2 CHAPTER ◆ 1 Introduction
Most engineers already know how to design machines that make parts; that research
went on in the 1930s and 1940s. Over the last 30 or 40 years, manufacturing research has
focused on production engineering. At Toyota and Honda, for example, research focuses
on designing processes that generate less random variation. This type of research led to the
well-known quality discipline Six Sigma and calculation of defects per million parts. The
additional cost of Six Sigma processes is acceptable.
Quality and its effects are all around us. Manufacturers, software developers, aero-
space, and many other industries use quality techniques everyday. This is especially true
for mission critical projects. Here are two examples:● When was the last time you heard about a plane crashing because of a software
glitch?
● How often do computer problems cause nuclear power plants to melt down?The answer to these questions is virtually never, because stringent quality management
techniques have reduced the probability of failure to essentially zero through well-tested
and redundant systems. For service firms, quality has a different slant. Controlling deliv-
ery at a service firm involves designing foolproof processes, communicating with and
training employees thoroughly, and making certain that all personnel understand proce-
dures and expectations.^3
Should trading and money management firms be any less concerned about the qual-
ity of their trading or investment systems, especially when time-to-market is a key com-
petitive advantage? Of course not. Since the late 1980s and early 1990s, the thrust of
financial research has been on stochastic calculus for derivatives pricing, a place not
dissimilar to manufacturing in the 1930s and 1940s. With most of the new mathematics
now understood, research is focusing on the design of the production systems around the
calculations.1.1. A Brief History of the Quality Revolution
Many years ago, manufacturing industries faced many of the same production engineer-
ing issues that trading and money management firms are facing today. Manufacturers
turned to quality for solutions. The quality revolution started as far back as the 1920s
with the idea of managing production with statistical process control. The concept was
essentially this: use the central limit theorem to measure process outputs and control sto-
chastic processes.
According to the central limit theorem, sample means from a population will be
normally distributed, even if the underlying distribution is not. Thus, when the mean of
samples from a process, such as a manufacturing process, shifts (say plus or minus three
standard deviations), engineers consider the process to be out of control. It may seem like
a simple idea, but back then it was revolutionary.
Dr. W. Edwards Deming, often called the “ Father of Quality, ” built an entire phi-
losophy of management around this simple idea, teaching quality management concepts
across Japan after World War II. The Japanese readily accepted his ideas, implementing
them at such world-class companies as Sony and Toyota, which went on to become high
quality/low cost producers. The quality revolution nearly crushed the U.S. automotive
industry. American manufacturers converted to quality just to survive and now compete
successfully with foreign firms. (Many industrial firms find that they are now even legally
required to be quality certified according to ISO 9000 standards, though the emphasis for