How to reduce your Break-Even Point?
In 1987, when I first attempted introducing Quality Improvement to corporates in India, I was a miserable failure. Each Quality Manager I approached was a devotee of ISO 9001. In other words, Quality Control.
Two years elapsed with no corporate willing to bite Quality Improvement. At my annual review with Dr J M Juran, he expressed concern about my approach. He underlined:
- Managing for Quality uses the same three processes as Managing for Finance – Planning, Control, Improvement
- Quality Improvement is a top-down initiative
- In order to implement Quality Improvement, speak the language of top management – MONEY.
Soon thereafter, I was fortunate to get an appointment with the Chairman of Tata Steel, Mr Russi Mody. Tata Steel was the darling of the share market.
I was young, with a track record of zero assignments over the past two years. Hesitatingly, I asked a few questions:
SL: What is your failure rate at the plant?
RM: 3 percent.
SL: So what is the cost of failures?
RM: Zero. My seconds (rejects) also have a pent up demand.
I dared the next :
SL: Sir, 3 percent failure rate creates 10 percent wasteful costs. We call it Cost Of Poor Quality (COPQ).
RM: Unbelievable. But, will you make this statement to my top management?
And so, over a two day executive briefing, Dr J J Irani, Managing Director, and Mr Ishaat Hussain, Finance Director, amongst others, declared that the COPQ at Tata Steel was 30 percent of sales!
Tata Steel was the first organization in India to adopt the Juran on Quality Improvement methodology.
The by-product of Quality Improvement was COPQ reduction. This also implied that several wasteful fixed costs that were budgeted for, declined. The top management of Tata Steel continuously challenged the quality standards.
The result: A lower break-even point!
Made in India
Many more corporates joined the Quality Improvement movement. The industries included: steel, textiles, tractors, diesel engines, air conditioners, amongst others.
The bottom-lines of their Profit & Loss Statements swelled.
By 1994, the brand Made in India had arrived.
- Make Or Buy is a critical strategic tool
- Make, when you have superior Process Capability compared to other sources
- Buy, when the supplier has superior Process Capability than you have.