QM Management Depth (6) | Quality Objective System Design: How to Align with Business Indicators Without Conflict

A precision injection molding company, with an annual revenue of 560 million yuan and 700 employees, primarily serves two home appliance brands. At the beginning of 2025, each department set ambitious goals: the Quality Department promised to reduce customer complaints from 22 to 13 and internal scrap rate from 2.4% to 1.2%; the Manufacturing Department committed to increasing per capita output by 12% and shift production by 10%; the Procurement Department aimed to reduce material costs by 5%. However, at the year-end business analysis meeting, an awkward situation arose: the Manufacturing and Procurement Departments met their targets, and the Quality Department reduced the internal scrap rate to 1.1%. Yet, customer complaints rose to 31, and returns and claims increased from 1.8 million yuan to 3.4 million yuan, raising the quality cost rate by 0.6 percentage points. The CFO asked, "All four departments claim to have met their targets, so where did the additional 10 million yuan go?" No one in the room responded.

The Quality Manager reviewed the records and realized the issue: to reduce the internal scrap rate, the production line changed batch-forming defects to "reworked and recorded as qualified," thus not counting rework hours as internal scrap; to meet the shift production target, the initial confirmation of a critical dimension was changed from a full inspection to a sampling inspection; the Procurement Department switched to a supplier offering 8% lower material costs, leading to greater material variability and increased sorting hours, which were recorded as "overtime" in the Manufacturing Department. Each department's records looked good, but the company's overall performance was poor.

1. The Essence of the Problem: The Conflict Is Not in the Numbers, but in the Criteria and Time Scales

The common misdiagnosis in this case is "unreasonable target setting," leading to adjustments in the numbers for the following year. While the numbers are indeed problematic, the root cause lies not in their magnitude.

This article focuses on one thing: the system structure design after the targets are set. How many layers should the indicators cover, how should the criteria be defined, who decides in case of conflict, and who bears the cost—these are structural issues that are largely unrelated to whether the target is set at 13 or 15.

Misjudgment One: Assuming the Conflict Stems from Target Values, Repeatedly Adjusting the Numbers. In the example above, if the customer complaint target was changed from 13 to 20, the behavior would not change—production lines would still rework and record as qualified, and procurement would still buy cheaper materials. The true conflict lies in the relationship between indicators: internal cost-related indicators are quick to show, modifiable, and evaluated in the current period; customer-related indicators take a year to manifest. As long as the structure remains unchanged, the organization will inevitably choose the path that can be immediately met.

Misjudgment Two: Assuming More Indicators Mean a More Comprehensive System. A department with 15-16 indicators may seem well-managed, but the opposite is true: the more indicators, the lower the weight of each, giving the evaluated party more room to pick the "most cost-effective few" to meet, while the rest become mere paper exercises. Worse still, with more indicators, departments will inevitably have mutually offsetting combinations—shift production and initial confirmation, cost reduction and incoming material stability, delivery and release. Their conflicts cannot be resolved by averages.

Misjudgment Three: Assuming Conflicts Can Be Resolved by Meetings. Without predefined arbitration rules, coordination meetings become a contest of who has the loudest voice, who is closer to the boss, and who is the most emotionally intense. More importantly, transferable costs are the most hidden flaw in this system: any extra hours, sorting, rework, or delays generated to meet targets, if they can be recorded in another department's account, turn meeting targets into mere shifting. Shifting does not create value; it only transfers the ugliness.

2. Three Structural Lines in the Target System

When designing a target system, first clarify the positions of three types of indicators.

Red Line Indicators (Non-Transferable Items): Limit the number to three or fewer, directly linked to safety, regulations, and customer key characteristics. Their special nature lies in priority: in any conflict with other indicators, red line indicators take precedence and must be confirmed by the General Manager or higher. The purpose of red line indicators is not to add another evaluation item but to provide middle management with a formal basis to say "no" to short-term interests.

Result Indicators (Lagging): Customer complaints, returns and claims, external failure costs, on-time delivery rates. These reflect the true business outcomes but manifest slowly and are often not solely determined by the Quality Department. Result indicators should not be numerous; one per business line is sufficient.

Process Indicators (Leading, Modifiable): First-time yield, initial confirmation compliance rate, change control rate, supplier process capability achievement rate. The value of process indicators lies in their leading nature—they change two to six months before results. However, they also have a fatal flaw: the easier it is for the evaluated party to record the indicator, the more likely it is to be modified. Therefore, the hard standard for selecting process indicators is: the data source must not be self-reported by the evaluated department, or at least there must be an independent verification path.

Two basic structural ratios: each result indicator should be paired with one to two process indicators; the total number of indicators at the department level should be controlled to five to eight, with each having a single responsible entity.

3. Implementation Actions: Five Verifiable Steps

Step One: Set Red Line Indicators and Get Top-Level Approval. Who: Quality Manager drafts, General Manager signs. What: Converge on no more than three non-transferable items from safety, regulations, and customer key characteristics, and specify "priority in case of conflict." Criterion: Any middle manager can verbally state these three items, and there has been at least one decision in the past year that was truly rejected due to the red line.

Step Two: Create a "Result-Process" Pairing Table. Who: Quality Department leads, Manufacturing, Procurement, and R&D jointly confirm. What: Under each result indicator, list one to two process indicators and specify the data collection points and responsible persons. Criterion: Randomly select three result indicators, and corresponding process indicators can be found, with data not self-reported by the evaluated party.

Step Three: Establish a "Cost Transfer" Accounting Standard. Who: Finance and Quality jointly determine the accounts. What: Any additional actions taken to meet targets—rework hours, sorting hours, concession acceptance, late delivery—must be recorded in the cost of the department where they occur. Criterion: At the end of the month, one can immediately answer, "How many hours and how much money were spent this month to meet targets?" This is the most critical step in the entire article; without it, the previous structural design will leak.

Step Four: Create a Target Conflict Arbitration Table. Who: Quality Department compiles scenarios, Business Meeting confirms. What: List the three to five inevitable conflict scenarios in the company (production capacity and initial confirmation, cost reduction and supplier capability, delivery and release, samples and mass production), and specify: in which meeting, who decides, based on what data, and what records are kept. Criterion: At least three instances of decisions made according to this table and recorded can be found within a year.

Step Five: Conduct a Backward Verification After Decomposition. Who: Quality Department works with Finance. What: Sum up the targets of each department and verify three things—whether they equal the company's target; whether there are any public items solely the responsibility of the Quality Department; and whether any two departmental targets are physically impossible to meet simultaneously. Criterion: For any department, each indicator has a single responsible entity, and there are no mutually contradictory target combinations.

4. The Quality Manager's Actions and Costs

In the second year, the Quality Manager's first step was to set three red line indicators: zero concessions for customer and regulatory items, initial confirmation compliance rate for critical dimensions, and no production start without controlled changes. The General Manager signed off and explicitly stated: any conflicts with other indicators must be resolved by referring back to these three red line items.

The second step was to change the main indicators. He downgraded the "internal scrap rate" from a main indicator to a reference indicator and adopted the first-time yield (FPY) as the primary indicator, reasoning that the internal scrap rate can be modified by rework, whereas FPY cannot. Under the customer complaint indicator, he listed three process indicators—initial complaint response time, 8D closure rate, and change control rate. The third step was accounting: rework hours and sorting hours were recorded in the Manufacturing Department's cost, and the Procurement Department's target was changed from "5% reduction in procurement price" to "total cost reduction + key material process capability achievement." The fourth step was to formalize the conflict scenario between delivery and initial confirmation in the Business Meeting: joint decision-making by the Manufacturing Director and Quality Manager, with disputes submitted to the General Manager and recorded in the monthly resolution. The fifth step was backward verification, where he discovered the most critical issue: a 10% increase in shift production and a 99% initial confirmation compliance rate were impossible to achieve simultaneously with the current production rhythm and personnel configuration. The target was adjusted to a 6% increase in shift production, with the saved rhythm used to add two self-inspection stations.

The results in the second year were as follows: customer complaints dropped from 31 to 14, returns and claims decreased from 3.4 million yuan to 1.3 million yuan, FPY increased from 91% to 96.5%, and rework hours decreased by about 40%. However, the costs were significant. The procurement target was reduced from 5% to 2.8%, leading to a public conflict with the Procurement Director, who argued with him in the Business Meeting. The data in the first two quarters of the transformation was even worse—rework began to be recorded, increasing the apparent internal scrap rate, and he was criticized for "making things worse." The Quality Department's own indicators included "business department satisfaction" for the first time, which some colleagues viewed as a "soft indicator, self-created trouble." The entire system transformation took two quarters, during which he spent about 40% of his time on the pairing table, accounting standards, and verification, delegating almost all technical work to his subordinates. He later summarized that the hardest step was not designing the indicators but acknowledging that the previously attractive quality indicators were partly due to costs being recorded in other departments' accounts.

5. Self-Inspection Checklist

• I have no more than three red line indicators, signed off by the top level, and prioritized in case of conflict.
• Each result indicator is paired with process indicators, and the data is not self-reported by the evaluated party.
• Costs incurred to meet targets—rework, sorting, concessions, and delays—are recorded at the end of the month according to the department where they occur.
• The three to five inevitable target conflict scenarios in the company have clear decision-makers, data sources, and recording methods.
• The sum of departmental targets equals the company's target, and no two departmental targets are physically impossible to meet simultaneously.

If more than two of these items cannot be checked, the problem usually lies not in the target values. Before adjusting the numbers, ensure that the accounting standards and arbitration rules are in place—conflicts are never about the numbers but about the costs that are allowed to be transferred.

Conflicts are not about the numbers but about the transferable costs.

Knowledge code: 1.1.3

Version: v20260916

Author: QTank QTank is dedicated to providing systematic professional knowledge, methodologies, and practical tools for quality management practitioners, helping companies continuously improve their quality capabilities.