Testing and Homologation: ‘Make or Break’ for Firms

Recent news reports suggest that certain Indian cars have failed to comply with the standards of crash test conducted by Global Car National Car Assessment Programme (GNCAP). On top of that, there have been news reports stating that Japanese car manufacturer, Suzuki, found discrepancies in its fuel and emissions testing but denied any cheating. Suzuki said that its testing method did not comply with Japanese regulations but the results are not materially impacted. About a month ago, Mitsubishi of Japan admitted that it had been manipulating fuel economy record of its automobile models for several years, a news which caused a serious erosion of its market capitalization. Only a few days ago, Nissan of Nissan-Renault alliance announced a 34 percent strategic stake in Mitsubishi to stabilize the company. These follow the infamous Volkswagen emission scandal that came to light in February 2015 involving tampering with of software code of engines fitted on millions of cars to show the vehicles to be in compliance of regulatory standards. A few other manufacturers are reportedly involved in such errors, discrepancies or manipulations.

These high visibility cover-ups pertaining to product quality come on top of several recalls that have been prominent in the automobile industry, covering both vehicle manufacturers (GM, Toyota, Honda etc.,) and component makers (Firestone, Takata etc.,). Nor is this a new trend. A review of available literature reveals that automotive manufacturers including the Big 3 of USA and other European makers were beset by problems of quality and non-compliance since the 1940s. India had its own incident when Standard Motor had to close shop in late 1980s as a result of alleged violation of fuel efficiency norms and concessional customs duties. Most of the issues pertain to fuel economy and safety. Flouting of governmental regulations is by no means confined only to automobile industry. Nestle has been in the eye of a perfect storm in India in 2015 because of alleged non-compliance of its lead product, Maggie, with label claim. These incidents which make or mar not merely reputation but even the very existence of a company bring out the importance of testing and homologation in industries.

Testing and homologation

Testing is the process of evaluating a product, system or their components with the intent to find out whether they satisfy the prescribed specifications or not. Testing is an integral part of an overall quality system which comprises a series of policies and procedures to identify compliance to specifications, identify gaps and potentially suggest measures to remediate and improve. Testing is just not an internal commercialization requirement for a company. It is required for homologation, usually of an end-product. Homologation is the official confirmation and approval by the regulatory authorities of a country that the product meets the prescribed regulations and laws besides the company’s own specifications and claims. Every nation tends to have its regulatory agencies, rules and procedures and testing agencies. A manufacturer based in India and marketing in India must necessarily meet Indian regulations. The manufacturer must also meet testing and regulatory protocols of all the nations to which its products are exported.

In addition to the above, in case technology is imported, the standards of the country supplying technology need to be followed. In certain cases, certain desirable global standards need to be met voluntarily for establishing product and brand equity. In today’s globalized and networked production system, fine-tuning design and manufacturing to meet the requirements of multiple nations is a critical requirement. The requirements of testing and homologation vary across industries. They are most complex and long drawn in the pharmaceutical industry relative to any other industry. Regulators in pharmaceuticals, especially of US, EU and Japan, focus on development and manufacturing controls through physical inspections as much as product approvals based on exhibit batches and dossier reviews. In other industries product certifications are all that are required. That said, given the critical importance of testing and homologation, and emergence of testing and regulatory agencies in various countries, companies must evolve new approaches to the domain. Some suggestions are made below.

Six principles for effectiveness in testing and homologation

In most companies, regulatory affairs, new product testing and homologation are parts of R&D setup, mainly because of the developmental nature of these activities, and the impact these three departments have on specification and product development, and vice versa. That said, there should be strong interface between mainstream functions such as manufacturing, sales and service with these three different departments to ensure that results are interpreted in terms of actual site manufacturing and field usage conditions. This collaboration needs to be more than just baton passing but must be more in the nature of collaborative hand-holding, while challenging the proceedings and providing solutions, based on every perspective. Six principles for assuring effectiveness and integrity in testing and homologation are discussed below.

Developmental quality assurance

While quality is generally considered paramount in companies, quality is not fully understood and executed well in an R&D context. This paradox arises from the fact that most of the R&D work is experimental and developmental, and not standardised and repetitive, in nature. The paradox can be resolved through developmental quality assurance (DQA) which understands the specific uniqueness of R&D but imposes the rigour of quality on development and testing. To ensure that testing and homologation absorbs the full rigour of mainstream quality function, DQA professionals must be from mainstream quality function but with an exposure to uniqueness of R&D. The focus needs to be on calibration of equipment, prescription of standard testing procedures, cross-calibration of equipment, processes and conditions encountered internal simulators, external simulators and actual running conditions.

Concurrent quality management

The developments with the automakers indicate the need for concurrent quality management as a concept that is as important as concurrent engineering. Just as quality cannot be inspected but needs to be produced, it also has to be an integral part of design to delivery process, from specification setting to homologation. This requires that the focus of concurrent engineering must change from current ‘first to market’ to ‘right and first to market’. Most designs involve incremental changes, with an eye on performance improvement or cost reduction. Some of the best practices of change management such as justifying a change and making an exception report when it fails to meet up to the expectations would help in ensuring concurrent quality management.

Global product development

Many of homologation issues are both a corollary and a fallout of globalization imperatives. Globalization enables customization of products to meet different markets but it also carries certain risks when cross-platforms are used across countries. An evolved global product development system which designs products for the minimal and maximal conditions of testing and performance, globally relevant, ensures that such products are backed by globally sustainable product platforms. These could relate to meeting more stringent crash tests, using less evolved fuels, more punishing road conditions, and so on. Global product development will also require a very strong global regulatory department which is well-versed in the operating conditions, and homologation requirements of different countries.

Software as hard-stop

Today’s products, especially the automotive products, incorporate more software than at any time. This trend is only likely to increase in future. As the examples quoted in the early part of this post demonstrate, software is one aid for manipulation too. It is important to develop not only bug-free and hack-proof software to ensure safety and privacy of automobiles and their users but also make it traceable and manipulation-proof. CXOs in charge of R&D and product development must integrate software development and error-proofing, including artificial intelligence, sensor technologies and robotics as part of R&D tool kit.

Quality as board audit function

Importantly, there is a need to make quality as an important responsibility of the functioning of the board of directors of a company. All boards today have audit committees to review finances and financial governance as also monitor internal controls in a company. Keeping mala fide intentions aside, financial outcomes are nothing but a resultant of operational integrity. Quality is the sentinel of operational integrity. The link between quality and integrity is thus evident. It is, therefore, important that the boards take upon themselves review of quality as an essential board responsibility. Product testing and homologation processes in global diversification strategies must logically merit attention in quality-centric board functioning.  

Organizational positioning

The above discussion brings out the importance of testing and homologation in making or breaking the reputation of a company. As Volkswagen episode demonstrates, slippages in this vital domain can put paid to global leadership ambitions of a company. And, Mitsubishi episode demonstrates that the very survival and ownership of a company could be at stake. There is every reason, therefore, to bring testing and homologation, from the current side play in R&D departments to the forefront of cross-functional commercialization of new products.

This requires that testing and homologation is treated as a high technology endeavour and not as a tail end activity of R&D. This also requires that this function is positioned with the brightest technical talent which is also exposed to requirements of different countries, and is taken up as a key delivery by the chief technology officer of a company. Integrity and competence in testing and homologation is akin to the role of safety in operations. Its effective presence is the greatest insurance for success and sustainability of both performance and reputation of companies.

Posted by Dr CB Rao on May 19, 2016

     

Innovation with Perfection: When Parts Become the Whole

Innovation is seen as the hallmark of creative development while perfection is seen as the surrogate of supreme quality. Customer delight arises from a combination of innovation and perfection. Innovatively designed products that are made to perfection surprise, delight and inspire customers. From an economic point of view, a combination of innovation and perfection results in greater productivity and sustainability. The beauty of this combination is that it is applicable not only to products and services but also to processes. Generally, however, innovation and perfection are seen to be somewhat antithetical to each other, with innovative products running the risk of failure and perfect products being a result of highly standardized inputs and processes, proven in millions of repetitive cycles. This intriguing reality has probably a socio-economic behavioural causation too; one can wait for innovation but not eternally and one can seek perfection but not at the cost of immediate needs.

While innovation could be a result of spontaneous intuition or diligent serendipity, and perfection could be a result of a mind-set steeped in conformity and quality, in most cases innovation and perfection are highly organized activities requiring time and effort. In principle, the greater the time and effort expended on innovation and perfection, the greater is the possibility of innovation and perfection. The pathway to innovation on which time and effort are spent is often dictated by the target of innovation. The pathway to perfection on which time and effort are spent is dictated by the level of specifications on one hand and usage feedback on the gap between specifications and requirements on one hand and the gap between specifications and performance on the other.  The targets of innovation and perfection are, themselves, set somewhat subconsciously by what humans as the experimenters see as the limits for innovation or perfection. As this process is complex, practitioners seek optimality which ironically could be sub-optimization.

Substrates

In reality, innovation that we see in products or services is invariably preceded by innovation in basic technologies. The innovative televisions of today are made possible because of innovations in display screen technologies such as OLED that were seeded a few years ago for palm size screens. When several innovative technologies become available novel products incorporating such technologies get to be developed, albeit with a lag. Strange as it may seem, rarely innovation gets defined ab initio at the end-product level. This facet of innovation in multiple technology substrates represents both an opportunity and a challenge for product level innovation. The opportunity arises in terms of choice and speed while the challenge arises because of imbalance in innovation of parts. Rarely one gets to have a total product technology mission that targets innovation in raw materials, components, integrating systems, manufacturing equipment, production processes, and end-products as one holistic mission.

That perfection does not necessarily move with innovation, and vice versa, is fairly obvious. Apple which has seemingly attained perfection with its iPhone range until recently (say, till iPhone 5) has not necessarily been innovative in all the departments. On the other hand, as the innovation level (as exemplified by a slim form factor) got bumped up in the iPhone 6 range, perfection lagged as evidenced by bending phones, protruding camera modules and blurred images in some lots. Samsung has been innovative in form factor and stylus based phones but never reached the top in terms of perfection. Incorporation of OIS modules in slim phones represent a greater challenge in terms of achieving perfection rather than integrating innovation. Inevitably, every first generation innovative product, be it cell phone or holography headset, emerges to be a rather bulky, blunt or crude form of innovation (at least, until after the next generation products are unveiled).

Parts and the whole

The author of this blog once wrote a post titled “Style is Substance: Management of Product Design and Manufacture”, Strategy Musings, August 8, 2009 (http://cbrao2008.blogspot.in/2009/08/style-is-substance-management-of.html). The post argued that the style of a product demands substance in design and manufacture of a product, and boosts efficiency, encourages creativity, promotes flexibility and drives growth but also demands management competence to ensure all of this. The blog post was, in fact, inspired by the crop of stylistic products that began to be unveiled during those years. Much intellectual water has flowed under the bridge since then with rapidly evolving products and amazingly shortening life cycles. While style and substance seem to have stood up over the last six years as a solid pair, perfection and innovation seem to be moving out of step, of late. This can be traced to the mismatch of perfection and innovation in the parts and the whole.

Product design as a technical discipline has such versatile facets that a few parts can make a significant change to performance but such trend can neither be unlimited nor perpetual. For example, a superior drive-train can step up an automobile to a different performance trajectory but without matching strides in overall strength-weight parameters or navigation systems, enhancement in performance of parts would soon be blocked. When breakthrough products are conceptualized, every part needs to be thought of for innovation and perfection. When Airbus A380 was designed as the largest commercial plane, each and every part had to be redefined to newer standards. The difference between a spaceship for a lunar expedition and a spaceship for mars mission would need a complete conceptual redesign. The challenge of perfect innovation lies in absorbing the approaches from such uncommon products to common products.

Perfect innovation

Perfect innovation may be defined as an organized process in which each component of a product is covered with innovation. This requires concurrent engineering and manufacture of a different detail and differentiated calibre. To institutionalize perfect innovation, a firm has to approach product development and commercialization in two distinct tracks. The first track covers the routinely followed quick-upgrade product cycle. This would incorporate typically certain innovative upgrades to differentiate products across generations; such product cycles may alternately focus on innovation or perfection. Typical examples are found in white goods and consumer goods sectors. The improvements in loading systems or washing cycles in washing machines, enhancements in purification and water recovery in water purifiers, integration of new materials in cooking systems, miniaturization of routers and dongles, enhancements in pixel density of display screens, improvements in aperture sizes of camera sensors and inverter integrated air conditioners are examples of such routine product developments.

The second track, which actually is the track of perfect innovation, reappraises the entire product concept in terms of the total design and functionality of the end-product at one level and the design and manufacture of every material, component, system and assembly at another level. The first editions of digital camera, smart phone, flat panel television, and several such others represent close examples of perfect innovation. The reasons are that each of the products had several totally new components (not merely upgrades of existing ones) involving new materials, new designs and new manufacturing processes. All of these products had new operating systems as well. Introduction of digital technology has enabled definition of metrics for measuring innovation and perfection. Until the entry of digital technology, mechanical fits and tolerances determined the perfection of manufacture. Digital technology helps monitor the perfection of manufacture as well as on-site performance on a continuing basis in critical equipment such as medical imaging equipment, diagnostic equipment and infusion equipment.

Bill of innovation

Perfect innovation is a multi-stage iterative process which starts in the first phase with a total redefinition of the product concept. This stage can be applied to any product, from a telephone or a television to a hotel room or operation theatre. This stage requires truly out-of-the-box thinking on product configuration, which could reposition even plateauing or declining products. For example, the land telephone which has reached a stage of plateau can be subjected to this process.  From a mere dialing instrument for physical communication, it can be converted into a home management robot. At the very least all the functionalities of a smart phone like multiple ringtones, display screens, voice assistance, voice recording and play back, and a number of utilities such as alarm, compass and calendar can be incorporated. At a higher level, it can be embedded with a mini-computer which can provide instructions to various devices and equipment in home, serve as daily organizer and also serve as a real-time camera to record entrants to the home. A fundamental re-positioning of a traditional product, based on a new technology substrate, is the first phase of perfect innovation.

The next phase is the crucial operative phase which comprises four parallel inter-connected streams of technology substrate choice, detailed bill of materials, bill of innovation corresponding to bill of materials and component-specific manufacturing perfection scheme, including testing and quality assurance and equipment planning. These four streams encompass the product on an end-to-end basis, from design to delivery. At the end of this second phase, the first prototypes of the new breakthrough product would be available. The third final phase is the iterative phase when the prototypes are honed to perfection, adding incremental innovation and perfection to each component to perfect the overall product style and substance. At the end of this phase, the product would be ready for homologation and commercial manufacture. As opposed to a typical 6 month upgrade cycle, perfect innovation would require a minimum development and commercialization cycle time of 3 to 5 years. Firms would do well to split their R&D and Manufacturing functions into Improvement Business Units and Redefinition Business Units.

Posted by Dr CB Rao on September 01, 2015

Synergy of Innovation and Perfection: Towards the Ultimate Competitive Advantage

Apple is reportedly working on a smart watch, called as iWatch by the media.  Will this be a successful product? Probably yes, if one were to consider Apple’s string of successful products such as iPod, iPhone and iPad; need not necessarily be, if one were to take into account its occasional failures such as its early generation gaming devices and portable computers.  Apple’s recent successes have, in large measure, been due to its ability to design, manufacture and deliver an innovatively perfect product for the market. From the looks and objectives, iWatch seems to have the innovative specifications and the perfect form factor that are in keeping with Apple’s core competence of innovation coupled with perfection. Apple’s track record does suggest that the combination of innovation and perfection is a pathway to success.

A study of several successful firms suggests that introduction of new products or services on a systematic basis is a key factor of success, but only if such products and services are delivered with perfection, that is, without any faults or weaknesses, and in a completely correct and exact manner. The relative importance of innovation and perfection in the combination has, however, been a matter of subjectivity. Companies that sparkle with innovation but fail to deliver it with panache have been far less successful than companies which have been merely followers but delivered products and services of impeccable quality. It would, therefore, appear that companies need to not only ensure both innovation and perfection but also get the right balance of innovation and perfection that makes economic sense.

Innovation

Innovation has no end. What appears to be an innovative product at the time of innovation or commercialization is soon rendered obsolete by a more innovative product or by a clone that is designed and manufactured more perfectly. Smart phones, for example, led a wave of innovation in mobile phones and convergence devices. The current experimental trend of iWatch and Google Glasses indicates that certain products, be they computers, smart phones or cameras, can be rendered obsolete by the trend of wearable or communicable computers that these smart watches and smart goggles signify. Companies which recognized the cycle of innovation and obsolescence, and have in addition made their own products obsolete by more innovative products have enjoyed consistent success. 

Innovation has no limits. What appears to be beyond the reach of a first innovation becomes a facile task for the subsequent innovations.  Having 256 MB RAM was once a design feat for computers. Today, a smart phone is designed with 2 GB RAM and quad-core processors. HD screen was unthinkable in a cellular phone not too long ago. HD screen capability of 1080p is now passé in contemporary mobile phones. iWatch with Bluetooth and wireless connectivity could lead to remote connectivity between the wearer and his or her devices easy. With development of needleless diagnostics, Apple may develop its iWatch into an iDoctor next. The more innovatively hardware and software are designed, and more importantly they are integrated, the more innovative a product would be.

Innovation has no boundaries. What appears to be a partial innovation in a component of a product can be a dominant driver of total product innovation. Samsung may be a follower in smart phones but its innovative edge in touch screens, ranging up to the latest large format Organic Light Emitting Diode (OLED) screens as well as bendable and extendable OLED screens has driven innovation in its smart phones. Ordinary components can be assembled into an extraordinary product through software innovation as Apple has demonstrated. As firms systematically specialize in innovation, they also acquire core competence in certain categories of innovation, as exemplified by Toyota in hybrid vehicles, Intel in computer chips, Qualcomm in mobile chips, Nintendo in gaming devices, BD in needles and so on. Continuous and systematic innovation leads to product specialization on one hand and erects entry barriers on the other.

Perfection

Like innovation, perfection has no end. As nano measurement technologies emerge, tolerances can be defined more tightly, for example. Perfection, however, tends to be comparative and contextual. Perfection is measured against the specifications set by the designer. Companies committed to high quality go in for high specifications to set the design tone for perfection. Each successive generation of products sets higher standards for perfection. In an automobile engine, spark plugs, for example, have become 30 percent thinner while moving parts like pistons, connecting rods and crankshafts have seen reductions in weights ranging from 30 to 50 percent. Perfection in measurement technologies has enabled such improvements.

Unlike innovation, perfection has a limit, a limit that is Zero in defects of manufacture and another limit that is infinity in “meantime between failures (MTBF)” of a product in service.  These limits are not easy to achieve, though. They are dependent on the sophistication, consistency and reliability of the manufacturing equipment and the manufacturing process as well as the quality of materials of manufacture on the other.  Continuous improvements have led automobile component makers to specifying defects from defective parts per  thousand that was in vogue years ago to defective parts per million that is the standard more recently. Six Sigma is another approach that tightens the limits for process variability. The term Six Sigma originated from statistical modeling of manufacturing processes and denotes 99.99966% of the products manufactured are statistically expected to be free of defects (3.4 defects per million).

Like innovation, perfection has no boundaries. It is not confined to products and services or product and process technologies. It is equally related to people and processes. Quality and avoidance of defects needs to be a credo, right from construction of language to manufacture of products, and from understanding consumer needs to fulfilling them. This assumes great importance given that consumers are more demanding, regulators are more watchful and competition is unrelenting. Over the last few years, millions of cars have been recalled by marquee companies such as Toyota, BMW and a few others, indicating that not being perfect has a significant cost attached to it. Perfection does not necessarily mean getting things right first time. There are enough practices in the design and manufacturing processes such as simulation and piloting to ensure that all defect-prone systems, causes and interventions are identified and addressed.

 

 Synergy

If innovation drives the boundary of user experience, perfection establishes the quality of user experience. Innovation has onetime design costs while perfection has recurring manufacturing costs. The combination of innovation and perfection thus determines the lifecycle costs for the company and the lifecycle value for the company. Depending upon their strategies, individual companies choose that combination which best suits their business position and market standing. The synergy of innovation and perfection comes from a combination of technology and people, a competitive and proactive mindset being the underlying behavioral foundation. Without innovation, perfection has little space while without perfection, innovation can go awry. This is best illustrated by the story of the modern day spark plug (first engineered in 1860  with the engineering of the internal combustion engine) which demonstrates how innovation and perfection are synergistic.

Spark plug is the heart of the internal combustion engine which in turn is the core of the petrol-powered automobile.  Spark plugs have seen a leapfrog in sparking efficiency and maintainability over the last several decades due to a combination of the use of more advanced materials (innovation in materials sciences) and the deployment of tighter tolerances in each of the components, not limited to the electrodes (perfection in design and manufacture). Use of exotic iridium and platinum materials for central electrode and ground electrode respectively, and tight ultra-fine tapering and gap setting promote not only high efficiency sparking but also long life and more effective self-cleaning characteristics. The synergy of materials innovation and manufacturing perfection that the modern day spark plug represents is also illustrative of how innovation and perfection can be synergistic to achieve ultimate competitive advantage for firms.

Posted by Dr CB Rao on February 17, 2013

         

       

Total Quality, Cost and Time Management (TQCTM): A Relevant Competitive Paradigm for India, Inc

The issue of industrial or manufacturing competitiveness has been engaging the attention of the Government of India (GoI) for the last several years. The GoI had taken some salutary measures in the past, through its enactments and the requirements of its agencies such as Securities and Exchanges Board of India (SEBI) to enhance the disclosure of information by certain categories of corporations for review by their stakeholders. While aspects like Management Discussion & Analysis have trailed the trends in other advanced countries, certain disclosure requirements on R&D expenditure, technology imports, technology assimilation, development of indigenous technologies, energy efficiency, payables to small and micro enterprises, installed capacities and production, imports and exports have been uniquely Indian, and have helped shine the light on certain important operational parameters of companies. The mandatory requirement of independent cost audit for certain category of firms has been another uniquely Indian requirement of corporate introspection and disclosure, mandated by the GoI, although it has never reached the status of statutory audit of accounts.

The new enactments on the Cost Audit Report Rules (CARR) and Companies (Auditor’s Report) Order (CARO) by the GoI represent an attempt to sharpen the cost audit principles and also expand their applicability. Simultaneously, they seek to reduce the hitherto prevalent resistance of the companies to external cost audits on the grounds of confidentiality of cost data. They also ensure greater teeth through a performance appraisal report that focuses on key operational metrics such as capacity utilization, productivity improvement and so on. Currently, The National Task Force on CARR and CARO of The Institute of Cost Accountants of India (ICAI) is engaged in a nation-wide discussion with industry associations, captains of industry and professional experts. Hopefully, the final outcomes would have the acceptance of all the stakeholders. While such Government and ICAI sponsored cost audits have their utility in terms of focusing attention and ensuring compliance, the real benefits of cost audits would accrue to the company only when the companies understand the concept of cost in its totality and put in place systems of rigorous and meaningful cost management. This blog post proposes a new paradigm of total quality and cost management against a time perspective for India, Inc.

Cost, quality and competitiveness

Cost management is the most important instrument in the quest for globalization by India, Inc. Cost, however, should never be seen independent of Quality. In all ways, cost and quality are significantly interrelated. There are several myths surrounding the cost-quality equation. The most prominent one is that cost and quality are inversely correlated. In other words, it is assumed that higher quality leads to higher cost and somewhat conversely lower cost implies lower quality. While higher levels of quality do require higher levels of product specification, material strength, manufacturing integrity and service delivery, the relationship is neither linear nor proportionate. A higher quality product or service actually creates and expands demand, enables higher scale of production and distribution, improves overhead absorption and ultimately results in superior cost position. Quality integrated cost management is the essential tool for competitiveness.

An ability to successfully operate on low margins is the ultimate test of the cost-competitiveness of a firm. Many times, firms, especially those operating in innovation and niche space believe that cost is secondary and differentiation is primary. Some firms may even believe that pursuit of cost leadership and product differentiation are contrarian activities. There is, in fact, no conflict in the pursuit of these twin goals. Elimination and avoidance of all non-value adding and wasteful activities, and infusion and integration of value adding activities is a primary strategy of all corporations which have accomplished sustainable profitable growth for decades. A review of all corporations which have had decades of such growth over the last several decades in multiple industries and multiple regions, from Toyota in Japan to IBM in USA reflects the basic philosophy.

Controllable factors, all?

Many times, firms have a rather simplistic view of costs and competition. Many leaders are apt to exhort their employees that they should control what is under their control, namely costs, capacity and production, and not worry too much about the factors which in their view are not under their control, for example prices, demand and competition. Nothing can be farther than truth in this. In fact, all factors mentioned above, whether apparently controllable or not, squarely fall within the responsibility and control of the firms. The fact that market demand is at a low level oftentimes is an indicator of the unacceptable quality-cost position of a product or service. The fact that some other player has a lower priced, equivalent or superior quality product or service in the market is an indicator of the superior cost position such a player has been able to achieve relative to the incumbent. The phenomenon of competition in an industry indicates that the industry is attractive in terms of growth and profitability parameters. In essence, therefore, a firm cannot believe that its costs alone are a concern but not how a competitor prices its products.

The belief that a firm should continuously work on a best-in-class quality-cost position is the fundamental tenet that differentiates an industry leader from the rest. This is not to suggest that all firms in an industry must aspire for such an industry leading position. A firm’s strategy is a resultant not merely of a firm’s leadership aspirations but also of its technical and managerial capabilities, capital and other resource endowments, and the legacy issues relating to historical evolution. The point is that a firm should anchor its growth and sustainability strategies on a comprehensive strategy of quality integrated cost management. To be able to do that, firms must recognize that quality and cost are supported by individually unique set of cluster factors that determine the levels of quality and cost, and their interrelationship that a firm can enjoy.

Cost-quality cluster metrics

Cost is a powerful indicator of the ultimate competitiveness of a firm in an industry in which all the constituent firms are able to provide products or services of a comparable quality. The levers that a firm has in its possession to establish a position of superior cost are: productivity (or efficiency and effectiveness combined), scale, scope and speed. Encompassing all this is a zero-waste approach. Each of these factors is interrelated and their harmonious integration requires detailed planning, and correct execution with high forecast and delivery accuracy. Here, forecast accuracy is a broad concept covering not merely demand forecasting but also forecasting of all resource requirements including people, finance, materials, equipment, and various other inputs that are required for operations and delivery. Total cost management, therefore, requires application of the appropriate levers as identified herein across the entire value chain.

Quality is a powerful indicator of the ultimate competitiveness of a firm in an industry in which all the constituent firms are able to provide products and services of a comparable cost. The levers that a firm has in its possession to establish a position of superior quality are: innovation, product and service specifications, process specifications (covering both technical and non-technical processes), safety, skill levels of employees and compliance systems. Encompassing all this is a zero-defect approach. Each of these factors is interrelated and a superior position on quality can emerge only based on integration of all these parameters across the value chain, with a ‘first time right’ approach. Concurrent engineering is a methodology that has been successfully deployed by the automobile industry, especially the Japanese automobile industry, to ensure that quality is ensured in a seamless and unfailing manner across the total value chain. Here, compliance is an important concept in terms of establishing stringent benchmarks and the organization simultaneously conforming as well as innovating to meet such benchmarks. Total quality management, therefore, requires application of the appropriate quality levers as identified herein across the entire value chain.

Technology and management as integrators

The foregoing discussion may lead one to consider Total Cost Management (TCM) and Total Quality Management (TQM) to be two independent, though quite interrelated, streams of a firm. The point that each influences the other positively is well-taken but how such integration would need to be accomplished in practice is as yet unclear from the discussion afore. The key to such integration lies in technology; be it product technology, service technology, manufacturing technology, distribution technology or information technology. Product and process technologies present themselves in terms of the right form factor, appropriate levels of consumption of appropriate types of materials, the conversion efficiencies in terms of uptime, yields and so on. Service and distribution technologies present options for the firms and consumers to interconnect the supplies and requirements in a seamless function. Information technology helps the total value chain to be efficient and effective, and to eliminate waste and ensure compliance to specifications.

Equally important is the management of a firm, which comprises a host of factors from organizational culture to individual competencies. TCM and TQM aspirations cannot be fulfilled merely by deployment of technologies. Like every firm activity which is fundamentally behavior driven, cost and quality require a managerial mindset that utilizes technology and human resources in perfect harmony. The overall industrial context, including its strategic evolution, and the nature of competitive forces determine how management should deploy technology and human resources. What industries considered as a luxury in research and workshop settings a few decades ago, namely automation has become common place with the advances in mechatronics (electronics integrated mechanical engineering) and vastly changed expectations on what constitutes good ergonomics and wise economics. At the same time, the employee’s fundamental capabilities continue to determine how a national or global value chain comprising several functions, sites, teams and technologies can be seamlessly integrated.

Time as the ultimate arbiter

With several firms competing for similar strategic space, and all of them pursuing superior quality-cost options, it becomes necessary to identify one additional calibrator for superior positioning of the firms of the highest order. In this context, time which is the most precious, non-renewable and non-regenerative resource becomes critically important. Here again, myths surround the concepts of quality-cost execution in a time frame. It is not true, for example, that faster work could carry the risk of lower quality or that greater time allocation would ipso facto provide greater quality. Many times there are hidden or implicit activities that need to be performed, not performing which could have adverse quality and cost implications. Curing of concrete in a construction activity is one such example. There could also be limitations in the extent of parallel processing that can be carried out in a multi-tasked project. Components of a new design watch, for example, cannot be ordered unless the basic design parameters, both product and manufacturing, are frozen.

The laudable initiatives of the GoI in cost audit and the recent enactments on CARR and CARO themselves are reflective of the importance of the temporal dimension. These projects were initiated by the Ministry of Corporate Affairs, Government of India, in January 2008 with the constitution of an Expert Taskforce, which submitted a report in a timely manner by December 2008. However, the time taken to translate the recommendations into enactments and furthermore the far longer time that appears to be required by the Indian industry to go beyond the statutory audit requirements and establish in-house cost management efforts point to a need to integrate time as an essential third dimension in the quality-cost-time triad of competitiveness. The very special attribute of rendering the highest quality work at the lowest cost possible, and in the shortest time frame possible differentiates the firm that is solely and uniquely positioned in an optimized quality-cost paradigm. The Total Quality, Cost and Time Management (TQCTM) paradigm as a completely integrated and holistic strategic platform of competitiveness is highly relevant for an India, Inc that is seeking an ever expanding presence in the globalized economic and industrial world.

Posted by Dr CB Rao on March 4, 2012