What it means
TQM grew out of the work of quality thinkers such as W. Edwards Deming and Joseph Juran, and it became widely known through Japanese manufacturers in the second half of the twentieth century.
The core idea is that quality is not a department's job but a responsibility shared by every employee, from the front desk to the boardroom. The approach rests on a few simple principles: focus on the customer, involve all employees, manage the work as processes, improve continuously and decide using data.
In practice this means measuring defects and complaints, tracing them to root causes and fixing the process so that problems do not return. Tools used under TQM include process maps, checklists, statistical process control (charts that show whether a process is stable), cause-and-effect diagrams and regular improvement cycles.
Many organisations run these through small teams that meet to solve specific problems. For finance, the key link is the cost of quality.
This divides spending into the money used to prevent problems, the money used to detect them, and the cost of failures that happen inside the business or reach the customer, and TQM seeks to shift spending from failure towards prevention. TQM is not only for factories.
Banks, hospitals, airlines and software firms use the same ideas to reduce errors in loans, patient records, baggage handling and code releases, and the savings appear as lower rework, fewer refunds and better customer retention. The method has limits.
It requires sustained commitment from leaders, it can become a box-ticking exercise, and results take time to appear, so managers should avoid expecting savings in a single quarter or treating a certificate on the wall as proof of quality. Success also depends on honest measurement, since a team that is blamed for every defect will soon stop reporting them.
In practice
Real-world examples.
Example
A car parts supplier trains operators to record every defect and review the figures weekly. After two quarters, scrap falls from 4% of output to 2.5%, saving $90,000 a year in materials and labour.
Example
A regional bank maps its loan approval process and finds that applications are re-keyed three times. Removing the duplicate steps cuts processing time from ten days to six and reduces errors that used to require rework.
Example
A hospital group introduces a checklist before surgery and tracks incident reports by cause. Fewer avoidable errors lead to shorter stays and lower claims costs, which finance can measure in the following year's accounts.
Formula
Calculation
Cost of quality = Prevention costs + Appraisal costs + Internal failure costs + External failure costs
Cost of quality as % of revenue = Cost of quality / Revenue
Suppose a manufacturer with revenue of $6,000,000 spends $40,000 on prevention (training and process design), $30,000 on appraisal (inspection and testing), $90,000 on internal failure (scrap and rework) and $140,000 on external failure (returns and warranty claims). Cost of quality = 40,000 + 30,000 + 90,000 + 140,000 = $300,000. As a share of revenue, 300,000 / 6,000,000 = 5%.Case study
Seen in the real world.
Pinecrest Appliances is an illustrative, fictional maker of kitchen appliances with revenue of $30,000,000. A review found that cost of quality was 9% of revenue, or $2,700,000, with most of it caused by warranty repairs and returned units.
The management team launched a TQM programme. Spending on prevention rose by $200,000 for supplier audits, operator training and design reviews, and in the second year external failure costs fell by $700,000 and internal failure costs by $250,000.
The net benefit in that illustrative year was 700,000 + 250,000 - 200,000 = $750,000, taking cost of quality from 9% to about 6.5% of revenue. The finance director's lesson was that prevention spending looks like an expense but can be one of the highest-return investments in the business.
Watch out
Common mistakes.
- Treating TQM as a project owned by a quality department, when its success depends on involving everyone and on active support from senior leaders.
- Counting only the visible costs of poor quality, such as scrap, and missing hidden costs such as lost customers, rework time and management attention.
- Expecting quick savings, even though training, process changes and cultural change take time to show up in the accounts.
Questions
People also ask.
How is TQM different from Six Sigma?
TQM is a broad management philosophy about involving everyone in continuous improvement, while Six Sigma is a more specific, data-driven method for reducing defects, and many organisations use the two together.
Can TQM be applied to a service business?
Yes, because errors, delays and rework occur in services as well, and the same measurement and root cause techniques apply.
How do you measure the financial return on TQM?
Track the cost of quality over time, along with defect rates, returns, warranty claims and customer retention, and compare the savings with the cost of the programme.
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