Stanley N. Sherman
Stanley N. Sherman, NAPM Professor of Purchasing, George Washington University, Washington, DC 20052, 202/994-7462.
The ISO 9000 series of standards has been widely recognized because it defines responsibility for quality, places it on the producer, and enables purchasers to rely on the producer's system. Reliance on ISO 9000 registration, however, is feasible only if the parties to the purchase action understand quality systems and the work of third party registry organizations. A major barrier to reliance is removed when purchasers appreciate the burden assumed by producers when committing to conform their systems to one of the three ISO models. The nature of that burden and indicators of the magnitude of the investment required is approached by exploring experiences of companies that have achieved registered status. The principal burdens are identified as internal, (personnel time for procedure verification or development, cultural or attitudinal change, documentation, work force education) and external (consultation and registry expense) . The qualification process may be perceived as costly, giving rise to a need for defining benefits. A summary of reported benefits is included. The approach of one company to the qualification process and successful registration is cited. It is noted that pursuit of registration could be a decision that is independent of qualification, and for some companies whose systems may already be fully reliable, may seem an unnecessary expense.
The Registered Company Directory for the United States and Canada, provides an up-to-date list of ISO 9000 registered companies in the two nations. Registration is accomplished on a site-by-site basis. If multiple sites are audited under the same standard and at the same time, a single registration may cover more than one site. As of the August 1993 update of the directory, approximately 1512 sites had achieved registration in the United States and 469 in Canada. This number of registered companies represents a remarkable increase from one year earlier when the total North American listing was approximately 300. The August 1993 registered companies were classified into 34 SIC codes at the two-digit level. If the cost and benefits summarized in this report are an indicator, this broad based move toward registration is likely to accelerate. Used as a sourcing tool, the ISO 9000 qualification process and registration promises to be vitally important to purchasing managers.
A summary of information about ISO 9000 includes the following points:
|ISO||9000||Guidelines--selection and use|
|ISO||9000-2||Guidelines--application of the models|
|ISO||9001||Model--design, development, production, installation, and servicing|
|ISO||9002||Model--production and installation|
|ISO||9003||Model--final inspection and test|
|ISO||9004||Guidelines--management and system elements|
|ISO||10011-1||Auditing, Part 1|
|ISO||10011-2||Auditing, Part 2, qualification of auditors|
|ISO||10011-3||Auditing, Part 3, management of audit|
COSTS OF QUALIFICATION AND REGISTRATION
The scope of supplier quality systems validation in the United States expanded with the adoption of JIT, TQM, SPC, and the philosophy of "do it right the first time." As part of supplier selection, most companies have gone beyond asking for verbal and written assurances by the supplier about their product quality. They have demanded verification and conducted quality audits whenever important supplies were being considered for purchase. But these procedures have not been based on ISO 9000 standards and have not depended on ISO 9000 registration as a quality systems verification tool. Until recently, these individually oriented approaches have been considered appropriate, and the costs of conducting them have been built into the purchasing process without specific identification.
These techniques have appeared to work satisfactorily, but the competitive environment has been changing. One result of Europe 92 and the action of the EC in adopting ISO 9000 is the perception that third-party verification of quality systems may be the only acceptable validation process for world-wide trade and exchange. Furthermore, registration as an ISO 9000 qualified producer may be an essential qualifier for European sales of selected products that have health, safety, or environmental impacts. Such products are being designated "regulated" products by the EC. Registration is, or is becoming, a key element in the selection of sources of supply for such products within the EC. Qualification of internal systems under one of the ISO 9000 models is prerequisite to registration by any of the recognized third-party quality audit registrars.
Our objective is to review the nature of the qualification and registration processes and to highlight the costs and benefits experienced by companies as a result of completing the registration process. We shall clarify the process by which a company may qualify under an ISO 9000 standard, examine the basis for company cost/time estimates to become registered, and provide a basis for anticipating gains that may accompany registration.
The cost of meeting the ISO 9000 standards is difficult to quantify because it will vary depending on the nature of the organization and its products, the standard to which qualification is addressed, the pre-existing status of the organization's work processes with regard to quality, and the level of commitment of management and workers to the process. Quantification of cost is difficult to address because many who are experienced in the process strongly argue that meeting the standards is simply to do that which the organization should already be doing. Approached from that perspective, the cost of qualification on a value added basis is zero. Regardless of the validity of that concept, commitment to ISO 9000 qualification will have substantial impact on the organization in terms of management and personnel time and energy even if facilities, procedures, training, and documentation are already satisfactory. Because the registration process requires third-party audit, the costs of an audit assessment and of regular follow-up audits must be recognized and included in budget plans.
An excellent treatise describing corporate processes leading toward registration is that of Rabbitt and Bergh. They describe the experiences of the Foxboro Company which became one of the first ISO 9001 registered companies in the United States. One part of their work is a listing and description of activities in sequence reflecting the steps leading to Foxboro's success. The scope of the internal effort to achieve registration is indicated by their listing. The steps they followed are indicated here.
These fourteen steps are indicative of the undertaking to which a company is committed when making a decision to qualify under ISO 9000. Notice that no new systems and no new facilities have been specified. The qualification process can be completed by any company whose systems are producing quality work or whose management determines that they will become such a producer. According to Marquardt, a company can become registered if they document what they do, do what they document, and produce the quality of product they have promised to their customers. Marquardt also asserts that qualification under ISO 9000 could be achieved with as little as a few days effort for companies who have just won a Baldridge award, but could exceed $100,000 for companies whose quality systems need to be improved or created from the ground up. For such companies, preparation for registration could require six to eighteen months and involve several person years of effort.
Hockman and Erdman classified the costs of registration into two categories, out-of-pocket for the registrar and "refocusing internal resources" on the registration effort. They attribute the magnitude of both categories to size and complexity of the organization, its geographical location, the status of the existing quality system, and the registrar selected. The complexity factor is closely related to the number of documented procedures and the detail necessary to describe the system adequately. The preparation of these procedures, an internal cost factor, is the biggest component of cost.
Registration represents the culmination of the preparation effort and is the part accomplished by a third-party audit team. As of November, 1993, The Registered Company Directory listed 47 registrars, 41 of whom have been accredited to issue ISO 9000 certificates. The costs incurred for securing the assessment of a registrar and, assuming the sponsor's system is qualified, issuance of a registration certificate, will include an application fee plus the costs associated with the number of person days required for each of the following types of work:
Once the original registration is issued, periodic follow-up audits are required to maintain registration status. The total cost of registry is driven by the size of the host organization, the depth of the audit needed for the specific model to which registry is sought, and the need for any follow-up audits caused by systems that fail to meet applicable standards. The registry cost, not counting the host company's effort, is estimated to run between $10,000 and $20,000 by the CEEM Information Services.
BENEFITS OF QUALIFICATION AND REGISTRATION
The most widely touted benefit of registration under ISO 9000 is access to the European Market. For companies that produce products that are regulated under EC policy, this benefit is immediate and evident; but for others this may not be the benefit of greatest appeal. For some, the confidence gained by knowing all productive processes are under control and meeting customer needs may be a sufficient benefit for action. For others with a longer time horizon, the greatest benefit could be access to all markets, including domestic customers. It is entirely possible that ISO 9000 registration will become a de facto requirement for doing business whenever the customer is concerned about reliability of product and is unwilling to undergo the expense of performing quality audits of suppliers. This is likely to be stage two of the quality revolution.
Reduced operating costs may be a particularly significant for many registered companies. One estimate, attributed to the British Standards Institute, is that companies can expect a 10 percent reduction in operating costs within two years of achieving certification. A key benefit affecting purchasers is the streamlined process of supplier selection. Adoption of ISO 9000 by the Tennet Co. resulted in further reduction in numbers of vendors from 1000 to 500 and then to 250.
While acknowledging that marketplace forces are primary in causing companies to seek ISO 9000 registration, Hockman and Erdman enumerate internal gains achieved at Du Pont. They cite savings brought about by calibration requirements imposed by ISO 9000 totalling $300,000 in one plant and $400,000 in another. In another plant they cite a 26 percent reduction of justified customer complaints, a 62 percent reduction of corrective actions, a 52 percent reduction of quality assurance reviews of specifications, and a 40 percent reduction in scrap. In addition to cost advantages, they stated that ISO 9000 registration clarifies roles and responsibilities and smoothes the interactions between different functions and departments. Of direct interest to purchasers, they found the number of quality audits by companies with supplier qualification programs significantly reduced when ISO 9000 registration was secured.
Without question, much more data will be required to motivate large numbers of companies in the United States to adopt ISO 9000 qualification as a primary internal goal to seek registration. Even so, it is my conclusion from the evidence to date that third-party quality audits and registration will become standards for doing business in fields of activity significant to the customer.