Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
In the preface Deming states that the present style of management is a modern invention and represents "a prison created by the way in which people interact." The present system includes competition between people, teams, departments, divisions, students, schools and universities. Although economists have taught that competition will solve our problems, we now know that competition is destructive. A better approach is for everyone to work together as a system. The solution to problems comes from cooperation, not competition. We need a transformation to a new style of management Deming refers to as Profound Knowledge. This includes four parts: appreciation for a system, knowledge about variation, theory of knowledge, and psychology. The purpose of this book is to start the reader on the road to knowledge and to create a desire for more knowledge. This book, according to Deming, is a textbook for engineering, economics and business students, to be used to prepare students for the future.
Chapter 1: How are we Doing?
Will best efforts bring improvement? No, Deming argues that best efforts not guided by knowledge will dig us deeper into the pit we are in. What is needed is new knowledge. There is no substitute for knowledge.
In order to improve living standards, people must trade with each other and the market is the world. Trade depends on quality. In terms of the balance of trade, the U.S. is not doing well. We have been in economic decline for three decades. What must be done? Our problem is education and the development of a culture that places value on learning.
Your customer expects only what you and your competitors have led him to expect, but he is a rapid learner. Customers do not know what they want. They may be satisfied and switch. A customer may be loyal and switch. What is needed is innovation. Deming provides several examples of companies that were doing well and lost their market to an innovator. The question to ask is what business are we in and what will it be in the future?
How do we achieve quality? Which of the following is the answer? Automation, new machinery, more computers, gadgets, hard work, best efforts, merit system with annual appraisal, make every body accountable, management by objectives, management by results, rank people, rank teams, divisions, etc., reward the top performers, punish low performers, more statistical quality control, more inspection, establish an office of quality, appoint someone to be in charge of quality, incentive pay, work standards, zero defects, meet specifications, and motivate people. Answer. None of the above.
All of the ideas above for achieving quality try to shift the responsibility of management. Quality is the responsibility of management. It cannot be delegated. What is needed is profound knowledge. A transformation of management is required.
Chapter 2: The Heavy Losses
According to Deming, the present style of management causes huge losses that cannot be evaluated or measured. His purpose for this chapter is to identify the most important sources of loss (or waste) and to suggest better practices. At the beginning of this chapter he tells us that the reason for many wrong practices is management's failure to understand the difference between common causes of variation and special causes of variation. He provides several tables similar to the ones I have provided below. I have condensed his ideas and tried to capture his main points, but the reader must consult the book for the many examples used to support his views on the present style of management.
Present wrong practice. (What is wrong?)
|Short term thinking. (Short term solutions have long term effects, frequently undesirable effects.)||Adopt constancy of purpose. Develop long term objectives and importantly, methods for achievement.|
|Ranking people. (Ranking is a farce and indicates the abdication of management. If x is the contribution of an individual and yx is the effect of the system on his or her performance, then x + (yx) = performance. Ranking people ignores the predominant (yx) term. Ranking does not help anyone improve or help improve the system.)||Abolish ranking. Manage the whole company as a system. Study and understand how every component contributes towards optimization of the system.|
|Merit systems, incentive pay and annual appraisal of people. (These are forms of ranking that create competition between people and are demoralizing. They do not help anyone improve or improve the system.)*||Abolish these methods. Study the capability of the system (chapter 3), leadership (chapter 5) and the management of people (chapter 6) and use this knowledge to manage.|
|Manage the individual components (individuals, teams, departments, etc.) as profit centers. (This ignores the interdependences between the components, causes sub-optimization and everybody loses.)||Manage the company as a system focused on the future. Encourage communication and continual learning. Draw a flow diagram to show how each component depends on others in the system so that people can see the process and improve it.|
|Management by objectives, numerical goals and quotas. (These methods ignore the interdependences and provide no method for achievement. As a result they may cause behavior that destroys the system.)||Manage the system. Develop methods for improving the process. Develop a horizontal self directed work force.|
|Management by results. (Action based on outcome is not action on the causes of the outcome. Emphasis on cost reduction is an example. Costs are not causes.)||Use the concepts and tools related to variation to understand and improve the system. Deming estimates that around 94% of the possible improvements belong to the system - the responsibility of management.|
|Buying based on the lowest bid. (Ignores the related costs and effects on quality.)||Buy based on estimates of all related costs and effects on quality.|
|Delegate quality to an individual or group. (The responsibility for quality cannot be delegated.)||Recognize that quality is management's responsibility.|
Although the losses from faulty management practices cannot be measured, Deming argues that it is a myth to assume that if you can't measure it, you can't manage it. We must learn to manage these losses and the transformation requires a system of profound knowledge (Chapter 4).
Chapter 3: Introduction to a System
Deming begins this chapter by saying that the prevailing style of management is a modern invention and a trap that has led us into decline. He defines a system as "a network of interdependent components that work together to try to accomplish the aim of the system." A man made system must have an aim and this purpose, or aim must be clear to everyone in the system. Deming continues by stating that "A system must be managed. It will not manage itself." Left to themselves the components of a system become selfish and competitive and this behavior has a destructive effect on the system.
An organization is a system if it has an aim or purpose. This purpose, or aim precedes the organizational system and the people working in it. The system must be defined in terms of the aim, not in terms of methods. When the whole system is optimized, everybody wins. Any less than optimization of the whole system means eventual loss to everyone.
A system includes the future and part of management's job is to govern the organization's future. A system cannot manage itself. It needs guidance from outside.
Managers must learn that in order to compete, they must learn to cooperate. A system includes competitors who working together to provide better service and to expand the market, contribute towards optimization for the entire industry. Deming argues that rather than worry about market share, companies would be better off to work together to expand the market.
Deming includes a diagram (used in Japan starting in 1950) that illustrates how production is viewed as a system. The flow of information and materials from any part of the system (from suppliers to customers) must match the input requirements of subsequent stages. It is used for planning from the idea stage through design, production, distribution and customer service. It also helps in making predictions of how changes in one component will affect the other components and shows the people in the system where their jobs are and how their work is related to the work of others in the system. This knowledge helps people take joy in their work.
The flow diagram is a more meaningful organization chart than the usual pyramid showing who reports to whom. The diagram shows the value chain concept described by Porter, although Deming does not use that term. The pyramid type organization chart ignores customers (internal and external) and contributes to the fragmentation of the organization into individual profit centers. The terms silos and stovepipes have been used by others who have described this problem. (See the Mintzberg & Van der Heyden summary on developing Organigraphs).
Two important jobs of management include: Recognizing and managing interdependence. Defining jobs to include what the work will be used for and how it contributes to the aim of the system.
Deming provides several examples of how lack of cooperation is destructive to an organization. In one company example, an increase in the cost of an engine of $30 would decrease the cost of the transmission by $80. The responsibility center in charge of the engine would not accept the idea because of the effect of the change on that segment's profits.
If the components of an organization are all optimized, the organization will not be optimized. If the whole is optimized, the components will not be optimized. "If economists understood the theory of a system, and the role of cooperation in optimization, they would no longer teach and preach salvation through adversarial competition. They would instead lead us into optimization of a system, in which everybody would come out ahead."
In a 1990 statement of the Interstate Commerce Commission (ICC), Deming states that forcing motor freight carriers to compete on the basis of price in a zero sum game will destroy a healthy transportation system. Deming points out that cheaper is not always better. It is more important to increase reliability and dependability by reducing variation in time of transit and time of delivery. He urges the ICC to take a leadership role in promoting cooperation between the components of the industry.
At the end of this chapter, Deming describes fifteen examples of cooperation that provide benefits to everyone. Some of these include common international measurements of time and date, red and green traffic signals, the metric system, and standardized parts such as batteries. Another example involves two service stations on opposite corners of an intersection that share each others tow trucks and stay open late on alternate nights. These companies compete with each other, rather than against each other and everybody wins.
Chapter 4: A System of Profound Knowledge
Deming states that the prevailing style of management must undergo transformation and this requires a new map of theory he refers to as profound knowledge. His purpose in Chapter 4 is to describe the components of the system of profound knowledge.
The first step, according to Deming, is the transformation (more appropriately conveyed by the Greek word metanoia or spiritual conversion) of the individual. He describes this change as a reorientation of one's way of life to apply the principles of profound knowledge in every kind of relationship with other people.
The system of profound knowledge includes four components as indicated in the preface, each described briefly below.
Appreciation for a System
An appreciation for a system includes knowledge of what a system is (defined in Chapter 3) and how interdependence between the components of the system creates a need for communication and cooperation. The greater the interdependence, the greater the need for the parts to work together. A bowling team, orchestra and business are used in a graphic illustration to show how interdependence ranges from low for the bowling team, to high for the orchestra and is very high in a business organization.
Knowledge of Variation
A knowledge of variation includes knowledge that life is variation, knowledge of the difference between a stable state and an unstable state, knowledge of the difference between common and special causes of variation and knowledge of the effect of the system on the performance of people. It also includes a knowledge of the implications of all this for management.
The Theory of Knowledge
The theory of knowledge includes an understanding that management in any form is prediction. A statement, if it conveys knowledge, predicts a future outcome including the risk of being wrong. Prediction requires theory. Without theory, experience has no meaning and there is no learning. Copying examples without understanding the underlying theory may lead to disaster. Any number of examples cannot establish a theory.
Deming states that "There is no true value of any characteristic, state, or condition that is defined in terms of measurement or observation." "There is no such thing as a fact concerning an empirical observation." An operational definition is needed. He defines this as a procedure agreed upon for translation of a concept into a measurement. But this produces information and information is not knowledge. Knowledge comes only from theory.
A Knowledge of Psychology includes a knowledge that people are different from one another and knowledge of how to use these differences to optimize everybody's abilities and inclinations. It includes the concepts of intrinsic and extrinsic motivation and the phenomenon of over justification.
People are born with intrinsic motivation that is often destroyed by various practices at school and work. Grades cause students to work for grades, or a reward from parents for grades, rather than to work for the purpose of learning. Rewards at work such a merit pay cause people to work for rewards rather than for job satisfaction and to find meaning in their work and lives. Some extrinsic motivation helps develop an individual's self-esteem, but over emphasis on extrinsic motivation eventually destroys an individual's intrinsic motivation and leads to detrimental effects on self esteem. Work and life eventually have no meaning. Ranking people, even if it could be done accurately (as opposed to ranking the effects of the system on the workers) would not improve the performance of the people, or the system.
Chapter 5: Leadership
This is a very short chapter. Deming explains that the job of a leader is to accomplish the transformation of his organization. A leader needs theory, obligation, a plan and persuasive power.
Chapter 6: Management of People
Deming begins this chapter by saying that "We are living in prison, under the tyranny of the prevailing style of interaction between people, between teams, between divisions." We must replace the idea that we need competition between people with cooperation. He provides a graphic illustration similar to the one below to show how present practices squeeze intrinsic motivation, self esteem and dignity out of people over their life time. Across the top of his illustration he lists the forces of destruction such as forced distribution of grades, merit systems, competition between people and groups, incentive pay, numerical goals, explanation of variances, and treating every group as a profit center. Along the vertical axis he shows the characteristics that people are born with such as intrinsic motivation, self esteem, dignity, cooperation, and joy in learning.
All of the forces of destruction must be replaced with new ways to manage people. The purpose of this chapter is to examine how to do this under the new philosophy or theory of profound knowledge.
1. Understand the meaning of a system and convey this to the people in the
2. Help people see how they must cooperate with the preceding and following stages as a component of the system to optimize the system.
3. Understand that people are different and use this knowledge to develop their abilities to optimize the system.
4. Be a continuous learner and encourage continuous learning for others in the system.
5. Be a coach and counsel, not a judge.
6. Understand a stable system and that anyone's performance will reach a stable state.
7. Develop and mainly use knowledge, personality and persuasive power in the management of people, and not rely on authority of office except to change the system for improvement.
8. Study results to improve as a manager of people.
9. Try to discover if anyone is outside the system in need of special help. This is an extension of item 6 above.
10. Create an environment of trust to encourage freedom and innovation.
11. Not expect perfection.
12. Listen and learn without passing judgment.
13. Have an unplanned and unhurried conversation with each worker at least once a year to understand their aims, hopes and fears.
14. Understand the benefits of cooperation and the losses created by competition between people and groups.
The Shewhart PDSA Cycle
Deming discusses the Plan, Do, Study, Act continuous improvement cycle developed around 1950 he refers to as the Shewhart cycle. He provides an illustration showing a circle where a plan for a change or test of a change in the process or system is developed in the first step, the change or test of change is made below clockwise in the do step, the results are examined in the study step, and the change is either adopted or abandoned in the act step. This leads to the start step, i.e., next plan for change or test of a change in the process or system, the foundation for the whole cycle.
The development of a new engine is used as an example. The secret to shorter development times is to put more effort into the early stages and understanding the interaction between stages. The manager's job is to manage the whole process, not to optimize any stage. Everyone involved including marketing people, suppliers, toolmakers, etc. should be included in the planning stage.
Current accounting practices reinforce the incorrect perception that decisions made during the development stage are independent of the future costs related to capital expenditures, maintenance, operations and the losses suffered by customers.
What should business schools teach?
Business schools should teach the theory of a system and the theory of profound knowledge for transformation, some economics, statistical theory, language and science. They should teach that un-measurable damage is created by short term thinking, ranking people, merit systems, incentive pay, management by results, and tampering.
How should the education system change?
To achieve notable improvement, the education system should abolish grades, merit ratings for teachers, comparison of schools on the basis of scores, and gold stars for athletics. Joy in learning comes more from learning than from what is learned. A grade is a permanent label for opening doors or closing doors, a way to achieve quality by inspection, rather than building in quality, a way to produce competition between people, rather than cooperation, a way to label people as winners or losers, a way to humiliate those at the bottom, rather than to promote their desire to learn and future achievement.
In this chapter, Deming says that he does not grade students, but gives them a "P" for pass.
Chapter 7: The Read Beads
See Martin, J. R. Not dated. What is the red bead experiment? Management And Accounting Web. (Summary).
Chapter 8. Shewhart and Control Charts
In this chapter, Deming discusses Shewhart's concepts of variation, common causes (variation caused by the system) and special causes (variation caused by something that is not part of the system of common causes).
He mentions the two mistakes, i.e., reacting to an outcome as if it came from a special cause when it came from a common cause, or reacting to an outcome as if it came from a common cause when it came from a special cause.
One of Shewhart's contributions was to develop control charts to minimize the loss from the combination of both mistakes. When the chart indicates no special causes, the process is in statistical control, or stable. In a stable system the performance of the system can be predicted within a range of variation. The performance of an unstable process cannot be predicted. After statistical control is achieved, the process may be improved. An improvement is either a reduction in variation or a movement in the average, up or down, closer to the optimum level. "The control chart is the process talking to us."
There are many potential applications of the control chart concepts, or techniques in industry, education and government. The most important application is in the management of people.
Some managers set specification limits where they think the limits should be. However, there is no logical connection between control limits and specification limits. Using specification limits based on intuition causes loss either from mistake 1 or mistake 2, but no one could know which or the extent of the losses.
Deming discusses some examples where common causes are often confused with or interpreted as special causes. These include accidents on the highway, fires, absenteeism, and malpractice suits. Highway accidents arise mostly from common causes such as drunk driving and unintelligible road signs. These, he says, are not special causes. Malpractice suits in medicine, engineering and accounting all treat the event as a special cause - somebody is at fault. Study and knowledge of variation leads to the conclusion that the event could have come from the process itself. The system may be at fault.
The purpose of this chapter is to illustrate the losses that are caused by tampering with a system or process. At the beginning of this chapter, Deming defines tampering as management by results. Other ways to define tampering include trying to improve the performance of a process or system based on an individual observation or result, or trying to improve the process or system without theory.
The funnel demonstration includes a funnel, a marble and a table, preferably with a cloth on it to record the results. A dot is drawn on the table cloth to represent the target. Then four rules or procedures are used and the results are recorded on the cloth.
Rule 1: Hold the funnel over the target and drop the marble through the funnel 50 times marking each spot where the marble stops. A distribution of spots or plots will occur.
Rule 2: After each drop, move the funnel from the previous position to compensate for the last error. The last error is the basis or reference point for each new drop. Record the spots with a different symbol. A wider distribution will occur. Deming calculates the diameter of this rough circle will be 41% wider than the circle based on rule one. This is tampering, i.e., trying to improve the performance of process each time based on an individual result.
Rule 3: After each drop, adjust the funnel using the target as the reference point. The results will be worse than before.
Rule 4. After each drop, set the funnel over the spot where the marble stops. The results continue to spread out and are even worse than in rule 3.
Tampering with the process (Rules 2, 3 and 4) only makes things worse. Deming says that possible improvements in this process include lowering the funnel, using a thicker table cloth, and using a steel ball rather than a marble. A magnetic target and marble will also improve performance of the process.
Deming provides seventeen examples of tampering based on rule 2. Some of these include reactions to a complaint of a customer, adjustments in interest rates made by the Federal Reserve Board, a reaction to stock market news, changing company policy based on the latest attitude survey, continuous tax law changes that try to correct a previous mistake, and price wars.
Examples of rule 3 include nuclear proliferation, barriers to trade, illicit drug enforcement, and a gambler increasing their bet to cover losses.
Examples of rule 4 include workers training other workers in succession, a group of players in an orchestra tuning their instruments sequentially not against the same source, hanging wallpaper, and copying examples with no theory.
A process may be stable and produce defects and errors. To adjust the process based on a single defect or error is tampering with the process and will make performance worse. Improvement in a process requires studying the process to understand the capability of the process, including the mean outcome and range of variation. If the process is stable, then a planned change can be developed based on theory, then tested, studied, then implemented or rejected.
The purpose of this chapter is to provide: 1) some easy lessons in variation including examples of situations where common cause variations are confused with special cause variations, and 2) some illustrations based on the concept of a loss function.
Deming explains that variation is life. Life is variation, but those who have no knowledge of statistical theory tend to attribute every event to a special cause. One qualification useful to anyone, and definitely needed by anyone in management, is to understand the concept of variation. This understanding of variation will help them understand the system and to stop asking people to explain the day to day, month to month, and year to year ups and downs that come from the variation that is built into the system.
Deming explains that a loss function shows the losses that a system suffers from different values of some adjustable parameter. A loss function is useful to help one change from the idea of meeting specifications to continual reduction in variation and improvement in the mean outcome through improvement of the process or system. Each individual has a loss function and a combination of people have a loss function. Loss functions are usually not symmetrical but may look something like the illustration below.
Two distributions are shown in the extended graphic illustration below to convey my interpretation of the concept Deming explains in Chapter 10. The distributions are identical except for their means, i.e., the range of variation is the same in both distributions. However, the one on the left creates more loss than the one on the right. The mean of the process described by the distribution on the left is further away from the optimum or minimum loss. The mean of the process on the right is very close to the optimum value. Improvements in both mean and range of variation are possible for the process on the left. Improvement in the range of variation, i.e., reduction of the amount of variation, is possible for the process on the right.
Deming was critical of the zero defect philosophy because it is associated with the idea of meeting specifications as opposed to continual reduction in variation and improvement in the mean outcome through improvement of the process or system.
This point was not entirely clear to me when I read the last chapter of The New Economics. Several articles by Albright and Roth helped to clear up my confusion. There are two philosophies associated with quality. One concept is the zero defects philosophy and the other concept is the robust quality philosophy based on the Taguchi loss function. According to Roth and Albright, the zero defects philosophy is associated with defining quality as conforming to specifications where the only costs attributed to variation are those that fall outside the specification limits. They refer to this as the goalpost view. However, the robust quality philosophy views any variation from a target value as undesirable because it causes unnecessary costs to be incurred by the manufacturer, the customer or society. The lost function provides a way to estimate these costs. Deming subscribed to the robust quality philosophy as indicated by his discussion of the loss function in Chapter 10. See my note below and the summaries below for more on this issue.
Note: Quality Models Compared1
Two quality models have appeared in the accounting literature in recent years. Juran's quality cost conformance model is associated with the zero defect philosophy shown on the left side in the illustration below. Juran's model includes a target value and tolerance, or specification limits, for the variation that occurs in a parameter or characteristic (X). In Juran's model, no loss occurs if the value of X is within the specification limits, i.e., it is considered acceptable. If the value is outside the limits it is considered unacceptable or a defect and becomes either scrap, spoilage or rework.
Deming, on the other hand, was associated with the robust quality philosophy based on Taguchi's loss function shown in the center of the illustration and combined with a distribution of X on the right hand side. Taguchi and Deming believed that some loss occurs for the manufacturer, the customer, or society when the value of X is not on target. In the graphic illustration above, the distribution of X is drawn so that it appears that the mean of X is on the target value, but of course this is not usually the case. The idea in the robust quality philosophy is to continuously improve the process by moving the mean value of the parameter closer to the target value and by reducing the amount of variation in the parameter.
Albright, T. L. and H. Roth. 1992. The measurement of quality costs: An alternative paradigm. Accounting Horizons (June): 15-27. (Summary).
Albright, T. L. and H. P. Roth. 1994. Managing quality through the quality loss function. Journal of Cost Management (Winter): 20-37. (Summary).
Anderson, S. W. and K. Sedatole. 1998. Designing quality into products: The use of accounting data in new product development. Accounting Horizons (September): 213-233. (Summary).
Huber, M. M. 2016. Work less, play more... Get results: Achieve gamification success with an appropriate, effective design and the right performance measures. Strategic Finance (April): 40-46. (Summary).
Johnson, D. W., G. Maruyama, R. Johnson, D. Nelson and L. Skon. 1981. Effects of cooperative, competitive, and individualistic goal structures on achievement: A meta-analysis. Psychological Bulletin (89): 47-62. (Summary).
Joiner, G. L. and M. A. Gaudard. 1990. Variation, management, and W. Edwards Deming. Quality Progress (December): 29-37. (Note).
Kim, M. W. and W. M. Liao. 1994. Estimating hidden quality costs with quality loss functions. Accounting Horizons (March): 8-18. (Summary).
Lepore, D. and O. Cohen. 1999. Deming and Goldratt: The Theory of Constraints and the System of Profound Knowledge- The Decalogue. North River Press. (Note).
Levinson, H. 2003. Management by whose objectives? Harvard Business Review (January): 107-116. (Summary).
Martin, J. R. Not dated. Chapter 3: Cost Behavior Analysis & Statistical Process Control - Part II. Management Accounting: Concepts, Techniques & Controversial Issues. Management And Accounting Web. https://maaw.info/Chapter3PartII.htm
Martin, J. R. Not dated. Deming's Theory of Profound Knowledge. Management And Accounting Web. https://maaw.info/DemingExhibit.htm
Martin, J. R. Not dated. Illustration of common cause vs. special cause variation. Management And Accounting Web. https://maaw.info/DogInYard.htm
Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. Lean requires cultural change. Extreme individualism must be replaced by more collectivist or cooperative behavior. Lean behavior is required from everyone in the organization as everyone understands his or her role. Workers in lean environments know who their customers are, both internal and external, and place emphasis on customer satisfaction, a clean, safe, and orderly environment with everything in its place, as well as teamwork, cooperation in problem solving, and employee empowerment. https://maaw.info/LeanConceptsandTermsSummary.htm
Martin, J. R. Not dated. Russell Ackoff quotes and f-laws. Management And Accounting Web. https://maaw.info/RussellAckoff.htm
Martin, J. R. Not dated. Russell Ackoff: What is a system? Videos. Management And Accounting Web. https://maaw.info/RussellAckoffVideos.htm
Martin, J. R. Not dated. Summary of the 1992 PBS Program Quality or Else. Management And Accounting Web. https://maaw.info/QualityOrElse.htm
Martin, J. R. Not dated. What is Six Sigma? Management And Accounting Web. https://maaw.info/SixSigmaSummary.htm
Martin, J. R. Not dated. What is the red bead experiment? Management And Accounting Web. https://maaw.info/DemingsRedbeads.htm
Martin, J. R. 1994. A controversial-issues approach to enhance management accounting education. Journal of Accounting Education 12(1): 59-75. (Summary).
Roth, H. P. and T. L. Albright. 1994. What are the costs of variability? Management Accounting (June): 51- 55. (Summary).
Sedatole, K. L. 2003. The effect of measurement alternatives on a nonfinancial quality measure's forward-looking properties. The Accounting Review (April): 555-580. (Summary).
Stevens, T. 1994. Dr. Deming: Management today does not know what its job is. Industry Week (January 17): 21, 24, 26, 28. (Summary).
Taguchi, G. and D. Clausing. 1990. Robust quality. Harvard Business Review (January-February): 67-75. (Summary).