Quality and Ethics Quality appears to be good business. Quality is also good ethics. It is unethical to ship defective products knowingly to a customer. Reliable products and low defect rates reflect an ethical approach of management’s care for its customers. This ethic is stated in the well-known mission statement of a New Bedford, Massachusetts, shipbuilder; “We build good ships. At a profit if we can, at a loss if we must. But, we build good ships.” Quality Highlight 4-1: Solectron Corporation www.solectron.com Solectron Corporation is an independent producer of high-tech manufacturing services. This manufacturing includes the assembly of printed circuit boards and subsystems for computer makers and electronics product producers. In addition, Solectron provides system-level assembly services, such as assembly of PCs and mainframe computers. Activities performed by Solectron include design, production, assembly, consultation, and testing. Solectron has achieved outstanding results because of its strategic planning system and the personal leadership provided by its management. By focusing on customer satisfaction, exploiting advanced manufacturing technology, and stressing continuous improvement in operations and service, the company has reached high levels of quality and efficiency, making it best-in-class and a world leader in production. Solectron is an American company that has competed successfully in international markets. Many competitors of Solectron are now customers because they found it was better to outsource to Solectron than to produce many products in-house. In addition, about 90% of all new work comes from returning satisfied customers. Assessing Customer Needs Solectron focused its planning processes on the customer. Solectron does not compete with its customers in designing and marketing products. Although it offers an original equipment manufacturers (OEM) design service, usually the company produces to its customers’ specifications and designs. As a result of understanding its customers, the company develops strategies to meet its customers’ requirements in the areas of service, quality, and cost. Solectron continually monitors customer satisfaction levels and conducts exhaustive research on competitors and markets. Surveys of customers are conducted on a weekly basis. The results of these surveys go directly to the CEO, who reviews the information with top management in one of three weekly meetings on quality-related issues. The survey information is used to grade the performance of each of Solectron’s nine divisions. Culture of Continuous Improvement Solectron has developed a culture that reinforces continuous improvement. Developing this culture has required arduous strategic planning. A top management team is involved in a crusade to revitalize American manufacturing through quality. This team sets corporate targets and then works with teams to set supporting goals in functional areas. The company has pursued several ...

1. Quality and Ethics
Quality appears to be good business. Quality is also good
ethics. It is unethical to ship defective products knowingly to a
customer. Reliable products and low defect rates reflect an
ethical approach of management’s care for its customers. This
ethic is stated in the well-known mission statement of a New
Bedford, Massachusetts, shipbuilder; “We build good ships. At
a profit if we can, at a loss if we must. But, we build good
ships.”
Quality Highlight 4-1: Solectron Corporation
www.solectron.com
Solectron Corporation is an independent producer of high-tech
manufacturing services. This manufacturing includes the
assembly of printed circuit boards and subsystems for computer
makers and electronics product producers. In addition,
Solectron provides system-level assembly services, such as
assembly of PCs and mainframe computers. Activities
performed by Solectron include design, production, assembly,
consultation, and testing. Solectron has achieved outstanding
results because of its strategic planning system and the personal
leadership provided by its management.
By focusing on customer satisfaction, exploiting advanced
manufacturing technology, and stressing continuous
improvement in operations and service, the company has
reached high levels of quality and efficiency, making it best-in-
class and a world leader in production. Solectron is an
American company that has competed successfully in
international markets. Many competitors of Solectron are now
customers because they found it was better to outsource to
Solectron than to produce many products in-house. In addition,
about 90% of all new work comes from returning satisfied
customers.
Assessing Customer Needs
Solectron focused its planning processes on the customer.

2. Solectron does not compete with its customers in designing and
marketing products. Although it offers an original equipment
manufacturers (OEM) design service, usually the company
produces to its customers’ specifications and designs. As a
result of understanding its customers, the company develops
strategies to meet its customers’ requirements in the areas of
service, quality, and cost. Solectron continually monitors
customer satisfaction levels and conducts exhaustive research
on competitors and markets.
Surveys of customers are conducted on a weekly basis. The
results of these surveys go directly to the CEO, who reviews the
information with top management in one of three weekly
meetings on quality-related issues. The survey information is
used to grade the performance of each of Solectron’s nine
divisions.
Culture of Continuous Improvement
Solectron has developed a culture that reinforces continuous
improvement. Developing this culture has required arduous
strategic planning. A top management team is involved in a
crusade to revitalize American manufacturing through quality.
This team sets corporate targets and then works with teams to
set supporting goals in functional areas. The company has
pursued several strategies to achieve a high-energy, customer-
focused workforce. These strategies include a strong family
orientation, an effective communication system, and an
innovative reward and recognition program. These strategies
have helped the company to weather the rapid growth it has
experienced. Management is participative with a focus on
coaching and a high degree of autonomy for workers. The team-
focused approach to employee involvement relies on training
and mentorship to overcome barriers to a multilingual
workforce with more than 20 ethnic backgrounds.
Each Solectron customer is served by two teams. These teams
ensure quality performance and on-time delivery. A project
planning team is involved in planning, scheduling, and defining
customer requirements. A quality control team meets weekly to

3. monitor and evaluate production with the aim of preventing
potential problems before they occur.
The Best and Getting Better
Solectron uses a comprehensive information system, organized
in a customized relational database that allows constant
monitoring of internal quality performance and process control
indicators. Key performance data are charted in all departments.
Employees are trained and empowered to take corrective action.
Solectron works with suppliers to improve the quality and
reliability of incoming components and subassemblies.
Statistical process control (SPC) charts track and review results
daily. These results are recorded on an automated SPC database.
Division managers and the corporate quality director track these
results on a daily basis. The company is partnering with its
suppliers to improve design quality as a future strategic
emphasis.
Solectron performs strategic planning in selecting its future
technological choices. Investments in advanced technologies are
guided by an evaluation of the customer’s future requirements
and top management’s emphasis on enhancing manufacturing
capability. All this effort is paying off for Solectron. As
indicated by its chief quality measure, customer satisfaction, the
company has won scores of superior performance awards in
recent years. After a quality audit, a major customer rated
Solectron as the “best contract manufacturer of electronic
assemblies in the U.S.” Solectron’s strategic focus is now
expanding as it adds production facilities around the world.
Companies focusing on their customers often develop a set of
ethics that includes valuing employees. This is reflected in
education, training, health, wellness, and compensation
programs that show empathy for the employees. Increasingly,
environmental friendliness is seen as an ethical concern. As a
result, more companies are implementing recycling programs
and making efforts to improve environmental practices.
With the Enron debacle, the problems of the accounting firm
Arthur Andersen, the Internet bust, and other highly publicized

4. fiascos, there is one overlooked variable that must resurface—
integrity in doing business. Floyd Harmston, a University of
Missouri-Columbia emeritus economist, once stated that the
entire U.S. economy was based on one simple principle: “When
I give you a check, there are funds sufficient in my account to
cover the check. When this fails to happen, the monetary system
is damaged.”
Harmston’s words seem wiser now than ever. In recent years,
with the focus on growth in companies, downsizing, and
discussion of “new business models,” we need to make sure that
we can look at ourselves in our mirrors before we go to bed at
night.
Good quality management is good ethics. Would we want to
knowingly provide poor service or ship bad product? J. R.
Simplot made a promise to Ray Kroc at McDonalds that
McDonalds would never run out of French fries. With a
handshake, they sealed their deal, and Simplot has kept his
promise.
Integrity gets down to honesty. Are we honest to our customers,
employees, colleagues, family members, and ourselves? This
must be the basis for business. There is not a new business
model that obviates the need for integrity.
Quality as a Strategy
In Chapter 1 we raised the question of whether quality is
sufficient to win orders in the marketplace. As you will recall,
we stated that although quality can still win orders in some
markets, in many markets quality has become an order qualifier.
This means that high-quality production is an essential
ingredient to participation in the market. In Chapter 3 we
discussed research showing that quality is still an effective tool
in successfully exporting in the international market.
We now discuss quality as a strategy from the perspective of
generic strategies. These generic strategies are cost,
differentiation, and focus.
Costs of Quality
One of the generic means of competing is cost. Traditionally,

5. this meant the lowest-priced items in the industry. Many
companies compete on cost. For example, Kmart competes on
cost. New definitions of cost are expansive, considering the
summation of costs over the life of a product. This includes
service, maintenance, and operating costs for the product. For
example, it is recognized that ink-jet color computer printers
are relatively inexpensive to purchase. However, owners of
these machines have found that the color cartridges dry up
rapidly and that the replacement costs for the cartridges are
quite high. As we discuss later, the life-cycle costs for many
products may be staggering when environmental costs are
considered. In this section we discuss the cost of quality and
how quality can help decrease the cost of doing business.
There are two broad categories of cost: costs due to poor quality
and costs associated with improving quality. At a minimum,
management must understand these costs in order to formulate
policy concerning quality improvement. In addition, Taguchi
and others have provided insights into the issue of quality costs.
As an example, the title of the classic book by Crosby, Quality
Is Free, reveals an interest in the costs of quality.
PAF Paradigm 9
9For a more in-depth discussion of quality-related costs, see
Plunkett, J. J., and Dale, B., “A Review of the Literature on
Quality-Related Costs,”International Journal of Quality and
Reliability Management 4 (1988):247–257; Carson, J. K.,
“Quality Costing: A Practical Approach,” International Journal
of Quality and Reliability Management 3, 1 (1986):54–65; and
Foster, S., “An Examination of the Relationship between
Conformance and Quality Related Costs,” International Journal
of Quality and Reliability Management 13, 4 (1996):50–63.
The PAF paradigm translates quality costs into three broad
categories, which are then subdivided into other categories. The
three categories are prevention, appraisal, and failure costs
(hence the acronym PAF).
Prevention costs are those costs associated with preventing
defects and imperfections from occurring. Prevention costs are

6. the most subjective of the three categories of costs. Prevention
costs include costs such as training, quality planning, process
engineering, and other costs associated with assuring quality
beforehand (see Table 4-2).
Table 4-2 Prevention Costs
The cost of setting up, planning, and maintaining a documented
quality system
Quality planning: establishing production process conformance
to design specification procedures, and designing of test
procedures and test equipment
Quality and process engineering (including preventive
maintenance)
Calibration of quality-related production equipment
Supplier quality assurance
Supplier assessment
All training
Robust design
Defect data analysis for corrective action purposes
Time spent on quality system audits
Two caveats associated with the collection of quality-related
costs include (1) there may be some debate as to whether these
costs are all related to quality and (2) persons who work in
prevention often do not keep accurate records of all costs.
Appraisal costs are associated with the direct costs of measuring
quality. These can include a variety of activities such as lab
testing, inspection, test equipment and materials, losses because
of destructive tests, and costs associated with assessments for
ISO 9000:2000 or other awards (see Table 4-3).
Table 4-3 Appraisal Costs
Laboratory acceptance testing
Inspection and tests by inspectors
Inspection and tests by noninspectors Setup for inspection and
test
Inspection and test materials
Product quality audits
Review of test and inspection data On-site performance tests

7. Internal test and release
Evaluation of materials and spares Supplier monitoring
ISO 9000:2000 qualification activities
Quality award assessments
These costs have undergone a fundamental change as U.S.
companies have progressed in quality. For example, these costs
were traditionally uncomplicated to assess because appraisal
was performed by a centralized quality control function. The
concept of in-process inspection has made it difficult to
measure appraisal costs accurately. In addition, appraisal and
auditing costs have been impacted by assessment activities
associated with ISO 9000:2000 and the Malcolm Baldrige award
as companies have undertaken these assessment programs.
Failure costs are roughly categorized into two areas of costs:
internal failure costs and external failure costs. Internal failure
costs are those associated with on-line failure, whereas external
failure costs are associated with product failure after the
production process. This includes failure after the customer
takes possession of the product (see Table 4-4).
Table 4-4 Failure Costs
Cost of troubleshooting
Reinspection of stocks after defect detection
Disruption of production schedules
Complaint handling and replacements plus extra time with
customers
Warranty (taking care not to duplicate previous item)
Cost of holding higher levels of stock as a buffer against quality
failure
Cost of corrective maintenance to plant
Cost of corrective action to product (redesign, repair)
Lost production because of manpower availability problems
(this refers to idle time brought about by failure to plan
manpower efficiently)
Lost production caused by system problems (i.e., material or
instructions not available; cost of idle time only)
Concessions (design and engineering time)

8. Process waste (including the waste commonly regarded as
unavoidable)
Cost of product scrapped at product audit
Cost associated with disposition of all scrap
Accounting for Quality-Related Costs
One of the impediments to the collection of quality cost data
has been the lack of acceptable accounting standards for these
costs. For example, the standard accounting definition for
quality is “meeting specifications.” This narrow definition
limits organizations desiring to quantify and measure customer
requirements as a means of improving service to the customer.
A reason for this is that accounting rules require definitions that
are not open-ended or open to alternative interpretations.
Example 4-1: Quality Costs in Action
Problem:Macaluso’s manufacturing company has gathered the
following quality-related costs. You are hired as a consultant to
evaluate these costs and to make recommendations to
management. Compute the ratio of prevention and appraisal
costs to failure costs.
Annual Quality Costs
Failure costs
Defective products
$
5,276
Engineered scrap
17,265
Nonengineered scrap
125,274
Consumer adjustments

9. 623,980
Downgrading products
1,430,678
Lost goodwill
Not evaluated
Customer policy changes
Not evaluated
TOTAL
2,202,473
Appraisal costs
Receiving inspection
$
35,765
Line 1 inspection
42,234
Line 2 inspection
53,567
Spot checking
63,766
TOTAL

10. 195,332
Prevention costs
Quality training
$
14,500
Process engineering Corporate
125,678
Plant
39,124
Product redesign
16,422
TOTAL
195,724
Grand total
2,593,529
Solution
:Ratio of appraisal to failure costs:
195,332/2,202,473 = .0887
Ratio of prevention to failure costs:
195,724/2,202,473 = .0889

11. Ratio of prevention and appraisal to failure costs:
(195,332 + 195,724)/2,202,473 = .1776
Proportion of total quality costs:
Prevention:
195,724/2,593,529 = .0755
Appraisal:
195,332/2,593,529 = .0753
Failure:
2,202,473/2,593,529 = .8492
This analysis shows that failure costs are very high compared
with the prevention and appraisal costs. Increasing prevention
and appraisal activities (and costs) could result in a significant
decrease in failure costs.
Lundvall-Juran Quality Cost Model
The PAF categorization of costs is a useful way of
understanding costs. Using the law of diminishing marginal
returns, quality costs can be modeled to show the tradeoffs
between these costs. This tradeoff model, called the Lundvall-
Juran model, is shown inFigure 4-1.
Figure 4-1 Lundvall-Juran Model
The Lundvall-Juran model is a simple economic model. It states
that as expenditures in prevention and appraisal activities
increase, quality conformance should increase. For example, the
more we spend on training and developing our employees, the

12. more benefit we should get. As conformance improves, failure
costs will lessen as well. This is an interesting case because if
these statements are true, there should be an economic quality
level that minimizes quality-related costs, and this flies in the
face of the idea of continuous improvement proposed by
Deming and others.
Differentiation through Quality
Think of a product you have been desiring for some time that is
priced significantly above the average market price for such a
product. It might be a very expensive, brand-name stereo
receiver or TV that you want because of its special appeal.
Chances are that such a product benefits from differentiation. A
Harley-Davidson is an example of a product that is priced far
above the average price for a motorcycle, yet dealers seem to
have trouble keeping enough of them in stock. Differentiation is
achieved by a competitor if the consumer perceives the product
or service to be unique in an important way. Neiman-Marcus,
the retailer, charges many times the prices charged by its
competitors for some products. A Rolex watch or Bang &
Olufson stereo invests the owner with a certain status that other
products do not. These are examples of differentiated products.
In the early 1980s, Japanese automakers differentiated their
products based on mileage and quality. The quality aspect
allowed Japanese automakers to gain significant market share in
the United States. There is evidence that by the early 1990s,

13. U.S. automakers had closed the quality gap sufficiently so that
the Japanese could no longer differentiate on quality. This is the
case in many markets. It is increasingly difficult to differentiate
products based on quality alone. However, there is still much
room to differentiate based on service to the customer in many
markets.
Focus through Quality
The third generic strategy is to focus the product. For example,
think of a product that is particularly regional or is marketed to
a particular segment of the population. This limited customer
group or segment of the market is the object of the focus
strategy. Chrysler is building high-powered specialty cars, such
as the Prowler, that are marketed to a small, affluent segment of
the market. As the baby-boom generation ages, many more
companies are segmenting products that can be marketed to this
age group. For example, more fitness clubs for the elderly are
springing up around the country. Such a focus strategy can be
very profitable. Consumer Research Incorporated reports that
they reduced the number of customers they served by 40% while
at the same time doubling profits. They found that by focusing
on only their very large clients for advertising services, they
were able to get more business with these clients and
simultaneously achieve higher service ratings.
The three generic strategies of cost, differentiation, and focus
have been identified as important strategic decisions. A

14. company that emphasizes cost will use different approaches to
producing quality products than will a company that emphasizes
differentiation or focus.
Order Winners
Terry Hill 10 of the London Business School defined a process
for setting strategy that is centered on the identification of the
order-winning criterion (OWC). Although the OWC is generally
associated with manufacturing strategy, the same concept can be
applied to service strategy.
10Hill, T., Manufacturing Strategy (Homewood, IL: Irwin,
2000).
Table 4-5 provides an overview of the planning framework
defined by Terry Hill. This framework addresses several of the
problems occurring in manufacturing. At times, there is a
mismatch or misalignment between corporate objectives and
decisions and operational subplans. There is a close relationship
between the Hill model and generic strategies that we have
discussed. First, the organization determines its competitive
priorities and defines how it wins orders in the marketplace. For
example, if the company wins orders based on focusing on small
niche markets, marketing strategies will be developed to market
a wide variety of specialized products. At the same time, this
agreement on order winners allows the manufacturing people to
make process choices and infrastructural decisions that support
wide variety. The process choice then might be a flexible

15. manufacturing system using short setup and change-over times.
Table 4-5 Hill’s Strategy Framework
Manufacturing Strategy
Corporate Objectives
Marketing Strategy
How Do Products Win Orders in the Marketplace?
Process Choice
Infrastructure
Growth
Product markets and segments
Price
Choice of alternative processes
Function support
Survival
Range
Quality
Tradeoffs embodied in the process choice
Manufacturing planning and control systems
Profit
Mix
Delivery speed reliability
Process positioning

16. Quality assurance and control
Return on investment
Volumes
Demand increases
Capacity size timing location
Manufacturing systems engineering
Other financial measures
Standardization versus customization
Color range
Role of inventory in the process configuration
Clerical procedures
Level of innovation
Product range
Payment systems
Leader versus follower alternatives
Design leadership
Work structuring
Technical support being supplied

17. Organizational structure
SOURCE: T. Hill, Manufacturing Strategy (Homewood, IL:
Irwin, 2000). Reproduced with permission of The McGraw-Hill
Companies.
The key to the Hill model is reaching consensus on the OWC.
The process for doing this involves segmenting the business
into smaller markets that can each be identified with an order-
winning criterion. This provides an understanding of the
markets the company is serving. Products are chosen for each
market, and marketing provides sales forecasts for the identified
markets. Strategic debate then occurs, resulting in the selection
of an OWC. From this, manufacturing strategy is formulated.
Quality as a Core Competency
Prahalad and Hamel 11 have identified the strategic concept of
core competence. They describe core competence as consisting
of
11Prahalad, C., and Hamel, G., “The Core Competence of the
Corporation,” Harvard Business Review (May–June, 1990):79–
91.
· communication, involvement, and a deep commitment to
working across organizational boundaries. It involves many
levels of people and all functions. World class research in, for
example, lasers or ceramics can take place in corporate
laboratories without having an impact on any of the businesses
of the company. The skills that together constitute core

18. competence coalesce around individuals whose efforts are not
so narrowly focused that they cannot recognize the
opportunities for blending their functional expertise with those
of others in new and interesting ways.
· Core competencies do not diminish with use. Unlike physical
assets, which do deteriorate over time, competencies are
enhanced as they are applied and shared. But competencies still
need to be nurtured and protected; knowledge fades if it is not
used. Competencies are the glue that binds existing businesses.
They are also the engine for new business development. Patterns
of diversification and market entry may be guided by them, not
just by the attractiveness of markets. (p. 79)
Using the Prahalad and Hamel definition of competency,
quality—in and of itself—probably is not a core competency.
However, for firms operating in rapidly evolving markets or
industries, the ability to change can be more important than the
actual changing technology of the moment. Hence organizations
producing outstanding products or services with a good
understanding of processes are better positioned to operate in
the changing market because they can introduce new products
rapidly with fewer quality-related holdups. Therefore, core
competency is built on the foundation of a long-term
commitment to quality and continual process improvement.
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