Chrysler LLC’s quality stewards smelled a rat when they reviewed the latest industry evaluations, but they are confident everything will come out OK in the end.

Slammed in Consumer Reports’ latest quality rankings, the auto maker forecasts steady improvement in the coming months, culminating in a dramatic upturn in 2010. The sudden gain will be triggered when Chrysler’s poor record in second-half 2007 disappears from the 3-year data window used by the influential magazine to compile its recommendations.

“It’s like the rat moving through the snake,” says Doug Betts, vice president and chief customer officer.

Betts links the painful period to a series of failure warnings reported by owners of its diesel-powered trucks. “A lot of engine lights came on,” he says, blaming a since-resolved problem with emissions-mitigation technology.

Fresh from one of his monthly quality review sessions with Chrysler Chairman and CEO Robert Nardelli, Betts echoes one of the chief executive’s favorite boasts: that Chrysler saw its 2008 warranty costs reduced by 30% compared with 2007, for a savings of $240 million.

If this trend continues as expected, Betts would be eligible for a bonus.

“Except the government won’t allow me,” he jokes dryly, referring to terms of the $4 billion emergency loan Chrysler received in December from the U.S. Treasury Dept.

The auto maker is in the final stages of developing a restructuring plan to satisfy terms of the emergency financing and convince the Obama Admin. to part with an additional $5 billion. And effective quality control is on the president’s checklist for the plan, which is expected March 31.

“The thing that the government wants to see is anything that would increase their chances of long-term viability,” says David Cole, chairman of the Michigan-based Center for Automotive Research. “Whether it’s cost, new products or quality improvements, that’s all part of the deal.”

Chrysler’s labor-relations team is attacking cost through negotiations with key unions. And the auto maker’s preliminary viability plan, submitted to the Treasury Feb. 17, outlines a product cadence featuring seven electric-drive or hybrid vehicles between late 2010 and early 2014.

Meanwhile, Betts, whom Nardelli recruited from Nissan North America Inc. 17 months ago, is spearheading a quality-improvement revolution based on a reorganization he implemented in early 2008. As a result, more decisions today are based on data and fewer by “gut” instinct, he says.

Previously, Chrysler’s quality-watchers were organized by product line. And quality control consisted of spotting mistakes and acting like “a policeman handing out tickets,” Betts tells Ward’s.

This dynamic created a climate that discouraged accountability.

“Design would say, ‘This is not a design problem,’” he says. “And then we’d go to manufacturing. They would resent the fact that design had sloughed it off onto them and they’d say, ‘That’s ridiculous.’ Meanwhile, the problem still exists. We were still shipping parts that had the problem.”

Corporate culture often promotes the development of strong vertical organizations at the expense of flexibility, Betts notes. “I don’t know if they teach ‘em that in business school,” he adds. “I’m an engineer.”

His approach calls for Chrysler to “work on things in a cross-functional way,” not unlike the product-development structure implemented last year. For every program under consideration, top engineers now huddle with chief designer Ralph Gilles and senior marketing executives under the supervision of Frank Klegon, executive vice president-product development.

Borrowing from a strategy he employed at Nissan, Betts helped assemble 14 teams organized by component. This encourages quick mobilization to attack problems at their source and, whenever possible, apply relevant solutions across the product lineup as a hedge against future setbacks.

Chrysler now has a quality-improvement team assigned to each of the following:

  • Brakes.
  • Ride, handling, steering and suspension.
  • Body-in-white systems, closures, sealing and fixed glass.
  • Paint, exterior systems and unique roofs.
  • Base engine and adaptation.
  • Malfunction indicator lights.
  • Transmission and driveline.
  • Electronics and active/passive safety systems.
  • Audio and telematics.
  • Wiring, charging, battery, cranking and starting.
  • Fuel and evaporative systems.
  • Heating, ventilation, air conditioning and powertrain cooling systems.
  • Interior, seats and seatbelts.
  • Body hardware.

This system is inspired by Carlos Ghosn, CEO of the Renault SA-Nissan Motor Co. Ltd. Alliance. Betts worked under him at Nissan and before that at Michelin North America, where Ghosn also served as CEO.

“Cross-functionality is his No.1 thing,” Betts says of Ghosn. “He thinks someday companies will not have departments. It will just be a herd of people looking for issues and fixing them and doing whatever they can.”

At Chrysler, Betts also wants to develop a herd mentality. To this end, he seeks to focus his teams to consider quality from multiple angles, each of which has a unique customer focus. They include:

  • Impact on warranty.
  • Recalls.
  • General perception.
  • Customer dissatisfaction.
  • Performance compared with competitive products.

Warranty and recalls are most easily quantified. Again echoing Nardelli, Betts notes Chrysler recalled fewer vehicles last year in the U.S. than any major auto maker.

However, recalls are “a very volatile thing,” he admits. “I’m not saying we’re always going to be the best.”

Success occurs when professionals responsible for vehicle design, testing and manufacturing work together closely and at a consistently high level of competency, Betts suggests.

General perception addresses first impressions that might register a vehicle as cheap in the eyes of consumers. Cut the wrong corner and it suggests thoughtlessness, says Alexander Edwards, president of Strategic Vision Inc., a California-based auto industry consultancy.

“Then the consumer thinks, ‘If they were thoughtless here, where else were they thoughtless?’” Edwards says. “This detracts from the overall perception of quality.”

Betts admits, “We do these things to ourselves.” In pursuit of cost-savings, content is sometimes cut, he says. And if consumers deem the wrong items have been axed, it generates negative reaction.

Part of Betts’ mission includes reminding Chrysler’s decision-makers about the give-and-take that comes with cost-cutting. “No good deed goes unpunished,” he says. “We need to balance these things.”

Chrysler is in the midst of one notable about-face. After critics slammed the Jeep Patriot and Compass cross/utility vehicles for having too much low-grade plastic, the auto maker redesigned their interiors for ‘09.

“The dealers are saying people are really reacting a lot more favorably,” Betts says.

But the best time to improve quality is during the product-development process, he adds. This will “reduce your challenges” in the marketplace.

An observation made during the development of the next-generation Jeep Grand Cherokee SUV, scheduled for launch later this year, provides one example. Shiny fasteners in the wheel wells of the current model proved distracting, so the redesigned vehicle will have black fasteners.

“The new Grand Cherokee, from a perceived quality point of view, is going to be totally different,” Betts promises.

Chrysler’s team approach also is paying dividends on the customer satisfaction front. After the auto maker received complaints about unresponsive air-conditioning systems on the Jeep Wrangler SUV, the problem was traced to the assembly plant in Toledo, OH.

Chrysler discovered the installer was forced to work blind when connecting the system’s cable to the instrument panel. As a result, some cables were not seated properly and became disconnected.

“So what they’ve done is installed a vision system that can actually see in there,” Betts says. “The camera can get in where the person can’t really get their head in to see and confirm that the part is fully seated.”

This was one of the fixes shown to Nardelli. “We had about a third of a Jeep actually up on the 15th floor (of Chrysler headquarters),” Betts says.

From that vantage point, you can see – on a clear day – General Motors Corp. headquarters in downtown Detroit. But Betts is working hard to expand the horizons of Chrysler employees.

“If you look at the history, and I would say you probably would find this anywhere here in town, we’ve made cars for ourselves,” he says.

For example, sporty suspensions have been compromised to accommodate the potholes in Detroit-area roads – as if all Chrysler customers are forced to contend with these conditions.

“I grew up in Georgia,” Betts says. “I don’t know what a pothole is. From where I sit, we want to make cars that are very competitive, that are not compromised because it’s OK in Detroit.”

That comes from comparing Chrysler vehicles with a broader range of competitive products, he adds.

“I’ve seen where our competitor was always just whatever GM or Ford (Motor Co.) makes. And I’m like, ‘You know, they’re selling the hell out of the (Toyota) Highlander. So get that in there.’”

Meanwhile, industry observers expect consumers will continue, at least in the near-term, to rule against Chrysler in the court of public opinion.

“All the domestics, typically, have a perceived quality issue relative to the imports, particularly the Japanese imports,” says Dennis Bulgarelli, director of Boston-based consultancy Compete Inc., which monitors consumer-shopping trends.

Says Edwards: “Even when the quality is identical or better on the Chrysler vehicle, the perception is still there.”

Betts concedes this inequity exists, but he looks forward to next year “when that rat finally comes out the end of the snake.”