Building India’s quality muscle

What is quality?

Quality is an oft-misunderstood concept. It is generally perceived as meeting a set of absolute product or service specifications, like durability or high performance. A more pragmatic definition of quality is being “fit for purpose” over the intended life of a product or service. Fit for purpose means delivering optimal specifications and performance in line with customers’ expectations, while maintaining consistency across all units sold.

However, customer expectations and perceptions vary a lot and quality must then be viewed subjectively, in the context of a well-defined target audience. Consider an example. A car’s basic purpose is to facilitate transportation from point A to B. But the expectations of the prospective buyer of a basic car are very different from a customer who is looking to buy a premium vehicle. Both may want a comfortable ride in terms of space, suspension, and smoothness—however, specifications that will satisfy the former, at the price that she can afford, will likely be very different from those expected by the latter. Therefore, the quality of the product offered to a customer should always be measured only against that buyer’s specific specifications and perception of value.

Another critical quality factor is maintaining consistency, both in terms of variability in performance and durability, across all delivered units of the product. A good quality product or service has a certain expected variation in performance over its promised life cycle. If a product’s performance deteriorates faster than this expected variation, it will be called an inferior quality good.

SHOULD WE WORRY ABOUT THE QUALITY COMING FROM INDIA?

Quality can be our competitive advantage

A large and populous nation like India needs manufacturing to be a significant part of its GDP (gross domestic product) to ensure higher employment and prosperity. While consumption in India is on the rise, making quick and deep inroads into overseas markets will help us accelerate growth. Furthermore, for profitable growth, we have to strive for a premium that will accrue only if we target products that need high quality engineering and manufacturing. Data, shown in exhibit 1, however indicates that we are and have remained an inconsequential import source for such products in developed markets for over two decades.

The “Make in India” vision sets out to correct this. But India’s much-vaunted cost advantage will not be adequate to best China on the world stage. Given the relative size of domestic markets, it is unlikely that Indian firms will be able to achieve the scale that China has established for several products. Despite adverse labour cost movements in China, this scale effect, coupled with cost advantage and strong government backing, make it challenging for India to compete and win against the country head-to-head on costs, for most products.

As a result, strong quality will be a critical building block in fulfilling the Make-in-India vision. Empirically, better quality has had a significant role to play with respect to products or services where we have managed to carve a substantial share in developed markets. Off-road tyres, a sector where Indian companies are doing well in developed markets like Europe, serve as a good example. A key reason is these firms have found the optimal balance between quality and value for a specific target segment of value-conscious customers. This has helped them create a space between the much cheaper and unreliable Chinese tyres, and very reliable and innovative, but far more expensive European tyres. A second example is the generic pharmaceutical industry, where India has managed to corner over 40% share of markets like the US, compared to an insignificant share by China. We are also winning on quality in other segments such as software, textiles and two-wheelers.

Quality is critical to continue winning at home

Even at home, delivering high-quality output consistently is becoming increasingly important. Indian firms have to compete with more evolved competitors, who are raising the standards and expectations of customers. In today’s virtually borderless world of e-commerce and international travel, competitors do not even need to set up shop in India. Customers today can choose from a large variety of global sources for a wide range of products and services.

Ubiquitous information, peer-reviews, and neutral comparisons of competing offerings, combined with a growing base of digitally-connected consumers, are eliminating information asymmetry and raising quality expectations.

Quality failures can have far-reaching implications

Containing quality failures is virtually impossible now. An irate customer can reach thousands on social media networks in a matter of a few hours and seriously damage brand equity. The cost of quality failures is also increasing. Heightened product liability risks, class-action suits or regulatory action for poor quality can pose a serious financial cost to firms. Volkswagen AG, General Motors Co. and airbag maker Takata Corp. and closer to home, Ranbaxy Laboratories, are all examples of firms that have paid a hefty price in recent years for quality lapses.

WHY ARE MANY INDIAN INDUSTRIES STRUGGLING WITH QUALITY?

During the “licence raj”, the lack of competition for firms and the limited choice available to customers encouraged mediocrity. Now, as we look deeper, 25 years since liberalization, several structural issues emerge at the heart of the quality problem. These issues do not apply equally to all sectors, but a subset applies to most of them.

First, minimum quality standards in many of our industries are not as stringent as developed markets. For example, the emission and safety norms for all vehicles in India have always lagged behind the developed world. Likewise, our standards for approving pharmaceutical drugs and sites are far behind those in the West.

Second, implementation of standards is still voluntary in some industries. The regulatory machinery for development and enforcement of these standards is not as well-resourced, skilled or experienced as their developed-market counterparts. All this leads to a large gap in standards between the leading and trailing firms in those industries.

Third, this divide between standards at leading and trailing firms is weakening the talent pool in several sectors. The industries with the highest growth suffer the most. Leading firms enjoying rapid growth have to recruit from trailing firms that run on weaker standards. As a result, they have to make do with relatively less competent talent. This is likely slowing down the pace of growth as well as weakening the enforcement of standards even at leading firms.

Fourth, the quality philosophy in many Indian companies is still focused on testing products using statistical quality control (SQC) techniques. Companies typically rely on sampling, detecting and correcting or rejecting errors in products. SQC, while necessary, is however not sufficient. It cannot really test whether quality will be retained over the product life, and the sampling does not cover all products. Further, failures typically lead to rejections and wastage or expensive rework. Hence, whenever the cost of rejection is high, the moral hazards are high too.

HOW DO WE AS A NATION PRIORITIZE QUALITY?

Our ambition should be to make quality our differentiator—which will first win our firms competitive parity and then help provide a premium in domestic and overseas markets. Sectors that aspire to this goal will need both individual and coordinated action by the state and companies.

Implement world-class standards

To compete with global leaders, we need a strong regulator to create and implement world-class quality standards. Minimum standards should be high, and time-bound compliance should be made mandatory. The regulator will also need a well-resourced arm to train companies and enforce these standards. Failure to comply with norms should meet with harsh consequences, such as suspension of approvals to operate or participate in specific demand pools like government purchases. Salary levels for the regulatory staff should be benchmarked to industry standards to help attract the right talent from corporate circles and academia.

In the absence of external standards, companies aspiring to compete at the global level need to benchmark their specifications to international standards. Instead of merely complying with minimum requirements, they must adhere to higher, self-imposed quality standards.

Push the Make-in-India agenda

In industries that we want to dominate, setting and enforcing standards alone is not enough. We need to attract investments from leading firms globally, to be able to source the latest technology, expertise and practices, and expose our talent pool to them. This “osmosis” will result in quicker growth of capabilities. This will automatically enhance the drive to deliver quality, while the practices we imbibe from global companies will enable large-scale change. Make-in-India is a good platform to enable and drive this rapid evolution.

Focus on quality assurance, not quality control alone

Companies need to complement quality inspection and control with a quality assurance approach. There should be an organization-wide effort to “build quality in” at each step starting from product development, all the way to commercial- scale manufacturing. Unlike quality control, this approach prevents quality failures from happening in the first place through better process control.

To succeed, companies will need to rethink their quality organization and capabilities. They can cross-pollinate the required skills from industries that are more evolved in this thinking. Industries such as automobiles, auto ancillary, pharmaceutical products, and bulk drugs have implemented this better than others, thereby flourishing as globally competitive manufacturing destinations. Companies in these sectors can provide the seed human capital needed by others. They can also attract global talent to coach the Indian teams. Firms with transnational operations can benefit from carefully considering where to house their quality leadership talent, and providing well-planned job rotations for Indian teams to overseas operations.

Aggressively adopt operations 4.0 for improved quality

We are now witnessing the end of traditional operations as we know it. Our ability to capture, store, transmit and process data in real time has grown exponentially, enabling us to find and act on patterns in supply chains and manufacturing. Development timelines are being significantly shortened with the use of computer-aided simulations, and rapid prototyping using 3D printing for moulds and pilot parts. Scale and experience curve benefits are becoming less relevant with newer production techniques based on advanced robotics and additive manufacturing. All this is not science fiction but a real revolution that is already under way.

These developments offer immense potential for an aggressive play. Apart from influencing design of newer facilities, older facilities can also be retrofitted for significant improvements in quality and productivity. For example, transducers that capture data on manufacturing conditions like spindle speed, temperature of bearings, noise and vibration of a shaft, can be retrofitted for a paltry sum of money on older machines. The data captured can be analysed and used to improve process control.

Quality as mindset and culture

Leaders will have a critical role to play in driving this transformation. A culture of quality can only flow top-down. It has to be a core operating tenet, not just a choice. Quality needs to be institutionalized in business processes and equally ingrained in the minds of all operations staff right from those on the shop floor to those driving management decisions. Such a large-scale DNA change requires the management to fully embrace and drive quality. Only then will it manifest in the form of a mindset that spans all key aspects, from the quality of finishing and the reliability of performance, to the level and consistency of service offered, including public service.

Leverage metrics to drive quality improvement

While companies are often fanatic about direct cost metrics and sales metrics, they rarely give the same importance to quality. Perhaps, part of the reason is that the impact of poor quality on their profit and loss can look low as it is limited to the cost of waste, rework and so on.

However, the fact remains that many companies understate the true cost of poor quality in terms of the reputational risk, pricing weakness, need to offer greater discounts, or poor word of mouth. Here is a case in point. A firm that has a supply constraint in its plants will account for rejections based on the cost of the material it had to reject. This view fails to value the incremental revenue and profit that the company had to forego because of not being able to sell the rejected products. Another example is where the poor performance of a product affects the company’s reputation and compels it to price its future products at a discount. Poor quality after-sales service can similarly lead to negative word-of-mouth and lower demand for the product.

A broad understanding of this fallacy in reporting quality costs is the first step. Companies then need to start identifying more appropriate output metrics, and finding creative ways to measure and utilize them. For instance, a company that is worried about the impact of poor quality on consideration must use social listening or brand advocacy index measures to understand what customers are saying about its products or services. It must correlate these views to the consideration and conversion it enjoys vis-à-vis competition. The company then needs to understand and measure the required remedial measures, base-lining, road-mapping and bringing them to the management dashboard, and constantly engaging in ways to improve the scenario.

CONCLUSION

India has always been touted as a country with immense potential to play a much larger role on the global manufacturing stage. Presently, a majority of our exports comprise low value-added commodities. A significant part of the value accrues to countries processing these commodities and making finished products. We can claim that value—but we need to earn the right to do so. This requires a significant improvement in the perception about the quality of Indian products, backed by concerted action from the government as well as industry associations and firms. We need to quickly narrow the gap in quality standards and embrace competition as a way to evolve faster. Firms need to invest in building quality into each operational element by leveraging newer digital interventions that provide a cost effective way to do so.

How soon and decisively we act will shape the next two decades. Will we count ourselves among the developed countries by the end of the time period, or continue to remain a country with a large population, blessed with natural resources?

Rahul Jain and Vikram Janakiraman are partners and directors at BCG India.