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This article appeared in Quality Digest on 12/23/2024
By: William A. Levinson
Combining value and balance to solve everything
A Single Quality Principle
The ongoing relevance of the quality profession requires evolution and adaptation to meet the needs of the 21st century. Remember, the quality profession originated with the need for inspection to prevent poor quality from reaching customers; this was before it evolved to include metrology, inspection by sampling, statistical process control, and other familiar quality management techniques. These are all necessary, but insufficient to meet the needs of modern industry.
This article’s message is intended to be to quality what the Theory of Everything is to physics (i.e., that one theory could explain every aspect of physics). We want a single and easily understood principle that can guide a supply chain’s every action, and also show how to stop economic inflation. This principle comprises value and balance, and all they imply.
If this goal sounds audacious, remember Sherlock Holmes’ words: “You see, but you do not observe.” There are numerous examples of very simple solutions with breakthrough potential that have been hidden in plain view, often in front of millions of people, for hundreds of years.
For instance, motion-efficient drills for loading and firing matchlock and flintlock muskets, and then breech-loading rifles, have been around for about 500 years, and the instructions resemble modern job breakdown sheets. Tens of millions of men served in armies that used them between 1500 and 1900, and innumerable drill sergeants were intimately familiar with them. When soldiers returned to civilian occupations, though, none appears to have brought with them what they learned in an army. Only in 1911 did Frank Gilbreth’s Motion Study contend that similar methods could be used to rid civilian enterprises of wasted motion.
And, of course, Henry Ford’s simple phrases and sentences held incalculable power to transform the entire world for the better.
Value and balance
The entire principle can be summarized with two words: value and balance. World-class economic performance and national affluence come from a society’s ability to generate value, and from nowhere else. Speculation in cryptocurrency may, for example, move money around and generate taxable income, but it produces no actual value or utility. Generating value is probably maximized (and it would be worthwhile to come up with an economic simulation or proof to this effect) when remuneration balances production perfectly. Imbalance results in suboptimization, in which some parties to the transaction receive too little and others too much—but all suffer in the long run.
The Society of American Value Engineers (SAVE International) defines value as “function performance divided by resources.” That is, what is the ratio of the utility of the product or service to the resources necessary to produce it? If the ratio is less than one, the missing fraction is waste, of which poor quality is but one of many sources. This is why definitions of quality such as Juran’s “fitness for use,” Deming’s “meeting or exceeding customer expectations,” and Crosby’s “conformance to requirements” are, while accurate, far from adequate to encompass what we must actually achieve.
A delivered item may be fit for use, exceed customer expectations, and conform to requirements, and still cost five or 10 times what it would cost in the absence of waste.
Balance, which relates directly to inflation, means that remuneration for a product or service must be consistent with its utility; ideally, no more and no less. If a vendor or laborer receives more money than their product or service is actually worth, the surplus money competes for genuine utility and drives up its price. If the supplier of materials or labor receives less money than its output is worth, it can’t buy as much output as it ideally should.
Let’s start with value.
The utility-to-resource ratio
The expenditure of any resource that doesn’t create utility is waste. This includes far more than the Toyota Production System’s Seven Wastes, of which poor quality is but one. Henry Ford defined resources as time, material, and energy; all seven TPS wastes can be quantified in these terms. It’s convenient for analytical purposes to expand these to four metrics.
1. Time of people
2. Time of things
3. Material
4. Energy
Inventory or work-in-process is, for example, proportional to cycle time and therefore a waste of time and things. The producer must meanwhile expend time, material, and/or energy to replace or rework nonconforming items. Eliyahu Goldratt’s Theory of Constraints (North River Press, 1999) adds that, if this happens in or after the capacity-constraining resource, the lost production can’t be made good because time lost at the constraint is lost forever.
Poorly designed jobs waste the time of workers. I recently saw some roofers carry heavy shingles up a ladder, as opposed to using conveyors that are made especially for this purpose. Shingles gain utility when they are nailed to the roof, but they add only costs when people carry them. The roof can be fit for use, meet or exceed customer expectations, and meet specifications, but it still costs more than it should while the workers get paid less than they should.
Jobs can also waste stock and consumables, which is a strong argument for using ISO 14001:2015 to address everything that is thrown away, as opposed to just environmental aspects. ISO 50001:2018 addresses wastes of energy.
Ford, in “My Life and Work” (published most recently by CreateSpace Independent Publishing Platform, 2013) adds that transportation is waste. “Why a steer raised in Texas should be brought to Chicago and then served in Boston is a question that cannot be answered as long as all the steers the city needs could be raised near Boston.” Shipment of the steer to Chicago, and then of the meat to Boston, expends resources but does nothing to enhance the utility of the steak. It was through simple statements of this nature that Ford taught entire concepts, often in less than a minute, to those willing to observe and learn.
In his book, Ford described elaborate corporate office buildings that were to somehow advertise the entity’s success and power (the emphasis is mine): “We will not put into our establishment anything that is useless. We will not put up elaborate buildings as monuments to our success. The interest on the investment and the cost of their upkeep only serve to add uselessly to the cost of what is produced—so these monuments of success are apt to end as tombs. A great administration building may be necessary. In me, it arouses a suspicion that perhaps there is too much administration.”
“We will not put up elaborate buildings as monuments to our success.”
—Henry Ford
Nonvalue-adding middlemen also consume resources but add no value. Ford wrote (again, emphasis is mine): “Capitalists who become such through trading in money are a temporarily necessary evil. They may not be evil at all if their money goes to production. If their money goes to complicating distribution—to raising barriers between the producer and the consumer—then they are evil capitalists and they will pass away when money is better adjusted to work....” Similar things can be said about car dealers who add costs, but no value, to every transaction.
This is not to say that all intermediaries add costs but no utility. Grocery stores, for example, reduce overall costs by eliminating the need for customers to spend hours going from farm to farm to get what they need, or farmers to bring their goods to market.
Unlike grocery stores, which rely on very rapid turnover on low-markup items to earn a profit, home improvement stores maintain huge stocks of items that might move much more slowly. This means customers must help cover inventory carrying costs, but the store adds genuine value by making immediately available items that might be needed for a project or a repair.
Ford would therefore probably define grocery, home improvement, and auto parts stores as necessary and valuable producers. The other extreme is, however, multilevel marketing (MLM), in which middlemen add costs but no value whatsoever. The Federal Trade Commission warns, “Most people who join legitimate MLMs make little or no money. Some of them lose money.” When one has a supply chain with a lot of middlemen, it starts to resemble MLM in terms of wasted money, even if it isn’t literally MLM.
These are but a handful of possible examples of how a supply chain may expend resources without producing any value. But Ford’s simple examples teach us pretty much everything we need to know. “If it consumes resources but does not add utility, it is waste.”
Balance
The other principle is that remuneration and value must balance. In Ford Ideals (most recently, Literary Licensing, 2014), Ford wrote of balance, “When the man gives more than he receives, or receives more than he gives—it is not long before serious dislocation will be manifest. Extend that condition throughout the country, and you have a complete upset of business.”
In Ford Ideals, he used potatoes to underscore the need for value to balance remuneration. “The demand of the disorderly element is practically that everybody be requested to raise fewer potatoes, and yet that everybody be given more potatoes.... If everybody does less work and everybody gets more of the product of work, how long can it last?”
It’s impossible for everybody to get more utility than an economy produces. But it’s possible for people and organizations to be paid for utilities they don’t produce. When this happened in Weimar Germany and Zimbabwe, they ended up with pieces of paper with numbers most conveniently expressed in scientific notation, but best suited for wallpaper, kindling, and personal hygiene purposes.
Suppose, for example, a closed system produces only potatoes. But they are magic potatoes that can turn into anything, like clothing, furniture, transportation, or medical care of equal utility. The workforce can produce 25 potatoes on its own, but with the aid of the investors’ plant and equipment, it can produce 100 potatoes. This contribution entitles the investors to a profit. The current price of potatoes is $1 each; the workforce gets $40 and can therefore afford 40 rather than 25 potatoes. If the workforce demands more pay but produces no more output, the price of the potatoes will by necessity go up, and real income will not increase; money that’s not backed up by utility is wastepaper.
On the other hand, suppose the investors decide to pay the workers as little as possible and reduce their pay to $25. The price of potatoes must go down, or else some of the output will remain unsold. Neither condition benefits the investors in the long run.
Ford and his associates made it clear that workers must be able to afford to buy the products of their labor; otherwise, there will be a much smaller market for the products.
Prior to the development of the moving assembly line, automobiles were so expensive that only the rich could afford them. That meant automakers couldn’t hire many people or make much money. The per-car profit may have been high, but the sales volume was very low. Ford’s methods reduced car prices enormously, to the point where the people who made them could buy them. Ford made more money, his workers received higher wages, and far more utility was produced for our society.
Instead of arguing over whose slice should be larger or smaller, the question is what allocation will maximize the size of the pie so all can have more.
There is probably an economic model that will maximize production of utility with a fair allocation of remuneration to labor and capital in proportion to each’s contribution to output, as well as price reductions to ensure demand for the increased output in question. Imagine a pie with three slices: one for customers, one for labor, and one for investors. Instead of arguing over whose slice should be larger or smaller, the question is what allocation will maximize the size of the pie so all can have more. Frederick Winslow Taylor’s Principles of Scientific Management (Dover Publications, 1997) cited models of this nature more than a century ago (emphasis is mine):
“We must assume, then, that the larger part of the gain which has come from his great increase in output will in the end go to the people in the form of cheaper pig-iron. And before deciding upon how the balance is to be divided between the workmen and the employer, as to what is just and fair compensation for the man who does the piling and what should be left for the company as profit, we must look at the matter from all sides.
“... The writer is one of those who believes that more and more will the third party (the whole people), as it becomes acquainted with the true facts, insist that justice shall be done to all three parties [customers, workers, and investors]. It will demand the largest efficiency from both employers and employees. It will no longer tolerate the type of employer who has his eye on dividends alone, who refuses to do his full share of the work and who merely cracks his whip over the heads of his workmen and attempts to drive them into harder work for low pay. No more will it tolerate tyranny on the part of labor which demands one increase after another in pay and shorter hours while at the same time it becomes less instead of more efficient.”
Ford, in Today and Tomorrow (most recently, Productivity Press, 1988), refers directly to balance:
“Buyer and seller must both be wealthier in some way as a result of a transaction, or else the balance is broken. Pile up these breaks long enough, and you upset the world.”
If remuneration does not balance production, at least in the long run and on a macroeconomic scale, our society will have less real wealth than it ought to have.
It’s the function of the quality profession to provide the value by maximizing the ratio of utility produced to resources consumed. It’s the function of business leaders and informed consumers to require at least a semblance of balance in every transaction. This will counteract inflation, and also promote fair compensation to all stakeholders or relevant interested parties.