Despite frequent efforts to estimate the general effect of quality programs on corporate performance, managers have rarely tried to document the connection between specific actions and specific results. That attention to quality pays has become, for the most part, an article of nearly scriptural faith. What exact kind of attention, however, and what exact form and magnitude of payment—questions of this sort have usually been left among the apocrypha.

To help answer such questions as these, McKinsey, together with the Technical University of Darmstadt in Germany, undertook a detailed study of the quality practices of automotive industry suppliers in both Europe and Japan. A breakdown of the companies studied follows.

To identify the key success factors of quality management, we grouped the companies in our sample by two measures: a "process quality indicator" (PQI) and a "design quality indicator" (DQI). We defined process quality according to industry-wide, clearly quantifiable measures, both internal and external, which we calculated for each company so as to take into account the complexities of different processes and products. Because no corresponding measures exist for design quality, we developed a scoring system to assess each company’s quality goals, as well as the tools that it used in the design phase. This helped us understand its ability to design products that meet customer needs and to produce them with low defect rates.

We then used PQI and DQI to arrive at a comprehensive view of total quality. The combination of these rankings resulted in four different performance clusters, which we refer to as the phases of quality management.

Impact of quality

By analyzing these performance clusters, we discovered four different—and progressive—levels of quality management, each of which has a corresponding management approach:

Phase I: Inspection. An inspection department is responsible for product control, mainly at the end of the process.

Phase II: Assurance. The production department strives for better understanding of—and control over—the production process, using tools such as statistical process control (SPC). These companies have begun to orient themselves toward zero defects.

Phase III: Prevention. Trying to "design to zero defects," Phase III companies encourage intense cross-functional cooperation, especially between R&D and the production department. Accordingly, they use cross-company problem-solving training. They also use preventive quality tools like design review, as well as product and process failure mode and effects analysis (FMEA) techniques in the design phase.

Phase IV: "Perfection." Phase IV companies strive constantly for perfection, and their quality programs "cross internal and external borders." Internally, they are characterized by reliance on cross-functional teams, far-reaching delegation of decision responsibility, and an internal customer/supplier principle. They focus sharply on customers during the design phase, and they use the quality function deployment (QFD) tool—a systematic approach to detecting OEM and customer wishes and translating them into products, services, and processes—before production. Externally, they have lasting and mutually trusting relationships with their suppliers, and they integrate both OEM and final customer into their quality management activities to better understand the needs of both.

Performance

The higher the phase of quality management, the better—on average—the corporate performance. Indeed, the "growth jump" from Phase III to Phase IV is remarkable.

Moreover, the two elements of quality each affect a different area of corporate performance: process quality influences return on sales; design quality, sales growth. This distinction is important because—as many companies around the world have realized—simply having a quality program is not enough. What matters is which output-oriented goals a company pursues. Unfortunately, most companies have a long way to go before they reach Phase IV (only 13 percent of all participating companies had achieved this). The Japanese companies in our sample dominate Phases III and IV due mainly to their superior process quality performance. Overall, the success of the best performing companies also stems largely from their orientation toward simplicity. This confirms the key finding of a previous McKinsey study on the German machinery industry. (See also Günter Rommel, "The secret of German competitiveness," The McKinsey Quarterly, 1991 Number 3, pp. 40–54, and A. Steven Walleck, Heinz-Peter Elstrodt, and David C. Robertson, "How competitive are US manufacturers?" 1992 Number 2, pp. 105–13.)

To better understand these differences in approach and performance, we took a closer look at two companies—one in Phase II, the other in Phase IV—that make the same component. Different management practices in strategy and organization, as well as in the two core processes of design and production, resulted in enormous variations in performance.

Strategy and organization

A successful quality strategy starts with the careful definition of goals along the entire business system. The best companies, for example, pay close attention to R&D, purchasing, and customer service. They set goals for the capability of a new production process to suit product developers, and, thus, make engineers responsible not only for a product’s function but also for the quality of its manufacturing process. They also follow a rigorous prevention strategy—including the need-based building of skills throughout the organization, the application of preventive quality assurance (QA) tools in the design phase, the use of quality information systems, and poka yoke (foolproof) process design—to implement these goals.

Phase III and IV companies, therefore, spend less on quality than their Phase I counterparts. Top management involvement—for instance, spending a day helping to design improvement concepts in a workshop for sub-supplier development—is crucial in engendering "quality thinking" throughout an organization. The better performers live by an active internal customer/supplier principle, both within and between functions, which instills in them a new "quality awareness."

On the organizational side, higher quality companies require at least one less level of hierarchy to run a company or production facility than do their lower quality counterparts. Their top and middle management have significantly greater spans of control; those of their shop-floor supervisors are much smaller. They also have fewer employees dedicated to maintaining quality ... ... a much stronger decentralization of quality tasks, and fewer "hidden inspectors"—employees officially assigned to the production department, but actually responsible for inspection. These organizational differences stem from the integration of quality tasks into each worker’s responsibilities, the presence of a small, central consulting QA department, and an active prevention strategy.

Core processes

Our research showed that about 30 percent of product defects occur during the production process (including failures of purchased parts) and that about 70 percent result from the design process (including insufficient consideration of customer wishes and poor product/process fit).

The design process

Effective quality management has to pursue two goals in the design process: developing products that both meet the requirements of OEM and final customers, and can be manufactured with a minimal number of defects.

To meet the first goal, higher quality companies focus their marketing and design activities on the final customer, an activity that does not come naturally in an industry where OEMs traditionally carry the "final-customer responsibility." In particular, they use final-customer and dealer surveys, and prototype tests involving final customers, to develop new product features—for example, ergonomically improved seats and heated exterior mirrors that improve visibility. Because such features provide additional benefits to final customers, they give a significant boost to sales growth.

In order to develop superior products, the best performing companies concentrate on research and pre-development, where they identify product concepts that reconcile final customer wishes with those of OEMs. Not surprisingly, they also allocate a higher percentage of their engineers to these areas than do the lower quality performers—even though they spend less overall on R&D as a percentage of sales. Through their demonstrated R&D competence, they "eat" into an OEM’s R&D budget, thereby playing the role of an "R&D supplier" instead of a pure "blueprint supplier."

Nevertheless, higher quality companies also cooperate intensively with their OEMs, especially in the area of simultaneous engineering. Often they achieve this by placing their own engineers at the R&D center of the OEM. They carefully select and train (for example, in the application of SPC or FMEA) their own sub-suppliers, and then involve them as competent development partners.

In addition, they use preventive QA tools in the design phase more intensively than do their lower quality counterparts. Generally, they use such tools earlier and in a more focused manner, such as conducting FMEAs for critical parts or QFD in case of significantly changing customer needs or technologies. They know that the managerial key to success in the design phase is to assure quality through personal responsibility, clear goal setting, and ongoing design reviews.

The production process

Similarly, quality companies establish clear, measurable goals and communicate them to everyone involved in the production process. They assign explicit personal responsibilities, such as requiring the reduction of rework time and scrap for a production line by

30 percent within six months. This triggers an ambitious problem-solving process, for which they will previously have trained their employees. In addition, they apply these same procedures to their sub-suppliers.

The best performers stress entrepreneurship, responsibility, and accountability. They empower workers to take action when quality issues arise. Decentralization of this kind, combined with need-based training, also helps to institutionalize continuous quality improvement programs, for example, in the form of quality circles. The best companies use self-managed teams, whose responsibilities include quality control, machine set-up, logistics, preventive maintenance, and short-term production planning.

Our findings indicate that integrating such "indirect" quality activities can yield a significant productivity jump. Higher quality companies rely on short feedback loops that operate through comprehensive worker self-inspection to minimize worker-related defects. They lower machine-related defects by rigorously improving the capability of production processes, measured by so-called CpK values. The higher these values, the higher the statistical probability that a specific product characteristic (such as diameter) can be manufactured to a targeted value. These figures are determined by examining the internal and external factors of a machine that influence the degree to which product specifications might vary. Top performers also rely to a much higher degree on sub-supplier quality than do lower quality companies. They achieve this through much higher investment in sub-supplier development, thus reducing the number of purchased-part defects.

Japan versus Europe

The Japanese companies in our sample have a sizable lead in process quality, clearly attributable to their management practices. The remarkable success of their kaizen (continuous improvement) activities is the most important factor ... complemented by significantly stronger cooperation with their sub-suppliers and with their customers. Nevertheless, Japanese companies face several new challenges. The most critical one is to maintain the momentum of kaizen in times of shrinking markets—a new situation. Until 1990-91 the potential of kaizen largely manifested itself as additional growth. Japanese efforts to improve final customer-oriented design quality—traditionally hindered by strong keiretsu structures—are now further curtailed by declining ROS and shrinking financial resources. Organizational restructuring, however, could provide some opportunities for improvement: the typical Japanese automotive supplier has eight levels of hierarchy as compared with Europe’s five or six. But, European companies have no room for complacency about their advantage here, as Japanese companies have shown they can improve very quickly. Any workable program for rapid improvement must start with the design of a company-specific quality program that assesses the company’s management profile along the 15 key levers found to be the strongest drivers of quality performance.