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ELSEVTER

Journal of Operations Management 12 (1994) 27-44

JOURNAL OF OPERATIONS MANAGEMENT

Alternative

quality improvement practices performance


Everett E. Adam, Jr.

and organization

Management

Department,

College of Business and Public Administration,

University of Missouri-Columbia,

Columbia, MO 65211, USA

Received 20 September 1993;accepted in revised form 5 June 1994

Abstract Quality improvement is a highly desired objective in the fiercely competitive international business world, yet it remains elusive to many US organizations. This study relates alternative quality improvement approaches to actual operating and financial performance. Productivity improvement approaches are also investigated and related to performance to define better the relationship between quality and productivity. In this study, multiple quality and productivity approaches are correlated to eight quality, three operating, and three financial performance measures for 187 US business firms. Results indicate a strong relationship between a quality improvement approach and performance quality. The relationship between a quality improvement approach and operating or financial performance is weaker, but significant. Productivity improvement approaches also help predict quality, operating, and financial performance often similarly to quality improvement approaches. This study suggests that the profile of quality and productivity improvement approach should vary, depending upon whether the firm is most interested in performance quality, operating improvement, or financial performance.

Competitiveness is a driving force behind the reevaluation of North American business. During the recession in the early 1980s chief executive officers seemingly awoke to the realities that not everything made or every service offered ~ no matter how well-developed or shoddy could be sold. This realization resulted in a genuine interest in quality improvement, an interest heightened by the economic, downturn of the early 1990s. This paper addresses the issue of competitiveness and the necessary ingredients to remain or become a world-class competitor, focusing on the quality of the organizations product or service. More specifically, this study identiJies alternative approaches to quality improvement practiced in the United States and then relates quality improvement practice to actual quality, quality costs, operating per0272-6963/94/$07.00 0 1994 SSDI 0272-6963(94)00004-X

formance, andjinancial performance. The strength of the correlations between quality improvement alternatives and actual performance should contribute to our understanding and guide quality improvement practices in the future.

1. Literature review Improved quality is commonly thought to reduce cost, as waste is eliminated by doing things correctly the first time (Crosby, 1979, 1984; Deming, 1986; Juran, 1982, 1989). An approach toward improvement, total quality management (TQM), that is popular today has its roots in eliminating waste, reducing variations, and continually improving. Although Feigenbaum (1983) outlined

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E.E. Adam, Jr./Journal of Operations Management 12 (1994) 27-44

this approach in the 1970s perhaps the Japanese experience popularized these cornerstones, as well as some of the techniques, for improvement (see, for example, (Ishikawa, 1976)). But what is the empirical evidence that quality improvement leads to improved business performance? The evidence is limited at best, and to that we now turn.
World-wide

quality practices

US manufacturing strategy in the 1990s reflects the continuing challenges from the 1980s - the need for continuous improvement in quality, development. During the costs, and product 1980s United States priorities were more similar to Europe than Japan. Japan, having achieved competitive advantages in manufacturing quality, seemed to focus more than the United States on product development speed and cost reduction. This focus can be seen in Boston Universitys annual survey of manufacturing executives in the United States, Europe, and Japan (Miller and Kim, 1990). During 1985-1987, US quality was the most rapidly improving of seven primary manufacturing core performance measures, increasing at more than a 6 percent annual rate. In 1990-1992, inventory turns increased the fastest, about 7.5 percent annually, while overall quality clustered with five other performance measures, each at about a 6 percent annual improvement. Qualitys position in the manufacturing strategy portfolio changed substantially from 1984 to 1992. In 1984, quality improvement was not yet a top-five strategy. By 1986, the top three strategies were all quality related: implementing SPC, introducing zero defects programs, and involving vendors in quality efforts. Vendor quality and SPC remained the top two manufacturing strategies in 1988, while improving conformance quality and vendor quality were the top two strategies in 1990. The 1992 study indicates that the top five most important competitive capabilities of US manufacturers are, in order of importance (Kim and Miller, 1992, p. 1): _ conformance quality, - product reliability, _ on-time delivery,

- performance quality, and - price. It is noteworthy that three of the top four capabilities reflect quality. Further support for a quality emphasis in the United States comes from Carl Thor, the president of the American Productivity and Quality Center (Thor, 1990). To remain competitive, he suggests the United States need to do the right things, regardless of what its competitors/partners do. In particular, he suggest (p. 40) that US companies will have to take their own initiatives to improve productivity and quality significantly. This alone does not guarantee success, but it is the part corporate executives can control. A comprehensive study conducted jointly by the American Quality Foundation and the public accounting firm Ernest & Young investigated best quality management practices (1992). The study was quite broad, examining 945 management practices in more than 580 organizations in four industries on three continents. The study had two objectives: to asses the impact of individual management practices on profitability, productivity, and quality and to structure a causal model to understand better the interaction of practices that create the critical path for improvement. Results were presented in a format that suggested a firm could position itself as low-, medium-, or highperforming and then, based on similar firms, understand the characteristics (actions) required to improve. Dos and don% were suggested for each of three broad categories: people, process, and strategy/technology. The tone was clearly managerial and focused on summarizing results rather than presenting the data and analysis. From the report emerged two important points for this study. First, only three management practices reportedly have significant impact on performance, regardless of industry, country, or starting positions. Those are process improvement methods, strategic plan deployment, and supplier certification programs. Process improvement (reflected by practices such as process value analysis, process simplification, and process cycle time analysis) significantly impact profitability, productivity, and quality ~ but especially so productivity.

E.E. Adam, Jr./Journal

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12 (1994) 27-44

29

Strategic plan deployment significantly affects all three performances measures, and middle managers must understand strategies for the best results. Supplier certification programs relate more closely to increased quality and productivity. The second point important to this study is that the data and analysis were not publicly shared. An appendix of assessment areas was provided - a listing of many of the 945 management practices - but the report did not provide the scores for these measures nor correlations to actual profitability, productivity, and quality. A causal mode was not provided. In short, one could not replicate this study, but presuming the report was prepared as a guide for management, replication might not have been the reports intent. US quality experiences Experienced executives understand the relationship between product (and service) quality and market share. The Boston Consulting Group and Harvard Business School faculty, for instance, have developed the widely quoted Profit Impact of Marketing Strategy (PIMS) database. Although the database is not readily available as a part of the public domain, it has been cited for some 10 years as one source supporting market share as positively and strongly related to perceived quality of a firms products (Buzzell and Wiersema, 1981; Leonard and Sasser, 1982; Garvin, 1984; Maani, 1988; Craig and Douglas, 1982; Phillips et al., 1983). The Malcom Baldrige National Quality Award, patterned after the Deming Prize in Japan, was first awarded in 1988 and is becoming highly valued in the United States. What practices do Baldridge award winners follow, and what are their results? A fairly recent US General Accounting Office (1991) study provides some answers. In the GAO study of 1988 and 1989 Baldrige finalists and winners, evaluation focused on employees, operating achievements, customer satisfaction, and financial performance. For these companies among the best in the Unites States - the primary employee responses were increased suggestions (15 percent average annual improvement) and lowered turnover (6 percent lower rate annually).

Operating gains were most noticeable in average annual improvements in order-processing time (12 percent), reliability (12 percent), errors or defect reduction (10 percent), and cost of quality decreases (9 percent). Customer satisfaction was reflected by decreased complaints (12 percent per year) and small increases in overall satisfaction and customer retention. Financial performance across all finalists and winners indicated increased annual market share (14 percent) and sales per employee (9 percent), but only a small increase was found in return-on-assets (2 percent) and return on sales (1 percent). Empirical studies relating quality improvement operations management and

The production and operations management literature has identified quality as a core content variable that has strategic significance within the operations function and for the firm (Adam and Swamidass, 1989; Miller and Roth, 1988; Schroeder et al., 1986; Skinner, 1978; Wheelwright, 1984), with profitability, to some extent, driven by quality (Adam et al., 1986; Heyl, 1987; Sluti, 1992). Sluti (1992), in the most complete empirical study on quality, utilized structural equations modeling to study 184 manufacturing firms in New Zealand. Quality was found to have mixed results when related to performance. For many of the measured direct relationships between quality and business financial performance, results were not significant, yet, the relationship between quality and production/operations outcomes was significant. Quality had significant positive impacts on performance measures for process utilization, process output, production costs, workin-process inventory levels, and on-time delivery. Alternative views exist on how quality should be managed in organizations. Practicing managers seem to favour one quality expert (guru) over another, while the empirical studies indicate no clear directions. To illustrate, Benson et al. (1991) have proposed a system-structure model of quality management that relates organization context, actual quality management, ideal quality management, and quality performance. Their results

30

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suggest that organizational context influences managers perceptions of both ideal and actual quality management. Important contextual variables are corporate support for quality, past quality performance, managerial knowledge, and the extent of external quality demands. With the practice of quality improvement literature as background, it is the empirical literature that provides the clearest direction for this study. Specifically, the work of Benson et al. (1991) is extended to include a wider array of contextual variables, an alternative set of quality improvement practices or approaches, and a full spectrum of performance variables (Sluti, 1992) both operational and financial performance measures.

2. Research question, experimental procedure Research question

design, and

Alternative approaches to quality improvement do exist. For example, current total quality management (TQM) infers that the entire organization is involved (total). TQM suggests customer focus, top-management leadership, statistical thinking, continuous improvement, problem solving, and workforce training (Evans and Lindsay, 1993, pp. 32-33). It often includes variation reduction and employee empowerment as key TQM attributes as well. If one desires to achieve improvements in these attributes, what approaches are available? There are many, including behavioural interventions, differing management practices, alternative problem-solving methods, and statistical process control. Similar to quality, a range of productivity improvement approaches also exist. Approaches include traditional cost reduction, industrial engineering work and process analysis, wage incentives, and management practices. Contemporary production/operations managers have available inventory reduction (via just-in-time (JIT) or material requirements planning (MRP)), increased speed of product/process design, and flexible manufacturing, to name but a few alternatives. The choice of an underlying theory against

which to test hypotheses is a complex issue. What is the prevailing quality improvement theory? Is it the total cost curve approach and the minimization of the costs as proposed by the Lundvall-Juran model (Juran, 1974; Fine, 1986)? Is it statistical process control and the application of sampling and statistical inference in control charting (Western Electric, 1956)? Or, is appropriate theory from problem solving and the application of the scientific method (Ishikawa, 1976)? Is appropriate theory grounded in employee empowerment, small-group behaviour, and leadership in the behavioral science literature? The difficulty in specifying an underlying quality improvement theory is quite real. The quality outcomes in this study are best predicted by the Lundvall-Juran model, while the items thought to influence these outcomes are found in the statistical process control (SPC) and behavioral components of total quality management (TQM). The operating and financial outcomes evaluated in this study are derived from the production/operations management theory involving the technology of resource transformation. The items thought to influence these outcomes are found in traditional industrial engineering/operations research cost minimization theory. The primary interest in this study is quality improvement, proponents suggesting that through quality improvement, operating and financial performance are enhanced as costs are reduced. This study also suggests that when design quality improves, revenues and market share increase (Deming, 1986; Garvin, 1988). These linkages lead to questions as to whether overall performance is always improved through quality improvement and whether productivity improvement techniques are utilized in tandem with quality improvement techniques to achieve the performance gains. What combination of quality improvement and productivity improvement techniques lead to the highest organization performance? How is performance defined? In this study, the interest is in identtfying a quality/productivity technique profile that can predict quality, operational, and financial performance. Here quality is distinguished from

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31

overall operating performance. Quality includes actual quality data expressed as error rates, cost of quality components, and customer satisfaction. Operating performance is employee turnover, employee satisfaction, and productivity expressed as net profit as a percent of sales. Financial performance includes return-on-assets (ROA) and annual sales growth. More specifically, the following hypotheses are addressed in this study: 1. A companys approach to quality and productivity improvement correlates to product and service quality, operating performance, and financial performance. 2. A companys approach to quality improvement correlates to product and service quality. 3. A companys approach to quality improvement correlates to operating and financial performance. 4. A companys approach to productivity improvement correlates to operating and financial performance. Experimental design

The first hypothesis examines interactions between quality improvement interventions, productivity improvement interventions, and the companys actual performance. Actual perforTable 1 Independent Independent Quality

mance is broadly defined here as it includes quality, operating, and financial performance. A profile of high performance versus low performance companies is sought, and details unfold as Hypotheses 2-4 are explained. Testing the second hypothesis requires a delineation of quality improvement approaches and measures for quality. Table 1 outlines the quality improvement approaches: no formal approach, statistical process control, behavioral, a customer focus, projects emphasized, or a focus on design, conformance, or both. Projects emphasized refers to Crosby (1979) and Jurans (1982) suggestion of quality teams assigned improvement projects. Table 2 sets forth the quality measures percent defective, the cost of quality, and customer satisfaction. To test the third hypothesis, the approaches to quality improvement (six levels, Table 1) are related to operating and financial performance measures set forth in Table 2. Operating performance is expressed as net profit as a percent of sales, annual employee turnover, and employee satisfaction. Financial performance measures include return-on-assets for the past year and for the average of the past three years, as well as sales growth, as an average of the past three years.

variables variable

and levels Level approach 1. No formal approach 2. Statistical process control 3. Behavioral; operative employee a. reward focus b. degree of training 4. A customer focus 5. Projects emphasized 6. Design, conformance, or both

improvement

or managerial

Productivity

improvement

approach

1. Traditional industrial engineering such as process analysis and work measurement 2. Inventory reduction 3. Improving quality 4. Employee selection - pre-employment testing and biographical data 5. Decentralizing decision making 6. Providing objective feedback on performance

32 Table 2 Dependent Dependent Performance

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variables variable quality Measure Average % items defective Cost of quality (as % of sales) scrap rework inspection training & development returns and warranty total cost of quality Customer satisfaction Net profit as % of sales, past year Annual employee turnover rate Employee satisfaction Return on assets, past year Return on assets, average past three years Sales growth, average past three years

Operating

performance

Financial

performance

The operating performance measures are surrogates for actual productivity, the total output of goods and services divided by all resources used to provide that output. Traditional accounting techniques do not readily support total factor productivity measurement, so the cost of goods sold as a percent of sales was considered. This cost of goods sold related to sales was captured as net profit, the difference in sales and total costs. The research literature concerning employee turnover suggests a wide array of contributors to turnover and relationships that are not always straightforward. For this study, the general belief that low turnover is better than high and that low turnover contributes to higher operating performance is accepted. Employee satisfaction does not directly relate to productivity. Neither does the literature show that employee satisfaction relates directly to quality. Employee satisfaction is placed as a performance measure because a stronger case can be made for that relationship than as a quality or financial indicator. It could be argued that employee satisfaction should not be included at all, as it is not an outcome of the organization, but rather a condition that leads to outcomes. The fourth, and final, hypothesis relates the productivity improvement approach (Table 1) to

operating and financial performance (discussed above and in Table 2). Productivity improvement approaches include traditional industrial engiinventory reduction, and improving neering, quality. Also included are managerial/behavioral approaches: employee selection, decentralizing/ low-level decision making, and providing objective feedback. Kopelman (1986) provides an excellent summary of practical, behavioral interventions that enhance productivity as demonstrative in the management and behavioral research literature. These managerial/behavioral interventions reflect his top composite interventions (Kopelman, 1986, p. 290) and are incorporated as alternatives in this study. Table 3 summarizes the experimental design. Two independent variables quality and productivity improvement interventions - are independently and jointly related to three dependent variables actual quality, operating performance, and financial performance. Multiple levels of the independent variables and multiple measures will exist, as indicated in Table 3 and the previous discussion.
Procedure

A survey was conducted facturing firms. The primary

of practicing manusource of companies

E.E. Adam, Jr./Journal Table 3 Experimental Independent

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Management 12 (1994) 27-44

33

design variable Dependent variables (measures)

Quality improvement approaches Productivity improvement approaches

Actual quality (8) Operating performance Financial performance

(3) (3)

was SIC and geographical listings where the companys address and telephone number were available. A secondary source was membership in the Operations Management Association, an association of production/operations management academics and executives. Only the executives were sampled concerning their company. The general procedure was to telephone the company and ask for the chief production or operations officer. Provided was a brief statement about the person and university conducting the research and an explanation of this study. The potential respondent was then asked to participate, and if he or she agreed, a questionnaire was mailed to that person. Firms were systematically selected; up to four telephone calls were made to solicit participation and one follow-up call was made to those who agreed to participate but did not return the questionnaire. Willingness to participate from those reached by telephone was quite high. Questionnaires were returned in preaddressed, postage-paid envelopes. For the primary source, a systematic random sampling procedure was used. Responding and nonresponding companies were similar industrial types (SIC) and had similar geographical dispersion. No differences were detected in the two groups. For the telephoned group, the return rate was 67.1 percent: 163 usable returns from 243 questionnaires mailed. For the secondary source, a direct mailing was used with no telephone contact. For this group, the return rate was 14.4 percent: 24 usable returns from 166 questionnaires mailed. No differences were detected in this group between respondents and nonrespondents. A total of 187 usable responses from 409 questionnaires mailed resulted in a 45.7 overall return rate. Thirty-four percent of the respondents indicated they would like a summary of the survey results. Questionnaire. The questionnaire content

reflected the research design and was thus based on the quality (and productivity) improvement research literature. A primary source of questions was (Benson et al., 1991) who utilized the instrument designed, verified, and validated by Saraph et al. (1989). In their 1991 study, the 26 measurement items for organizational quality context were assessed (Benson et al., 1991, Appendix A). Accepting their results, this study utilized items relating to corporate support for quality, managerial knowledge, past quality performance, and marketplace. Respectively, these sets accounted for 40, 19, 10 and 9 percent of the variance from all questions in the Benson study. That is, 78 percent of the variance was captured by items in these categories. Saraph et al. (1989) had 111 items in the questionnaire they developed and tested. Benson et al. (1991) benefited from that work, as did this study, by selecting items that accounted for a high percentage of the variance. The 1991 Malcolm Baldridge National Quality Award (US Department of Commerce, 1991) identified seven categories of quality and under the seven categories evaluated a total of 32 items. Based on previously cited research literature, 12 of those items became candidates for this study. The 12 items were taken from Baldridge categories human resource utilized, quality assurance of products and services, leadership, quality results, and customer satisfaction. Kopelmans (1986) survey of the behavioural/ managerial literature provided a summary of items concerning productivity interventions. Items from that survey included here were employee biographical data in selection, placing decision making at lower levels, providing objective feedback on performance, and employee satisfaction. The survey instrument also included questions that summarized traditional productivity improvement techniques such as industrial

34

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engineering, effective inventory planning and control, and improving quality. These items were stated in a style consistent with the overall survey, which was primarily a Likert seven-point scaling. Example questions are included as Fig. 1. Demographic characteristics of the participants. Respondents tended to be from a wide distribution of firm sizes. From the 187 respondents, the average number of firm employees is 3,770 and average annual sales are $914 million. These data are skewed upward considerably by a few large firms. The median number of employees is 500, and the median annual sales is $10 million.

For the most part, the firms have been in business for some time, the mean 40.7 years. Only 15.7 percent of the firms have been in business fewer than 10 years. An average of 50.3 percent of present employees are involved in quality improvement within participating firms. The vast majority of firms, 8 1 percent, have a quality department. Firms have had a formal approach to quality improvement and to productivity improvement for some time, averaging 7.1 and 9.7 years respectively. Respondents are primarily in general management presidents or manufacturing vice-presidents (15 percent), general managers (8 percent), and plant-works managers (32 percent). Secondarily,

Strongly
Disagree

Neither

Agree

Strongly
Agree

Nor Disagree

QUALITY is best Applying Statistical Involving

IMPROVEMENT described no formal process employees; as... approach control each

at this

company

. (SPC) employees in nature

2 2

3 3

4 4

5 5

6 6

7 7

. .
the

responsibility;

behavioral

Quality (1) and

products these

and and

services specifies

depend customer

upon

degree AT

to which (design) MY

a company and (2) produces

understands services

requirements

requirements and sales views calls,

(conformance). regarding sought focus through groups, 1 receive 1

COMPANY...

Customers their direct and Customers

opinions needs so forth regularly are contact;

actively

.
and

.
formally

.
questionnaires for company and sustain . values by introducing PRODUCTIVITY

customer Senior executives profit clear Productivity practices. Traditional work and Effective and and can At

satisfaction (responsible loss) visible create quality

3 engineering, BY...

4 and

5 accounting

be improved company

behavioral, IS IMPROVED

my

industrial

engineering process flow analyses, layouts. 1 planning and control 1 2 2 3 3 4 4 5 5 6 6 7 7 standards,

applications: so forth inventory

measurement,

Fig. 1. Example

measurement

items for quality

and productivity

improvement.

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35

respondents were the quality managers a director or manager of the quality function (36 percent). A few more were owners or other managers with a major resource responsibilities (9 percent). Overall, the sample represents a mature cross section of US manufacturing. Respondents have major responsibilities for quality within the firm, and they view themselves as quite knowledgeable about quality and its practices. Analysis procedures Data included responses to Likert scale questions (circles 1 through 7), ordinal scaled numbers, and essay responses. The essay responses are not coded and reported here. The responses for each of 187 respondents were displayed in various forms - the raw information, frequency distributions, graphs, means, and standard deviations. The data were carefully examined and some entry errors were discovered and corrected. Independent variable constructs for quality are not commonly defined and accepted in the research literature. Therefore, factor analysis was necessary to define these constructs. Factor analysis was conducted on the quality and productivity improvement responses to determine which items were answered similarly. The SAS System factor analysis routine was selected and a principal components analysis performed, including an orthogonal transformation with a varimax rotation. Factor scores were the average of the items with factor loadings exceeding 0.400. After the factor analysis, a step-wise multiple regression was conducted to test the hypotheses. The independent variables, expressed as factor scores condensed from the item responses, were regressed against the dependent variables quality, operating, and financial performance. A decision was made to use factor analysis as an exploratory method for finding the minimum number of factors to account for the observed covariation. Consideration was given to confirmatory analysis, where factors are pre-determined and then tested to see if the items actually did fall in those groups (Kim and Mueller, 1976). Conservative factor analysis procedures use a respondent/

items ratio of about 10. With the 20 items the sample size would need to be about 200 respondents. The 187 respondents of this study fall slightly short of that.

3. Results Quality andproductivity Table 4 identifies the 20 items that were factor analyzed, 13 that are quality improvement indicators and 7 that are productivity improvement indicators. The factors with eigenvalues greater than 1 resulted in five factors that captured all of the variance. Factors 1, 2, and 3 explained cumulative variances of 39, 57, and 72 percent, respectively. The orthogonal transformation with a varimax rotation resulted in factors nearly orthogonal, but not totally so. In Table 4, the item quality training addressing employee needs remained in three factors, while the items improving quality and applying a formal approach remained in two factors. Factor 1 is broadly defined by nine of the 20 items. Quality items that involve management and employee behaviors have strong factor scores: involving employees, management involvement, project teams, and quality training to meet employee needs. Somewhat similarly, productivity items that are behavioral have strong factor scores: employee satisfaction, objective feedback, and decision making at lower levels. Nonbehavioral productivity items that carry high scores include effective inventory planning and control and improving quality. Factor 2 captures five items that reflect conformance and design: a conformance emphasis, actively seeking customers views, a design emphasis, improving quality, and quality training. Customers views could be sought regarding what they desire (reflected in design) and what they receive (reflected in conformance). Factor 3 could be viewed as knowledge: the desire to expand knowledge, skills, and training. Factor 4 captures rewards and statistical process control (SPC), while Factor 5 reflects traditional engineering items. In summary, Factors l-5 will be referred to respectively as

36 Table 4 Quality and productivity Items Quality (or Productivity)

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factor analysis Factor improved at my company by Factor pattern 1 Factor 2 Factor 3 Factor 4 Factor 5

_ involving employees - providing objective feedback on performance _ employees satisfied with the company _ managements involvement & responsibility _ not crisis based; attention other than after a failure _ effective inventory planning & control - placing decision making at lower levels _ identifying & resolving improvement projects _ improving quality ~ quality training addressing employee needs _ applying a formal approach - quality practice reflecting a conformance emphasis _ actively seeking customers views - quality practice reflecting a design emphasis _ attempting to expand knowledge in quality area - being reward focused; pay for quality performance - utilizing statistical process control (SPC) ~ employee biographical data used in selection ~ traditional industrial engineering _ inspectors trying to assure conformance to specs

0.76115 0.72803 0.69161 0.69048 0.67018 0.6493 1 0.63707 0.62471 0.55924 0.44532 0.44117

0.55155 0.41463 0.82738 0.55481 0.46267

0.43045 0.63121

0.82993 0.75394 0.71534 0.52639 0.74397 0.73818

behavioral, conformance and design, knowledge, rewards and SPC, and traditional engineering. The crux of this study is explaining how these quality and productivity improvement factors related to actual quality, operating, and financial performance. The stepwise regression summarized in Table 5 defines or explains the dependent variable in terms of the independent variables (Factors l-5). Only the statistically significant variables at a level of significance less than 0.05 are reported. Dependent variables where no relationship was found include annual employee turnover, past years net profit, and sales growth. Most dependent variables are predicted by a significant regression. The R*s appear low, except for the two opinion-based items - customer satisfaction (R* = 0.1759, F ratio 14.73) and employee satisfaction (R* = 0.5214, F ratio 75.16). Six of 14 regressions are significant at p < 0.01, five atp < 0.05, and four nonsignificant. Each regression is a test of a separate model. The total cost of quality is important because of the broad scope of the measure. It emerges as an important dependent variable as it is significantly

(p < 0.05) related to Factors 2 and 5, with an R* of 0.1463. By examining Factors 2 and 5, we see that focusing on conformance and design (F2) and traditional engineering (F5) are the highest item loadings in these factors. One component of total cost of quality deserves attention: training and development (p < 0.01, R* = 0.1632, F = 5.59). It is explained by Factors 1, 4 and 5: the broad behavioral factor, rewards and SPC, and traditional engineering. The operating and financial results indicate some promise. It is noteworthy that last years return-onassets can be explained (or predicted) at the p < 0.05 level. Note that Factor 1 is the primary determinant. Factor 1 reflects behavior and loads most heavily on involving employees and providing objective feedback on performance. More attention in industry is being placed on understanding employee and management behavior. Perhaps these data reflect that. Performance quality An exploratory investigation was next con-

E.E. Adam, Jr./Journal Table 5 Quality and productivity Stepwise regression procedure

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regression

summary variables quality Waste and scrap 7.199 F2(- 1.206) F5(0.606) Returns and warranty 7.746 Fl(-1.156) Inspection Rework Training and development -2.295 Fl(0.725) F4(-0.291) F5(0.316) 0.4043b 0.1632 5.59

Dependent Performance Total cost of quality

Intercept Regression (parameter component estimate)

28.842 F2(-5.317) F5(3.026)

7.270 F2(- 1.508) F5( 1.037)

4.979 F2(-2.426) F3(1.333) F5(0.828) 0.3261a 0.1064 3.85

R R2 F ratio Stepwise regression procedure

0.3824b 0.1463 5.66 Dependent Performance

0.2716a 0.0738 4.11 variables quality (cont.)

0.2847b 0.0811 8.12

0.3165b 0.1002 5.12

Operating Customer satisfaction Employee satisfaction

Financial Last years return-on-assets

Average percent of items defective Intercept Regression (parameter R R2 F ratio a p < 0.05 bp < 0.01 component estimate) 6.269 Fl(-1.696) F3(1.067) 0.2357a 0.0556 3.18

4.273 Fl(0.546) F3(-0.229) 0.4194b 0.1759 14.73

1.764 Fl(l.184) F3(-0.516) 0.7220b 0.5214 75.16

-6.950 Fl(3.500)

0.2774= 0.0770 4.17

ducted on a set of quality items that represented the details of alternative quality improvement techniques. Deleted were items relating to productivity improvement. The quality improvement items included represented details concerning: customer assessment, design, conformance, senior executive involvement, markets and quality, resources and training, and employee involvement. Selected quality relationships are presented in Table 6. Note that the independent variables in the regression, the factors, are represented by FQ to denote they are not the factors in Table 4. Factor FQl, which explains employee

knowledge, training, and customer involvement, is very broad, with nine items loading into the factor as 0.400 or higher. Factor FQ2 reflects senior executive involvement and encompasses six items. Taken together, FQl and FQ2 reflect behavioral items that affect quality. Factor FQ3 loads clearly on quality practice, reflecting both design and conformance (with three items at 0.4000 or higher). The final factor, FQ4, encompasses items on employee conformance to specifications and inspectors seeking conformance as well. In summary, the relationships in Table 6 are

38 Table 6 Quality regression: Stepwise regression procedure

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selected relationships Dependent Performance Total cost of quality variables quality Inspection Waste and scrap 4.018 FQ3(-0.606) FQ4(0.585) 0.2679a 0.0718 4.41 Training and development -0.172 FQl(0.327) Operating Employee satisfaction Financial Past years return-onassets 2.476 FQ3(2.849) FQ4(-1.833) 0.3277a 0.1074 3.79 Past 3 years return-onassets 3.171 FQ2(2.735) FQ4(-1.783) 0.3742a 0.1401 4.89

Intercept Regression (parameter R R= F ratio component estimate)

-0.831 FQ4(3.434)

3.057 FQ3(-0.717) FQ4( 1.029) 0.3464b 0.1200 6.89

1.075 FQ2(0.458) FQ3(0.336) 0.6204b 0.3850 44.13

0.3765b 0.1418 12.22

0.2080 0.0433 4.43

ap < 0.05
b&I < 0.01

similar to those in Table 5. That is, quality alone (Table 6) provides (explains) relationships that are significant, as does quality and productivity together (Table 5). Quality factor relationships to the dependent variables are significant at both p < 0.01 and p < 0.05, and the R2s are somewhat low. Not all significant dependent variables are shown in Table 6. For the seven selected, total cost of quality (p < 0.01, R2 = 0.1418) inspection (p < 0.01, R2 = 0.1200);and employee satisfaction (p < 0.01, R2 = 0.3850) all provide clear relationships. The weakest quality relationship is training and development, with a low R2 and but one predictive variable, FQl. It should be noted that past years ROA measure relates similarly to the data for quality alone as for quality and productivity combined (Table 5). Yet, for the quality alone data, the past three years ROA was significant as well. Productivity Productivity improvement items alone were factor analyzed and the results regressed against the dependent variables. Results are less significant overall than the combined quality and productivity regression (Table 5).

Validation of quality items The quality improvement items utilized from Benson et al. (1991) were evaluated in two different ways to determine if that study and this one are in general agreement. First, the Benson items were organized by their factor analysis results (Benson et al., 1991) and regressed upon the dependent variables in this study. Second, as an alteration, the Benson items were factor analyzed with the current study data and the factors were regressed against the dependent variables. Both analyses yielded similar results. In both approaches, only five of the 14 dependent variables had significant regressions, substantially fewer than the reported analyses for this study (Table 5), where 11 of the 14 dependent variables were significant. With the Benson items, significant regressions were found for returns and warranty costs, training and development costs, employee satisfaction, and both past years and the past three years return-onassets (ROA) measures. In the study reported here, the first three of these regressions are significant at p < 0.01 and the last two at p < 0.05 (Table 5). The Benson items load into factors adequately, but taken alone they do not relate to a high number of dependent variables. This replication provides

E.E. Adam, Jr./Journal of Operations Managemenl

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39

general validity to the current study. However, in comparing results to the current study, as represented in Tables 5 and 6, we can see the broader nature of the current investigation. A direct comparison of the Benson factors and those in this study suggest similarity on the majority of factors. Bensons corporate support for quality is similar to the broad behavioral factor (Factor 1, Table 4) in this study. Managerial quality knowledge is clearly a factor in both studies. In the Benson study extent of external quality demands is similar to the confrormance and design factor (Factor 2, Table 4) of this study - customer imposed practices. The Benson factor past quality performance does not correspond to any factor in this study.

4. Discussion

and conclusions

A set of hypotheses were suggested as research questions. Did they hold based on the regressions? Could performance be predicted, based on this study?
Quality andproductivity improvement

Hypothesis 1 reflected an interest in examining interactions between quality improvement approach, productivity improvement approach, and performance. Performance is captured by quality, operating, and financial measures. Table 5 presents the results of this analysis. Reviewing the results, we first conclude that factors reflecting approach to improvement could be identified for performance quality (p < 0.01) operating (p < O.Ol), and financial results (p < 0.05). Second, we can observe that for most dependent variables (columns of Table 5) the regression used multiple factors to explain the relationship. This is saying that factors - which are groupings of quality improvement approaches (items) are required to explain quality, productivity, and financial performance. Stated otherwise, an individual item, expressed as one approach to quality or productivity improvement, is not sufficient to explain performance significantly (statistically). Relationships are multiple and com-

plex. Finally, it is clear that quality improvement influences a broad set of actual quality outcomes but only one operating and one financial outcome. What is the profile that would best improve performance? From Table 5, ifperformance quality is ones objective, the quality measures might be total cost of quality, return and warranty costs, inspection costs, and training and development costs as a percent of sales (all p < 0.01) as well as customer satisfaction results (p < 0.01). Improvement should utilize Fl, F2, F4, and F5. These factors encompass improvement approaches that are behavioral (Fl), reflect design and conformance (F2), emphasize rewards and SPC (F4), and are traditional engineering (F5). The broad internal failure quality measures were significant at p < 0.05: average percent of items defective, waste and scrap, and rework. If operating improvement is ones objective, only employee satisfaction (p < 0.01) was found to be important. Factors that influence employee satisfaction include Fl and F3. Employee turnover and net profit were insignificantly related to these quality and productivity improvement approaches (p > 0.15). Finally, if jinancial performance is ones emphasis, then measuring past years return-on-assets (ROA) is useful (p < 0.05). Annual sales growth could not be explained by these improvement factors (p = 0.14), nor could the past three years ROA (p = 0.07). The factor that influenced ROA most was Fl, suggesting a broad set of behavioral items as an improvement scheme. Again, the quality and productivity approaches studied here seem to have a greater impact on quality than on operating and financial performance. We could also conclude that a wide array of improvement approaches (items, factors) impact quality rather than one or two items.
Quality improvement approaches

An important finding regarding quality and productivity improvement, as well as quality improvement, is that respondents to a great degree perceived most improvement techniques similarly. The quality and productivity factor analysis (Table 4) demonstrates this by the larger number of items

40

E.E. Adam, Jr./Journal

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(nine) loading into factor 1. Recall that 39 percent of the variance was in Factor 1, and that was the behavioral factor. For quality, this is represented by FQl, also encompassing nine of the items the research literature suggested should influence quality. Items loaded into FQl at 0.400 or greater and FQl accounted for 36 percent of the overall variance in the factor analysis. Quality factors FQl and FQ2, the behavioral factors, accounted for 67 percent of the variance. What does this mean? One interpretation is that quality improvement is a broad construct, not easily divisible into components such as involving employees, management involvement and responsibility, identifying and resolving improvement projects, and so forth. Rather, respondents saw many items as similar - and generally agreed or strongly agreed they were used at their company. But do all these items, in Fl, FQl, and FQ2, for example, significantly correlate to the outcome variables quality, performance, and financial performance? The answer is no, not always, as Table 6 and the following indicate. Hypothesis 2 suggested that a companys approach to quality would correlate to actual quality. This was found to be true, as Table 6 demonstrates. Quality as measured by total cost of quality and inspection costs was explained by

quality improvement approaches captured in FQ3 and FQ4. Total cost of quality (p < 0.01) could be explained by inspection and specifications being emphasized (FQ4), while inspection (p < 0.01) was explained by specifications emphasized as well as design and conformance (FQ3, FQ4). Although not reported in Table 6, quality items were also significantly related to returns and warranties (p < 0.05) rework (p < 0.05), and customer satisfaction (p < 0.01). For all the actual quality measures, only the average percent of defective items was insignificantly related to quality improvement approaches, no improvement approaches significant at the p < 0.15 level. As we see from an analysis of the actual frequency tables for the approaches to quality improvement, companies favored employee involvement, management involvement and responsibility for quality, and quality improvement projects to guide improvement. Fig. 2 presents means for these and several other items of particular interest. Surprisingly, statistical process control (SPC) was not a strongly favored quality improvement technique, although it was reported as useful by participants. It was no surprise, based on experience, but a continued disappointment based on the research literature, that reward-focused pay for quality performance techniques was not widely used as a technique to improve quality.

3 Average

cl1

Applying Statistical Involving

no formal approach process control employees; (SPC) responsibility; behavorial in nature

02: 03: Q4: 05: 06: Q7:

each employees

Managements Identifying

involvement

and responsibility projects primarily after a failure

and resolving

improvement and improvement

Crisis based: attention Reward focused;

pay for quality

performance

Fig. 2. Quality

improvement

item means.

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41

Hypothesis 3 asked if the quality improvement approach correlates to operating and financial performance. Productivity and financial performance were measured as described in Table 2, and the relationship to quality improvement approaches explained in Table 6. Operating performance as measured by employee satisfaction was explained by quality improvement approaches captured in FQ2 and FQ3. Financial performance as measured by return-onassets (ROA) was explained by quality improvement approaches captured in FQ2, FQ3 and FQ4. FQ2 captured senior executive involvement items (six), FQ3 reflected design and performance items (three), and FQ4 encompassed items on inspection and seeking conformance to specifications. An interesting finding of this study was that financial performance could be somewhat explained by quality improvement techniques; these results are significant at p < 0.05 and with R2s of 0.1074 and 0.1401. The F ratios were good, 3.79 and 4.89, as well. There were no significant relationships at p < 0.15 between sales growth and quality improvement approach. Overall, these operating and financial results support Slutis (1992) findings and are new to the quality improvement literature. Explained variance. At this point in the discussion, we should note that R2s vary considerably throughout the results. They tend to be lower for the continuous, ordinal scaled operating and financial data (R2 from 0.04 to 0.14) and higher for the respondent opinion data (R2 from 0.17 to 0.53). Several points are in order. First, in the management literature R2, the explained variance, is generally much higher for attitude or opinion measures than for more exact operating and financial measures. This was true here as well. Second, this is a cross-sectional rather than continuous study. The study is at a point in time, rather than from repeated measures over time. The R2 scores are generally much lower for cross-sectional regressions as opposed to many continuous regressions found in research in economics, finance, and production/operations. Finally, another reason for lower R2s is that many items besides quality or productivity improvement techniques affect operating and financial performance.

To some extent it is pleasing to obtain statistical significant, even though the explained variance (R2) is not as great as desired. In summary, it is suggested that these statistical results are reasonable for this experimental design and methodology. However, regardless of arguments, the reader must demand the level of significance and explained variance he or she desires. The following section provides an alternative view. The case for TMQ as a failure. This section has been added for balance to reflect the position that some readers might hold, that R2s this low demonstrate no accountability for the vast majority of the variability. To illustrate, consider training and development expenditures as a percent of sales (Table 5, R2 = 0.1632). Unaccounted-for variance is 1 - 0.1632 = 0.8368. This suggests that 83 percent of the variability is not explained by this model. Regardless of significance (p < 0.05 or p < 0.01) there is simply too much unexplained variance. Further, this example was for the model with the highest R2, other than the customer and employee satisfaction models. Strengthening the case, recall that for three models there was no significance for employee turnover, past years net profit, and sales growth. What does this mean? Simply that for three models there are no relationships and for the other nine models these factors, and the items that comprise them, do not explain the variance adequately. The items are directly from the quality improvement research literature, from what TQM proponents suggest will influence quality, operating performance, and profitability, yet the factors comprising the items explain little, if anything. These R2s therefore, suggest that TQM and other commonly promoted practices have little practical influence on the performance variables reported in this study, Significant p values simply distinguish a set of factors that are statistically different; they do not explain the unaccounted-for variance. A case can be made from this study that TQM is a failure. Productivity improvement approaches

The fourth and final hypothesis asked whether a companys approach to productivity actually

42

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related to productivity and financial performance. The factor analysis and regressions conducted for productivity improvement techniques alone are not reported here, due to length restrictions. Overall, regressions were significant and can explain a reasonable amount of variation. Findings were (1) no productivity improvement techniques (factors) explained the total cost of quality, although some quality cost components and percent of the items defective could be explained by productivity factors; (2) turnover, net profit, and employee satisfaction all regressed strongly to productivity improvement factors (with strong R2 scores as well); and (3) financial performance as expressed by ROA and sales growth was not significantly explained by the approach to productivity. In summary, the approach to producas expressed in factor tivity improvement groupings of items related to operating performance measures, related somewhat to performance quality measures, and did not relate to financial measures. These results are consistent with the American Quality Foundation and Ernest & Young (1992) study in which productivity improvement practices strongly related to performance. Fig. 3 presents the item means for a few productivity improvement approaches. Inventory reduction (Ql and Q3) and quality improvement (Q2) were viewed as improving productivity by respondents at these companies. These items were loaded

3 Average

Ql:

Effective Improving

inventory quality

planning

and

control

02: 03:
04: 05:

Implementing Output-based Group incentive

just-in-time individual plans

production incentive like plans and profit sharing

gain-sharing

Fig. 3. Productivity

improvement

item means.

heavily in the factor loadings (not reported here). Incentive systems were not widely thought to impact productivity at these companies though the research literature suggests they should. Fig. 4 presents a summary of the four hypotheses as a model of significant relationships between the approach to performance improvement and performance. One would expect research literaturebased quality improvement approaches to impact quality and productivity improvement approaches to impact operating performance. That is shown to be so (H2 and H4). Interestingly, quality and productivity improvement (Hi) and quality improvement (H,) significantly relate to financial performance, especially return-onassets. This expands our understanding of quality improvement. Research shortcomings. Several deficiencies in this study might well be addressed in future studies. Among them are (1) the self-report nature of all data, (2) missing data, (3) the shortcomings in conducting empirical research without a strong theoretical basis, and (4) the issue of adequate R* values. All data were self-report. They were both an expression of opinion and beliefs (Likert-scaled) and actual performance. For the actual performance data, respondents were asked to obtain within the firm percent defective, various costs as a percent of sales, return-on-assets, and so forth. It would be better to collect these from independent observation or public records such as financial reports. Some data were missing. Among the lowest response items was the financial information. The lowest response came from past three years return-on-assets, with but 68 of 187 respondents providing answers. Another low response rate was the calculated total cost of quality, again with but 68 of 187 respondents answering all components of the total cost calculation. Components and development responses, such as training expenditures as a percent of sales, ranged from 112 to 129 of the 187 respondents answering. On the other hand, the majority of all questions had more than 180 of the 187 respondents answering. The issue of an adequate theoretical base for

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43

IMPROVEMENT

PERFORMANCE

QUALITY AND PRODUCTIVITY IMPROVEMENT-

FINANCIAL PERFORMANCE

PRODUCTIVITY IMPROVEMENT

OPERATING PERFORMANCE

Fig. 4. Model of significant

relationships

between

improvement

approach

and performance.

quality improvement research was reviewed earlier. Perhaps studies such as this will illustrate how theories can be tested and revised. The issue of an adequate R* value is left to the reader. So many factors influence quality, productivity, and financial performance that low R*s are almost inevitable in a study such as this. Still, low R*s are a deficiency and should be addressed in subsequent research. The American Quality Foundation and Ernest & Young (1992) study investigated 945 management practices and found only three that broadly and consistently impact performance. The problem persists for others as well.

Conclusions In conclusion, this study confirms and extends the work of Benson et al. (1991). Factors were identified that capture approach to quality improvement (Benson et al., 1991) and to productivity improvement. A profile emerges for the organization as to what improvement techniques might be most useful if the objective is to improve quality, operating, and/or jinancial performance. The approach to improvement also will vary depending upon the selected measure of quality, operating, and financial performance.

This study is in agreement with reports from the PIMS database (Maani, 1988), the Baldrige finalists (U.S. General Accounting Office, 1991), a system-structure model of quality management (Benson et al., 1991), and the international American Quality Foundation and Ernest & Young report (1992). Yet the results of this study compare most closely to those of Sluti (1992), where he related quality improvement to operating and financial performance for 184 manufacturing firms in New Zealand. The 187 US firms participating in this study provided the basis of support necessary to add to a small body of empirical knowledge on how best to improve performance quality in the firm. Results are promising. Additional knowledge is needed to guide both quality improvement practice and research.

Acknowledgements The author wishes to acknowledge the assistance of S. Thomas Foster, Jr., Boise State University for his assistance in data collection while a doctorate candidate at the University of Missouri-Columbia, and the assistance of Ron Howren, senior analyst, University of Missouri-Columbia for his assistance in data analysis.

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E.E. Adam, Jr./Journal of Operations Management 12 (1994) 27-44 Juran, J.M., 1989. Juran on Leadership for Quality. Juran Institute, New York. Kim, J.O. and Mueller, C.W., 1976. Introduction to Factor Analysis. Sage Publications, Beverly Hills. Kim, J.S. and Miller, J.G., 1992. Building the Value Factory: A Progress Report for U.S. Manufacturing, A Research Report of the Boston University School of Management Manufacturing Roundtable, Boston, MA. Kopelman, R.E., 1986. Managing Productivity in Organizations, McGraw-Hill, New York. Leonard, F.S. and Sasser, W.E., 1982. The incline of quality. Harvard Business Rev. Maani, K., 1988. Quality and productivity: Are they really compatible?. Proc. The ORSAjTIMS Joint National Meeting, Denver, CO. Miller, J.G. and Kim, J.S., 1990. Beyond the Quality Revolution: U.S. Manufacturing Strategy in the 1990s. A Research Report of the Boston University School of Management Roundtable, Boston, MA. Miller, J.G. and Roth, A.V., 1988. Manufacturing Strategies. Executive Summary of the 1988 Manufacturing Futures Survey (Manufacturing Roundtable Research Report). Boston University, Boston. Phillips, L.W., Chang, D.R. and Buzzell, R.D., 1983. Product quality, cost position, and business performance: A test of some key hypotheses. J. Marketing, vol. 46, 26643. Saraph, J.V., Benson, P.G. and Schroeder, R.G., 1989. An instrument for measuring the critical factors of quality measurement. Decision Sciences, vol. 20, no. 4, 810-829. Schroeder, R.G., Anderson, J.C. and Cleveland, G., 1986. The content of manufacturing strategy: An empirical study. J. Operations Management, vol. 6, no. 3,405-416. Skinner, W., 1978. Manufacturing in the Corporate Strategy, Wiley, New York. Sluti, D.G., 1992. Linking Process Quality with Performance: An Empirical Study of New Zealand Manufacturing Plants. Ph.D. Dissertation, The University of Auckland, Auckland, NZ. Thor, C.G., 1990. Perspectives. Research Report of the American Productivity and Quality Center, Houston, Texas. U.S. Department of Commerce, 1991. 1991 Application Guidelines Malcolm Baldrige National Quality Award. 43 pp. U.S. General Accounting Office, 1991. Management practices: U.S. companies improve performance through quality efforts. GAOINSIAD-91-190. Western Electric, 1956. Statistical Quality Control Handbook. Delmar Printing Co., Charlotte, NC. Tenth printing: May 1984. Wheelwright, SC., 1984. Manufacturing strategy: defining the missing link. Strategic Management J., vol. 5, 77-91.

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