Early Quality Control Problems Were Major Issues For PC And Auto Manufacturers

ibmscCompaq finds its stocks contaminated with faulty power supplies. Disney gets eaten alive by crashing “Lion King” CD ROMs. Intel makes Pentiums that can’t handle division. IBM short circuits with defective ThinkPad power adapters. Rioworks has issues with its mainboards. H&R Block and Intuit stir a taxpayers’ revolt. It almost sounds like deja vu–to the days when poor quality sent U.S. automakers skidding out of control. The PC industry continues to cruise, but the recent spate of product flaws raises a crucial issue: Is the pressure to pump out more, faster, cheaper forcing vendors to fall beneath their own wheels by breaking the speed limits on quality?

No one is saying poor quality is about to besmirch the PC industry to the extent that it tainted Detroit. “Most of these companies are more focused on quality than in the past,” says Roy Bauer, a former IBM executive who’s now an examiner for the Malcolm Baldrige National Quality Award. Nevertheless, “they’re caught up in the explosion in demand, and when that happens you try to take shortcuts.” Adds Michael Slater, editor of the Microprocessor Report: “Everyone is trying to shave a penny here or there, an d quality costs money.”

But poor quality costs even more. Intel ate $475 million to write off its wayward Pentium chips. Intuit took a charge of $1.3 million for its glitchy MacInTax and TurboTax. And pity poor Golden Systems. With only $29 million in annual revenue last year, the Simi Valley, Calif., company had to book a $5 million reserve when Compaq–which accounts for 70 percent of its sales–rejected 175,000 of its power supplies, because a small portion of them contained improperly cured circuit boards from China.

Even though margins have become the industry’s latest obsession, the gurus insist that quality is destined to become an increasing competitive differentiator, especially as the industry matures. “There’s only so far costs can drop,” says Roland Rust, a Vanderbilt University management professor who specializes in quality. “You can’t just differentiate on price or technology.” Rust argues that a company can ship a new product six months later than a competitor–and still come out ahead if its quality is superior.

It’s easy to pontificate from an ivory tower. The real frustration lies in the day-to-day battle of trying to overcome the seemingly irreconcilable differences between low margins and high quality. Take comfort. Pursuing quality isn’t hurting Hewlett-Packard, Gateway 2000, and Solectron. All have major quality initiatives yet continue to post healthy profits.

HP showed how internal quality systems can turn a potential negative into a positive. Because it tests every single unit in a new product line for months, the company discovered a flaw in the power-supply cover of its OfficeJet printer/fax/copiers. HP’s quality-assurance processes were stringent enough to detect that even a mere metal shaving from the cover could cause a shock. Although the chances of injury were slim, HP recalled 10,000 affected units. Being proactive paid off: OfficeJet sales were unaffected.

External quality-assurance systems are just as important as internal ones. Compaq, known for holding suppliers to tough quality standards, apparently took its eye off the ball when it came to Golden Systems. Compaq won’t say if the snafu cost it money, but Golden continues to pay. To keep doing business with Compaq, it has had to put checkpoints in place to prevent delivering another bad batch of power supplies, says Dave Barton, Golden’s sales and marketing VP. Barton, for one, laments the consequences of having to meet strict standards–at ever lower costs. As systems vendors pressure suppliers for less expensive components, the component makers must scramble to find their own lower-cost suppliers. Some, invariably, will cut corners. Barton predicts that, at some point, vendors will say, “I don’t want to build those power supplies anymore–I can’t make any money at this.”

Gateway 2000 goes out of its way–literally–to safeguard against miscues similar to the one that struck Compaq. Jim Schultz, the company’s quality-assurance manager, has a team of quality engineers in Singapore that routinely visits supplier sites. One of those engineers will monitor production in mainland China for a few weeks to make sure quality doesn’t suffer when one of Gateway’s suppliers fires up a plant there.

Gateway is just as diligent back at its home office in North Sioux City, S.D. As part of a three-month-old “Cost of Quality” program, Gateway uses internally developed software to track the failure rate of every component in every unit that it sells. It has already found in several instances that a less-costly component offered better quality than a premium-priced one. Yet another effort, known as “The Quality Seekers,” has drawn raves from John d’Auguste, Gateway’s vice president of manufacturing. After i mplementing the quality improvements suggested by a team of 10 top production employees, the company saw about a 20 percent reduction in defects. But here’s the kicker: Output surged 11 percent, he bubbles.

Solectron, a Milpitas, Calif., contract manufacturer, won the Baldrige Award in 1991. But it hasn’t sat on its laurels. It has spent about $1.6 million in the past two years to implement a self- directed work-team effort. What does teamwork have to do with quality? Rich Allen, director of quality for Solectron’s California operations, says the team training reduced rework alone as much as 34 percent. Hambrecht & Quist expects Solectron this year to book a 37 percent increase in profits, to $75.8 million– proving in the most concrete way that it is possible to pump out more, faster, cheaper without careening out of control.

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