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Setting the Table for Deming’s Chain Reaction

In the first chapter of Out of the Crisis, W. Edwards Deming outlines the business case for quality. Deming’s Chain Reaction is one of his more famous revelations to American management. The blackboard diagram infers a causal chain between quality, cost, productivity, market share, business survival, and job creation.

It’s hard to argue with Mr. Deming’s logic, especially if you sympathize with the voice of quality. On the other hand, we can afford to be a little skeptical, especially when you’re talking job creation in manufacturing. Setting aside the difference between necessary and sufficient cause, one could still ask “is each causal link enough for the result?”

The weakest link in Deming’s Chain Reaction is that increasing productivity leads to increased market share. Others have noted the flaw in his logic. It assumes that improved quality at a lower cost is the only way to increase market share. That murky idea of “value” again rears its head. The customer defines value, so improved quality at a lower cost does not necessarily lead to increased market share.

This isn’t devastating to Deming’s argument. As others have pointed out, Deming’s idea of quality is broader than common usage. He uses it synonymously with value. What is more likely to derail his train of logic is the failure to account for the cost associated with increased market share and new hires.

Even when increased productivity leads to excess capacity, there is a cost associated with putting that newfound capacity to work. It needs capital. Even marketing campaigns have a cost and may need capital planning and project approval.

Capital budgeting is mysterious despite all the financial equations because the most important variables usually depend on market forecasts and confidence in those forecasts. Most business owners don’t have a team of statisticians, so they usually guess. You hope it’s an educated guess, but it’s still subjective and prone to error.

Increased productivity does not necessarily lead to increased market share or job creation. It does set the table for capital spending at an attractive rate of return, which leads to increased competitiveness and higher wages. It’s not a panacea, but it does preserve our standard of living. That’s not bad in a global economy.

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