Why Quality Matters for Industrial Equipment Manufacturers

November 16, 2012

When industrial equipment manufacturers evaluate ERP software, one of the key categories on the checklist is quality management. There seems to be a consensus that any Enterprise Resource Planning (ERP) system worth its salt ought to include the ability to plan and manage quality. While the quality management capabilities of Microsoft Dynamics AX compare favorably with those of competitive systems, taking a hard look at why quality really matters in Industrial Equipment Manufacturing demonstrates some of the major reasons why Dynamics AX is the ERP system of choice for mid-market IEM companies.

Quality is been a common theme in most manufacturing segments since the rise of Japanese automakers and the introduction of the Toyoda Production System in the 1980s. Japanese automakers dominated the American market first on price and then on the reliability of their cars. When Ford Motor Company declared “Quality is Job 1,” it reflected the realization of many American manufacturers that quality was mechanism that drove the Japanese competitive engine. Since that time the concept and the imperative of quality has evolved considerably. Whether it’s called Total Quality Management or Six Sigma or something else, the focus on quality has become ingrained in American manufacturing management doctrine and methodology. As a result, we include a quality management evaluation category on our ERP checklists and believe the ERP system we select will somehow help us do a better job of producing quality product.

Customer success stories demonstrate that IEM companies selecting Microsoft Dynamics AX often improve in managing quality and producing quality product. It’s possible to learn a great deal from the successes of others, but it’s also important to understand how to translate that learning into success for your company. As we said, taking a comprehensive look at why quality matters in IEM can help you evaluate how you can improve the quality performance of your company and understand why Microsoft Dynamics AX ERP software for industrial equipment manufacturing is a key tool in helping your achieve your quality goals. 

For IEM manufacturers, quality has many more dimensions than winning the Baldrige Award or reducing the headcount in your warranty management team. Let’s take a quick look at the ways quality—good or poor—affects the performance of your company.

  • Cost of Manufacturing/Cost of Goods Sold. Reducing manufacturing costs and improving profitability by eliminating waste has always been one of the fundamental measurements of success in quality management. This focus on the cost of quality goes beyond the cost of rework and scrap and includes areas such as effective vendor management and the quality aspects of inbound and outbound logistics.
  • Product Warranty Costs. In addition to the expense of refurbishing defective products and the administrative overhead of managing a product warranty program, warranty costs have to include intangibles like the loss of good will with your customers and the loss of repeat business.
  • Product Liability. Product liability is often confused with warranty management. The true costs of product liability are incurred when the failure of your product causes harm to someone, to a customer company, to society as whole or the environment. Product liability costs include the cost of compensating those who have been harmed, as well as legal fees and regulatory penalties. Product liability costs can dwarf warranty costs and can put you out of business.
  • Corporate Reputation and Market Image. Poor quality, poor warranty performance and product liability claims can also affect the public image of your company and the inclination of customers and potential customers to buy your products. The cost of a major recall can linger for years and seriously damage your company’s long-term market performance.
  • Product Pricing and Profitability. The direct negative impacts of poor quality are increased manufacturing costs and the costs associated with warranty and liability claims. Poor quality can also affect what you can charge for your product and prevent you from doing what Japanese auto manufacturers were once able to do, charge a premium above the average market price for the superior quality and performance of your products.
  • Employee Health and Safety. Poor product quality usually indicates ineffective manufacturing processes and a lack of attention to detail. The same trends also contribute to employee injuries, turnover and a failure to focus on the broader aspects of employee safety. In addition to the direct costs of hiring, of higher insurance premiums and the replacement of defective equipment, you can also face severe regulatory penalties for overlooking the employee health and safety side of quality.
  • Impact on Personnel issues. Intangible employee costs don’t stop there. Failing to emphasize the pursuit of quality and tolerating substandard results also affects how employees view themselves, their commitment to their jobs and the company and their willingness to invest the time and energy to produce quality products. These issues, in turn, can complicate your attempts to hire the best employees and can start a vicious cycle of ever-poorer employee performance and product quality.
  • Sustainability and the Reduction of Waste. Poor quality can also prevent your company from effectively implementing sustainability and waste reduction initiatives. Ineffective waste reduction and sustainability initiatives not only directly affect profitability, they can also affect the company’s market image and ability to sell its products, as mentioned above.
  • Shareholder Value and the Continued Viability of the Company. Taken together, all of the impacts of quality influence the one metric stockholders and boards of directors care most about: the overall worth of the company and the impact on shareholder value. Failure to focus on quality can start the chain of events that results in major corporate reorganizations, divestiture or breaking up the business. None of these outcomes benefit employees or management. By the time the Board of Directors and shareholders are considering these issues, it’s too late to fix the quality management problems that started the whole cycle.

In our next segment we’ll discuss how Microsoft Dynamics AX can help you understand these quality issues and manage them effectively.


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