CH 16 Control Systems & Quality Management
Within this dynamic world, you will draw on the practical and theoretical knowledge described in this book to make decisions about the four management functions of planning, organizing, leading, and controlling.
The purpose is to get the people reporting to you to achieve productivity and realize results.
What does this mean to you as a manager? It means that you can increase overall productivity by making substitutions or increasing the efficiency of any one element: labor, capital, materials, energy. For instance, you can increase the efficiency of labor by substituting capital in the form of equipment or machinery, as in employing a backhoe instead of laborers with shovels to dig a hole. Or you can increase the efficiency of materials inputs by expanding their uses, as when lumber mills discovered they could sell not only boards but also sawdust and wood chips for use in gardens. Or you can increase the efficiency of energy by putting solar panels on a factory roof so the organization won’t have to buy so much electrical power from utility companies.
Planning is setting goals and deciding how to achieve them.
Organizing is arranging tasks, people, and other resources to accomplish the work.
Leading is motivating people to work hard to achieve the organization’s goals.
Controlling is concerned with seeing that the right things happen at the right time in the right way.
All these functions affect one another and in turn affect an organization’s productivity.
The senior banker of J. P. Morgan Chase, Ina Drew, contracts Lyme disease and is frequently out of the office when traders begin taking more and more risky bets, culminating in a loss of at least $3 billion and public demands for greater bank regulation. California-based Pacific Gas & Electric Co. accidentally overpressurizes pipelines on its gas system more than 120 times since its 2010 San Bruno explosion that killed eight people, raising risks of another disaster. Could greater control have helped avoid or reduce the consequences of these situations? Of course.
There are six reasons why control is needed.
Example: As is certainly apparent by now, the issue of climate change or global warming has created a lot of change and uncertainty for many industries. The restaurant industry in particular is feeling the pressure to become “greener,” since restaurants are the retail world’s largest energy user, with a restaurant using five times more energy per square foot than any other type of commercial building, according to Pacific Gas & Electric’s Food Service Technology Center. Nearly 80% that commercial food service spends annually for energy use is lost in inefficient food cooking, holding, and storage. In addition, a typical restaurant generates 100,000 pounds of garbage per location per year. Thus, restaurants are being asked to reduce their “carbon footprints” by instituting tighter controls on energy use.
Example: You might not even miss a dollar a month looted from your credit card account. But an Internet hacker who does this with thousands of customers can undermine the confidence of consumers using their credit cards to charge online purchases at Amazon.com, Priceline.com, and other web retailers. Thus, a computer program that monitors Internet charge accounts for small, unexplained deductions can be a valuable control strategy.
Example: As we have discussed early in the book (and will again in this chapter), the use of quality controls among Japanese car manufacturers resulted in cars being produced that were perceived as being better built than American cars. Another example: 3M Co.’s system for creating plastic picture-hanging hooks used to be split among four states and take 100 days; after reworking the system to get rid of “hairballs,” as the former CEO called them, now all production takes place at one hub and takes a third as much time.
Example: A markdown on certain grocery-store items may result in a rush of customer demand for those products, signaling store management that similar items might also sell faster if they were reduced in price.
Example: In recent years, Macy’s Inc. has twice had to deal with complexity. In 2006, it pulled together several chains with different names—Marshall Field’s, Robinsons-May, Kaufmann’s, and other local stores—into one chain with one name, Macy’s, and a much-promoted national strategy. But after losing money in 2007, CEO Terry Lundgren began altering course from a one-size-fits-all nationwide approach to a strategy that tailors the merchandise in local stores to cater to local tastes.
Example: At General Motors, former chairman Alfred Sloan set the level of return on investment he expected his divisions to achieve, enabling him to push decision-making authority down to lower levels while still maintaining authority over the sprawling GM organization. Later GM used controls to facilitate the team approach in its joint venture with Toyota at its California plant.
Nonprofit institutions might have standards for level of charitable contributions, number of students retained, or degree of legal compliance. For-profit organizations might have standards of financial performance, employee hiring, manufacturing defects, percentage increase in market share, percentage reduction in costs, number of customer complaints, and return on investment. More subjective standards, such as level of employee morale, can also be set, although they may have to be expressed more quantifiably as reduced absenteeism and sick days and increased job applications.
One technique for establishing standards is to use the balanced scorecard, as we explain later in this chapter.
Performance measures are usually obtained from three sources: (1) written reports, including computerized printouts; (2) oral reports, as in a salesperson’s weekly recitation of accomplishments to the sales manager; and (3) personal observation, as when a manager takes a stroll of the factory floor to see what employees are doing.
As we’ve hinted, measurement techniques can vary for different industries, as for manufacturing industries versus service industries. We discuss this further later in the chapter.
How much deviation is acceptable? That depends on the range of variation built in to the standards in step 1. In voting for political candidates, for instance, there is supposed to be no range of variation; as the expression goes, “every vote counts” (although the 2000 U.S. presidential election was an eye-opener for many people in this regard). In political polling, however, a range of 3%-4% error is considered an acceptable range of variation. In machining parts for the spacecraft Orion (NASA’s scheduled 2015 successor to the space shuttle), the range of variation may be a good deal less tolerant than when machining parts for a power lawnmower.
The range of variation is often incorporated in computer systems into a principle called management by exception. Management by exception is a control principle that states that managers should be informed of a situation only if data show a significant deviation from standards.
When performance meets or exceeds the standards set, managers should give rewards, ranging from giving a verbal “Job well done” to more substantial payoffs such as raises, bonuses, and promotions to reinforce good behavior.
When performance falls significantly short of the standard, managers should carefully examine the reasons why and take the appropriate action. Sometimes it may turn out the standards themselves were unrealistic, owing to changing conditions, in which case the standards need to be altered. Sometimes it may become apparent that employees haven’t been given the resources for achieving the standards. And sometimes the employees may need more attention from management as a way of signaling that they have been insufficient in fulfilling their part of the job bargain.
First, you need to consider the level of management at which you operate—top, middle, or first level.
Second, you need to consider the areas that you draw on for resources—physical, human, information, and/or financial. Finally, you need to consider the style or control philosophy—bureaucratic, market, or clan, as we will explain.
For example, Ford Motor Company CEO Alan Mulally and his senior managers meet every Thursday to review performance across the company’s global operations. They specifically review the performance of its suppliers because these companies have a significant effect on Ford’s profitability and quality. They ultimately determine which suppliers to keep and which ones to let go.
Considerable interaction occurs among the three levels, with lower-level managers providing information upward and upper-level managers checking on some of the more critical aspects of plan implementation below them.
Examples: There are equipment controls to monitor the use of computers, cars, and other machinery. There are inventory-management controls to keep track of how many products are in stock, how many will be needed, and what their delivery dates are from suppliers. There are quality controls to make sure that products are being built according to certain acceptable standards.
Bureaucratic control works well in organizations in which the tasks are explicit and certain. While rigid, it can be an effective means of ensuring that performance standards are being met. However, it may not be effective if people are looking for ways to stay out of trouble by simply following the rules, or if they try to beat the system by manipulating performance reports, or if they try to actively resist bureaucratic constraints.
Example: Earlier (Chapter 12), we mentioned that Google, the search-engine company, which appeared as No. 1 on Fortune’s 2012 list of “100 Best Companies to Work For,” is a good example of an organization that promotes, measures, and rewards employee motivation. For instance, in a program called Innovation Time Off, engineers are encouraged to spend 20% of their workweek on pet projects, which has led to such new products as Gmail and Google News. Google’s tremendous revenue growth over the last decade is clearly driven by a set of cultural values, norms, and internal processes that reinforce creativity.
“The dashboard puts me and more and more of our executives in real-time touch with the business,” says Ivan Seidenberg, former CEO at Verizon Communications. “The more eyes that see the results we’re obtaining every day, the higher the quality of the decisions we can make.”
Throughout this book we have stressed the importance of evidence-based management—the use of real-world data rather than fads and hunches in making management decisions. When properly done, the dashboard is an example of the important tools that make this kind of management possible. Others are the balanced scorecard, strategy maps, and measurement management, techniques that even new managers will find useful.
David Norton is founder and president of Renaissance Strategy Group, a Massachusetts consulting firm. Kaplan and Norton developed what they call the balanced scorecard, which gives top managers a fast but comprehensive view of the organization via four indicators: (1) customer satisfaction, (2) internal processes, (3) innovation and improvement activities, and (4) financial measures.
“Think of the balanced scorecard as the dials and indicators in an airplane cockpit,” write Kaplan and Norton. For a pilot, “reliance on one instrument can be fatal. Similarly, the complexity of managing an organization today requires that managers be able to view performance in several areas simultaneously.” It is not enough, say Kaplan and Norton, to simply measure financial performance, such as sales figures and return on investment. Operational matters, such as customer satisfaction, are equally important.
However, making improvements in just the other three operational “perspectives” we will discuss won’t necessarily translate into financial success. Kaplan and Norton mention the case of an electronics company that made considerable improvements in manufacturing capabilities that did not result in increased profitability.
The hard truth is that “if improved [operational] performance fails to be reflected in the bottom line, executives should reexamine the basic assumptions of their strategy and mission,” say Kaplan and Norton. “Not all long-term strategies are profitable strategies…. A failure to convert improved operational performance, as measured in the scorecard, into improved financial performance should send executives back to their drawing boards to rethink the company’s strategy or its implementation plans.”
Quiznos is a good example. The company uses a speed-dining approach to develop new products and test out different pricing strategies. The company invites groups of 25 people to a location in which they move from station to station and try out new menu options. This technique has reduced the time from test kitchen to market to six months, as opposed to the one year needed by a key competitor.
Top management’s judgment about key internal processes must be linked to measures of employee actions at the lower levels, such as time to process customer orders, get materials from suppliers, produce products, and deliver them to customers. Computer information systems can help, for example, in identifying late deliveries, tracing the problem to a particular plant. (ERP systems, mentioned earlier, can aid this technological boost.)
An example of a strategy map for a company such as Target is shown on the next page, with the goal of creating long-term value for the firm by increasing productivity growth and revenue growth. Measures and standards can be developed in each of the four operational areas—financial goals, customer goals, internal goals, and learning and growth goals—for the strategy.
Is this really true? Concepts such as the balanced scorecard seem like good ideas, but how well do they actually work? John Lingle and William Schiemann, principals in a New Jersey consulting firm specializing in strategic assessment, decided to find out.
In a survey of 203 executives in companies of varying size they identified the organizations as being of two types: measurement-managed and non-measurement-managed. The measurement-managed companies were those in which senior management reportedly agreed on measurable criteria for determining strategic success, and management updated and reviewed semiannual performance measures in three or more of six primary performance areas. The six areas were financial performance, operating efficiency, customer satisfaction, employee performance, innovation/change, and community/environment.
The results: “A higher percentage of measurement-managed companies were identified as industry leaders,” concluded Lingle and Schiemann, “as being financially in the top third of their industry, and as successfully managing their change effort.” (The last indicator suggests that measurement-managed companies tend to anticipate the future and are likely to remain in a leadership position in a rapidly changing environment.) “Forget magic,” they say. “Industry leaders we surveyed simply have a greater handle on the world around them.”
Top executives agree on strategy. Most top executives in measurement-managed companies agreed on business strategy, whereas most of those in non-measurement-managed companies reported disagreement. Translating strategy into measurable objectives helps make them specific.
Communication is clear. The clear message in turn is translated into good communication, which was characteristic of managed-measurement organizations and not of non-measurement-managed ones.
There is better focus and alignments. Measurement-managed companies reported more frequently that unit (division or department) performance measures were linked to strategic company measures and that individual performance measures were linked to unit measures.
The organizational culture emphasizes teamwork and allows risk taking. Managers in measurement-managed companies more frequently reported strong teamwork and cooperation among the management team and more willingness to take risks.
Objectives are fuzzy. Company objectives are often precise in the financial and operational areas but not in areas of customer satisfaction, employee performance, and rate of change. Managers need to work at making “soft” objectives measurable.
Managers put too much trust in informal feedback systems. Managers tend to overrate feedback mechanisms such as customer complaints or sales-force criticisms about products. But these mechanisms aren’t necessarily accurate.
Employees resist new measurement systems. Employees want to see how well measures work before they are willing to tie their financial futures to them. Measurement-managed companies tend to involve the workforce in developing measures.
Companies focus too much on measuring activities instead of results. Too much concern with measurement that is not tied to fine-tuning the organization or spurring it on to achieve results is wasted effort.
Incremental budgeting allocates increased or decreased funds to a department by using the last budget period as a reference point; only incremental changes in the budget request are reviewed. One difficulty is that incremental budgets tend to lock departments into stable spending arrangements; they are not flexible in meeting environmental demands. Another difficulty is that a department may engage in many activities—some more important than others—but it’s not easy to sort out how well managers performed at the various activities. Thus, the department activities and the yearly budget increases take on lives of their own.
There are two basic types of financial statements: the balance sheet and the income statement.
Assets are the resources that an organization controls; they consist of current assets and fixed assets. Current assets are cash and other assets that are readily convertible to cash within 1 year’s time.
Examples are inventory, sales for which payment has not been received (accounts receivable), and U.S. Treasury bills or money market mutual funds. Fixed assets are property, buildings, equipment, and the like that have a useful life that exceeds 1 year but are usually harder to convert to cash. Liabilities are claims, or debts, by suppliers, lenders, and other nonowners of the organization against a company’s assets.
Revenues are assets resulting from the sale of goods and services. Expenses are the costs required to produce those goods and services. The difference between revenues and expenses, called the bottom line, represents the profits or losses incurred over the specified period of time.
Among the types of financial ratios are those used to calculate liquidity, debt management, asset management, and return. Liquidity ratios indicate how easily an organization’s assets can be converted into cash (made liquid). Debt management ratios indicate the degree to which an organization can meet its long-term financial obligations.
Asset management ratios indicate how effectively an organization is managing its assets, such as whether it has obsolete or excess inventory on hand. Return ratios—often called return on investment (ROI) or return on assets (ROA)—indicate how effective management is in generating a return, or profits, on its assets.
Because of this diligence, the Ritz-Carlton has twice been the recipient (in 1992 and in 1999) of the Malcolm Baldrige National Quality Award. This award was created by Congress in 1987 to be the most prestigious recognition of quality—the total ability of a product or service to meet customer needs—in the United States. It is given annually to U.S. organizations in manufacturing, service, small business, health care, education, and nonprofit fields. (That the award actually means something is shown by a study that found that hospitals that received the honor significantly outperformed other hospitals on nearly every count.)
The Baldrige award is an outgrowth of the realization among U.S. managers in the early 1980s that three-fourths of Americans were telling survey takers that the label “Made in America” no longer represented excellence—that they considered products made overseas, especially in Japan, to be equal or superior in quality to U.S.-made products. As we saw in Chapter 2, much of the impetus for quality improvements in Japanese products came from American consultants W. Edwards Deming and Joseph M. Juran. As we mentioned, two strategies for ensuring quality are quality control, the strategy for minimizing errors by managing each stage of production, and quality assurance, focusing on the performance of workers and urging them to strive for “zero defects.”
In Chapter 2 we said there are four components to TQM:
Make continuous improvement a priority.
Get every employee involved.
Listen to and learn from customers and employees.
Use accurate standards to identify and eliminate problems.
This people orientation operates under the following assumptions.
Delivering customer value is most important. The purpose of TQM is to focus people, resources, and work processes to deliver products or services that create value for customers.
People will focus on quality if given empowerment. TQM assumes that employees (and often suppliers and customers) will concentrate on making quality improvements if given the decision-making power to do so. The reasoning here is that the people actually involved with the product or service are in the best position to detect opportunities for quality improvements.
TQM requires training, teamwork, and cross-functional efforts. Employees and suppliers need to be well trained, and they must work in teams. Teamwork is considered important because many quality problems are spread across functional areas. For example, if cellphone design specialists conferred with marketing specialists (as well as customers and suppliers), they would find the real challenge of using a cellphone for older people is pushing 11 tiny buttons to call a phone number.
Sometimes, however, an organization needs a special-purpose team to meet to solve a special or onetime problem. The team then disbands after the problem is solved. These teams are often cross-functional, drawing on members from different departments. American medicine, for instance, is moving toward a team-based approach for certain applications, involving multiple doctors as well as nurse practitioners and physician assistants.
This improvement orientation has the following assumptions.
It’s less expensive to do it right the first time. TQM assumes that it’s better to do things right the first time than to do costly reworking. To be sure, there are many costs involved in creating quality products and services—training, equipment, and tools, for example. But they are less than the costs of dealing with poor quality—those stemming from lost customers, junked materials, time spent reworking, and frequent inspection, for example.
It’s better to do small improvements all the time. This is the assumption that continuous improvement must be an everyday matter, that no improvement is too small, that there must be an ongoing effort to make things better a little bit at a time all the time.
Accurate standards must be followed to eliminate small variations. TQM emphasizes the collection of accurate data throughout every stage of the work process. It also stresses the use of accurate standards (such as benchmarking, as we discuss) to evaluate progress and eliminate small variations, which are the source of many quality defects.
There must be strong commitment from top management. Employees and suppliers won’t focus on making small incremental improvements unless managers go beyond lip service to support high-quality work, as do the top managers at Ritz-Carlton, Amazon.com, and Ace Hardware.
Reliability—ability to perform the desired service dependably, accurately, and consistently.
Assurance—employees’ knowledge, courtesy, and ability to convey trust and confidence.
Tangibles—physical facilities, equipment, appearance of personnel.
Empathy—provision of caring, individualized attention to customers.
Responsiveness—willingness to provide prompt service and help customers.
For example, despite its former (2004-2009) well-known advertising campaign, “An American Revolution,” Chevrolet outsources the engine for its Chevrolet Equinox to China, where it found it could get high-quality engines built at less cost. And when IBM and other companies outsource components inexpensively for new integrated software systems, says one researcher, offshore programmers make information technology affordable to small and medium-size businesses and others who haven’t yet joined the productivity boom.
Outsourcing is also being done by many state and local governments, which, under the banner known as privatization, have subcontracted traditional government services such as fire protection, correctional services, and medical services.
At one time, buyers and sellers simply had to rely on a supplier’s past reputation or personal assurances. In 1979, the International Organization for Standardization (ISO), based in Geneva, Switzerland, created a set of quality standards known as the 9000 series—”a kind of Good Housekeeping seal of approval for global business,” in one description. There are two such standards:
The ISO 9000 designation is now recognized by more than 100 countries around the world, and a quarter of the corporations around the globe insist that suppliers have ISO 9000 certification. “You close some expensive doors if you’re not certified,” says Bill Ekeler, general manager of Overland Products, a Nebraska tool-and-die-stamping firm.61 In addition, because the ISO process forced him to analyze his company from the top down, Ekeler found ways to streamline manufacturing processes that improved his bottom line.
All kinds of products require periodic inspection during their manufacture: hamburger meat, breakfast cereal, flashlight batteries, wine, and so on. The tool often used for this is statistical process control, a statistical technique that uses periodic random samples from production runs to see if quality is being maintained within a standard range of acceptability. If quality is not acceptable, production is stopped to allow corrective measures.
Statistical process control is the technique that McDonald’s uses, for example, to make sure that the quality of its burgers is always the same, no matter where in the world they are served. Companies such as Intel and Motorola use statistical process control to ensure the reliability and quality of their products.
What is this name, Six Sigma (which is probably Greek to you), and is it a path to management paradise? The name comes from sigma, the Greek letter that statisticians use to define a standard deviation. The higher the sigma, the fewer the deviations from the norm—that is, the fewer the defects. Developed by Motorola in 1985, Six Sigma has since been embraced by General Electric, Allied Signal, American Express, and other companies. There are two variations, Six Sigma and lean Six Sigma.
Six Sigma and lean Six Sigma may not be perfect, since they cannot compensate for human error or control events outside a company. Still, they let managers approach problems with the assumption that there’s a data-oriented, tangible way to approach problem solving.
“Six Sigma gets people away from thinking that 96% is good, to thinking that 40,000 failures per million is bad,” says a vice president of consulting firm A. T. Kearney. Six Sigma means being 99.9997% perfect. By contrast, Three Sigma or Four Sigma means settling for 99% perfect—the equivalent of no electricity for 7 hours each month, two short or long landings per day at each major airport, or 5,000 incorrect surgical operations per week.
Six Sigma may also be thought of as a philosophy—to reduce variation in your company’s business and make customer-focused, data-driven decisions. The method preaches the use of Define, Measure, Analyze, Improve, and Control (DMAIC). Team leaders may be awarded a Six Sigma “black belt” for applying DMAIC.
Xerox Corp., for example, has focused on getting new products to customers faster, which has meant taking steps out of the design process without loss of quality.
A high-end, $200,000 machine that can print 100 pages a minute traditionally has taken three to five cycles of design; removing just one of those cycles can shave up to a year off time to market. The grocery chain Albertsons Inc. announced in 2004 that it was going to launch Six Sigma training to reduce customer dissatisfaction and waste to the lowest level possible.
Example: Global warming is now shifting the climate on a continental scale, changing the life cycle of animals and plants, scientists say, and surveys show more Americans feel guilty for not living greener. A growing number of companies are discovering that embracing environmental safe practices is paying off in savings of hundreds of millions of dollars, as we saw with Subaru of Indiana
Be timely—meaning when needed. The information should not necessarily be delivered quickly, but it should be delivered at an appropriate or specific time, such as every week or every month. And it certainly should be often enough to allow employees and managers to take corrective action for any deviations.
Be accurate—meaning correct. Accuracy is paramount, if decision mistakes are to be avoided. Inaccurate sales figures may lead managers to mistakenly cut or increase sales promotion budgets. Inaccurate production costs may lead to faulty pricing of a product.
Be objective—meaning impartial. Objectivity means control systems are impartial and fair. Although information can be inaccurate for all kinds of reasons (faulty communication, unknown data, and so on), information that is not objective is inaccurate for a special reason: It is biased or prejudiced. Control systems need to be considered unbiased for everyone involved so that they will be respected for their fundamental purpose—enhancing performance.
Be realistic. They should incorporate realistic expectations. If employees feel performance results are too difficult, they are apt to ignore or sabotage the performance system.
Be positive. They should emphasize development and improvement. They should avoid emphasizing punishment and reprimand.
Be understandable. They should fit the people involved, be kept as simple as possible, and present data in understandable terms. They should avoid complicated computer printouts and statistics.
Encourage self-control. They should encourage good communication and mutual participation. They should not be the basis for creating distrust between employees and managers.
Some organizations, particularly bureaucratic ones, try to exert too much control. They may try to regulate employee behavior in everything from dress code to timing of coffee breaks. Allowing employees too little discretion for analysis and interpretation may lead to employee frustration—particularly among professionals, such as college professors and medical doctors. Their frustration may lead them to ignore or try to sabotage the control process.
2. Too Little Employee Participation
As highlighted by W. Edwards Deming, discussed elsewhere in the book, employee participation can enhance productivity. Involving employees in both the planning and execution of control systems can bring legitimacy to the process and heighten employee morale.
3. Overemphasis on Means Instead of Ends We said that control activities should be strategic and results oriented. They are not ends in themselves but the means to eliminating problems. Too much emphasis on accountability for weekly production quotas, for example, can lead production supervisors to push their workers and equipment too hard, resulting in absenteeism and machine breakdowns. Or it can lead to game playing—”beating the system”—as managers and employees manipulate data to seem to fulfill short-run goals instead of the organization’s strategic plan.
4. Overemphasis on Paperwork
A specific kind of misdirection of effort is management emphasis on getting reports done, to the exclusion of other performance activity. Reports are not the be-all and end-all. Undue emphasis on reports can lead to too much focus on quantification of results and even to falsification of data.
Example: A research laboratory decided to use the number of patents the lab obtained as a measure of its effectiveness. The result was an increase in patents filed but a decrease in the number of successful research projects.
5. Overemphasis on One Instead of Multiple Approaches
One control may not be enough. By having multiple control activities and information systems, an organization can have multiple performance indicators, thereby increasing accuracy and objectivity.
Example: An obvious strategic goal for gambling casinos is to prevent employee theft of the cash flowing through their hands. Thus, casinos control card dealers by three means. First, they require prospective hires to have a dealer’s license before they are hired. Second, they put them under constant scrutiny, using direct supervision by on-site pit bosses as well as observation by closed-circuit TV cameras and through overhead one-way mirrors. Third, they require detailed reports at the end of each shift so that transfer of cash and cash equivalents (such as gambling chips) can be audited.