ABC Inc. is a Canadian-based company that manufactures electronic equipment used in advanced military and civilian aircraft. Peter, the managing director, learnt about Total Quality Management (TQM) and how its implementation could be used to improve manufacturing efficiency and product quality. Peter was really impressed by the potential of TQM, and decided to implement TQM at the Northern Ontario factory starting Jan 1^st, 2020.

It is now March 2021, and Peter is staring at the audited financial and operational results of what appears to rather disappointing fiscal year 2020 compared to 2019. Peter feels let down by TQM - "it showed so much promise in theory, but in practice a year has gone by and let alone improvement in profits, TQM has resulted in a loss for the company!"

Questions:

(a) Do you share Peter's disappointment? Explain. (support your answer with numbers above to the extent possible).

(b) Peter's old friend and colleague, Nancy, suggests introducing quality incentives for employees - i.e., linking their total compensation to improvements in quality indicators. Provide one reason each for and against the introduction of such a compensation plan.

Pre-TQM 2019 annual TQM implementation period Q1 2020 Q2 2020 Q3 2020 Q4 2020 $ millions 2020 annual 5 3 1 0 5 3 1 0 9 Quality costs Employee quality training Additional testing costs Quality incentives for employees Returns and service costs Software costs - Total quality costs 0 0 0 12 0 0 0 0 0 3 3.2 2.8 2.5 process control 2 1 0.3 0.3 0.1 12.1 11.5 3.6 33.1 15 10.2 5.1 2.8 20 10 10 6 6 32 Operating profit before quality costs Operating profit after quality costs 7.9 -5 -0.2 0.9 3.2 -1.1 3% 5% 10% 9% 9% 8.3% Appraisal and testing time (as a % of throughput time) % defective products shipped 6% 7% 8% 4% 3% 5.5% Manufacturing cycle efficiency 28% 29% 25% 27% 27% 27%