Quality and Productivity

Engr. M. N. Tahir
NDC Islamabad-Pakistan
CONTENTS

• Quality and Productivity (Introduction)

• The Effect of Quality on Productivity

• Effects of Quality on Cost and Productivity

• Effects of Quality on Market and Productivity

• The Deming View Of The Relationship Between Quality And Productivity

• Productivity vs. Quality Approach to Improvement (Examples)

• Management Awareness for Quality and Productivity
• Benefits of Improving Quality and its Effects on Productivity

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 Quality and Productivity

Quality:
Five definitions of quality:

Transcendent: “Quality is neither mind nor matter, but a third entity independent of
the two … even though quality cannot be defined, you know what it is.”

• Product-based: “Differences in quality amount to differences in the quantity of some desired

ingredient or attribute.”

User-based: “Quality is fitness for use”

• Manufacturing-based: “Quality is the degree to which a specific product conforms to a
design or specification.”
• Value-based: “Quality is the degree of excellence at an acceptable price and the control
of variability at an acceptable cost.”

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 Quality and Productivity
Dimensions of quality
• Performance (primary product characteristics)
• Features (“bells and whistles”)
• Reliability (frequency of field failures)
• Conformance (match with specifications)
• Durability (product life)
• Serviceability (speed, courtesy, or competence of repair)
• Aesthetics (“fits and finishes”)
• Perceived quality (reputation and intangibles)

Productivity:
1: the quality or state of being productive
2: rate of production.

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 Quality and Productivity
Productive:

The definition of "Productive" is:

1: having the quality or power of producing, especially in abundance
2: effective in bringing about
3: a yielding or furnishing results, benefits or profits

• Productivity is the relationship between output and input.

• It should be viewed as value adding in addition to optimizing.
• It is a total concept that addresses the key elements of competition, i.e. innovation,
cost, quality and delivery.
• Therefore, an increase in productivity can be achieved by enhancing the value-added
content of products/services, or by decreasing the unit cost of production, or a
combination of both.

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 Effects of Quality on Cost and Productivity
Effect on Cost
Quality costs can be grouped into the categories of

• Prevention,

• Appraisal,

• Internal failure,

• External failure.
Improved productivity may affect each of these costs differently.

Effect on Prevention and Appraisal Costs:

With initial improvements in productivity, it is possible that prevention and appraisal
costs will increase. As adequate process control procedures are installed, they contribute
to prevention and appraisal costs. Furthermore, process improvement procedures may
also increase costs in these two categories. These are thus called the costs of conformance
to quality requirements. With time, a reduction in appraisal costs is usually observed. As

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process quality improves, it leads to efficient and simplified operations. This may yield
further improvements in productivity.

Effects on Internal and External Failure Costs:

• A major impact of improved quality is the reduction in internal and external failure
costs.

• In the long run, decreasing costs in these two categories usually offset the increase in
prevention and appraisal costs. The total cost of quality thus decreases.

• Moreover, as less scrap and rework is produced.

• More time is available for productive output.

• The company's profitability increases.

• As external failures are reduced, customer satisfaction improves. Not only does this
emphasis on quality reduce the tangible costs in this category (such as product
warranty costs and liability suits), it also significantly affects intangible costs of
customer dissatisfaction. Figure shows how improved quality leads to reduced costs,
improved productivity, and eventually increased profits.

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Conclusion:
• Management must focus on long-term profits rather than on short-term profits.
• A frequently cited reason for not adopting a total quality system is management's
emphasis on short-term profits.
• As is well known postponing much-needed investment in process improvement equip-
ment and methods, by reducing research and development, or by delaying preventive
maintenance, can enhance short-term profits. These actions eventually hurt
competitiveness and profitability.

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 Improved
Quality

Reduced Reduced Increased

internal failure appraisal conforming
costs costs output

Reduced Improved
external efficiency of
failure costs operations

Increased
Reduced cost
productivity

Increased
profitibility

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 Effect on Market

An improvement in quality can lead to increased market shares, improved competitive

position, and increased profitability.

Competitive Position:

• With a reduction in external failure costs and improved performance of the product in
its functional phase, the company is in a position to raise the satisfaction level of its
customers.

• Many of them return to buy the product again.

• Satisfied customers spread the word about good quality, which leads to additional
customers. Market share goes up as the quality level goes up. Figure demonstrates the
effect of quality improvement on profitability via market share.

Market Share:
• All organizations want to stay competitive and to improve their market position.

• Efforts to improve quality are crucial in attaining these goals.

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• So, even if the selling price remains fixed, an improved price/cost ratio is achieved.
Alternatively, as quality improves, the firm may be able to charge a higher price for its
product, although customer satisfaction and expectations ultimately determines price.
In any event, an improved competitive position paves the way for increased
profitability.

• Figure shows that through process control and improvement and efficient resource
utilization (reduced production of scrap and rework), a firm can minimize its costs.

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 Effect of quality on productivity and profitability.

Improved
Quality

Process Efficient
Increased
improvement resources
customer
utilization
satisfaction level

Increased
market
Improved
share
competitive
position

Increased
Improved
revenue
price/cost
ratio

Increased
profitability
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 The Deming View Of The Relationship Between
Quality And Productivity
• Why should an organization try to improve quality?

• If a firm wants to increase its profits, why not raise productivity?

• For years, W. Edwards Deming has worked to change organizations that operate
under the philosophy that increasing productivity will increase profits.
• Deming's philosophy can best be depicted by what he calls the chain reaction for
quality improvement. By improving quality, costs decrease and productivity
improves. As a result, there is a greater potential for an increased market share.
• To address the first box in the chain reaction (improve quality), management must
adopt the 14 principles of management and understand the statistical approach to
process improvement.

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 Productivity vs. Quality Approach to Improvement
Example 1:
• For the past 10 years the Universal Company has produced 100 units per hour, 20
percent of which are defective.
• The Board of Directors now demands that top management increase productivity by 20
percent. The directive goes out to the employees, who are told that instead of producing
100 units per hour, the company must produce 120.
• The responsibility for producing more units falls on the employees, creating stress,
frustration, and fear. They try to meet the new demands but must cut corners to do so.
• The pressure to raise productivity creates a defect rate of 25 percent and increases
production to only 104 units, yielding 78 good units, fewer than the original 80, as shown
in Figure

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 (a) Universal Company Output

Before Demand for After Demand for

20% Productivity 20% Productivity
Increase Increase

(Defect rate = 20%) (Defect rate = 25%)

Units Produced 100 104
Units Defective 20 26
Good Units 80 78

* Onlyreached 104, not required 120, but defect rate rose from 20 percent to 25 percent. More units
were produced: but more were defective, yielding less productivity.

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 Example 2:
Stressing productivity often produces exactly the opposite of the effect desired. The following example
demonstrates a new way of looking at productivity and quality.

• The Dynamic Factory produces 100 units per hour with 20 percent defective.
• Top management is continually trying to improve quality, thereby increasing productivity.
• Top management realizes that Dynamic is making 20 percent defective units, which translates into 20
percent of the total cost being spent to make bad units.
• If Dynamic's managers can improve the process, they can transfer resources from the production of
detective units to the manufacture of additional good products.
• Management can improve the process by making some changes at no additional cost, so only 10
percent of the output is defective.
• This results in an increase in productivity.
• Management's ability to improve the process results in a decrease in defective units, yielding an
increase in good units, quality, and productivity.

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 (b) Dynamic Factory Output

Before Improvement After Improvement

(Defect rate = 20%) (Defect rate = 10%)

Units Produced 100 100
Units Defective 20 Process 10
Good Units 80 Improvement 90

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 Management Awareness for Quality and Productivity
• The importance of quality and the management of the quality function cannot
be overlooked during the development and production of new products and
the improvement of existing products.
• Management must be aware that the quality of the product or service must be
improved. Awareness comes about when a company loses market shares or
realizes that quality and productivity go hand in hand.
• Automation and other productivity enhancements will not help a corporation
if it is unable to market its product or service because the quality is poor.
• The Japanese learned this fact from practical experience. Prior to World War
11, they could sell their products only at ridiculously low prices and even then
it was difficult to secure repeat sales. Until recently, corporations have not
recognized the importance of quality. But a new attitude has emerged—
quality first among the equals of cost and service.
• Quality and productivity are not mutually exclusive. Improvements in quality
lead directly to increased productivity and other benefits.

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 • Table below illustrates this concept. As can be seen by the table, the
improvement in quality results in a 5.6% improvement in productivity,
capacity, and profit. Many quality-improvement projects are achieved with
the same work force, same overhead, and no investment in new equipment.

Gain in Productivity with Improved Quality

Before Improvement After Improvement
(Nonconforming = 10%) (Nonconforming = 5%)

Relative total cost 1.00 1.00

for 20 units
Conforming Units 18 19
Relative cost for
nonconforming units 0.10 0.05

Productivity increase 1/8(100) = 5.6%

Capacity increase 1/8(100) = 5.6%

Profit increase 1/8(100) = 5.6%

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Benefits of Improving Quality and its Effects on Productivity

• A misconception that has existed among businesses (and is hopefully in the process of
being exposed) is the notion that: Quality decreases productivity.
• On the contrary, the relationship between the two is positive: Quality improves
productivity.
• Making a product right the first time lowers total costs and improves productivity.
• More time is available to produce defect-free output because items do not have to be
reworked and extra items to replace scrap do not have to be produced.
• In fact, doing it right the first time increases the available capacity of the entire
production line.
• As waste is reduced, valuable resource—people, equipment, material, time, and effort—
can be utilized for added production of defect-free goods or services. The competitive
position of the company is enhanced in the long run, and an improvement is observed in
profits.

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 Deming's way of looking at the relationship between quality and productivity stresses
improving quality to increase productivity. Several benefits result:

1. Productivity rises (in our Dynamic Factory example, from 80 good units in the 100
produced to 90 good units in the 100 produced).
2. Quality improves (from 80 percent good units to 90 percent good units).
3. Cost per good unit decreases.
4. Price can be cut.
5. Workers' morale improves because they are not seen as the problem. This last aspect
leads to further benefits:
i. Less employee absence.
ii. Less burnout.
iii. More interest in the job.
iv. Motivation to improve work.

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Conclusion:
Stressing productivity
• In sum, stressing productivity means sacrificing quality and possibly decreasing output.
Employee morale plunges, costs rise, customers are unhappy, and stockholders become
concerned.

Stressing quality
• On the other hand, stressing quality can produce all the desired results: less rework,
greater productivity, lower unit cost, price flexibility, improved competitive position,
increased demand, larger profits, more jobs, and more secure jobs.
• Customers get high quality at a low price, vendors get predictable long-term sources of
business, and investors get profits.
• Making quality the primary focus for managing the company will increase
productivity, decrease costs, and create a more favorable working environment.

• Productivity Increases As Quality Improves

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• Improve Quality Decrease Costs by making better use of our efforts, equipment, and
materials
• Improve Productivity Increase Sales With Better Quality, Higher Value Stay In
Business
• Create Opportunities for personal and professional growth.

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