will be perceived to be ‘owned’ by the consultant and, when he/she leaves, there is no continuity. An effective consultant ensures that the changes are institutionalized and owned by the client."

"If I were to suggest a ‘right way’ of doing this, it would be to use a contract replacement as a facilitator to bring new skills and technologies to existing staff; otherwise, such skills and technologies disappear when the contract replacement leaves," concurred Bruman. "And replacing proven, loyal workers with temps is usually not cost-effective and can be very destructive. It is invariably viewed by the rest of the staff as a simple economic ploy and can seriously damage employee morale and loyalty and prove to them that their leadership really doesn’t know what they are doing."

Quality Planning and Improvement in a Slowdown

During the recent boom times, many companies did not invest in quality planning and efforts to continually improve QMS effectiveness because they lacked the time and staff for such efforts. Remember the labor shortages? Yet, the survey respondents consider the slowdown a time to invest in planning and improvement.

However, only what have been called "mature organizations"–those with well-developed and effectively maintained QMSs–appear to be engaging in quality planning and continual improvement efforts. In some instances, there is now adequate staffing but a lack of funding to undertake planning and improvement efforts, which often involve training, materials (books, software programs) and experienced consultants to lead the efforts.

"While mature organizations are engaging in planning activities and improvement efforts, those projects of minimal strategic value are being placed on hold or dropped from the funding pool," said Green. He indicated that the less mature organizations are dropping everything that resembles "true preventive action projects" and will suffer one of two results: costly reinvention of the original project at a later date or failure to meet the original need identified in the project. "The most likely effect will be costly catch-up action when the pain of not having kept the project alive during the downswing becomes great enough that action must be taken with or without adequate resources."

Syerson has several clients who are engaging in planning and/or improvement efforts and expects them to gain one or both of the following advantages:

1. Assurance that the QS-9000/ISO 9001/2 system in place conforms entirely and is fully implemented by all personnel.
   
2. Establishment of lean manufacturing within their operations, which has cost savings in itself.

"At the small company where I work, we are continuing in our proactive mode because of the Vision and Values we have adopted," commented Bruman. "We are reaching out to our suppliers and encouraging them to adopt a new philosophy as well as to implement formalized QMSs. We are also planning the update of our systems to new standards of quality management and pursuing continuous learning."

Another question raised was whether ISO 9001 and Six Sigma’s customer satisfaction objectives are being lost in today’s marketplace, with the focus only on using them to reduce waste, improve efficiency and save big money. Bruman believes ISO 9000 and Six Sigma were created solely as cost reduction efforts on the part of large corporations to reduce internal costs. "Both are dependent on a formal, company-wide Quality Policy and Strategy to become effective tools for improving customer satisfaction and demand," declared Bruman.

"There is no reason why using a system that conforms to ISO 9001:2000 will not save money with each cycle," affirmed Broomfield. "Six Sigma projects may save money, but backsliding is easier if a management system conforming to ISO 9001:2000 is not also being used and improved."

However, Green and others believe that the downturn is actually enhancing the awareness of these "values" and "objectives" in mature organizations. "It is apparent to them that the improvements made during the late 1990s using ISO 9001 and Six Sigma are having a dampening effect on the economic downturn," advocated Green. "Without this effort, the damage from a weak economy would be a magnitude worse than it already is.

"There have been no value-added victories provided by QMS conformity or Six Sigma silver bullets in less mature organizations, because they have only paid them lip service, if that. Such organizations can easily sail on into oblivion, deluded that fate played a very dirty trick on them. They will probably be the voices who cry, ‘I told you ISO 9000, QS-9000, Six Sigma and Baldrige are all a waste of time and money anyway!’"

"Some organizations focus more on customers in a downturn than they do when times are good and orders are plentiful," observed West. "Others seem to do the opposite. In my view, the market has rewarded those who focus on the customer in times like these."

The respondents offered the following advice to organizations confronting declining sales and/or price reduction pressures but that nevertheless want to gain the most benefits from their QMSs and Six Sigma programs:

• Use your organization’s management system and Six Sigma projects to eliminate waste and provide lower prices, find more customers or do something else. (Broomfield)
  
• Develop a formalized quality policy and strategic plan that addresses basic questions, including:

— What are we in business for?

— What do we hope to accomplish and why?

— What values and ethics do we wish to support?

Examine all the demands being made by various customers in terms of the plan and policy, then decide if each one is educational, profitable or fun. If anything is none of these, don’t do it. (Bruman)

• Begin a serious baseline assessment today of your organization’s current products, processes and projects. Work this one around the clock, because you’re already late. Based on the assessment, dump the valueless and semi-valueless, borrow money if necessary to ensure resources to retain your valuable staff and then hunker down and prepare yourself for real, essential WORK. (Green)
  
• Use Six Sigma to focus on projects that directly support your organization’s strategic plan. This plan should be focused on the organization’s goals–profit and customer satisfaction. Don’t use quality or any other initiative to secure jobs or create unnecessary work. (Marash)
  
• Analyze your organization’s business and seek out all options for cost savings. Before choosing, make sure that you have looked at all of the short- and long-term effects of the cuts. And don’t just look at personnel cuts. (Syerson)
  
• Use the QMS to make the organization better and more efficient. Be very careful to understand the changing needs of your customers. And focus on customer retention. (West)

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