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Philip Morris Incorporated 880000 Malcolm Baldrige National Quality Award Report

Date: 1988 (est.)
Length: 83 pages
2030131267-2030131349
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2030131258/2030131429a/Philip Morris Usa 1988 Malcolm
Baldrige National Qualilty Award Application
Named Organization
Action Cost Team
Allied Chemical
American Inst of Industrial Engineers
American Natl Standards Inst Comm
American Society for Quality Control
American Society of Quality Control
Aqp
Assn for Quality + Participation
Batf, Bureau of Alcohol, Tobacco and Firearms
Board of Directors
Board of US Senate Productivity Award Pr
Central Fidelity Bank
Chesterfield County Schools
Circuit City Stores
Dupont
Epa, Environmental Protection Agency
Executive Comm
Factory of the Future Comm
Fifteen Year Outlook Comm
Focus
Fortune
Ftc, Federal Trade Commission
General Foods
Intl Assn of Quality Circles
Intl Management Council
Intl Standards Org
Involvment Team
Jw Fergusson + Sons
Marlboro Standardization Comm
Md Center for Productivity
Mfg Council of the Charlotte C
Middle Management Training Advisory Grou
Miller Beer
Natl Assn of Suggestion Systems
NC Employment Security Commission
New Products Comm
North American Container
Nqm Comm
Oscar Mayer
OSHA, Occupational Safety & Health Administration
Plackett Burman
PM Magazine
Qualiity Engineering Group
Quality Circles Journal
Quality Standards Task Force
Reynolds Metals
Richmond Gravure
Richmond Quality Conference
Richmond Quality Forum
Richmond Report
Senate
Society for the Advancement of Managemen
Steering Comm
Stone Container
United Va Bank
US Army
Va Folding Box
Va Productivity Center
Va Productivity Center Awards Comm
Va Society of Cpas
Vitex
Westvaco
Request
Stmn/R1-017
Stmn/R1-020
Master ID
2030131259/1429

Related Documents:
Litigation
Stmn/Produced
Site
M58
Named Person
Baldrige, M.
Campbell, W.J.
Deming
Horner, C.
Juran
Mroczkowski, T.
Pierce, E.F.
Resnik, F.E.
Serrano, M.A.
Date Loaded
05 Jun 1998
Brand
Marlboro
UCSF Legacy ID
qsj93e00

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!S !S ~ PHILIP MORRIS INCOR'PORATED 1988 MALCOLM BALDRIGE NATIONAL QUALITY AWARD REPOR'T' ri Page 1.0 Leadership ii ti ni j !j . j J' i r 1 - -i J ~ t 1.1 Senior Corporate Leadership 1 1.2 Policy 3 1.3' Management System, and the Quality Improvement Processes 4 1.41 Resource Allocation and Utilization 8 1.5 Public Responsibility 10 1.6 Unique and Innovative Leadership Techniques 14 2.0 Information and Analysis 2.1 Use of Analytical Techniques or Systems 16 2.2 Use of Product or Service Quality Data, 17 2.3 Customer Data and Analysis 18 2.4 Supplier Quality and Data Analysis 19: 2.5 Distributor and/or Dealer Quality Data and~ Analysis 22 2.6 Employee-Related Data and Analysis 22 2.7 Unique and Innovative Information/Analysis 23 3.0 Strategic Quality Planning 3.1 Operational andl Strategic Goals 24: 3.2 Planning Function 26. 3.3 Planning for Quality Improvement 27' 3.4 Unique and Innovatiwe Planning 28' 4.0 Human Resource Utilization 41.1 Management and Operatinns 30 4',2' Employee Quality Awareness and Involvement 33' 4,3 Quality Training and~ Education 36 4.4 Evaluation, Incentive,, and~ Recognition Systems 38' 4.5 Unique and Innovative Approaches 39 203013126t I
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3 3 9 4 9 ~ 7 . 0 I i i . I i. ~ I 5.01 Quality Assurance of Products and Services P'age 5.1 Customer Input to Products and Services 41 5.2 Planning for New or Improved Products or Services 4f 5.3' Design of New or Improved Product's 42 5.4 Measurements, Standards and Data System 45 5.5, Technology 46 5.6 Audit 47 5.7 Documentation 48' 5.8 Safety„ Heaith, and Environment 50 5.9 Assurance/Validation 53 5.10 Unique and Innovative Approaches 55 6.0 Results From Quality Assurance of Products and Services 6.1 Reliability and Performance of Products and' Services 57' 6.2 R'eductions in Scrap,, Rework,, and Rejected Products or Services 61! 6.3 Reductions in Claims,, Litigation and' Complaints Related to Quality 62 6.4 Reductions in Warranty or Field Support~ Work 62 6.5 Uriique or Innovative Indicators of Quality Improvements or Economic Gains 63 7.0 Customer Satisfaction 7.1 Customer Views of Quality of Products or Services 64 7.2 Competitive Comparison of Products 69 7.3 Customer Service and Complaint Handling, 71 7.4 Customer Views of Guaranties and Warranties 73 7.5 Unique or Innovative Approaches to Assessing Customer Satisfaction 73 2~~0~ 301312~ G~~ 8~~ I
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I 1 I i i I i i i I iI .I I L E A D E R' S H I P 1.1 Senior Corporate Leadership, Philip, Morris, has, always maintained a long-term view of the industry... We will continue to, excel because we have the people and assets in place to meet the dynanzics of the marketplace... Superior Quality - Product and Smoke - As determined by com~- petitive quality audits and a declining rate of consumer complaints. We believe [that] building upon our quality tradition... willl assure our continued growth and reaffirm our position as the industry leader: Thus did Mark A. Serrano, Executive Vice President, Operations, PM-USA,, open and close his management leadership seminars t'othe 700 managers of PM-USA's facilities in Richmond,, Virginia, Louisville, Kentucky and Cabarrus, County, North Carolina in Eebruary1986. His presentation is one example of personal communications, formal presentations, news articles andl interviews given by executives at all levels of PM-USA to drive home the message that quality - including continuous quality improvement - is what differentiates PM-USA products from competitors' products foreign and domestic. Executive management - the CEO, Executive Vice President, Operations,, Senior Vice President,, Manufacturing and Director, Quality Assurance - directly affects PM'-USA''s commitment to~ quality. Examples:  Senior, management sponsors andl supervises the five-year business plans. (to, whiChl all organization units provide input) and thecorporate~ quality policy.,  The CE0 (Frank E. Resnik), as chairmani of the New Products Committee, reviews all consumer input and quality assessments in the design andl development of new or modified product's and oversees the improvement processes. He routinely stresse& quality as the guiding principle in the development of new products - quality in every aspect, from tobacco to finished' package.  The Executive Vice President, Operations, Mark A. Serrano, conductsm monthly Operations review meetings in which quality goals„ progresss towards goals, status of quality improvement projects, consumer complaints and competitive audits are reviewed.  The Director,, Quality Assurance, interacts withi senior management,, management in alll facilities and management in staff groups to guide the development of quality roles and mission, quality policies, objec- tives and standards of processes, products and measurements. He is also responsible for the documentationl andl tracking of quality 203013127Q programs. 1
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9 7 I t t ~ t I t . . i a . Other examples of executives clearly communicating PM!-USA's commitment to quality:.  Frank E. Resnik, President & CEO Dnterview„ Richmond Report„ October 1984 I'm very committed to quality. I''m strong on, quality because of thee price of cigarettestod'ay- even though a big, part of it is taxes. If a: . person is forced to pay a dbllar or more for a pack of cigarettes, and some of the cigarettes are not~ smokeable - the filters falll off or whatever - that's very, very bad business...If our product is not~ thee best in the marketplace, it won't sell. We're noted for our quality, and we keep progressively improving in that area. But the bottom line to quality is, people...and Ii'm very proud of our people and the great jobb they are doing in the quality area..  W. John Campbell, Senior Vice President, Manufacturing Interview, Rrchmondl Report', January 1985 A good cigarette is a cigarette that customers willl buy and! enjoy.. That's what we've always made. I think we'll have to continue to discipline ourselves to~ produce ani excellent'! quality product, although I don't think thatqualiRy stops there. T& me, quali'tyis the quality of the job that I personally do. We must all perform quality work, whether we type letters, pack cigarettes or run a tobacco feeder in the stemmery. This: is our strength, and it's what the company's been built on. As individuals, the personal feelings that we have about quality are reflected in the way we feel about quality here at work.  Edgar F. Pierce, Director, Quality Assurance Speech, Taiwanese Business Journalists, September 1987 Philip Morris became the largest not because size was our goal but because our goal was to be the best. These words are translated into specific objectives through the 1988-1992 Five-Year Manufacturing Plan, in which quality is highlighted as a separate topic and integrated throughout. Our progress toward these objectives iss discussed monthly with CEO Frank E. Resnik at the Operations meetings, and is, reviewed annually with the Board of Directors during the Operatibnss presentation. 20301312711 00 2 40
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Our executives carry this quaiity message externally through presentations oni quality improvement and employee involvernent~ to:  American Institute of Industrial Engineers  American Society for Quality Control  International Management Council'.  Society for the Advancement of Management. They also, sponsor these and other organizations and support large PM-USA memberships in them (refer to Section 1.5). Concrete evidenceoftheiinpact ofleadership is found in the following sections:  Domestic and international unitvoltime~ growthi - Section 7.1  Iincreasing market share - Section 7.2  Decreasing consumer complaints - Sections 3'.1 and 7.1. PM-USA's domestic and international growth,, increasing market share and decreasing level of customer complaints - all indicate that the quality of our product clearly meets the expectations of consumers and is evidenced by customer loyalty. While our annual five-year plans specify our intent to be the best! in the industry - it is in the marketplace that the performance appraisal is given. The Fortune magazine "Best in America" article (March 28,, 1988) shows that the report card is in. 1.2' Policy As stated in our overalll business plan, PM-USA''s quality mission statement is "to manufacture cigarettes that deliver consistent consumer satisfaction withi quality superior to our competition." The philosophy behindl the statement is that PM-USA will:  Design products with the consumer in mind..  Clearly define alt quality characteristics ini terms of consumer expectations.  Design and maintain equipment~ which has the capability of' rnanufac- turing products to meet consumer expectations.  Develop and implement systerns for monitoring conformance to consumer expectations and for comparisons to competitors'' products.  Maintain a continuous improvement approach.  Train PM-USA personnel in consumer expectations, causes of defects, statistical process controls and corrective actions. 20301312 '72
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 Motivate personnel to achieve and maintain a superior quality level by including~ quality as an element in performance appraisals and byproviding recognition for sustained high q,uality.. s i  Engage and' involve employees at every level in efforts to enhance quality and satisfy consumers. This mission,, in effect for seven years, was developed jointly by line and staff personnel, with the guidance and approvall of senior management, and incorporatedl into management's written manufacturing and business plans. This missioni is also disseminated to employees in employee handbooks and quality standards manuals. Through speeches, reinforcement, recognition and Management By Walking Around (MBWA), managers at every level spread the wordl about our quality philosophy. In fact, our Senior Vice President,, Manufacturing, makes it, a point to routinely visit each manufacturing site and to spend time on the production floor. The large-scale training, efforts ini quality standards - the result of ai significant commitment to ani ad hoc Quality Standards Task Force - is but one further example. As its manufacturing and business plans outline,, PM-USA continues to strengthen t!he focus on orientation toward the consumer, continuous quality improvement, the forging of all functions, organization units and emplbyees into ai quality-driven corporation. 1.3 Management Systemi and the Quality Improvement Processes Senior management integrates QIP andl management structure by constantly monitoring trends (and progress against goals) andl assigning interdepart- mental problem-solving teams as necessary. Responsibility for tracking quality improvement is assigned m Quality Assurance and progress towardl goals is reported to all departments and teams having, impact~ on product quality. Every manager and employee ini Operations is held accountable for the qualityy of his/her production. These improvement objectives - and results - are included in the~ 19884992' Five-Year Manufacturing Plan. Integration of these objectives is assured because: ~Each level of~ management~ uses~ the same set of~quality~ standards~~..  Each level of management works from, the same quality improvement goals that ini turn are driven by customer, consumer and competitor assessments.  Quality standards are constantly being upgraded and passed throughh each level of management to assure awareness, understanding; and buy-in. 203101312'731 4
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But executive commitment to quality is obviously more than words in, a five- year plan. Itt'akesaction and modelingbehavibr. The Executive Committee,, comprised of the senior management of each department:  0 e a.  Attended Dr. Juran's "Quality and Upper Management" seminar together.  Was trained' ' in Dr. Deming''s1 philbsophy, andi statistical process control techniques.  Visited numerous other businesses to learn about their QIP' and QWL systems.  Serves on the steering committee for PM-USA''s initial total quality effort.  Reviews the progress of operat'ional' quality improvement programs and emplbyee involvement programs. Tocont'inuetheintegrationi process, mid4evel andl lbcal managers from: ~  Research and Development Iinformation Services  Engineering  Employee Relations j1 I  Manufacturing  Quality Assurance r  Purchasing  O'perations, Services  Finance  Tobacco Technology a have also receiived training in the Deming philosophy and SPC. : .. s  s r. r  Numerous elements of QIP' have proved valuable in imter-functionall coordination and! cooperation:  Planning meetings held by the Senior Vice President, Manufacturing, bring together executives involvedl in production to approve goals,, identify obstacles, zero in on quality and process problems.  Executive staff meetings: representatives from all support groups and' service areas attend to assure that all aspects of a change in quality goals or standards can be examined.  Quality Standards manuals: specify approximately 200 cigarette and packaging quali'ty characteristics. These standards are based onr consumer expectations gathered from consumer surveys, complaints and consumer interactions. The standards have been communicated, not only t~o Operations personnel, but to staff departments as well. The manuals are made available to all personnel and used by the training centers in technical t~rainingprograrns.  On a daily, shift to-shift basis, Manufacturing department~ heads meet~ to discuss process problems with. shift management. The Quality Audit supervisor from each shift attends these meetings where quality problems, goal' setting and progress ~ reports on quality improvement~ programs are discussed. 2 Q 30 13 ' 1274 5
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I  e I-  i.; I .a I  I  I  14 i .~ I . ~ I 1.0 r  I  I is- a i ~ 7d I  I a  10 I Other examples of integration of mission and structure and the use of interdepartmental teams (including the use of supplier/user concepts) include: Thelleaf department andl Quality Assurance jointly established quality testing laboratories ini Izmir,, Turkey, and Salonica, Greece, for quality measures during processing.  Charlie Horner,, Director, Manufacturing Services, wrote an issue of Focus (Management Development publication) on "Quality: A Major Part of Every Task"' for distribution to all supervisors and managers..  Ad hoc tearns are created - often on each shift or across shifts - to develop~ and implement ideas and concepts, whichaddressqsuality, effi~ ciency and~ the general quality atmosphere of the production areas. People from appropriate departments!, (such as Maintenance, Engineering,1Vlanufacturing and' Quality Assurance) are included on these teams.  Processing: plant personnel routinely visit their "customers" in primary/cigarette manufacturingo to review quality levels, problems, measurements and to establishi QI projects and teams.  Cabarrus' Organization Work Units (departmental) and Problem Solving Units (cross organizational) ~ meet routinely. Quality Assurance is the focal point for quality improvement efforts, documentation and appropriate interpretation of all quality data. This is accomplished through periodic and exception reporting expressing quality trends; status of engineering improvement programs; defect frequency, rate and variation; and customer complaint trends, (particularly as they relate to consumer reaction to ongoing quality improvement programs).. PM-USA tracks quality improvement information by the following means:  Reporting systems are used to compare actual' performance to annual five-year manufacturing plans and to set objectives.  QA Managers from all facilities meet quarterly to: • Discuss philosophy of total quality management . Review quality trends • Review, progress on quality objectives • Standardize ~ methodology • Establish QI goals, objectives and action plans. Object2ves, - botht~o create stretch targets and to track progress - are an, invaluable part of the process :  Major quality improvement goals (and quantifiable objectives): are established basedl on areas where consumer and~ customer complaints are highest. Thesehelp~ identify where PM-USA is having the most problems in wholesale and retail markets. 20301312175 ' 6
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 Using the information gathered from plant audlt~s, corporate audits, customer/consumer complaints,, competitive audits and internationail competitive audits, a set of goals is established and five=year action plans, are designedi to achieve these corporate goals. These goals, are disseminated to all levels of management: and progress is: reviewed quarterly. I r  Corporate quality plans and goals, with accountability assignments, are established through five-year plans.  Corporate and factory quality objectives are established in five-year planning, incltidingsuchi objectivesas, 50 percent reduction oft~he topp five consumer/customer complaints.  The Resource Utilization Planning I process, implemented by Quality Assurance, establishes ~ five-year goals such as reductions in Quality Assurance inspection costs, variat'ion in moistures, customer complaints,, pesticide controll costs and efficiency, incoming, materials defects, defect rates and quality cost per 1,000 cigarettes. PM-USA's QIP management systemi parallels the corporate management structure: at every level, quality is a clear job responsibility and specific goalss are outlined. The Company goes to great lengths to facilitate the transfer of quality technology. Specific examples:  Management identifies hourly ernployees considered to be sub ject matter experts in a particular area of quality improvement. These individual's receive training whichi enables them to pass their skills on to their peers.  Expertise and training is routinely provided to assure a centralized quality audit in, all major operations regions: Eastern Europe, Middle East and Africa; European Economic Community; Latini America/Ib.eria;~ and Asia. Standardization of product arnd! processes is also the subject of effort: because PM'~-USA has four distinct cigarette manufacturing facilities,, Engineering and Quality Assurance have joint responsibility to standardize alla equipment, processes, materials,, and measurement systems before transfer to Manufacturing. Other examples:  The Marlboro Standardization Committee routinely reviews thee procedures and processes to assure Marlboro! and other products are consistent - among all our facilities.  Procedure standardization is in progress by means of comparative analyses as well' as round-robin programs. Examples: primary 2 a~~ 1312 ,7 6 methodology, menthol analysis, and pack seal gauge. 7
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. w ~ . r >A. I 1.4 Resource Allocatilon andl Utilization Appropriations for quality improvements have increased in past years and plans have been approved for increases in the future. I 1983-1986 1987 1988' (Average)~ (Projected) I Fundfng,  n_ I Approved For Quality Projects (In Millions) $5.4 $7.7 $13'.8 Cost of Quality studies performed by the Finance department show favorable trends in terms of being proactive rather than reactive. Prevention costs have increased while appraisal and failure cosm have decreased. r ~f 1983 1986 I Prevention Costs 9:6010 16:2% Appraisall Costs Internal Failure 29~:0% 61.2010 26.6010 57.0% External Failure .2a7o .2a7o. W a 0 511IR d The following graph, puts this into perspective: the theoretical' quality cost curve (developed by Dr. Juran), indicates that, since 1983' PM-USA has remained in the zone of indifference while moving closer to the optimal cost point. 280000 240000 200000 180000, Theoretical Quality Cost~ Curve COST OPTIMAL 120000, 80000', Zone of Improvement Failure Costs >70% Prevention < 1 D% Zone of Ihdifference Failure Costs 50%: Prevention 10%1 Zone of Perfectionlsmi Failure Costs <40% Appraisal >50% 100% ~ Defective~. Quality of Conformance 100°!o Good 20301 31 2 771 8
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I= so IN I 1- I  v IT I  I I I a  0 I  I 0  l  s i-  0 i-  s I- I - While these figures show a decrease in constant total quality cost dollars, the allocation of spending is moving in a positive direction. Example: prevention costs increased 60 percent - fromi approximately 9.6 percent in 1983 to 16.2 percent in 1986. This represents an increased emphasis on efforts to pre- vent problems before they occur in the production process through increased training programs, planning, and process controls, engineering projects and improvement programs. Example: appraisal costs decreased 13.2 percent - fromi approximately 29 percent in 1983 to 26.6 percent ini 1986. This represents a reduction of attendants and inspectors due to improved materials and processes and automated inspection devices. Example: internal failuree costs decreased 6.9 percent - from 61.2 percent in 1983 to 57.0 percent in. 1986 due to a decrease ini cigarette rejects.. Other trends:  Cost of quality as a percent of sales decreased from 3'.5 percent ini 1983 to 2.7 percent in 1986.  Consumer complaints decreased 39 percent fromi 1983 to 1986, Dr. Jurani suggests improvements in Cost of Quality will occur as failure costs approach 50 percent and prevention costs approach 10 percent. The latest Cost of Quality study ind'icates that PM~USA is moving in this direc- tion. Prevention costs were 16.2' percent ini 1986 and failure costs were 57.2' percent. The target i& toimprove, failure costst~& the 50 percent level. Future Cost of Quality studies for PM-USA will be conducted witlth continued emphasis on plant-by-plant studies. A f'uture target for resource allocation is to automate or further reduce inspection/appraisal costs. The direction for Quallty Engineering is to make suppliers (particularly machinery vendors) cognizant of PM~USA's quality measurements and standards so that they can design robust machinery with capabilitiest'~hat meet or exceed a: Cpof1.33, Summary of cost of quality: Since 1983,, study results indicate that PM-USA is approaching the optimal cost of quality. We have continued to spend more dollars in the prevention area (up 60' percent) while appraisaI and internal failure costs have decreased by 13.2 percent andl 6.9 percent, respectively.. A major commitment of resources occurred in 1984, when the Quality Engineering (QE) G'roup, staffed by 30, professionals, was created. Quality responsibilities are included in the following areas:.  New brand deveioprnent  New equipment!, processes and materials evaluation  Quality improvement programs  Quality standards  Unified~ procedures 20 3011312 78 9
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I .r I ~ I ~ I ~ I . I ~ 1  4 i . I ~ . I .~ I . LI I ~ I I I I I t d  Metrology for both new and existing measurements  Coordination of SPC training.  Analysis of on-line control systems and automated detectors/rejectors  Process capability assessments/documentation  Audits of procedures and practices Incoming, materials specialists were later addcd to work with suppliers on process capabilities, materials certificat'ion and vendor rating systems. A Quality Assurance statistician, process analysts (for process improvements in the manufacturing facilities)d and employee involvement facilitators were also added. These addAtions are remarkable since the Company had also implemented two "organizationi analyses'"' (reducing overall staff' and line personnei)s two early retirement'~ programs, a hiring freeze and a constraint on constant dollar increases ini fixed~ operating budgets. Other specific evidence of resource allocat'ion:  ffunding of Product Audit's computerization  Refurbishing of Quality Audit laboratories  Commitment to SPC training by external consultants rffunding of Tobacco Quality Audit Lab  Funding of Automatic Test stations  Funding of Tobacco Lot Analysis, Other financial and nonfinancial commitments include:  Louisville scheduled implementation of a formal process control group under Quality Audit. SPC and procedural standardization will be applied.  Using extensive data gathering and laboratory testing,, each piece of equipment in the tobacco blending area was qualifiied~ through Quality Assurance before it~ was put on4ine.  Process control through computerization ini tobacco blending area yielded better size and moisture control. ~O!n-line, ~ moisture meters~ for process~ control were~ installed~. 1.5 Public Responsibility The first paragraph, of the PM-USA's "Corporate Contributions Policy and Guidelines" pamphlet states: The degree to which a corporation, lfves up to, those expectat2ons [of the general population] is measured by the quality of its goods and services, by the fair treatment it accords its employees, and by the concerni it shows for the well-being: of the communities in which it has special interests. 9610'i2f 279 1b,
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The following list gives only a flavor of t~hekindsof activities PM-USA regularly undertakes:  The Leaf department and QA discussed PM-USA's quality expectations withi the Flue Cured Stabilization Cooperative prior to processing.  Engineering has provided assistance to suppliers~ to improve process capabilities.  Director, QA, presented PM-USA's approach to: "Total Quality" to. PM~Europe's Annual Quality Assurance meeting.  Disseminati'on of information about quality enhancement ideas and employee involvement to other parts of the organization and to other organizations: • General Foods •Oscar Mayer . Miller Beer (including attendance in QualPro). . Vitex • Reynolds Metals . Virginia Folding Box • Stone Container Corporation . Richmond! Gravure.  Selection of PM-USA as recipient of the U.S. Senate's 1983 Productivity Award, recognizing PM-USA's "productivity record and Employee Involvement Program achievements.'"'  Machine vendors begani PM-USA quality standards training, in, 1987 and~ formulated a machinery assessment proto~col'for their internal QA staffs m qualify machines before installation at PM-USA.  Purchasing and QA Incoming Materials provided SPC/seven basic tools training to Virginiai Folding, Box, Richmond Gravure, i'slorth Americani Container and Vitex. Team leader training (problem solving and employee involvement) offered to vendors. Printing converters (Vitex, Virginiai Folding Box, J.W. Fergusson and Sons) were given support in designi of equipment detector technology.  Identification of Philip Morris as "one of the great pioneers and famous proponents'"' of Quality Circles in the U.S. in Dr. Tomasz Mroczkowski's article, "Cooperative Problem Solving Teams in Jobbing Production,'"' The Quality Cfrcles J'ourrtal, June 1983. . 2Q'30i3i2180 ti
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 QWL information presented to these local organizations: • City of Hopewell • Allied Chemical • Circuit City Stores •Westvaco• Chesterfield County Schools • United Virginia Bank. • Central EidelityBank• CityofRichmond • DuPont  Through the Agricultural Programs function in the Leaf department, PM~USA maintains an active program to assist growersini improving tobacco quality. This action is focused on cooperative programs with land-grant universities in the southern tobacco producing states. Typically;Philip Morris funds research grants and educationall programs to develop and communicate to, growers ways to improve tobacco quality and means of measuring quality. While enhancing farm income, this: app.roach, improves the quality of our basic raw material. . PM-USA supports various quality and participatory management organizations through membership,, officers, funding and presentations.. Some examples: • Superintendent, Manufacturing Support,, Stockton Street (formerly Manager, Employee Involvement) serves on Boardd of United~ States Senate Productivity Award Program. . PM-USA sponsored the 1988 Society for the Advancement of Management seminar on Total Quality Management. • PM-USA is represented on the Virginia Productivity Center awards committee and the American National Standards, Institute(ANSI)~ committee (theU.S. representative to theIint~ernat~ionat Standards Organization). • The Resource Utilization Planning (RUP) staff attends meetings and conferences of the following professional organizations (to lecture and to exchange ideas on improving quality and overall corporate performance): rAssociation for Quality and~ Participation (AQP) rVirginia Productivity Centerr U. S. Senate Productivity Awards r American Society of Quality Control AInternational Association of Quality Circles AVirginia Society of CPA"s, . P'M'~-USA supplies data and contributes to National Association of Suggestion Systems (NASS). This information is sorted by NASS' and published in an annual report which is categorized by type of industry and~ totall number of employees. Members of the Action Cost Team (ACT) are members and serve as officers in NASS. PM-USA has received four nationall awards over NASS's eight-year existence for "Highest Savings per Einployee." 20,30131284 12
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• General Manager, Manufacturing-Cabarrus, is ani active participant on the Steering Committee for the Manufacturers' Council of the. Charlotte Charnber of Commerce. The impetus of this committee's plan is to affect the methods, manpower and machinery used by manufacturers to produce products to, more stringent specifications as required by consumers. . PM~-U~SA~ is~~ a strong supporter of the~ American Society~ for~ Quality Control (ASQC)~, e~.g~.: I .. AP'M~USA professionals founded the Richmond chapter of ASQC. . I . I 1i ~ _Q  -A ~ . i I . -W I -0  w, I  7  :1 -W a 0 I i-A I_ •Of' 200: Richmond-area~ members of ASQC, 6& are PM-USAA employees, representing QA,, R&D, Purchasing, Manufacturing, Cost Control and Planning. ATwelve of the 36 Richmond-area Certified Quality Engineers are PM-USA emplbyees. APM-USA has been a sustaining member of the National ASQC since 1981. APM-USA sponsored ASQC's 1987 and 1988 National Quality Month (NQM). PM-USA's QA Director is a member of the NQM Committee. APM-USA's Senior Vice President, Manufacturing, was keynote speaker, ASQC meeting November 9, 1987, "The Changing Role. for Quality Control. "' . PM-USA co-sponsored Richmond Quality Conference ' 87. . Facilitators of PM'~-USA''s Circles of Excellence are also members and officers of AQP, Virginiai Productivity Center„ Maryland Center for Productivity, Richmondl Quality Forum, Society for the Advancement of Management, and ASQC. The Company presented QC orientations for command structure of U:S'. Army, Fort Lee, Virginia and DuPont EIP'.  An, annual operations presentation, with quality items included, is given to the Board of Directors. Mark Serrano, Executive Vice President, Operations, ini one such presentation stated: Philip Morris stands on top of the industry because quality pervades everything we do. The demand for excellent perfoirmance reaches across the entire organization - ini the research laboratories, the engineering design rooms - not just oni the production floor. Superior product 203a1312~i'~ 13'
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~ I S ~ ~ I I W I ~ I S tl S !  !@ ~ . S'. . I ~  S I . t quality is an absolute necessity in a highly competitive industry. Today we make the best quality product~s, in~ theindustry„ anct this leadership is a challenge to maintain., Our competitors are continually trying to overtake us. I want to assure you that this commitment continues in PM-USA. Quality and~ excellence are not words we just talk about - they are in-grained in us and influence the way we do business. We stmived for excellence before it became the subject of a best-seller. 1.6 Unique and Innovative Leadership Techniques Participatorytechniquesthat'~ have brought forth exceptional results include ad hoc, cross-functionall task forces, asked to sketch the future and what PM-USA needs to do to enhance its quality reputation and~ commitment. Three such task forces chartered by senior management:  Middle Management Training Advisory Group: chartered to determine what skills managers would need ini 1995 to help PM-USA thrive (and then, what kind of training and development PM-USA should be providing today to prepare our rising managers); one clear observation of this Advisory Group was that future middle managers must be committed to the spirit of excellence in product and relationships).  Factory of the Future Committee: chartered to uncover changes that wouldl allow PM-USA to act proactiveliyto affect quality and' productivity in these areas: • Mission, management style and structure • Technology • Sel'ection and~ train.ing processes, • Labor Relations andl utilization of human resources • Management'~ systems. The committee's charter recognized, as a sine quai non, that "the mission of P'hilip, Morris [is] to be the low-cost producer of cigarettes whose quality is better than those of any and all competitors." One of the clear messages of the report to the Senior Vice President, Manufacturing, was: "We must not accept mediocrity; we must create a normi which expects and cherishes excellence."  The Fifteen Year Outlook Committee: chartered to: look at what! 2002 A.D. would demand' of us and to identify issues we should begin to deal with now. These task forces direct managers to focus on the big, picture; help them learn more of each others' disciplines; and facilitate cross-functional teamwork. 2030131283 141
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Recognizing the importance of cultural differences in our international markets, PM-USA's senior management initiated' and participated in regular "survey" visits to ma jor markets around~ the world t~o: rN 0 FM i no 0 r1 ..W E I R 11 3 ,I  Understand better consumer and customer expectations.  Learn first-hand the distribution systems.  Gain insight~ into warehouse, retail customer, and consumer problems.  Educate marketing, sales, warehouse, and retail personnel about PM-USA products andl provide to them quality trends andl irnprovements. These surveys have resulted in definite improvements in storage, handling, shelf-life and stock rotation. Furthermore, because of these initial face-to- face communications and personal observations, as well as subsequent routine visits by other management personnel~ PM-USA has been able to makt quality improvements in product' design, manufacturing and materials in theworldlwi& market. 2030131284 15
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INFORMATION ANU ANALYSIS . U-01 LT 2.1 Use of Analytical Techniques or Systems. PM-USA systematically collects qualitative and quantitative datai from both internal and external sources. The information derived from these data is used from the concept stage through design and development and finally validated' through field testing. R&D established internal panel surveys to evaluate product taste. Panels provide data related to acceptability (like-dlslike), descriptive characteristics of taste qualities, and comparisons among product models. In addition,, consumer opinions, preferences and perceived needs are solicited through external panelists throughout the United States. Replicated design analysis of variance and other multivariate statistical methods are employed to analyzee and validate the data for use in marketing/advertising, as well as in design and develbpment of newproducts, Product development is an evolutionary and' iterative process involving 1Vlarketing, R&D; Engineering, Purchasing, Technical Services and Quality Assurance. Collected data relate to material quality, material~ and machine capability, reliability, and effects of process/materials changes on product quality. Techniques for evaluating quality leveis or improvements include:  Use of X, R' andl S charts to assure product consistency  Pareto analyses of product defect rates and types to identify major control and~ improvement opportunities.  Plackett-Burrnan screening, experiments to determine critical variables  Process capability studies to determine Cp and! Cpk.  Simulated shipping tests to assure cigarette/package integrity  Trend analyses of material/process/product performance Analysis of variance to identify major sources~ of variation.  Multiple regressioni to correlate quality characteristics with significant process variables  Tests of significant differences (Chi-square, t and F tests, binomial) Environment testing to predict product performance in adverse climate&  Reliability and function testing of packaging using automated or panel simulations. Onee equipment, materials and product specifications are confirmed, results and analyses from pre-production runs are reviewed with Manufacturing personnel.ID.uring test marketing, data are collected to measure quality conformance and productivity (yields, machine efficiencies, waste). This data,. . 20301312816 6 16
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! w I ~ 11i 01 i 1i . . M  0  0 : t! e W 0 = i as well as product sales and opinion survey data, are used to; predict product success and determine if the originally designedi brand will be expanded too national markets. As new brands proceed into full prod'uction, internal and external panels continue sensory evaluations to assure consistency in product or to detect perception changes in the market. These data are! used by Marketing, R&D'., and~ QA. Analytical, physical and visual aspects are tracked~ internally through process and product monitoring and externally through the competi- tive brand audits described in Section 2.2. Analytical techniqueslistedl above also apply to this data.. 2.2' Use of Product or ServiceQuality Data Finished product testing is a major source of product performance data. These after-the-fact assessments assure compliance with government! regulations and advertising claims. In addition, they are true indicators of what is going to the consumer and provide focus for quality improvement~ programs, companywide. Measures at various stages of product design, development and product'ion are used to identify and correct:, problems to assure al high-quality finished prod'uct.. Finished~ product samples from alU manufacturing locations are visually inspected for cigarette and packaging defects. This inspection is conducted by an independent, central audit function. Defect levels andl trends, evaluated todetermine the status of quality improvement objectives, are widely disseminated throughout the Company. Smoking data are provided weekly for all brands from all locations. Tar and nicotine,, as welll as menthol levels, are reviewed ini conjunction withi supporting physical test data (weight, circumference, moisture). If data indicate, process or material changes are made. Reviews include personnel fromi Quality Assurance, R&D, Technical Services,, and Purchasing. In different cities throughout the~ United States, the sales force purchases products which are inspected by the central audit function. Defect data from visual inspection of PM'-USA cigarette and~ packaging and' selected domestic competitors' products are analyzed and reported quarterly. Also reported are smoke delivery and' physical test data. Comparisons with our competitioni are also conductedl in selected' international markets, including, Japan, IHong Kong, Taiwan, Singapore and Saudi Arabia. Data from each of these sources are analyzed'' for trends and significant differences and used throughout all levels of management tofocus efforts ini Purchasing, R&D, Manufacturing, Planning, Engineering, and 1Wlarketing. 2030131287, ~ 17 t.0
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2.3' Customer Data and AnaEysis  ~ I ~  a I . ~ I b I  I   I- i- 1! I= ~ PM-USA receives quality-related information and compiles data from four major consumer/custorner sources. These include: Market Surveys The opinions and preferences of consumers - users of the product - are solicited through several channels. Sample products are distributed nationwidee to demographically selected panelists. Products may be tested blind or identified. Results for preferences and~ acceptability are analyzed and used in new brand development, competitive brand positioning and~ monitoring consistency in current products. Telephone or face-to-face interviews are routinely conducted by both independent and internal organizations - again, to solicit information about consumer expectations, perceived! needs, andl preferences.. Statisticall method& used include multivariate statistics, replicated design analysis of variance and trendl analyses. Consumer Complaints Letters and phone calls are received directly from~ consumers expressing their specific concerns with the product. Samples are sometimes included or may be requested for further evaluation. All complaints are reviewed and categorized. Data are compiled, weighted by sales impact and adjusted for seasonal trends. Quality improvement priorities are determined by trend analyses and Pareto~ ranking of complaint categories. Consumers receive personalized responses and appropriate replacement product. Response letters: are mailed~ to the consumer within four to seven days of receipt. The replacement product is intended'o to be in~ the hands of the consumer within three weeks of the initial correspondence. In addition, consumers receive complimentary copies of Philip Morris Magazine quarterly. Customer Complaints Distributors or jobbers - who buy cases of our product - also communicate their concerns to the Company: These communications relate ~to quality observations concerning the product as it progresses through the di'stribution system. Data from these sources are also compiled~ and ranked for quality improvement priority. Appropriate and timely responses are provided. International Customer Relations International customers are visited routinely. Since their relationship to PM-USA differs because of government policies and~ monopolies, visits are scheduled with sales personnel~ distributors, wholesalers, and retailers. Included are site visits, product reviews and open discussions about~ concerns, corrective action and prevention., Information is compiled' on~ product: and service concerns. Samples off damaged or defective product are brought back for review with QA,. Engineering and Manufacturing. Again,, trends are analyzed and prioritiies addressed. 2 0 3`01312 a' S ia
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i- rW1 r n n n n. oi 0 a 0 >o lo 2.4 Supplier Quality and Data Analysis. Datai regarding each supplier's quality performance are collected'~ fromi both internaf and external measures definedl in our rating system plan. Throughh routine reviews of this data with each supplier, PM-USA's expectations and objectives are reinforced.. Suppliers' success and failure in quality improve= ment can be measured'i by the volume of PM-USA business allocated to them. In specific cases, after repeated'l failure to measure up to P'MLUSA standards, and after protracted counseling and training, business with that supplier is discontinuedl. Programs for collecting data and providing feedback on supplier quality incl'ude:: rTobacco Quality Audit: provides evaluationi of processed incoming tobacco, including size, stem content and moisture content to be used in buying programs.  Vendor Rating: provides a performance index based on sample data, rejectedl material, cost, service, and vendor-initiated qualityprojectsto~ assist~ in making purchasing decisions.  Vendor Audit: evaluates vendors' procedures, methods, documentation, training, and data management as controls to assure compliance with quality improvement'~ objectives.  Incoming Materials Audit: provides laboratory evaluation of incoming materials and is used to support vendor rating.  p'loor Complaints: document and prioritize materials problerns found in production related~ to machinability, construction or visual quality and are used in vendor rating. To facilitate supplier quality improvement, PM-USA provides suppliers with support and~ guidance for their quality programs by:.  Reviewing Tobacco Product~ Standards with suppliers annually, providing laboratory set-up assistance,, processing, guidelines andd troubleshooting support.  Providing test procedures andl training for tobacco suppliers' quality assurance personnelL  Participating in joint studies withi our major tobacco~ supplier to standardize operations and improve product consi6tency.  Providing technical assistance for establishment of tobacco quality audit laboratories in locations close to international field operations.. 203'0131289 19
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 Providing, non-tobacco material suppliers with specifications and visual print standards manuais..  Assi'sting non-tobacco materiall suppif ers with implementation of employee invol!vernent teams, problem-solving techniques, basic statistics skills, and statistical process control. Provid7ng PM-USA engineering support for advanced technology on-line quality monit'oring to printing suppliers. Data generated by suppliers andl PM-USA are analyzed to identify quality deviations, adjust allocations, controli in-process operations and improve quality measurements and, procedures. Specific examples of data-based decisions include:  Exclusiion of tobacco processors from PM-USA allocation/buying programs!.  Improvement of product quality from suppliers of tobacco as shown below: Tobacco Quality Audit Facility Quality Audit Results 1'986' vs 1987'  1986  1987 PERCENT 30 20 12.5 10 0 SUPPLIERS/PROCESSORS' ; u )A  Changes in the containers used for other tobacco material (e.g., size less than ~/4 inch and stem) while maintaining quality and reducing cost. 22.3 NSK VB OK TN RC A'LEM' TK 21 L0'. 16.7 24.9 ET AT NR' 203013129 a 20
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 Improvement in direct materials quality while reducing costs as shownn below: a r to J ~ I t Direct Materials Purchasing Cost 1983-187 2.0 COST 1.9 1.8 1.7 1.6 1.5 1983 1984 1985 Direct~ Materials Purchasing Quality 1983-1987 QUALITY LEVEL 1983 1984 1985 1986I 1986' 1987 1987 20301311231 21
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2.5 Distribution and/or Dealer Quality Data and Analysis Quality protection dtiringdistributionis measured by volume ofret~urned~ goods and warehouse audit's. PM-USA policies and procedures for assuring product quality during warehousing are reviewed with, warehouse personnel, both internal and external. Operating manuals, include procedures for proper handling, storage and, care of our proctucts. Warehouses are audited duringg field visits to assure that operating procedures are followed., Policies and procedures are reviewed and deficiencies discussed. If deficiencies continue, use of the warehouse is di'scontinued.. Retailers are instructed in product date-coding and product quality. Old or damaged product is returned, to PM-USA through the distributor. Saless personnel routinely conduct stock rotation and visual, product audits in retail outlets, This informationi is shared with field sales support, brand management, customer services and quality assurance. 2.6 Ernployee-Related Data and Analysis The evolution of employee involvement programs at PM-USA is described in Section 4.2. As shown below, participation in these programs has grown 70 percent since 1983.. Employee lnvolvement Participants (All Locations) 1983'-1987' NUMBERI OF' EMPLOYEES A 4 I ~ Another significant employee-relatedl trend - safety performance - is shown in Section 5.8. . 203'Q'13120-2 22
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~ ' ' ' ' . ,~ ' '  r~ ' ' ' . I ~ . ~ I Employee suggestions are collected from a variety of sources including:  Einployee involvement, group meetings  Resource Utilization Planning (RUP) survey responses  Suggestion boxes located throughout, the facility. , Suggestion box ideas are collected, tracked and recognizedl by the PM-USA Action Cost Team (ACT). The number of suggestions implemented has increased by46percentfromT983'to, 1987. 2.7 Unique and Innovative Information/Analysis A major focus during the design and product'R'on of a cigarette is its taste, which is, in, large part, determinedl by the tobaccos used' in the blend. There are hundreds of grades of tobacco: - depending on tobacco type, growing region and stalk position - each different in its chemical make-up, aromatic and/or physical properties. The new PM-USA Tobacco Lot Analysis program is intended to optimize the development of new blends/products and enhance the maintenance of blend consistency from crop to' crop. Results from chemicall and! physical analyses of each tobacco grade are used in computer modeling to predict smoke characteristics, quality and~ cost~ implications of new and existing, blends. This process will assist in meeting advertising claims, reducing the number of cigarette construction andl filter changes required because of tobacco varia- tions and reducing the number of prototype production runs required during new brand development. 203013'12Of 3 i ~ 23'
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STRATEGIC QUALITY PLANIN ING rr rr 3.1 Operational and Slrategic Goals A corporate quality goal is established by senior management and communi- catedl through the five-year business and manufacturing plans ta guide strategy development and allocation of resources throughout PIvI USA. Our corporate quality goal, "To manufacture cigarettes with quality superior to the competition while delivering consistent consumer satisfaction" is clearly stated in PM-USA's 1988-1992' Five-Year Manufacturing Plan and each of the functional area plans. Corporate quality goals are identified by priorities derived from consumer complaints and competitive audits, In our 19854989 Five-Year Business Plan, specific goal's were established to reduce by 50 percent consumer complaints in the following four quality areas by 1989: Complaints Quality Area Quality Goal 12/31/84 12/31/87' Subjective Physical Function Material' 4.5 3.5 2.9 1.0 9.0 7.0 5.7 1.9 The graph below depicts progress made toward these goals. 20 10 0 -10 40 Operatlonal Improvement Priorities 8.2 4.7 3.3 1.2 1987 Progress vs Commitment~ /,1'985  1986  1987' PERCENT CHANGE IN CONSUMER' COMPLAINTS PHYSiCAL, FUNCTION. MATERIAL SUBJECTINE, 1989 GOAL _ 42.3 Five-year goals are formally reviewed~ and modified each year, based on consumer, customer and competitive. trends. For exa:rnple, our 1988-1992 Five-Year Manufacturing Plan and Business Plan address shortages, a primary concern~ of our customers. Specifically, the goal is to reduce shortage occurrences by 50~ percent by 1992. 2030131205 24
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A 1~986 review of subjective complaints revealed the quality goal for 1989 was not being reaiized., The Company created a subjective QI team of Manufacturing, Engineering, Quality and R&I7., personnel to identify possible causes of this number one consumer complaint. This team reviews and analyzes, weekly all consurnercomplaint letters and samples, to determine corrective action. 1 W 1 . 0 A  t  Accountability for reaching goals is delegated to: appropriate managers - Engineering, for design,, Manufacturing for implementation - or delegated to a specific Q'I team. The status of design and/or implementation is reported andl reviewed quarterly through departmental, managers with, senior management.. Active quality enhancement programs are outlined ini internal documents covering the entire scope of operations. Two examples follow;  Based~ upon our consumer feedback and internall audits, areas were identified as operational improvement priori'ties. Of the 11 specific areas targeted for improvement, the top nine are quality related'. This document addresses specific corrective actions and~ is reviewed in staff meetings as well as quarterly technical meetings held' with the generall managers.  Our manufacturing personnel annually use the Management By Objectives (MBO) process to prioritize specific quality improvementt actions. The objectives include corrective actions as well as expectedl progress. The ultimate success of our quality efforts is measured against two external standards: (1), consumer or customer complaints, and (2) competitive audits of criteria deemed critical to the consumer. These are continually tracked, routinely reviewed and published in five-year plans, Progress in these areas is shown in the following graphs: Total US'Consumer Complaints 1981 ~1 I987 COMPLAINTS 100 1981' 1982 1983 1984 1985 1'986 1987 20301312~~ 25
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USCompetitive Audit-Critical Cigarette Defects 1987 PERCENT rim r• r1 INDUSTRY ra rl FA iI r:~ u ~A Ll U V To assist the quality improvement process, input related to root causes~ andd corrective actions is solicited from employee involvement teams in each operational areal. P1VI-ZJSA'sattitudetowardsqualitypromotes! , input~ from all employees at all levels. Employee involvement teams identify causes and brainstorm corrective actions to minimize or prevent product defects. An example is the modification of the ejectionl arm on carton packers. This improvement has eliminated carton jam-ups, a source of carton damage. 3.2 Planning Function PM-USA's planning function is driven, by a five-year domestic and export sales forecast andi marketing strategy developed by senior management. Each subordinate functional area then develops quality strategies and' action plans to support these goals. These strategies and plans are d'ocumented in each five-year, manufacturing plan and integrated into, each five-year business plan.. The business plani is reviewed each year with the Boardl of Directors of Philip Morris Companies Inc. ©!n the following page' is ani information flow diagram of the planning process: 203a1312S'7 26
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- jR S S S S 14 !I PLANNING MODEL PM USA 5 YR. PLAN O % , 11MFNr 5 YR. MARKETING PLAN LEAF MFG.. R&D 5 YR. FINANCE PLAN A PM USA OBJECTIVES PM USA OPERATIONS 0 PM USA MARKETING 5 YR. MARKETING PLAN O' Every manufacturing facility has, in-house quality audit support with associated planning accountabilities. A central quality assurance organization, with specialfzed areas of expertise, audits the overall Company effort. Inn addition to this, formal, budgeted quality organization, well over two hundred employee involvement teams provide input into quality planning oni a project basis. Prior to the annual development of the five-year plans, documentedi progress and areas of concern are accumulated from, each of these sources, examined for relevance to departmental quality objectives and incorporated,, as appropriate, into eachi plan. A list of quality-related operat'ional, improvement priorities ~ is reviewed by appropriate departmental management quarterly. This review consists of the progress arnd'stat'us of specific corrective actions. 3.3 Planning For Quality Improvement Quality improvement plans are documented~ in our 1i988-1992' Five-Year 1Wlanufacturing Plan to assure support~ and m communicate priorities to all departments. Listed' below are examples of such quality improvement initiatives:  SPC is used in Manufacturing, Quality Assurance and Processing operations. Long-term strategies: have been~ developed to assure imple- mentation of these useful tools in all suitable applications. An example used in all cigarette manufacturing locations is the Plug (Filter) ~ Quality Control System. Plug variables - circumference, resistance-to-draw and! weight - are automatically entered into a computer where trend analysis is performed. The system provides corrective action~ to the machine operator. 2030431298 27'
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 In the materials vendor arena, improvement of packaging material' quality is gained throughi our vendor certification effort. Two examples of cigarette paper and plug, wrap~ vendors who send a certificate of analysi's to provide evidence that, all' quality parameters specified by PM-USA are met. Vendor process audits have been conducted on approximately 15 of our materials vendors. Vendor audits include a review of the stated management policy on quality, systems and procedures to monitor incoming, materials,, in-process controls,finished, materials and training. 1i I 10 0  In addition to quality status monitoring, the Company has allocated resources for "defect prevention." Through design! enhancements of equipment and processes, we provide "predictive control" systems rather than "defect detection" systems. For example, our cut filler dryers measure inlet moisture along with the volume of tobacco. The computer system then predicts the heat required to~ dry to the targeted moisture level.  We have established, with our machinery and~ equipment vendors,, relationships which allow us to develop and incorporate into new equipment, proprietary quality assurance technology t'o meet our unique needs. For example, our Engineering personnel' designed a metal detector to remove bits smaller than the head~ of a pin at machine speeds of 8,000 cigarettes per minute., The device was then jointly engineered into a new cigarette making machine.  Our cigarette manufacturing processes routinely use computerized' data collection systems to collect,, trend and report quality data to the operator.  The Product Audit arm of Quality Assurance has extended its proven consumer data collection system into major international markets serviced by PM-USA. To further enhance customer relations abroad, a~ collaborative plan with Sales and Marketing has been implemented to routinely visit our overseas distributors and licensees toI solicit input and share information. Examples include Japan, Hong Kong, Taiwan, Korea and Saudi Arabiai where reviews are made of systems and product bothi in storage and marketplace. 3'.4' Unique and Innovative Planning During the last two years the Company has ianplemented~ the following business planning techniques:  Fifteeni Year Outlook - In 1987,, SME's from all functional, areas within PM-USA developed'' a projection of the market environmea for our products in the year 2002, the probable expectations of our customers and'' how the Company should be poised in order to respond m consumer preferences. This report stimulated farsighted thinking and has spawned long-term projects_ aimed at' preparing us for the future. One of the issues generated is the need to expand hourly employee accountabilities to include more quality-related duties. To accomplish 2030131299! _im- 28
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this, wedeterrnined that our work force must be, kept informed of specific quality goals and~ objectives and Employee Relations has included these goals in hourly work force training programs. This philosophy has also been reflected in the 1988'-1992 Five-Year Manufacturing Plan. AA -~' ~  Unique Relationships With Our Consumers - A PM-USA publlshed periodical, P'hilip Morris Magazine, with a readership of eight million, provides the mechanism for continuous, timeiyinput directly from a large segment of our consumer base, without media programs. 203013 130 0 29
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Ln
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HUMAN RESOURCE UTILI'ZATION 4.1 Management and Operations PM-USA's 1988-1992' Five-Year Business Plan clearly articulates the Company's commitment'~ to human resource utilization: While capital expenditures on facilities and equipment provide the foundation to achieve productivity improvements, these gains are optimized through better human resource management. Our commitment to manufacture even higher quality cigarettes andl reduce production costs will continue to be supported by the integration of state-of-the-art technology throughout the manufacturing process. Introduction of new technology - whether it is designed t'o improve quality,, productivity,, customer service or management information systems - requires that we direct resources to provide empioyees with the skillk necessary t'o fully utilize that technology. The ability of employees to properly operate and maintain sophisticated equipment will! play a crucial role in achieving: quality and productivity targets. PM-USA is developing intensive training programs to enhance the technical' competency of key employees throughout the manufacturing process. Current efforts are focused on first'-line supervisors, machinery fixers and operators, Working together, Employee Relations and Manufacturing have designed a structured approach to determine criticall job skills, evaluate competency levels and develop training programs whichi correct deficiencies. Examples of the steps taken to: improve the technical skills of key manufacturing employees include:  An assessment of supervisors in Richmond and Louisville during 1985 identified critical training needs in the areas of equipment and product~ knowledge (48' percent of the test items were quality related) andl people management.  Operator follow-up training, started in 1985, utilizes on-lfne observationi to assess operators' machine knowledge and further training needs.  Follow-up training for machinery fixers,, initiated! in 1986,, focuses on the critiCal tasks in machinery maintenance. Pre- and post-tests assure that skills are acquired.  Extensive efforts are underway to select and train supervisors, operators and machinery fixers for eachi bay of the Manufacturing, Center as new high*speed making and packing equipment is installed..  Extensive cross-training of instrument electricians and maintenance mechanics, begun in 1987, will assure that PM-USA realizes the full benefit of the multi-craft concept. 2 030 13130 ~ 30
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/.q F 1 I  I .. 1i ~  .R r A $4,8 million technical training, facility was constructed to accom~- rnodate PM-USA's expanded training requirements. This facility contains training machinery, classroorns and office space. The new facility provides twiCe the space previously available for technical training in Richmond. A 28 percent increase in the training staff is underway in 1988', In addition, one of the four goals stated in the 1988'-1992 Five-Year Manufacturing Plan is:, Improve the productivity and utilization of human resources.. Examples of strategies planned to support this goal include:.  Manufacturing Facilities Continue quarterly expansion of employee involvement programs to improve productivity and quality of worklife. .Institute a comprehensive statistical quality control program within the! Louisville Working Together structure. . Develop training programs for hourly and salaried'personnel concerning defects, machine operations,, use of high-tech equipment,, statistical process control, maintenance and productivity analysis as part of the Manufacturing Center modernization program. . Expand the local Learning Resource Center concept to, all departments for quality and production training. Implement control hardware to improve the quantity, speed, reliability and~ presentation of process data to operators. Staff~Support~ Functions~~ Implement Project ACRO~ (Accentuating Circles in a Renewing Qrganizat'2nn) to provide the opportunity for adnlinistrative, technical, and professional staff to work towards improving their productivity and effectiveness. I . r . ~ ~AN Implement and maintain Resource Utilization Planning (RUP) productivity measures in all QA groups. Monitor achievement~ of goals and' adjust system as necessary.. . Establish employee involvement circles to follow up the RUP process and foster team concepts to improve performance. Invest'igate the use of a production scheduling system that effectively utilizes human resources in meeting production objectives. 2d30131303 31
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PM-USA's organization structure also supports our efforts in quality improvement and employee involvement. Each cigarette manufacturing facility has a quality function which provides audit services m the manufacturingg operation. The fact that these functions report to their General 1Vlanagerr assures high: visibility and priority. Also,, a central' independent Quality Assurance organization provides specialized services such as quality engineering, final product~ audit and incoming materials audit. Additionally, eachi of our cigarettemanufact~uringfacilit~ieshas~ an on-site employee involvement group to provide training, coordination,, direction and other support necessary for a successful program. These groups report to either the Plant IVlanager or General' Manager. These reporting relationships help assure that' the respective goals, strategies, and action plans for quality improvement and employee involvement are well integrated with the line organizatiom Another aspect of PM'-USA's plan to, assure continuous quality improvement is the commitment to selecting, motivated employees technically capable of implementing our quality improvement initiatives. Visible evidence that PM-USA reward's quality at the individual contributor level is the value placed on it in every manufacturing supervisor's performance appraisall. Our new Cabarrus facilityprovides~ one of the best examples of how PM-USA used its personnel system to select,, train and develop employees capable of contributing significantly. Advancedl manufacturing technology raised management awareness of the critical need for sound employee selection and training. To this end, a comprehensive selection and training program was designed. This "multi-hurdle" process involved:  Manually screening more than 30;000 applications  Testing, the top~ candidates using the North Carolina Employment Security Comrnission to administer t'he General Aptitude Test Battery (GATB)  R'eferring the top 20 percent from testing to 64 hours of pre-employment training  Providing extensive orientation and competency-based training to each new hire prior to the first~ job assignment;. Since the Cabarrus success (illustrated by the machine efficiencies, unit' cost and product quality), many of these techniques have been extended to~ refine the selection and training, processes at other facilities. For example:  Aptitude testing is now used'' in selecting new operators, crafts and line supervisors in other manufacturing facilities.  Supervisory development programs now include more quality-related~ productand machine~ knowledge.  Qualification requirements for operators and machinery fixers, much of which is quality related, have been tightened. 20'30 i31 H 4 32
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4.2 Employee Quality Awareness and Involvement I IN 0 PM-USA execut~ive management sets general quality goals through the five-year manufacturing plan and reinforces these goals through speeches,, company newspapers, training, programs, and~ - most ianportant- through day-to-day personal contact with employees. Within this framework, operating unit~sareencouraged t~ol determine the best way toimplement; track and improve efforts toward those goals: the theory is that operating units in the field, after being given a clear picture of where the Company is going, cani best d'esign and implement action plans toward achieving company goals. Operating units: are allowed and encouraged~ to involve all levels of' employees in defining their quality enhancement actiwities themselves., Many quality improvement options have been chosen, each reflecting the culture and needs of the operating unit~, each clearly "owned'"' by the employees of that unit. For instance, the following chart shows how employee involvement~ in quality improvement' has evolved over time: J Year Location/ Current Number of Teams/Employees F Started Function Program Name Involved A 1979 M'fg. Center/Empioyee Involvement 40/568~ Cigarette IVIfg. Program (EIiP) 1981 Cabarrus Organization Work OWU 165/1600' ~ 4 Units (OWU) I ~. Alll Departments Problem~Solving Units (PSU) PSU' 20-40, as required 1982 Engineering Circles of Excellence 20/200 1984 Stockton St. Employees Working, 60/500 ~ Together (EWT) 1986 Mfg. Center/ Teams Offering Better 13/70, ~ ~ Primary Answers Consistently Processing (TOBAC). 10 1987 Mfg. Center/ Service Teams 6/57 ~ Plant Are Responsive Engineering (STAR) ~ 1987 Louisville Louisville Working 33/300 Together (LWT) 1988 York Rebuild Quality Using Skills 5/38 ~ and Teamwork (QUEST) 1988' Mfg CenterL Finding Our Creative Being J~ '. . QA Usable Strengths (FOCUS) , Implemented ~03ni~1306 33
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In addition, two new programs now being developed in, Richmond processing plants,, will be implemented in late 1988. . n - ©verall„ more than 3,300 hourly and salaried employees participate in al formal' employee involvement program. I r I - I 0 • n I 0 I . n I -  I  iI .~ I n ....  n I  o I ~. r J MW a e 1,10 I Each of these employee involvement programs has developed its own mission statement, its own operating philosophy and structure, its own communications vehicle and its own team/t~eam leader training~ process. Each creat~esinnovativewaystoinvolvepeoplein its activities - rai'singqualityconsciousness, setting higher stand'ards and creating excitementlenthusiasm/ commitment. A notable example was a "Quality Fair"' held at the Manufacturing Center in 1986. The fair featured game booths,, organized by Quality Task Forces from throughout the plant, with names like "Name That Defect" and "Shoot For Quality."' Each booth featured a quality quiz. Those giving correct answers won prizes featuring the fair's theme: "Quality Fever-Catch It In '86."' Employee reaction was captured by an hourly employee quoted in a Richmond Report article on the fair: It was excellent. We wanted to do this to promote quality, and the Plant Manager told us we could go ahead with it. I'm glad they understand that we're just as concerned about quality as they are. Specific examples of recent quality improvement~ ideas generated by employee involvement teams include: .Installation of a conveyor to remove foreign~ matter fromi cut filler.  Design and implementation of canvas, covers for cigarette tray tmuckst~o keep dust off finished product.  Modification of the ejection armi on a carton packer,, completely eliminating a potential source of product damage.  Design of daily control charts to track quahty and productivity trends and a log book to note corrective actions taken as a result of deviations. (On this production line,, defects decreased 62.0 percent and, production increased 15.0 percent.)  Identification, of the cause-and-effect relationships of air leaks (filt'er defects). .Improved quality,, accuracy and timeliness of engineering drawings,, engineering testt procedures and parts catalogs. Management participates by circulating consumer complaint letters; by helping teams maintain trend charts in highly-visible locations; publlshing, significant success stories; funding programs; providing comparative industry up-dates; posting ~ quality standards clearly on equiprnent, providing training; maintaining quality direct material displays; and - most important - beingg visible, supportive and availWe. 20 30131 30t 34
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Our Louisville facility utilizes a~ unique information system known as Supervisory Technical Analysis and Related Training (START). Developed' in 1I980, START provides concise, meaningful reports on quality and productivity by department, machine and defect' type. Supervisors and their work teams use these data to assess trends, set quarterly goals and develop action plans, to achieve them. Progress against goals is discussed at subsequent meetings. In Louisville, the START programi has been integrated into the LWT process, andl it is currently being implemented at the Manufacturing Center. Management has instituted, often as a result of employee suggestions, several methods for employees to communicate quality ideas, concerns and recommendations to upper management. For instance:  Involvement teams are urged to make teami p.resentations to manage- ment, outlining their, activities, successes, or suggestions. In Louisville and at Richmond's Stockton Street plant, teams are assured of a response from management within 10 working days.  Union leadership participates in Stockton Street's EWT Steering, Committee with management; indeed, the unioni was instrument'al' in creating the right climate for iinplementingEWT.  The Action Cost Team, (ACT) was implemented as a cost-savings suggestion program wherein any employee can make recommendations about any issue. In 1987, 178 ACT suggestions involved! quality improvement. Rewards include recognition plaques and~ gift certificates for use ini the Company store.  Ad hoc Quality Task Forces (QTF'§) are called together to concentrate talent on a partiicular quality problem (especially if customer complaintss begini to identify a specific negative quality trend). Over the past three years, QTF's have been created to solve such product defects as spotting, tipping, and loose ends.  In Cabarrus supervisors shut down machines one at a time to review quality standards, discuss quality concerns and decide on joint actions with members of the OWU.  Management personally inspects product quality and solicits observations, concerns, recommendations, arnd~ solutions from employees at every level. In conjunction with the first phase of the five-year Manufacturing Center modernization effort,, a cross-functional team was assembled to~ explore ways to improve safety, quality, productivity and overall quality of worklife. This team included representatives from Manufacturing,, Engineering, QA, Employee Relations and Information Services. Using the rare opportunity a complete factory modernization program presents, the teami explored ways to integrate organization change with, technological change. The team used input from employees at every levef within the plant to develop its final plan. 20'30t3-13b7 35'
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S S S il As a result of their efforts, numerous recornmendations will be implemented. For instance:  A new management philbsophy that emphasizes quality of product,. "customer" relatibnships, teamwork, individual accountability and expandedi job responsibility at all levels  New, "user-friendly" information systems to provide timely performance data to operators  Enhancedl technical and management training programs including a week-lbng "orientatibn"program jointly attended byal levels. i' !SI 0 S ' I ~ !I S !I I I~~ ~ q 0 I AI 0 i ik 0 43 Quality Training and Education Fortune magazine recently cited PM-USA as one of America's most ad'mired corporations. In its March 28, 1988 issue, Fortune named a PM-USA product, Marlboro cigarettes,, one of the 100 highest quality, Arnerican}mI product~s. . Being so: honored~ by a major business magazine inevitably raises questions like "What does a company like PM-USA do to accomplish such recognition?" One thing that PM-USA has done is train its people. Generous multi-million dbllar training, budgets and facilities testify to the importance the Company places on training. Five common priorities of the training, centers at the three manufacturing locations are: safety, quality„ production, waste reductioni and cleanliness. Employee awareness of'the importance of quality is one of PM-USA's strengths. PM-USA trains its people to use technolbgy to improve product quality. People learn our product terminology; are trained to understand their role, as well as the role of their, equipment; and develop the skills necessary tol id'entify and prevent product defects as a major part of their responsibilities. The training of machine operators,, maintenance personnel and~ to an extent~, line supervisors has, over the past 10 years, evolvect to a competency-based format. This format uses written tests and practical task demonstrations m assure that trainees have mastered the material. An example of this competency-based format is the Operator Competency Evaluation (OCE) program. Product quality is first introduced in this program in a general way. As the program progresses, quality becomes as specific as recognizing al particular defect and how to correct it. A typical 20-day program will cover 30-50 potential defects. Later, five or more potential defects are randbmly selected for inclusion in the trainee's evaluation. When the training cycle continues in the manufacturing environment, quality is one of six subjective criteria on which each trainee is assessed. Failure to meet the quality criteria can prevent ai trainee from being "qualified" as an operator. To: emphasize further the increasing importancee of quality in the work envi'ronmentI,. passing scores on many of these evaluations have recently been raised'' to 80 percent on written tests and 100 percent on task evaluations. In 1987' alone, more than 400 instances of operator training accounted for over 60;U00' employee-hours of training. 203' 01313' 0S 36
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TYA Tim ... rN 1 TV T I I n _J I '. ~ . T ~ i ~ ~. LZ Q ~ i@ _t A major effort was undertaken in 1985 to extend this competency-based~ philbsophy beyond the hourly classifications. A Technical Assessment' was developed and administered to all cigarette manufacturing supervisory personnel in Richmond and Louisville. This multiple-choice test covered all aspects of a supervisor's jiob-knowledge requirements, from labor relations to specific machinery. Of the 290 test questions, 48 percent were quality related. The results of this assessment'~ were used to develop specific, targeted modules of the Supervisor Technical Training Programi (STTP). In a typical training module, each sect'ion has a distinct~ quality-related learningobjective.In justt over a year there have been nearly 600 instances of supervisory training in this program. Pre- and post-tests are used! to determine individual improve- ment and overall program effectiveness. Thus far, test scores have improved 40 percent.. Other examples of quality-related training efforts include:  Basic SPC classes were conducted~ in the past three years in Richmond and Louisville for more than 500 hourly and salaried Manufacturing,, QA, Engineering andl staff employees. These four- or five-day classes. used~ both SPC consulting firms and local colleges. An additional 53 middle and upper managers attended a two-day execut'ive overview.  Over the last four years, more than one hundred designi engineers, quality engineers and staff professionals have attended in-house college training courses covering: basic statistics, statisticat quality control,: experimental design andi regression analysis. Twelve PM-USA employees have become Certified Quality Engineers in the past five years. . PM-USA sales representatives now take their initial training ini a manufacturing complex where they receive a first-hand appreciation of the emphasis PM-USA places on the quality of its product~s..  Empibyee involvement facilitators at all locations receive Team Leader Training to develop skills in problem-solving, processes and techniques, group facilitationi and presentation skills. The same training has been provided for PM-USA vendors m assist~ in their efforts to develop employee involvement programs.  Project Uptime in Louisville will provide 60, percent of the work force' al minimum of three days' training in quality standards, audlt~ and troubleshooting' procedures, data analysis methods and! downtime analysis.  Several troubleshooting programs for maintenance personnel were initiated to respond to specific quality issues. Additionally, a quality course is currently being developed' for Maintenance Machinist Apprentices in Louisville. To summarize, at PM-USA the commitment to quality training is pervasive - from, machine operators and maintenance' personnel toline supervisors and Quality Engineers to top management.. Oni any giveni day, more than 1100 2'03Q13t309 37
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PM-USA employees are in some type of training program - in a classroom, on-the-job, or outside the Company - acquiring the knowledge; skills and abilities toful'fil their role in the quality effort.. I t 4.41 Evaluation,, Incenthve,andRecognitionSwstems, PM-USA has bothi formal and informal systems to evaluate and recognize employee contributions to quality improvement. All production supervisors and managers have specific quality objectives against which they are evaluated during their annual performance appraisals. These objectiwes focus on defect levels and/or specific quality improvement action plans. Quality typically accounts for 20 percent of the~ overall rating. Written performance appraisals are communicated orally by the immediatee supervisor., Final performance ratings are then used to determine the annual salary increase which can vary significantly depending on the rating received. Beginning in 1988, two new monetary recognition programs are being implemented to~ formally recognize significant achievements of salaried employees. These awards can be given, for quality improvements and other significant results. INbminations and awards can occur at any time throughout the year to provide timely recognition. Another important method of communicating quality evaluation, information is through various bulletin board notices, newsletters and employee meetings. At the Manufacturing Center, for example, numerous quality report's and graphs, "Quality Alert Bulletins" and consumer letters are centrally posted in production areas. These provide timely information on defect Ievels, consumer complaints and machine performance. Electronic message centers are also used to display timely performance information. An in-house newsletter, Vision, provides further quality information and employee involvement team recognition. Additionally, "roving auditors" on the manufacturing floor inspect the final product andd provide immediate feedback to the appropriate supervisor and machine operator.. Employees also receiive quality information through various QTF meetings and periodic meetings with their supervisors. For example, Cabarrus has monthly OWU meet'nngs where all employees receive current information on factory performance and goals. These meetings provide a regular forum for discussion of quallty and other business matters. Even though hourly employees do not receive formal performance appraisals, failure to adhere to quality standards and guidelines results in counseling and, if appropriate, additional training. Continued failure to adhere to quality standards results in formal disciplinary action as outlined in the Standards of Work and' Conduct for Hourly Employees, In rare cases, termination has been necessary. Achievements in the area of quality improvement are recognized throughi our employee involvement programs, on-going managernent practices, the ACT program and Company newspapers in all manufacturing locations. 203013'1310 38
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At the Manufacturing Center, employee involvement teams receive non-monetary awards such as pins and certificat!es for cost savings,, communications and related items. Luncheons and banquets are held too recognize employee accomplishments related to quality and productivity ('e.g,,, zero defects in Bay 1 on the day shift). Other recognition occurs through the immediate supervisor. Some supervisors have established a tradition of buying, machine operators ai bucket of chicken when exceptional quality and productivity levels are achieved. 1* 14 ' At our Louisville facility, top-performing operators receive recognition on electronic message centers. At Cabarrus, employees initiating particularly noteworthy projects are invited to present~ them at the General Manager's staff meeting. Personalized thank-you letters, plaques and luncheons are also provided. Our company newspapers frequently feature employees in stories about quality improvement through employee involvement. Numerous photographs and employee~ quotes provide recognition and' continuousreinforcement. The ACT program is a more formal way of linking quality, cost and other improvements to employee recognition. All ACT awards,, including those forr quality improvement~ suggestions, are presented by the department manager. These "Jewel Awards: " are given for successful completion and documenta- tion of an idea submitted through this employee suggestion program. Additionally, "Idea Club" pins are given, for submitting five or more suggestions in a quarter. All suggesters receive coupons redeemable for merchandise in company stores. Recognition for quallty, also: extends to our materials vendors., For example, a special' award': is given to vendors who, supply reject-free materials for four consecutive quart.ers,, We also provide annual recognitioni to one tobacco farmer from each tob.acco-producing, state through the Outstanding Young Tobacco Farmer Award. Farmers, selected for suchi reasons as community service and their success in working with university extension personnell to produce high quality tobacco, receive an engraved certificate and $1,000! 4.5 Unique and Innovative Approaches Three methods innovative in their approach to employee involvement, awareness and training/recognition are:  PM-USA uses employee panels to conduct't blind, subjective evaluations of our products. More than 600 hourly andl salaried employees evaluate thousands of our products each year and provide valuable product development~ data.  In 1985, Project Consumer was: initiated in Cabarrus to respond to employee concerns about the lack of product availability andl quality awareness in retail outlets. Tw& training videos were produced~ and all employees were provided' business-size cards which read,, "Thank Youl for Stocking Our Fine Products., I Know: I Make Them," which they distribute to area retailers, 2030131311 39
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 IrnLouisville,, machine operators,, identified for their exceptional quality knowledge and results,, are recognized as "subject matter experts"' and are used to train other, operators and/or troubleshoot specific quality problerrns. L N 03 t . 203013134121 4&
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QUALITY AS'SURANCE OF PRODUCTS AND SERVICES 5.1 Customer Input to Prodtiets and Services The current trend in the cigarette industry is toward market segmentation. Accordingly, PM-USA has developed programs to obtain both qualitative and~ statistically vaW customer input to assist'~ in new product~ development. Qualitative direct market techniques, such, as one-on-one comparisons, focus groups and mall studies, are used for initial test'ingofmanynewproduct concepts. These studies are complemented by more statistically valid techniques. One of these uses Product Opinion Lab (POL), testing, a consumer rnail~out with product and ballot„ conducted between 200, and 2% times per year. POL is al sequential monat'ic test with balancedl presentation; it provides both! attribute and acceptability information. POL's are keyed to identify market segments and panelists are selected based on segment and demographics. By maintaining and continually updating a demographic and~ statistically founded data base, PM-USA is able to identify markets for new products or trends in current markets. Statistically valid analytical techniques, such as replicatedl design analysis off variance withi interact'ions, are used for the POL. The POL allows for mapping~ attribute andd sensory perceptions. Sensory testing, using internal panels representing all areas of PM-USA, is also done. These panels permit replication, determine differences or screen test candidates.. R&D maintains a data, base of POL's which is available via computer terminal to all relevant personnel including Market Research. Also, hard copy reports are di'stributedl and reviewed at monthly development meetings.. Regarding customer satisfaction withi existing brands,, several market tests have been conducted. In these, smokers of seveni brands rated 241 quality items for both frequency of occurrence and~ importance. Results have been key to prioritizing consumer concerns not frequently heard in consumer complaints. Results from these surveys are documented andi presented to R&D, QA and Technical Services personnel. 5.2 Planning for New or Improved Products: or Services Concepts for new products are developed from demographic and statistical studies, POiL's and direct market research. An initial concept is developedd through the combined efforts of Marketing, Leaf, Engineering and R&D.. Consumer requirements and unique characteristics are identified: this point. 20301313J-1 4 411
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Once a decision has been made to move from concept stage to test market, planning for the new product takes place ati weekly meetings where representatives from various departments - R&D, Engineering, Quality Assurance, Manufacturing, Purchasing, Planning, and Leaf - review progress, schedules and quality concerns. Typical quality concerns involve: ^ Defining, characteristics, of • Materials • Blends • Flavors • Construction or function I ^ Equipment . Availability . New design features ^ Quality and Operationall Standards • Conformance to existing standards • Unique standards reqnired': • New/modified measurement techniques ~ ^_ i ~ ^.Other Considerations • Special, market requirements, suchi as carton overwrap tear tape for the Japanese market' • Current trends in consumer complaints. Responsibilfties for addressing the concerns are assigned to the appropriate group~ or groups, which report back during new brand meetings. Additional mall tests and POL's provide an on~going update of consumer informationi to validate the product concept. In general, cost plays a secondary role to consumer requirements. PM-USA management has shown a strong commitment to undertake major innovations in light of the highly competitive market. This commitment has resulted in groundFbreaking new products like Merit, the first full flavor low tar brand, and Concord, the first variable delivery cigarette. 53 Design of New and Improved PQoducts New Products Qtaality objectives specific to a new product are established through detailed analysis of prototype samples. Individual groups analyze and establish quality objectives. Generally: 2 0' 3 01313' 15 42
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do 7. I 0  R&D establishes basic cigarette and taste objectives and conducts direct I ~ 7 comparisons to other products in the targeted market. Example: For one brand~,, blind subjective comparisons were done with leading competitors' brands. I .  Purchasing, and Quality Assurance establish material objectives, such ass compatibility of materials and vendor tolerances. Example: Analytical I 7 comparison of inks and adhesives is done to avoid blocking.  Quality Assurance establishes quaiity attribute and function objectives I . ti to determine the need for new or modified standards, and determines the need~ for new measurement systems. Examples: S qi ~ In one project, a departure from normal prodtict circumference required that modifications be made to most existing measurement devices. I Ini another project, a new standard for break-strength on twist filters was developed. .On oval cigarettes, a new measurement of shape was developed.  Engineering translates quality andl function criteria into machinery design/modification: requirements, then designs and builds subassemblies and finished machine assemblies to achieve these. It also estabiishess critical or unique equipment set-up parameters..  Manufacturing establishes requirements for training, scale-up considera- tions, equipment maintenance and~ repair needs. Specific tolerances are developed~ for product attribute criteria depending, onn the complexity, uniqueness or desired image of the product. These standards are communicated through:  Monthly product~ development reports  R&D, Operations and "new brands" meetings.  Purchasing specifications to vendors  Interim quality standards. Throughout the development of a product, extensive pre-production testing is done to refine the product, materials and machine design to meett the established~ quality objectives.. In 1984'„ PM-USA established a Quality Engineering (QE) ftanction to aid in the design and develbpment of new products. In conjunction with Engineering, this group has facilitated the use of more detailed analytical approaches, such as P'lackett-Burman screening experiments and process capability studies to define Cp~ and Cpk. Some examples of design/ development testing are:  Capability studies using X charts, R' charts, and S charts to establish capabilities by machine types. 2'030131315 43
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 Control charts to establish limits relating to the joining of cigarette rod and fil'terplugson oval cigaret'~tes., 7 7 7 7 r 7 7 - 3W J1  Pl~ckett-BUrman screening experitnentsto evalhatelaserperforating;, optimize resistance to draw (RTD) and circumference of filter rods; and RTD, weight and circumference on cigarette rod's.  Life testing to establish meani number of lid openings and closing before failiure..  Environmental testing to evaluate the clear fold and cardboard adhesives on new brand promotional items to deterrnine the impact, of extreme environmental conditions. rSimulated~ shipping tests to determine ink scuffing and, case/carton/ pack/cigarette integrity.  Tax-stamping evaluations to assure proper carton sizing and pack configuration for the various, types of tax stamping equipment. Following pre-production trials, the productl is followed~ through the manufacturing process by R&D, Engineering, Purchasing, Quality Engineering, and Quality Assurance. New quality standard's, measurement devices, packaging andl cigarette specifications and documentation, of engineering changes are provided to the manufacturing facilfty, before production. During initial production,, any exi'sting deficiencies are jointly addressed by development and production groups. Audits of physical and analyticali variables are compared to design specifications to assure that all appropriate design work is complete. Ti ypical product validation includes:.  R&D, - subj ective response  Quality Assurance/Quality Engineering - cornpleteness of standards and measures  Purchasing - suitability of materials  Engineering - adequacy of machine redesign or modification. Manufacturing is involved or consulted in reviewing standards, designs and'equi'pment throughout the development of the product.. Product Irnprovements As a result of competitive audits in domestic and international markets,, PM-USA objectives for conformance to existing standards have been tightened to assure our competitive advantage. Competitive audits drive four of eleven designated operational improvement priorities. Using consumer complaint data, new brands have been designed to: avoid problems such as lip-release (filter sticking to lips) and filter flare-upp problems. Selectioni of packaging, films, is now based on machinery,, market and compatibility with printed labels. 20'31013134L 7 44
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R J :S'. :S IN 1i ~ 31 ~ 1i Fa 21 io In R&D, a Cigarette Intelligence (CI), program is designed to track changes to competitors' existing brands and the design for new brands. These data are used when establishing design criteria for competitive new products. In, addition,, periddicsubjective comparisons between P'M~-USA and competitors'brands are performed to assure our taste performance. 5.4 Measurements, Standards andl Data Systems On-Line Measurements Cbmputer-based control, systems have been integrated into PM-USA's tobacco processing and cigarette manufacturing facilities. These systems provide operators reai.-tirne feedback by identifying currentt condition within the process or signalling alarms for special conditions. The use of control charts has been incorporated into various areas, such as:.  Tobacco Processing - to control drying targets to assure finished product specifications are met.  Filter Making - to control filter weight, circumference and RTD (this applicationi is integrated into a computer-based Plug Quality System where current trends and'i real-time feedback are displayed' to the inspector via CRT).  Cigarette Making - to control cigarette RTD 1 and circumference.. Off-Line Measurements The PM-USA Standards Lab is responsible for supplying to each testing locationi calibration standardsfor cigarette circumference, RTD~ and ventilation. The lab also circulates a set' of master circumference, RTD and ventilation standards quarterly so each lbcation can verify the accuracy of its internal calibrations standards. Iim addition, the Iab., provides calibrationi service for psychrometers and hygrothermographs andl the measurement of critical components of other test equipment. QA prepares tobacco and cigarette monitors to assure the accuracy of moisture tests, cylinder volume testers, cigarette smoking machines and' firmness testers. The monitor method assures that tests at different locations yield the same results. This method gives a measurement of other parameters that may affect results but would not appear, as part of the calibration procedure, e.g., the stability of laboratory environmental conditions, testing equipment stability, faulty calibration devices and testing techniques. Each testing facility is equipped withi its own set of weights for checking the accuracy of analytical balances. Verification of this accuracy is normally done by an outside calibration service. 20,30 131318 45
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. A J 1§ -4 Sieve testing screens are analyzed by image analysis equipment before being placed ini service. A master set of screens, previously certified' by NBS traceable techniquees„ is used to calibrate the image analysis system. PM-USA conducts sample exchanges to verify calibration, and standardization of testing.. Round-robin testing, takes place among plants, vendors and QA. QA provides to each testing facility the Philip Morris Quality Assurance Test Procedure Manual which do~cuments;  EquipmentspecificationsCalibration of instruments  Sample collection/selectidn.  Instructions on how to perform the test  Technical, informationi oni accuracy and repeatability  References. 5..5 Technology 'p'hequest for continual quality improvement at a timewheni production speeds are drastically increasing (cigarette production rates are double those of 11978) demands integration of on-line technology into the manufacturing and office environment'.. Examples of technologies used by PM-USA to improve product quality are:  Optical Detection Systems are used~ to identify and! reject non-tobacco materials., As tobacco is an agricultural product coming out of the ground, occasional pieces of trash and~ other debris find their way into: the product prior to arriving at Company facilities. In 1984, Engineering department personnel developed a photoelectric-based system, to compare tobacco with non-tobacco materials. The difference in reflective light develops a signal that operates a solenoid removingg the non-tobacco material. These systems are employed throughout our tobacco processes.  Density scanning. devices, are used to detect~ product shortage (missing pack in carton or missing carton in case). These devices were developed by an outside firm with PM-USA Engineering assistance. The device measures density while the product passes oni a conveyor. If a pack or cartoni is missing, a reject signal operates a solenoidl to remove the defective product from the conveyor. These devices have been installed on all case systems and are being installed on carton conveyors. A computer Information Center (IC) using SAS software was developed by PM-USA to integrate consumer, audit and sales datai for analysis. Inputs include sales by region, factory and competitive audit and consumerr complaint data. Uses of the ~IC include:  Tests of significance to determine trends.  Compiling demographic and geographical consumer complaint data  Analyzing individual production, machine, brand and factory quality performance. 203013i319 46
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I 7 I 7 ~ A M I . M I I . I A Data on the IC are accessed through personal computers. This permits personnel ini all locations broadl based usage of the data. A system using closed-loop feedback control based on SPC is being tested in a filter-manufacturing area. This system, Intelligent Filter Monitoring and Controt (IFMAC); is a joint development of a supplier and PM-USA personnel. Filters are extracted automatically from the output side of' the filter maker and pneumatically conveyed in tubing to a remote quality inspection station. This test station automaticallyperforms four quali'tymeasurements. Data from this station are treated using controll chart logic by a computer that initiates control adjustments to the filter maker. Final design of this system is expected within one year. 5.61 Audit Both internal and external audits of PM-USA product~s are used to directt product quality improvement programs as welll as to improve the quality management system. PM-USA utilizes external product quality information (obtained from the trade and our consumers), as a major driving force in, determining quality improvement programs and priorities. Objectives related to filter fall-offf complaints and concealed shortages are examples of quality improvement priorities derived from consumer and trade feedback, respectively. AsPM-USA expands into international markets, considerable effort is directed towards establishing similar types of feedback systems in these rnarkets, A centralized, independent product audit'~ organization exists to evaluate and compare finished product quality for the four cigarette manufacturing facilities to assure product consistency and continued quality improvement. A similar organization exists to evaluate and compare processed leaf quality from P'M~USA stemmeries, as well as dbmestic andi international contract processors. Internally conducted audits of PM-USA and competitors' products are used to assure that' objectives regarding competitive quality positioni are formulated.. Progress towards meeting these objectives is dbcumented and reviewed with senior management as well as piant operations personnel on ai semi-annual basis. QE is responsible for coordinating test-methods standardization and conducting internal audits of procedures to assure consistency among all organizations involved in evaluating product quality. Additionally, QE hass initiated& audits of plant operating procedures which directly affect product quality (e.g., changeover procedures from mentholated to non-mentholated products) to assure brand', integrity. Internal audits are performed routinely to assure conformance to governmentt agency regulations. Similar audits (e.g., radiation and sanitation) are con- ducted periodically by external consultants and/or representatives from the agencies themselves. Examples include the Nuclear Regulatory Commission on handling of radiation sources used ini process monitoring equipment; the 203013'1320 47
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Federal Trade Commission (FTC) on warning notice rotation and tar and nicoti'ne deliveries disclosed in advertisements; and the Bureau of Alcohol, N' Tobacco, and Firearms (BATF) on finished~ product accounting for tax i purposes, proper coding of product with regard to manufacturing locatiorr, and conformance of product to the definition of Class A cigaxettes.. a F WO I .W I Results of procedural audits, whether internal or external, are documented. Any non-conforming conditions are addressed and corrected. 5.7 Documentation Corporate Standards In 1981, ai major interdepartmental effort was made to establish corporate quality standards for cigarettes and packaging. This effort produced two manuals, one for packaging and one for cigarettes, in whichi acceptable and defective conditions are described. For cigarettes, seven major categories with a total of 69 defects are described. For packaging, eight major categories and 1161 defects are described. These manuals are supported by pictures that were generated using computer graphics. The manuals have been revisedd severali times and a new section covering export packaging, has been added.. In addition, a new manual covering, filters has been prepared and! issued. These manuals, besides having broad internal distribution, have been reviewed with and distributed to our major equipment suppliers so that our quality criteria and expectations can be factored into machine design and capab.ilit'ies. To assure consistency in QA testing procedures, P'M~USA initiated a highly structured system. These procedures document instrument, set-up andd troubleshooting, calibration protocol,, sampiing plans, audit programs and test procedures. We have developed and issued an administrative system which includes:  A policy statement regarding measurement systems.  A definition of a measurement system,  The approval system for new or modified procedures  QE's role in system management  QA management's role in system management  The numbering system  Standard~ formats for procedures  Distribution of manuals  Ptocedures review protocol  Procedures forms printer's layout  Ptocedures forms typing, layout. Procurement Specifications  Tobacco Procurement specifications regarding physical properties of leaf such as moisture;, size and stem content are prepared annually. These are discussed and distributed to all processors of PM-USA's le ~-03013132 1 48 I I
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 Direct Materials~~. Both generic and specific standards are described for each direct material such as cigarette paper, packaging labels and film. These standards are negotiated and agreed t'obetween PM-USA and thee supplier. As new measures of materials performance are developed, these standards are refined and updated. For printed supplies,, a quality standards manual was also prepared and issued., Covered in: this are nine major categories and 35 defect: types. These manuals have been distributed~ internaily and t& all printed- material suppliers. The defects are shown in pictures and described. Documentation and communication of materials standardsand~ attributes criteria to vendors are important because 40 percent of the direct materials buying plan is related to materials quality..  Machinery For major machinery classifications, generic standards have been prepared and issued to our major suppliers. Specific standards are written for each major equipment~ purchase.  Maintenance and Repair Manuals For cigarette and packaging machinery, a major condition of' purchase is that complete manuals be provided by the supplier. These include machinery set-up, operation and repair manuals as welli as suggestedl maintenance schedules. In addition, PM-USA's training department prepares numerous "shirt pocket"' procedures and instructions for operators, and machinery fixers to use as ready references or check lists.  Customer Complaint Handling Domestic complaints are channeled to specific groups, withini PM-USA. The system, for handling these complaints is described in Section 7.3. VVritt~en procedures regarding information flow, written response and corrective actions for international complaints have been developed.  ProcessControl Manuals In the manufacture of filters and cigarettes, SPC is used in controlling weight, circumference and resistance to draw (RTD) and dilution. Many of the SPC applications have been programmed intol computers which: do trend analyses and prompt operators to take corrective action. 2a130131322 49
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I I 4 S I I I A S 3 3 ~ 3 ~ . A In 1985, a major effort was initiated to begin developing key machinery set-up and operating, standards directly related to quality. These standards define normal conditions for product, equipment, inspection devices and processing logic. The tolerances associated with the target represent the range over which acceptable quality is achieved. Standard's may be derived from the following sources:~  Specific study of a single piece of equipment or a collection of common machines/equipment that relates machinery set-up: to a desired product quality  Product standards based on known customer expectations  Operating, standards based on process knowledge andi experience  Operational parameters/conditions identified viai cause/effect analysis. Priority giwen to standard development is based on:  Specific customer complaints  Response to recurring, quality defect  Management-directed~ focus.  Cause/effect discovery. Knowledge' Preservation PM-USA has a central document retention group which archives important records for either a specified time period or ini perpetuity. This retention systemi has been in place for many years and is effective. In addition, the QA function has evolved over the last six years from a manual to a fully automated' and computerized system both ini the central product audit/customer complaint sect'ion and in each manufacturing Quality Audit section. The data in these systems are retained in ai host computer in Richmond that allows quick access to past years' data. In addition to this, syst~em, central records systems; exist in R&D, Engineering, and QE; each of which i's accessible to searches by PM-USA employees. 5.8 Safety, Health and Environiment. Corporate~ Goals and Requirements for Employee Protectioni Providfng a safe work environment has been and continues to be one of PM-USA's highest priorities. Structured, well-documented programs with standards that go beyond the minimum requirements of OSHA and EPA have been established. The administration of these programs is conducted'by a central group, Employee and Environmental Protection, staffed by 20, professionals trained in safety engineering,, industrial hygiene, fire protection, 20310131323 so
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~ I M I ~ 0'. 1 ~ I N N ~ N'' Is  g I . ~ .. 1 0 I . I . I ~ ~ I ~ . S I . I . ~ environrnental engineering, hazardous materials management, transportation and, disposal, emergency planning and government regulations. The basis for the formal program is contained in a seven-point PM-USA safety, health, and environmental~ policy statement. The policy is supported by a t,welve-point statement of management objectives.. Objectives arereviewed andl updated annually in the five-year manufacturing plan. Standards and procedures aree dbcumented in the following manuals covering, various program aspects:  Safety,, H'ealth and Environmental Procedure  Emergency Management Program  Hazard Communication Program  Job P'rocedures~ Management and, supervisory accountabilities and responsibilities are clearly spelled'' out inthese manuals. The Safety, Health, and Environment Procedure Manual currently contains more than thirty-eight standards, such as:  Accident/Incident Investigation and~ Follow Up  Confined Space Entry Contractor General Safety Regulations  Drum Handling: and Disposal.  Hazard Communication Labeling  Lock-Out Procedures  Respiratory Protection  Waste Liquid Discharge  Waste Disposal. To support hazardous materials management'~ inventory, we have a compu- terized datal base that tracks the location„ hazard, storage requirements,, quantities and disposal of chemicals used throughout operations. Thi's system currently tracks more thani 10,000 materials. Inventory updates are made for all materials throughout the year. 2030131324 51
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i S' As shown in the follbwing graph, PM-USA has a lower accident incident rate tfian the manufacturing industry as a whole and a lower rate than other cigarett~ernanufacturers. Safety Performance PM-USA vs Industry Performance 1979-1987 INCIDENT RATE  !q I ~ i S 1979 1'980~ 5.0 .~ i . I S . S i ® I !I I I . I . I 0 I ~ ~ ,A 0 1981 Private Industry ..« ...... ..«.....««...«... 7.7 _ Tpb Ind t acco us ry 66 .......... Cigt. Manufacturers 1982 1983 1984 1985 1986 1987' Corporate Goals and Requirements for Consumer Safety Analysis of consumer complaints shows that the major safety concerns are:  Foreign material in the tobacco rod.  Construction dirfects. Foreign matter relates to extraneous material ini the product and' construction relates to a characteristic of product design. The goals and requirernents for customer safety, therefore,, are directed primarily towards these areas: A materials control program which prescribes thecomposition of products used'i in and~ around tobacco and cigarette manufacturing areas..  Foreign material removal systems, such as manual searching of tobacco leaf in leaf processing,, magnets, optical inspection systems, metal detectors for cigarettes being made at 5,000+ per minute.  Sanitation programs for housekeeping,, with routine work schedules and clean up requirements clearly documented. These are supported by an outside auditor hired by PM-USA tol perform routine sanitation inspections'& in all facilities, The results andi follbw-up actions for these are documented and reviewed by senior management. 20130131325 52 
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 A product-tampering, program has been carefully designed to orchestrate all affected departments in a rapid response effort. Clear accountabilities and communication protocols have been established and documentedl. Alll affected members of management and staff have been trained in their duties and responsibilities. With regard to construction complaints, extensive experimentation found the cause to be an interaction between filter paper properties and adhesives. Modifications to the product designi have resulted in a reduction of construc- tion complaints. 5.9 Assurance/Validation Overview of Inspect'ion and Assurance Functions in PM-USA Throughout all tobacco manufacturing operations there are three tiers of quality control: direct operator inspection and controls, auditing of in-process and finished product quality,, and a centralized audit to assure long-term consistency among similar operations. Tobacco finished product quality standards are prepared and issued by a centralized Tobacco Product Standards group. / The direct materials quality program currently emphasizes vendor certificationn whereby our quality standards and measures are fully defined and the vendor approves or rejects material based on these prior to shipment. Where vendor certification is in place,, vendor data are backed up by PM~USA skip-lot sampling plans based oni the vendor's recent performance. Specifications are provided to the vendor through Purchasing arnd~ include generic and specific requirements for measured variables. Visual standards and attribute informa- tioni are provided in the QA Direct Materials Manual. Quarterly performance reviews are held withi each supplier. With vendors not yet certified, normal incoming inspection procedures are followed. In cigarette manufacturing, the cornerstones for quality assurance are the operators and machinery. Operators have been trained in quality d'efect identification and are accountable for on,going observation of product quality and corrective action. Due to the speed of our machinery (up to 9,000 cigarettes per minute or 400 packs per minute), operators are assisted by automated sensors and controllers to detect/reject, random occurrences of severe defects or control critical factors such as tobacco weight.. The assurance system for variables information contained in each, product's specification sheet, is achieved through in-production, inspectors and aa centralized audit facility. Brand specifications are prepared by a centralfzedi specifications group and distributed to, Manufacturing through in.-plant QA departments. A typical example of a brand change would involve issuing to the production~ supervisor the specification and associated control chart': information for dilution and circumference. The supervisor is accountable for seeing that the new target tobacco weight is changed in the computer control system.. In-plant inspectors verify tobacco: weight, circumference and, dilution, throughout'~ the production run against the specifications on control charts. 2030131326 53' -A
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73 ~ 4 S ~ S ~ ~ 14 4 ~ ~. ~'' 14 ~ 1W ~ 1W ~ ~ Ei IM i@ ~ ]A ~ Concurrently, each QA department takes samples throughout the order according, to a detailed written sampling plan. These are submitted to the central audit'~ gtoup~ that perforrns smoking analysis and re-verifies thee physical d'ata.. The direct materials needed for each order are, contained in abild of materials, preparedl by Production Planning. This is issued to~ the manufacturingg plant withi each order and is used first in the direct material staging area to assemble the supplies on a cart. The production supervisor and operator are accountable for verifying, priortouse; materials received against the bill of materials. For attribute quality, there are three levels of inspection/assurance: operators/ supervisors, in-plant quality inspectors and a central product audit~ group. The documentation for this is contained in two manuals defining quality defect criteria for bothi cigarettes and packaging.. These defect': definitions apply to all brands produced. For several unusual features of a few brands, special criteria have been established. These have been defined as brand specific and are part of the training for operators and auditors involved with these brands. In-plant quality inspectors perform roving inspections following written sampling plans and procedures. Data from these inspections are entered into: a: computer. This data base is used to compute overall defect rates by brand, week, production area, shift and machine., These are use~ most effectively to prepare Pareto analysis regarding defects and machinery and to initiate corrective action programs. Concurrent'~ with this,, samples that are stratil'iedd by brand/machines but randomized within shift are audited by the central product audit group to assess product quality. The data are then entered into a computer for between-plant comparisons and long-term trend analyses. Fromi this data base, corporate quality improvement priorities regarding chronic problems common between plant's are established.. Over the last~ three years, PM-USA has steadily replaced inspection activities with preventive activities. For example„ process control of significant process parameters: is being tried~ in pilot programs to show that a consistent and predictable process yields consistent quality. In, another area, renewed efforts are being made to define the proper frequency and procedures for verification of automated detectors to improve reliability. Finally, standardization andd documentation of tipping, glue rollers is being accomplished to improve filter assembly quality and' assure consistent filter dilution; between plants and machine types. Validation of Product Requirements In the design and development of ai cigarette brand~ Marketing defines customer requirements ini terms of smoke deliveries, packing style, cigarette length andl menthol or non-menthol. Validation that these requirements doo indeed meet the expectations of target consumers is achieved! through small- scale testing, such as consumer opinions in mall studies, and~ eventualliy in test markets,. 203013132'.7 54
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i 4 I ~ I ~ I I ~1 I I 0i I i ~ 0 During the small-lot manufacturing cycles prior to mall studies or test markets, evaluations are performedl regarding overall' quality and manufacturing difficult~ies, for both our dlrectmaterial suppliers and the~ PM-USArnanu- facturing process. R&D gives input regarding subjective or taste requirements. If data indicate problems, direct material changes are made regarding size or construction of materials; or ink formulations may be changed if, forr example, the film overwrap sticks to the pack. At this stage, specifications are usually finalized to assure proper tar and nicotine delivery. There are clear accountabilities within Technical Services, Quality Assurance; Manufacturing, Engineering and Purchasing for design reviews, so that corrective actions are assigned and followed through effectively. During the test market distributioni and sales cycle, at a minimum, product is returned from the market to analyze its condition. In some instances, individuals or teamsvi'sitthemarket and~ seefirst~-hande the condition of the product on the retail shelves and discuss with sales personnel relevant feed- back from retailers and consumers. The data from these audits are brought back to appropriate departments for any required corrective action. For our Japanese market, where customer expectations can at times be more stringent, routine visim are made by QA and Manufacturing personnel to the port of entry, distribution centers, distributors, sales and~ marketing personnel and~ retailers to see and discuss product quality and concerns. The results from these visits are documented and presented to PM~USA management. From these audits, short- andl lbng-terml improvement efforts continue to be launched. Exampl'es of improvements include a stronger case construction too protect product during shipment, revised procedures to avoid product mix-ups, and more frequent and formalizedl communications concerning any product changes and delfveries.. 5.10 Unique and Innovative Approaches Due to the low frequency of defects in both cigarettes and packaging, a long-standing problem within QA has been performing statistically valid~ comparative tests requiring a large sample size. Typically, sample sizes of 40, 000: to 100,000 for both test: and control are necessary to find 20 to30' defects from which representative defect rates and statistics can be calculated.. This invoNves manual inspection using, visual standards where both auditor- to-auditor differences and auditor fatigue require carefull consideration inn experimental design. This problem often creates a bottleneck in quality irnprovements because of' the amount of effort' required and lack of manpower available. To overcome this problem, both off-line and on-line vision systems have been develbped to scan cigarette rods for holes, tears, spots, smears, etc. The off-line system can be run at 200' cigarettes per minute while on-line systems can scan up to 8,000 per minute. As an example, these systems are beingg used to evaluate changes in the tobacco feed hopper relatedl to stem hole formation, with results available in days instead of weeks. 2030,131325, 55.
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I S For packaging,, on-line vision systems have beeni developed to detect rarely occurring but severe defects. These types of' defects db not occur randornly„ but normally happen during machine jams, start-up or shut-down sequences. The value of these detectors is that they now allow analysis of the conditions under which certain defects recur so that machine logic or redesign cani be investigated. A similar technology, ini use for five years, is high-speed photography. More than one hund'red high-speed camera analyses have been performed to better establish cause and effect. Illustrating its advantage,, high-speed camera, analysis has showni that speed changes during paper=splicing, relate to high incident rates of paper breaks and increased print variation, Based on this analysis, new machinery vendbrs now provide paper-splicing capability that does not require speed changes. Another example of the benefits of this approach is a study to: identify the causes of label registration problerns, The~ high-speed camera identified~ the cause upstream in the process, relating to a cigarette-feed problem. Engineering is currently working on a feeder redesign to solive both a productivity and a quality problem. 2030131329 56
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2030131330
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RESULTS F'ROM QUALIT'Y ASSUR'AN~CE OF PR'ODUCT'S AND S'ER'VICES 6.1 Reliability andi Performance of Products and Services PM-USA manufact'ures a nondurable consumer product. The performance and reliabillt'y, of our products are measured on the basis of functional and aesthetic criteria as perceived~ by the consumer. These include packaging that~ protects and allows easy access to the product, assures a product that is fresh,, smokes properly, and delivers desirable taste consistent with consumer expectations. As with all consumable products, the major indicator for performance or reliability is direct consumer response. Other indicators are:  Internal measures of product quality: • Product'~ moisture • Tar and nicotine levels • Menthol levels • Cigarette firmness . Pack seal! • Product audit of visual and functional characteristics.  Marketplace measures of product quality: • Consumer complaints • Customercomplaint~s. Visual and functional characteristic audits from field pick-ups . Product age • Product moisture • Comparisons with competitive brands. Product~ Quality One measure used to assess the performance of our product prior to shipment is audits for visual and functional characteristics, which correlate directly or indirectly to consumer complaints. A one-to-one correlation does not exist, however, since our internal criteria for defects are set considerabl+y tighter than the severity reflected in defects returned! by consumers. Shown here is the trend in this audit for all brands over the last three years. 2030131331 57
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 i i I Quality Audit Critical Cigarette Defects 1985-1987 ~ I  I  I  ~ Ii .r ri ~.. Ii ...r ~ 1986' 1987 ' Besides this attribute data, variable data are monitored to assure consistency ~' andl conformance to specifications. Two examples of' variable data are ~ cigarettemoi'sture and cigarette~ firmness. Shown, below are typical results: rt~  M-i I I a W I I 13.5 4.5 4.0 3:5 3 ~>0 2.5 2.0 PERCENT' 1985 Product Audif-Moisture 1 st Quarter 1986-1 st' Quarter 1987 PERCENT J 13.0 12:5 I USL LSL 12.0! ' 1 st 86 2nd 86' 3rd 86 4th 86 1 st 87 2nd 87 3rd 87 4th 87 1 st 88' 2030131332 58'
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Adjusted Ftrmness 3 Month Moving, Average 3.0 2.9 2.8. ~ FIRMNESS L USL - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- 2.7 - - - - - - - - - - - - - - - - - - - - - - - - LSL 2.6' 1 MAR 87 APR MAY JUN JUL Complaints AUG SEP OCT NOV DEC JAN 88 Total consumer complaints decreased 25 percent between 1984 and 1987. A discussion of this trend is contained in Section 7.1.. In addition to complaints from consumers, we also address the problem of shortages reported by wholesale and retail customers., Shortages decreased by 40 percent between 1985 and 1987 as shown in Section 7.1!. Since 1981,, we have been engaged in a program~ to minimize complaints from this source including the addition of automated detectors to reduce shortages. Product R'eca11/Replacement PM-USA''s system to handle recaiD and replacement of any unsaieabii' product involves Quality Assurance, Customer Service and Sali's. Through this cooperative effort, replacement product is provided' to customers,, both i distributors and end-use consumers. In addition,, we address product freshness. As a preventive measure„ we enforce a strict policy that no product more than four months old is shipped from our warehouses to distributors. Our sales force regularly rotates our product in the fieU The age criteria for rotation are established within each region.. To protect our consumers,, we have set up crisis management procedures to handle possible product tampering incidents and potentiali recalls. To date we have had no recalls through this system. We established our program based on consultation with federal and local law enforcement agencies and companies which had experienced tampering incidents. This effort involves personnel atboth parent headquarters and Richmond operations, including every department, associated with the recall function. 20 301313 3 3 59
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Field Product Moisture s7 0 m In The subjective category, the number one consumer complaint, is complex, and has proved to be difficult to solve.. Analysis has shown that more than, half of these complaints relate to freshness, which can be equated with low moisture: This assessment was substantiated by sensory panel testis which reported a stale response to cigarettes below specific pack moistures. To improve pack moisture at the point of use, PM-USA undertook ai major program to increase the seal of the polypropylene overwrap. This involved new measurement instruments and machine modifications. Improved results from these efforts, in terms of average pack moisture (oven volatiles) from sample packs pickedd up: randomly in U.S. cities, are shown below: Median Pack Oven Volatiles 1985-1987 •••••• Style B m 1if m m 13:2' 12'8 12,41 12,0. 11.6 Median Pack OV 1985 1986' - - - Style A 1987 As illustrated above, we have improved our pack moisture by approximately 0.8' percent for each style. Our competitive audit is an example of externall product quality assessments using consistent, criteria, both before shipment and after placement. Both. PM-USA products and those of our competitors, are given continuous quality testing regarding appearance, function, age, moisture and pack seal. Results fromi the competitive audit are shown in Section 7.2. 203013 I3"04
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fi1 ~ i . ~ I  ~- n n i-  I ® . n I 0 t7 i- . !r~ i- I n ~ i Q  ss' i ID  i ! /J' i I 6.2 Reductions in Scrap, R+ework,, and Rejected Products~ or Services Measures~ of~ rework~ in; ~ PM-USA can be~ characterized by~~ several indicators;~ including: . Leaf yield  Material waste  Cigarette rejects  Other Tobacco Materials (OTM). Of these indicators, leaf yield has been more than 99 percent for the past three years. Materiat waste has decreased fromi 7.2 percent in 1984 to 6.5 percent in I987. Cigarette Rejects In the past three years, cigarette rejects in all manufacturing plants have been substantially reduced,, as shown in the graph below. This reduction in overall rejects was accomplished~ through technological improvements and employee training. Performance Data Rejects 198+3-1 J87 REJECTS' 7.0( 6.0 5:0 4.0 1984 1985, 1986 1987 203Oii31335 61
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Other Tobacco Materials. (OTM). Small tobacco materials, generated dhring tobacco processing and cigarette manufacturing, are reclaimed and reprocessed for use. Data shown below indicate a marked decline in the generat'ion of small materials since 1983. Performance Data Other Tobacco Materials 1983-1987 1 i70 OTM 150 130 110 1983 1984 1985 1986 1987 6.3 Reductions in Claims,, Litigations, and Compiaints Related t& Quality Claims from consumers typically are handled through the complaint system described in Sectioni 7.3. Approximately 0.5 percent~ of consumer complaints involve claims. Product'~ liability claims decreased 6.7 percent between 1985 and 1987. During the period 1983-1986, the cost of PM-USA's product~ liability insurance and complaint adjustments (in constant dollars), decreased 43.0 percent~ and 46:7 percent, respectively. 6.4 Reductions in Warranty or Field Support Work Although cigarette products bear no written warranties, PM-USA considers there to be an implied warranty that if the customer is not pleased with ourr product, we will, replace it in kind~ and quantity. Customer satisfaction with the Company's products is favorably reflected in PM~USA sales. 203013i336 62
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' A 21 :3 :1 :3 14 -1 It ~ t -1 6.5~~ U~nique, or Innovative, Indlcators, of~ Quality~ Improvements, ~ or~ Economic Gains The quality of our products manufactured in the U.S. for the Japanese market has improved due to unique indicators for product design and development. PM-USA has established a smoking panel in Japan to assess consumer preferences in existing and potential products. Using Japanese panelists, we can better tailor the product characteristics to meet Japanese tastes. This program is an example of PM-USA's goal of designing consumer-orientedproduct's. 2030131337 63
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2030131338
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CUSTOMER SATISFACTION V dw-7 IT W 7! , C 7.11, Custome~r~~ V'iews~ of~ Q~uality~ of Products~~ or Services, A major component of PM-USA's business strategy is to manufacture cigarettes that~ deliver consistent consumer satisfaction, with quality superior to our competition. Product quality is vital to protect our strong brand imagery. A key measure of consumer satisfaction is sustained sales growth. Sales become a reality when the product meets consumer expectations eachi and' every time. PM-USA achieved a 1.8 percent growth in unit volume from 1984 to 1987 although cigarette sales in the United States decreased 5.0 percent. Salles (Billions Cigarettes) Industry PM-USA. 1984 600.2 211.7 1985 595.1 213.6 1986 581.91 21!4.5 1987 570,01 215.5. PM-USA continues to be the largest exporter of cigarettes from the United States. Our export volume increased 61.7 percent during the period 1984-1987. Cigarettes Exported, From U.S. (Billions) PM-USA Other U.S'. Manufacturers ~7 1984 39.7 24.9 1985 41.0 24.8 1986 46.3 24.4 t ~N 1987 64.2 41.0 Information from consumers is also an important gauge in measuring consumer satisfaction. All communications - both positive and negative - from our consumers are compiled daily. From this information~ the favorable trends for PM-USA consumer complaints are exhibited on the next page: 2030131339 64
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Total US Consumer Complaints Year End Averages 1984-1987  I 7  IN I  7 I  I 7  7 I  7 IT  I  I 0 M  r ~ I -0 1 Ji I i-  ' I COMPLAINTS 1984 1985 1986 1987 In~ 1987, PM-USA achieved its lowest level of consumer complaints since it began compiling, the data. These complaint data are also~ analyzed for individual consumer quality requirements suchi as product funct'i'on and appearance. Examples of these consumer complaints are shown below: US Consumer Complaints - Subjective Year End Average 1984-1987 9.5 9.0 COMPLAINTiS 8.5 8.01 ~ 1984 1985 1986 1987 Subjective complaints have decreased 8.7 percent since identified as ann operational improvement priority. 203'0131340. 65
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US' Consumer Complaints - Physical Year Endl Average 1984-1I987  7  1 :  II 1' r___.x '. ,. COMPLAINTS 1984 1985' 1986' Physical complaints have decreased 32.8 percent since identified as ann operational improvement priority.. US' Consumer Compliaints - Function Year End Average 1984-11987 6:0 5.5 5:0 4.5 4.0 3:5 COMPLAINTS 3.01 1987 1984 1985 198&' 1987 Function complaints have decreased 42.4 percent since, identified as ann operational improvement priority. 2030131341 A 66
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US Consumeu Complaints - Material Year End Average 1984-1987 a   ® -W 2.0 1.8 1.6 1.4 COMPLAJNTS` 1.2 1.0 1984 1985 1986 1987 Material complaints decreasedl 35,4 percent since identified as an operat!innall irnprovernentt priority. US Consumer Complaints - Construction Year End Average 1984-1987 1.4 1.0 0.8 0.6 0.4 0.2 0.0 COMP'LAINTS'. 1984 1985 1986~ 1987 Construction complaints have decreased 17.3 percent since 1986. 2 030 13134 2 67
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Feedback from our customers - distributors, wholesalers,, retailers - provides additional information t,oi assess our performance.  1 1  I 1  I 1    To J In the U.S. market, Pareto analysis of customer feedback has indicated case shortages as distributors' primary concern. US Case Shortages. 1985-1 J8'7 OCCURRENCES Between 19851 and 1987, shortage occurrences decreased 40 percent. In~ 1987,, shortages were identified as an operationali improvement priority and includ- ed in the five-year manufacturing and business plans to continue emphasis oni this major customer complaint. Additionally,, customer feedback systems have been developed for the geographical areas to which PM-USA exports cigarettes. As an example, PM-USA sales in Japan have increased 23'1.3 percent from 1984 to 1987; complaints from distributors and retailers in Japan have decreased 80.6 percent, from 1984 to 1987. 2030131343 68 I
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i i IN    / a   :    . '  Japanese Customer Complaints Year End Averages 1'984-1987 400 300 200 COMPLAINTS 100 0 1984 11985 1986 _1 1987 7.2 Competitive Comparison of Products A key measure of competitive position is market~ share. For the past five years, PM-USA has been the domestic market leader widening its share advantage ta seven points over its closest competitor.. U.S. Market Share (%). 1983 1987 PM-USA 34.4 37'.8 Competitor A 29.5 30.9 Competitor B 11.5 11ff Competitor C 9.2 8.2 Competitor D 4.7 3.6 Competitor E 8.6 6,9 During this five-year period, Marlboro continued its record~ of impressive growth - increasing 7.3 share points to 23.6 percent of market. Overseas,, Marlboro manufactured by PM~-USA continues to maintain andi improve its ind'ustry-leading share in Hong Kong, Singapore, and Saudi Arabia. Brands manufactured by PM-USA for Japan, Turkey and Taiwan have obtained and maintained the largest share of those countries' imported cigarette market. The quality of PM-USA brands versus competitive products is measured through internal competitive audits., Individual packs of PM-USA and competitive brands are purchased monthly from retail stores across the U.S.,, and ini Japan, Taiwan, Hong Kong, Singapore and Saudi' Arabi& These packs are inspected by the Company's independent Product Audit group using the criteria deemed~ critical to~ the consumer: 20301313 4' 4 69.
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Despite competitors' quality irnprovement efforts, PIVZ-USA continues to outperform the industry. In the U.S., critical cigarette defects decreased 27.6 percent'~ and critical packaging, defects decreased 23.7 percent in 1987 versus 1985. US Competitive Audit-Critical Cigarette Defects 1985 vs 1987 10 DEFECTS  1985 '1987 8:3' 111 US Competitive Audit-Critical Packagingi Defects. 1985 vs 1987 1985  11987 DEFECTS 1.4 1.2 1.0 0.8 0.6 0.7 0.6 0.5. 0  0.4 0.4 . 0~3 0.4II ~ 0 3 0.2 ~0,0 0.8 2030131345 70 1.1
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In Japany PM-USA critical cigarette defects decreased 58.5 percent and critical packaging, defects decreased 52.6 percent in 1987 versus 1985. In 1987, PM-USA achieved a lower level of criticall cigarette defects thani Japan's largest producer, JTI. Japanese Competitive Audit Critiaal Cigarette and Packaging Defects 1985 vs 1987  1985  DEFECTS 1987 4 2' PM-USA JTI PM-USA 7.3 Customer Service and Complaint Handling Customer Service JTI PM-USA sells cigarettes to more than 3,500 customers. The majority phone in their orders to an 800 number. Typicallly, PM-USA has direct contact with more than 2,000 of these customers daily. This contact not only results in the placement of orders, but also provides an opportunity for daily customer feedback. In addi'tiony PM-USA sales representatives call on each retail outlet serviced at least once per month. This process a1so encourages customer feedback on a continuous basis. Products from PM-USA manufacturing facilities are shipped either to regional warehouses or to~ large volume customers. The Company commits to shipment within 24 hours after the customer places the orders, evidence of just-in-time delivery. Studies indicate that the Company is meeting thiss commitment 99.7 percent of the time. In fact, approximately 70 percent of the orders are shipped, the day they are received. Daily contact has helped develop strong, rapport between customers and the Company. Complaints are handled personally with customers being reim- bursed for damaged product. 2 0 31013 13'4 0 71
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S Thecontinuous, customer feedback to the Customer Service function provides an opportunity to, learn and correct problems. The following example indicates the nature of these types of problems,, as welt as the Company's response to them: During a brand introduction,, it was extremely difficult for the customer to tax stamp the packs because of the carton's narrow width. The carton design caused pack damage. Based on customer feedback, PM-USA redesigned the carton to, allow for proper tax starnping and elimination of pack damage. Consumer Compiaint~s P'M~USA has instituted a formalized system for receiving, logging and responding to consumer complaints for all prod'ucts manufactured' by the Company. The system works this way:  Consumer complaints are received by letter,, telephone call, personal visit' and through retailers.  Complaints are then conveyed to the Quality Assurance Product Audit group, where they are logged into a computer system..  P'M-USA consumer complaints are assigned unique code numbers, and are classified into approximately 200 categories. The data recorded' include: • Name • Address • Telephone number • Brand~ • Type of defect • Facility where the product was manufactured.  Response letters are mailed~ to the consumers within four to seveni days of receipt., Replacement product is then shipped to the consumer. The Company goat is that replacement product be in the hands of a consumer within three weeks of the initial correspondence. Finally, any returned product is sent back to the factory that produced it for review by management and operators. In addition to individual responses, P'MIUSA regularly summarizes data on consumer complaants, and performs trend analyses by category. Results of these analyses are communicated! throughout the organization,, to improve the quality control process. Thus, awareness of quality is conveyed to employees in both the salaried and~ hourly work force. Senior management actively participates in the response to consumer compiaints. They then assign top complaints to cross-functional teams for investigation, and corrective acti'on. Severat such teams have made improve- ments to both the product and the associated manufacturing processes. Since the start' of the operational improvement priority program in 1985, the number of consumer complaints in these categories has decreased significantly.. 2430 13134'7 72
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To respond' to international customers and'' consumers, PM-USA has created ai system to handle overseas complaints under the aegis of the Quality Assurance function. rf 6 l1~ ® d J d d a J a g t All PM-USA cigarette packs have the Company's name and address printed on the side, for the convenience of consumers who wish to correspond. The Company conducted~ an extensive survey of smokers registering a complaint during a two-month period in 1981. Those participating were asked whether or not they received a reply letter and~ replacement cigarettes. The survey also asked for consumer reactiion to the Company's handling of the complaint. Key results were as follows:  91 percent of those surveyed were satisfied overall with the way the complaint was handled and 75 percent~ were "'very satisfied. "'  97 percent' said they received a reply letter from PM-USA within three weeks of the date they sent in the complaint.  90 percent said they received replacement cigarettes within three weeks of receipt of the Company's reply letter.  Virtually a1D smokers interviewed were still smoking the same brand, despite having experienced a~ problem that led them to contact t~he Company. 7.41, Ctist'onner Views of Guarantees and Warranties PM-USA offers no formal guarantees or warranties for its products. However, the Company accepts as ~ returned goods any of its products deemed unsaleable by distributors,, wholesalers or retailers. PM-USA reimburses the customer for the full price of the product. Also,, the Company replaces any cigarettes that consumers feel do not meet their expectations. Consumers generally receive more product~ of their choice than referenced in the complaint. 7.5 Unique or Innovative Approaches to Assessing, Customer Satisfaction. Competing in marketplaces around the world presents quality challenges due to differences in culture, language, environment, preferences, distribution systems, quality desires andl quality expectations. PM-USA's senior management initiated an innovative approach which is meeting these challenges. Quality Assurance personnel, accompanied~ on occasion by members from other organizational units, conduct quality surveys in the U.S. and every major market where our products are exported. Survey checklists have been estab.lished to assess the following: .I)istribution facilities  Product appearance  Product age 2'030131348 14 73
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r , ~3 M J .  Complaint handlfng, systems  Specific complaints  Suggestions for improving product and/or product handling. ~ ~ The programi requires the survey teami to meet with sales representatives, I distributors, wholesalers and retailers. These one-on-one,i first hand M J I ~ ri assessments have been effective as evidenced by:  Iincreased PMLUSA knowledge of cultures, desires and expectations of customers and consumers in various countries .r ,II ro .  Development'~ of a glossary of quality terms and defects for improved understanding of problems or conditions. I t. ~  Increased opportunity to accurately convey to various P1kL USA whi h ne d im rove de a tments th e s f alit t p r ose ar qu y p a o c e men . I  Increased opportunity to convey to representatives of the country ~ ~. visited,, PM-USA's quality improvement projects and their status.. a ~. Examples of specific successes experienced as a result of the program: I . ~  Discovery that in Japan distribution employees were walking on cases and~ damaging product. Conveyors were used to remed+y this source of I damage. 0 d I . ~  Japan has a standardized, pallet size different fromi that in the U.S. This requires a different stacking arrangement'. Cases have now been redesigned. I . t I  id J I a id ~  Product "scuffing" occurredi during shipment. Product protection in container has been added.  Inventory levels were not proper for preserving product integrity and have been adjusted.  Environmental conditions and warehouse condltions presented undue stress to product. Through educational discussions, these conditions have been minimized. .~ rl  Packaging films have been modf fied to assure proper vending of product. I  d  Export cigarette cartons, overwrapped with a polypropylene film~ were modified with a tear tape feature for customer convenience. 293'01313491 74
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