? Essay, Research Paper
Introduction In today s business world, companies are expanding into global markets. Because of language, cultural, and governmental differences, standards have been created for smooth transitions into these markets. Standards are documented agreements containing technical specifications or other precise criteria to be used consistently as rules, guidelines, or definitions of characteristics to ensure that materials, products, processes and services are fit for their purpose.5 International Standards contribute to making life simpler, increasing reliability and effectiveness. ISO (The International Organization for Standardization), a non-governmental organization established in 1947, developed a series of standards called ISO 9000 in 1987 to ensure that companies adhere to a quality management system specification that is now the worldwide standard for doing business. The ISO 9000 Standard can be applied to any product, tangible or intangible, or a combination of both. It is equally applicable to both small and large companies, including service providers and distributors. This paper will analyze the economic, financial, and organizational system impacts of ISO 9000, and whether or not all industrial suppliers should implement the ISO 9000 Standards to ensure quality. What is ISO 9000? ISO 9000 is a certification process for companies that represent international standards for conducting business which focuses on quality assurance. The ISO 9000 Standard was written by representatives from the United States and 14 European countries.4 The requirements of the Standard are aimed primarily at achieving customer satisfaction by preventing nonconformity at all stages, from production through servicing.4 In most cases, this is the primary goal for all businesses. Some popular principles incorporated into these standards include: Total Quality Management (TQM), Just-in-time inventories (JIT), Kaizen (continuous improvement), and Lean Manufacturing. These standards ask a company to document and implement its systems for quality management; and then to verify, by means of an audit, conducted by themselves or an independent accredited third party, the compliance of those systems to the requirements of the standards.2 Currently, the ISO 9000 series is comprised of the following international standards: ISO 9000 – Guidelines for selection and use ISO 9001 – Model for quality assurance: design, development, production, installation, and servicing ISO 9002 – Model for quality assurance: production, installation, and servicing ISO 9003 – Model for quality assurance: final inspection and test ISO 9004 – Quality management and quality system elements ISO 9001, 9002, and 9003 are requirement standards while the rest are guidelines. These mandatory standards dictate what a company will do. Companies become registered to or compliant with one of the requirement standards.13 QS 9000 is a more mature version of ISO 9000 and reflects the needs of the automotive industry. QS prescribes that specific quality planning and standard quality control techniques be in place in order to achieve certification.4 ISO 14000 is a brand new international standard, required by some suppliers, on environment management. It is based on the premise that economic development can only happen in a healthy environment.4 ISO Certification A company interested in ISO 9000 certification needs to choose a requirement standard based on its core competencies. Core competencies include communication, involvement, and a deep commitment to working across organizational boundaries. The link between identified core competencies and end products is the company s core products.10 These core products, either manufactured or resold, will conform to the company s ISO 9000 series designation. For example, an industrial supplier such as a local distributor does not need to get an ISO 9001 certification, because they do not design or produce anything. A local distributor should most likely desire an ISO 9002 certification and commit to following ISO 9000 guidelines. On the other hand, a Tier 1 automotive supplier would seek an ISO 9001 or QS 9000 certification depending on the automotive customer s preference. Companies usually initiate an ISO 9000 project due to customer demand. Supply and demand are the most fundamental and the most powerful of all economic models. ISO 9000 certification fits in the supply and demand model, because of the market pressures put on suppliers to comply with the standards. Because of the increases in the number of suppliers requiring ISO 9000 certification, the demand curve for ISO compliant suppliers has shifted outward, facilitating an overall growth in demand. The need to obtain ISO 9000, QS 9000, or ISO 14000 registration by many companies is growing daily as pressure from both customers and competitors increases.4 After determining on which requirements standards a company should base their quality system, the company needs to perform two primary tasks for certification. The first task includes the documentation of its business processes in light of the requirements of each of the applicable 20 elements of the ISO 9000 standard. These twenty elements are as follows: management responsibility; quality planning; contract review; design control; document and data control; purchasing; control of customer-supplied product; identification and traceability; process control; inspection and testing status; control of non-conforming product; corrective and preventative action; storage, handling, packaging, preservation, and delivery; control of quality records; internal quality audits; training; servicing; and statistical techniques.4The second task involves the implementation of these documented processes throughout the organization. Upon completion of these two tasks, the organization then has the option of :contracting with an accredited independent third-party to obtain registration (registrar), or performing a self-registration audit. The third-party option audits the company to ensure that the documentation of its business processes meets all the requirements of each of the applicable twenty elements of the ISO 9000 Standard. Actual business practices in the organization reflect these documented business practices.6 In the first instance, if the company passes its registration audit, the third-party issues a certificate, and the company is registered to the appropriate standard. In the other instance, the company itself simply states that its quality management system is ISO 9001, 9002, or 9003 compliant, as appropriate. This is not the end of the certification process though. Every year the company will receive a review, and every third year, the company will need to have another major audit in order to maintain its certification.6 For a graphical interpretation, please refer to the flowchart on Appendix A. Depending on the size of the company and the organizational systems in place, ISO 9000 implementation and certification can take from a few months to a few years. For IBM the length of time (from start to registration) took anywhere from 12-18 months; with some locations experiencing up to 24 months to gain compliance.12 For smaller companies it can take as little as 4-6 months. Time of implementation also depends on many other factors discussed later in this analysis. Benefits of ISO ISO 9000 certification can benefit suppliers economically, financially, and through enhancing their organizational systems. ISO 9000 can bring organization and efficiency to business processes, and help straighten out a disorganized culture that exists in smaller, privately owned suppliers. Some of the claimed benefits include improved cost containment, increased productivity, increased competitive advantage, increased customer satisfaction, and enhanced employee morale.4 If a company s quality systems are functioning correctly, they should realize savings on the order of 5% of sales.4 Some documented case histories of ISO 9000 benefits include: A wholesale distributor – 10% sales increase directly attributable to ISO, 2% reduction in costs yielding $300,000 per year. Manufacturing assembly shop – return on investment achieved in less than two years Service and repair shop – savings of $250,000 in the first year following registration Process control systems and instrumentation manufacturer – inventory reduction of 50%, decrease in lost work days of 80%, increase in on-time deliveries of 12%, reduction in credit memos of 70%, increase in market share of 15%.4According to Jack Small of IBM, We have found ISO 9000 to be a significant addition to a more robust implementation of a total quality management system.12 Small claims, By embarking on an ISO 9000 journey, it is reasonable to expect lower costs, improved customer satisfaction, greater brand loyalty, and stronger market performance associated with this quality effort. 12 Customers also benefit from a manufacturer s ability to reduce cost through more efficient operations. ISO s systematic approach prevents process upsets and work stoppages. ISO registered companies build in quality procedures early in the product development cycle to prevent defects, rather than testing the product for defects after its manufacture. The result is a higher quality, more cost efficient product.2
Associated Costs of ISO 9000 Even though ISO 9000 can benefit companies, high costs associated with implementation and registration can deter companies from seeking certification. The initial registration fee is around $10,000, and the addition of other fees can bring the base price up to at least $35,000. This fee covers basic certification and six-month check-up fees over a three-year period.3 Then the cycle begins again. These fees are dependent on a company s size, auditors, and the registrar used. Small to midsize companies can expect to spend considerably more than the basic registration cost. Many companies may have to invest as much as $250,000 to earn ISO certification, the first time. Major corporations report the cost to be about $1 million.3 According to Mike Lenz, the owner of a small manufacturing firm with about 150 employees, Our estimated cost is around $60,000 to become registered. 8 Over the past two years, costs have come down dramatically as registrars tailor their services to smaller clients on tighter budgets. Increased demand in ISO 9000 certification has caused the price of getting certified to come down. On the supply side, increases in the amount of companies offering the ISO registration audits has forced an outward shift in the supply curve which causes prices to fall. These days, a company with as many as 10 employees can expect to pay a registrar at least $8,500 for a typical package that includes: a review of a firm s quality manual, a two to three day on-site inspection, employee training on quality procedures, and at least two years of follow-up audits, which are required.9 Other opportunity costs associated with ISO 9000 include time and training. Companies seeking registration must appoint someone either internally or by third-party to document their business processes according to the ISO standards. Associated with IBM s costs were numerous non-conformance s and process violations in many areas of the standards which was costly, time consuming, and wasteful.5 If companies decide to self-audit, then they have to pay for their auditor s training on ISO standards. Also, many companies without a regimented quality system in place will have to retrain many employees to conform to the ISO standards. Analysis of Implementing ISO Should all industrial suppliers seek ISO 9000 certification? Before anyone can make that decision, suppliers need to examine their current quality assurance system, the financial and opportunity costs associated with ISO 9000 implementation, and the economic and financial paybacks from implementing it. From a strategic architectural standpoint, the company must refine their business processes to conform to ISO s quality standards. The elements that make up a company s strategic architecture include: organizational learning, innovation and experimentation, constructive contention (freedom to debate), employee empowerment, optimized value potential ( i.e.- ISO Certification), sustainability, and strategic re-framing.7 Most important when implementing ISO, gaining management backing is crucial, as is training of management and employees. Lawrence Van Pelt, vice-president of sales and marketing for Burlington Air Express agrees: Your quality system must be part of your culture. This can t be a stand alone division or issue. Secondly, we would really recommend that there be a lot of effort put into connecting ISO 9000 with customer needs. ISO 9000 can t stand alone. It must be linked with specific and tangible ways to meet customer needs. 5 Suppliers that lack a strategic focus and proper leadership should not waste the resources on ISO 9000. Many people, however, argue against ISO 9000. ISO 9000 does not guarantee quality, unless you define quality as simply meeting customer requirements. According to occupational psychologist, John Seddon, ISO 9000 has nothing to do with quality. To argue that ISO 9000 could improve productivity is to rely on flimsy opinion research – research which was conducted amongst those who have registered.11 Seddon states that his research has found companies providing worse service to customers and behaving more inefficiently.11 Some companies treat ISO as a facade, something used to increase sales. These companies get certification and then go back to operating the way they did before ISO. Then two to three weeks before their audit, they revise their procedures to keep from losing ISO approval. Such hypocrisy defeats the purpose of ISO 9000. If the company s culture is resistent to the changes that ISO 9000 brings, then the certification process is a total waste of time. Some people argue that the standard itself is set too low. There is practically no emphasis on customer satisfaction. Others feel the language is too ambiguous, and it emphasizes documentation over true quality methods and metrics. There is no value differentiation since results are not evaluated. The circumstances surrounding registration are also vague and confusing, particularly for U.S. firms marketing products and services abroad.12 Questions persist over whether the certificates granted by U.S. registrars will be recognized in other countries; if so what circumstances and in which countries; and whether or not international customers are even demanding ISO 9000 conformance.12 Companies can use capital budgeting analysis to determine whether taking on the ISO certification project will add value to the company. First the company will need to determine the total costs of implementing the ISO 9000 process, estimating training allowances and other opportunity costs. Next, the management must estimate the expected cash flows that ISO will bring from new sales. Third, from the riskiness and the projected cash flows, the cost of capital must be determined.1 Next, the expected cash flows are put on a present value basis to estimate the dollar value ISO 9000 adds to the company.1 Finally this value is compared to the costs of implementation.1 The company s financial officers can then calculate the payback period, the net present value, and internal rate of return. Conclusion The question of whether industrial suppliers should adopt ISO 9000 depends on the company s organizational systems, the financial gains from increased sales, opportunity costs, and market pressures. Suppliers must see some type of economic and financial benefit from the ISO 9000 certification before choosing to implement it. Also, the company s size, culture, and ability to accept change can determine the success of ISO. Regardless of people s opinions, no one can deny the fact that ISO 9000 is growing in popularity daily. Today , a fourth of the corporations around the globe insist that all their suppliers have the ISO 9000 designation, according to a 1996 survey by Dun & Bradstreet and Quality Systems Update, and industry newsletter.9 ISO 9000 certification is, or soon will be necessary to do business in the EC, Japan, with the U.S. Government, the Big Three auto makers, and several other industries.4 Though getting certified is a tedious and time consuming process entrepreneurs like Bill Ekeler believe the effort pays dividends. By forcing me to analyze our company from the top down, I found a way to streamline Overland s manufacturing process. I expect the benefits of ISO 9000 to bottom line will be immeasurable. 9 ISO 9000 can definitely benefit multinational companies and their suppliers. The smaller domestic suppliers, Tier 2 and lower or industrial supply houses, may not benefit, because of the costs involved. Leadership, knowledge and understanding are the essential ingredients in a successful ISO 9000 venture. Early awareness and appreciation of the ISO standards, and deploying the learning and experiences throughout the corporation are the keys to success. All companies including industrial suppliers need some type of quality assurance to stay competitive. The ISO 9000 quality process can be an important step on the road to total quality management. References 1. Brigham, Eugene F. and Gapenski, Louis C. Financial Management: Theory & Practice. Dryden Press. 1997. ch.9. p.394-395. 2. Hitchcock, Robert and Stein, Richard. Is ISO 9000 Qualification Worth the Time and Effort? www.survivair.com/iso9000.num. 3. How much will ISO 9000 Cost? www.industry.net/iso9000/costs.num 4. Information About the Standards. www.isonet.com 5. Introduction to ISO. www.iso.cn 6. Kelly, Christopher J. ISO 9000 and Klippy Inc. SFSU Engineering, May 1996, p.24. 7. Kierman, Matthew J. The New Strategic Architecture: Learning to Compete in the Twenty-First Century. Managing Organizational Systems. Harcourt Brace. 1995 p.247. 8. Lenz, Mike. Re: Costs of Implementing ISO. Cayman Systems ISO/QS 9000 Forum, www.qs9000.com/cgi-bin/board.cgi. April 11, 1998. 9. Menzies, Hugh D Competitive Edge: Quality Counts When Wooing Overseas Clients. Money Magazine. June 21- July 6 1997. p.23. 10. Prahalad, CK. and Hamel, Gary. The Core Competence of the Corporation. Managing Organizational Systems. Harcourt Brace. 1995. p.150. 11. Productivity Claimes for ISO 9000 Ruled Untrue. www. avnet.co.uk/tesseract/QiC/News/asa.html. Sept. 11, 1996. 12. Small, Jack E. ISO 9000 and IBM s Total Quality Management Program. www.semi.org/focused/quality/ibm.num. Nov. 1993. 13. What is ISO 9000? www.isocenter.com/9000.