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Quality Management and Measurement Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 11.

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Presentation on theme: "Quality Management and Measurement Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 11."— Presentation transcript:

1 Quality Management and Measurement Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University Chapter 11

2 11–2Copyright © Houghton Mifflin Company. All rights reserved. Learning Objectives 1.Describe a management information system and explain how it enhances the management cycle. 2.Define total quality management (TQM) and identify financial and nonfinancial measures of quality.

3 11–3Copyright © Houghton Mifflin Company. All rights reserved. Learning Objectives (cont’d) 3.Use measures of quality to evaluate operating performance. 4.Discuss the evolving concept of quality. 5.Recognize the awards and organizations that promote quality.

4 11–4Copyright © Houghton Mifflin Company. All rights reserved. The Role of Management Information Systems in Quality Management Learning Objective 1 –Describe a management information system and explain how it enhances the management cycle

5 11–5Copyright © Houghton Mifflin Company. All rights reserved. The Role of Management Information Systems in Quality Management To compete successfully, managers need information that enables them to –Determine accurate product, service, and customer costs –Improve processes –Provide timely feedback to stakeholders about their organization Can only be provided by a management information system that captures both financial and nonfinancial data

6 11–6Copyright © Houghton Mifflin Company. All rights reserved. The Role of Management Information Systems in Quality Management Management information system (MIS) –A reporting system that Identifies, monitors, and maintains continuous, detailed analyses of a company’s activities Provides managers with timely measures of operating results –Is designed to support Just-in-time (JIT) operations Activity-based costing (ABC) and activity-based management (ABM) Total quality management (TQM)

7 11–7Copyright © Houghton Mifflin Company. All rights reserved. The Role of Management Information Systems in Quality Management Primary focus of MIS –Management of activities Provides managers with improved knowledge of the processes for which they are responsible Identifies resource usage and cost for each activity Fosters managerial decisions that lead to continuous improvement throughout the organization

8 11–8Copyright © Houghton Mifflin Company. All rights reserved. The Role of Management Information Systems in Quality Management Activity-related information is readily available –Needed to speed responsiveness to customers and reduce processing time Provides more accurate product and service costs –Leads to improved pricing decisions Nonvalue-adding activities are highlighted –Can then be reduced or eliminated Analyzes profitability of individual customers

9 11–9Copyright © Houghton Mifflin Company. All rights reserved. Enterprise Resource Planning Systems An MIS may be designed as either –A customized, informally linked series of systems for specific purposes Such as financial reporting, product costing, and business process measurement –An enterprise resource planning (ERP) system A fully integrated database system

10 11–10Copyright © Houghton Mifflin Company. All rights reserved. Enterprise Resource Planning Systems (cont’d) ERP system –Combines the management of all major business activities with support activities to form one, easy-to-access, centralized data warehouse Major business activities –Purchasing –Manufacturing –Marketing –Sales –Logistics –Order fulfillment Support activities –Accounting –Human resources

11 11–11Copyright © Houghton Mifflin Company. All rights reserved. Using MIS in the Management Cycle Without the flexibility and power of database management systems like ERP, managers would be at a disadvantage in today’s rapidly changing and highly competitive business environment

12 11–12 The Management Cycle and a Management Information System

13 11–13Copyright © Houghton Mifflin Company. All rights reserved. Using MIS in the Management Cycle (cont’d) Planning –Managers use the MIS database to obtain relevant and reliable information for Formulating strategic plans Making forecasts Preparing budgets

14 11–14Copyright © Houghton Mifflin Company. All rights reserved. Using MIS in the Management Cycle (cont’d) Executing –Managers use the financial and nonfinancial information in the MIS database to implement decisions about Personnel Resources Activities –MIS minimizes waste and improves the quality of the organization’s products or services

15 11–15Copyright © Houghton Mifflin Company. All rights reserved. Using MIS in the Management Cycle (cont’d) Reviewing –Managers identify and track financial and nonfinancial performance measures to evaluate all the major business functions Allows managers to –Reward performance promptly –Take speedy corrective action –Analyze and revise performance measurement plans

16 11–16Copyright © Houghton Mifflin Company. All rights reserved. Using MIS in the Management Cycle (cont’d) Reporting –Managers can generate customized reports that Evaluate performance Provide useful information for decision making

17 11–17Copyright © Houghton Mifflin Company. All rights reserved. Discussion Q.What is a management information system (MIS)? A.A management information system is a reporting system that identifies, monitors, and maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results

18 11–18Copyright © Houghton Mifflin Company. All rights reserved. Financial and Nonfinancial Measures of Quality Learning Objective 2 –Define total quality management (TQM) and identify financial and nonfinancial measures of quality

19 11–19Copyright © Houghton Mifflin Company. All rights reserved. Financial and Nonfinancial Measures of Quality Total quality management (TQM) –An organizational environment in which all business functions work together to build quality into the firm’s products or services

20 11–20Copyright © Houghton Mifflin Company. All rights reserved. Financial and Nonfinancial Measures of Quality (cont’d) Steps toward creating a TQM environment 1.Identify and manage the financial measures of quality, or the costs of quality 2.Analyze operating performance using nonfinancial measures and require that all business processes and products or services be improved continuously

21 11–21Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality Quality –The result of an operating environment in which a product or service meets or conforms to a customer’s specifications the first time it is produced or delivered

22 11–22Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) Costs of quality –The costs specifically associated with the achievement or nonachievement of product or service quality –Includes Costs of good quality incurred to ensure the successful development of a product or service Costs of poor quality incurred to transform a faulty product or service into one that is acceptable to the customer The costs of quality may make up a significant portion of a product’s total cost, so, controlling the costs of quality strongly affects profitability

23 11–23Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) Components of the costs of quality –Costs of conformance The costs incurred to produce a quality product or service –Costs of nonconformance The costs incurred to correct defects in a product or service

24 11–24Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) Costs of conformance –Prevention costs Costs associated with the prevention of defects and failures in products or services –Appraisal costs Costs of activities that measure, evaluate, or audit products, processes, or services to ensure conformance to quality standards and performance requirements

25 11–25Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) Costs of nonconformance –Internal failure costs Costs incurred when defects are discovered before a product or service is delivered to a customer –External failure costs Costs incurred after a product or service is delivered to a customer

26 11–26Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) An inverse relationship exists between costs of conformance and costs of nonconformance –Spending money on the costs of conformance reduces the costs of nonconformance –If little is spent on the costs of conformance, the costs of nonconformance will be high

27 11–27Copyright © Houghton Mifflin Company. All rights reserved. Financial Measures of Quality (cont’d) Overall goal of an organization –Avoid the costs of nonconformance Internal and external failures affect –Customers’ satisfaction –The organization’s profitability

28 11–28 Financial Measures of Quality

29 11–29Copyright © Houghton Mifflin Company. All rights reserved. Nonfinancial Measures of Quality Management needs a measurement and evaluation system that signals poor quality early enough to correct problems before the product or service reaches the customer –Accomplished by implementing a policy of continuous improvement Use nonfinancial measures of performance

30 11–30Copyright © Houghton Mifflin Company. All rights reserved. Product Design Quality problems are often the result of poor design –Can automatically identify poorly designed parts or manufacturing processes by using computer-aided design (CAD) A computer-based engineering system

31 11–31Copyright © Houghton Mifflin Company. All rights reserved. Product Design (cont’d) Managers monitor the CAD reports on design flaws –Ensures that products are properly designed and free of defects Measures to consider –Number and types of design defects detected –Average time between detection and correction –Number of unresolved design defects at the time of product introduction

32 11–32Copyright © Houghton Mifflin Company. All rights reserved. Vendor Performance In the past –Companies dealt with dozens of suppliers in the quest for the lowest price Now –Companies analyze their vendors to determine which ones Are most reliable Furnish high-quality goods Have a record of timely deliveries Charge competitive prices

33 11–33Copyright © Houghton Mifflin Company. All rights reserved. Vendor Performance (cont’d) Once identified, these vendors become an integral part of the production team –Ensures a continuing supply of high-quality materials –Vendors may even contribute to product design Ensures that the correct materials are being used

34 11–34Copyright © Houghton Mifflin Company. All rights reserved. Vendor Performance (cont’d) Managers monitor each vendor’s performance using –Measures of quality Such as defect-free materials as a percentage of total materials received –Measures of delivery Such as timely deliveries as a percentage of total deliveries Such measures enable managers to identify and monitor reliable vendors so that high-quality, reasonably priced materials are available when they are needed

35 11–35Copyright © Houghton Mifflin Company. All rights reserved. Production Performance Computer-integrated manufacturing (CIM) systems –A fully computerized, plantwide manufacturing facility in which all parts of the manufacturing process are programmed and performed automatically –Minimizes concerns about wasted money that can be traced to Defective products Scrapped parts Machine maintenance Downtime

36 11–36Copyright © Houghton Mifflin Company. All rights reserved. Production Performance (cont’d) In CIM systems –Most direct labor hours are replaced by machine hours –A significant part of variable product cost is replaced by the cost of expensive machinery, a fixed cost The largest item on the company’s balance sheet is often automated machinery and equipment

37 11–37Copyright © Houghton Mifflin Company. All rights reserved. Production Performance (cont’d) Each piece of equipment has a specific capacity, above which continuous operation is threatened The measures managers use to evaluate these machines have two objectives 1.Evaluate the performance of each piece of equipment in relation to its capacity 2.Evaluate the performance of maintenance personnel in following a prescribed maintenance program

38 11–38Copyright © Houghton Mifflin Company. All rights reserved. Production Performance (cont’d) Measures that help managers monitor production performance –Production quality –Parts scrapped –Equipment utilization –Machine downtime –Machine maintenance

39 11–39Copyright © Houghton Mifflin Company. All rights reserved. Delivery Cycle Time Companies evaluate their responsiveness to customers by examining delivery cycle time –The time period between acceptance of an order and the final delivery of the product or service –Company’s goal Fill its orders 100 percent of the time Deliver its products 100 percent on time

40 11–40Copyright © Houghton Mifflin Company. All rights reserved. Delivery Cycle Time (cont’d) To meet this goal, a company must –Establish and maintain consistency and reliability within its manufacturing process –Be highly aware of its delivery cycle time Important to customers Decrease in delivery cycle time can lead to an increase in income from operations

41 11–41Copyright © Houghton Mifflin Company. All rights reserved. Delivery Cycle Time (cont’d) Delivery cycle time consists of –Purchase order lead time The time it takes for materials to be ordered and received so that production can begin –Production cycle time The time it takes to make a product –Delivery time The time between the completion of the product and its receipt by the customer

42 11–42Copyright © Houghton Mifflin Company. All rights reserved. Delivery Cycle Time (cont’d) For each component of delivery cycle time, management should –Emphasize the importance of minimizing the time –Track the actual time –Highlight trends –Make reports available daily or weekly

43 11–43Copyright © Houghton Mifflin Company. All rights reserved. Delivery Cycle Time (cont’d) Other measures designed to monitor delivery cycle time –Waste time –Order backlogs –On-time delivery performance –Percentage of orders filled

44 11–44Copyright © Houghton Mifflin Company. All rights reserved. Customer Satisfaction Performance measurement continues beyond sale and shipment of a product –Use customer follow-up to evaluate total customer satisfaction

45 11–45Copyright © Houghton Mifflin Company. All rights reserved. Customer Satisfaction (cont’d) Measures used to determine the degree of customer satisfaction include –Number and types of customer complaints –Number and causes of warranty claims –Percentage of shipments returned by customers Or percentage of shipments accepted by customers These measures help a company continuously produce higher-quality products, improve production processes, and reduce throughput time and costs

46 11–46 Nonfinancial Measures of Quality

47 11–47Copyright © Houghton Mifflin Company. All rights reserved. Measuring Service Quality Quality of services can be measured and analyzed –Many of the costs of product conformance also apply to the development and delivery of a service Measures include –Flaws in service design –Timely service delivery –Services accepted or rejected –Number of complaints –Many of the costs-of-quality categories and several of the nonfinancial measures of quality can also be applied directly to services

48 11–48Copyright © Houghton Mifflin Company. All rights reserved. Discussion Q.What are the components of the costs of quality? A.The components of the costs of quality are the costs of conformance, which are the costs incurred to produce a quality product or service, and the costs of nonconformance, which are the costs incurred to correct defects in a product or service Costs of conformance include prevention and appraisal costs, and costs of nonconformance include internal and external failure costs

49 11–49Copyright © Houghton Mifflin Company. All rights reserved. Illustrative Problem: Measuring Quality Learning Objective 3 –Use measures of quality to evaluate operating performance

50 11–50Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality Evaluate each company’s approach to quality enhancement by analyzing the costs of quality and by answering the following questions –Which company is most likely to succeed in the competitive marketplace? –Which company has serious problems with its products’ quality? –What do you think will happen to the total costs of quality for each company over the next five years? Why? Three companies, Able, Baker, and Cane, have taken different approaches to achieving product quality. All three companies are the same size, each having generated $15 million in sales last year

51 11–51Copyright © Houghton Mifflin Company. All rights reserved. Measures of Quality–Data for Analysis

52 11–52 Analysis of the Costs of Quality

53 11–53Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality (cont’d) Which company is most likely to succeed in the competitive marketplace? –Able Company Spent the most money on costs of quality –Spent 80 percent of that money on costs of conformance –Means that only a small amount had to be spent on internal and external failure costs –Result is high-quality products, which leads to high customer satisfaction

54 11–54Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality (cont’d) Which company has serious problems with its products’ quality? –Baker Company Spent the least on costs of quality –Over 68 percent of its costs of quality was spent on internal and external failure costs –Scrap costs, reinspection costs, the cost of downtime, warranty costs, and customer complaint costs were all high –Products are very low in quality

55 11–55Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality (cont’d) What do you think will happen to the total costs of quality for each company over the next five years? Why? –Able Company Total costs of quality should be lower in the future because the company is establishing a high level of quality –Spent the most on costs of conformance early in the product’s life cycle –Quality is integrated into the development and production processes

56 11–56Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality (cont’d) What do you think will happen to the total costs of quality for each company over the next five years? Why? –Baker Company Costs of conformance will have to increase significantly if the company expects to stay in business –Seven percent of sales revenue being spent on costs of failure –Company is vulnerable because the marketplace is not accepting its products –Is in a weak position to face competition

57 11–57Copyright © Houghton Mifflin Company. All rights reserved. Evaluating the Costs of Quality (cont’d) What do you think will happen to the total costs of quality for each company over the next five years? Why? –Cane Company Company must learn to prevent high internal and external failure costs to remain competitive –Spending 53 percent of its costs of quality on conformance, so product quality should be increasing –However, costs of nonconformance are high

58 11–58Copyright © Houghton Mifflin Company. All rights reserved. Evaluating Nonfinancial Measures of Quality Evaluate each company’s experience in its pursuit of total quality management

59 11–59Copyright © Houghton Mifflin Company. All rights reserved. Measures of Quality–Data for Analysis

60 11–60Copyright © Houghton Mifflin Company. All rights reserved. Evaluating Nonfinancial Measures of Quality (cont’d) Able Company –Costs of conformance are having a positive effect In 20x5, 98.6 percent of materials received form suppliers were of high quality –Quality over the three years has been increasing Product defect rate has been decreasing rapidly –Customer acceptance and satisfaction have been increasing Percentage of on-time deliveries increasing Both percentage of returned orders and customer complaints decreasing

61 11–61Copyright © Houghton Mifflin Company. All rights reserved. Evaluating Nonfinancial Measures of Quality (cont’d) Baker Company –High costs of nonconformance are having a negative effect Number of high-quality shipments of materials from vendors decreasing Product defect rate increasing (severe problem) On-time deliveries poor and getting worse Returned goods and customer complaints increasing

62 11–62Copyright © Houghton Mifflin Company. All rights reserved. Evaluating Nonfinancial Measures of Quality (cont’d) Cane Company –Making very slow progress toward higher- quality standards Most nonfinancial measures show very slight positive trend Needs to spend more money on costs of conformance

63 11–63Copyright © Houghton Mifflin Company. All rights reserved. Comparison of Costs of Quality: Conformance Versus Nonconformance

64 11–64Copyright © Houghton Mifflin Company. All rights reserved. Discussion Q.When evaluating the costs of quality, how can you determine whether a company is likely to succeed in the competitive marketplace? A.The amount of money a company spends on costs of quality and a comparison of its costs of conformance to its costs of nonconformance are indicators of whether it is likely to succeed If costs of conformance are much higher than costs of nonconformance, it means that only a small amount had to be spent on internal and external failure costs The result is high-quality products, which leads to high customer satisfaction

65 11–65Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality Learning Objective 4 –Discuss the evolving concept of quality

66 11–66Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality Return on quality (ROQ) –Results when the marginal revenues possible from a higher-quality good or service exceed marginal costs of providing that higher quality

67 11–67Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Managers must –Weigh the high costs of consistent quality against higher revenues –Base the quality standards for a good or service on the expected return on quality

68 11–68Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Before the advent of TQM, over 20 years ago, managers assumed there was a trade-off between the costs and benefits of improving quality

69 11–69Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) In the 1980s, quality gave organizations a competitive edge in the global marketplace –Advocates of TQM stressed improved quality as a means of enhancing an organization’s efficiency and profits –Companies emphasized kaizen Continual and gradual improvement of products and processes while reducing costs

70 11–70Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Quality control methods eliminated defects in the design and manufacture of products –Statistical analysis –Computer-aided design (CAD) –Six Sigma Today, more than 90 percent of Fortune 500 companies use a combination of these methods

71 11–71Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Efforts then expanded to include the quality of nonmanufacturing processes –Benchmarking Measurement of the gap between the quality of a company’s process and the quality of a parallel process at the best-in-class company –Process mapping Method of diagramming in a flow diagram –Process inputs, outputs, constraints, and flows Helps managers identify unnecessary efforts and inefficiencies in a business process

72 11–72Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Service businesses and ecommerce companies also recognize the importance of quality by seeking to –Maximize customers’ satisfaction with their services –Continuously improve the customers’ experience

73 11–73Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) A manager’s concept of quality must continuously evolve to –Fulfill customers’ needs and expectations –Meet the demands of the changing business environment Dimensions of quality –Products and services must Be defect-free and dependable Embody intangibles such as prestige and good taste

74 11–74Copyright © Houghton Mifflin Company. All rights reserved. The Evolving Concept of Quality (cont’d) Managers must –Meet or exceed a variety of expectations about customer service –Create innovative new products and services that anticipate the opportunities to be offered by an ever-changing marketplace

75 11–75Copyright © Houghton Mifflin Company. All rights reserved. Discussion Q.What is kaizen? A.Kaizen is the continual and gradual improvement of products and processes while reducing costs

76 11–76Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality Learning Objective 5 –Recognize the awards and organizations that promote quality

77 11–77Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality To promote the importance of quality, many awards and organizations have been established –Deming Application Prize –Malcolm Baldrige Quality Award –International Organization for Standardization

78 11–78Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) Deming Prize –Established by the Japanese Union of Scientists and Engineers in 1951 –Honors individuals or groups who have contributed to the development and dissemination of total quality management

79 11–79Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) Deming Application Prize –Also established by the Japanese Union of Scientists and Engineers –Honors companies that achieve distinctive results by carrying out total quality control –Originally limited to Japanese companies Interest so great, rules were revised to allow participation of companies outside of Japan

80 11–80Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) Malcolm Baldrige Quality Award –Established by U.S. Congress in 1987 –Recognizes U.S. organizations for their achievements in quality and business performance –Purpose is to raise awareness of the importance of quality and performance excellence

81 11–81Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) Organizations are evaluated on the basis of a set of standards in seven categories –Leadership –Strategic planning –Customer and market focus –Information and analysis –Human resource focus –Process management –Business results

82 11–82Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) Thousands of organizations throughout the world accept the Baldrige criteria as the standards for performance excellence –Use them for training and self-assessment, whether they plan to compete or not Award winners are showcased and encouraged to share their best practices with others

83 11–83Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) International Organization for Standardization (ISO) –Worldwide federation of national standards bodies from over 130 countries –Promotes standardization with a view to facilitating the international exchange of goods and services

84 11–84Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) ISO 9000 –Set of guidelines for businesses Covers the design, development, production, final inspection and testing, installation, and servicing of products, processes, and services –Standardizes quality management and quality assurance

85 11–85Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) ISO 9000 has been adopted worldwide –Many companies do business only with ISO-certified companies To become ISO certified –A company must pass a rigorous third- party audit of its manufacturing and service processes As a result, certified companies have detailed documentation of their operations

86 11–86Copyright © Houghton Mifflin Company. All rights reserved. Recognition of Quality (cont’d) The ISO series provides a similar framework for environmental management

87 11–87Copyright © Houghton Mifflin Company. All rights reserved. Discussion Q.What does the International Organization for Standardization (ISO) promote? A.It promotes standardization with a view to facilitating the international exchange of goods and services

88 11–88Copyright © Houghton Mifflin Company. All rights reserved. Time for Review 1.Describe a management information system and explain how it enhances the management cycle 2.Define total quality management (TQM) and identify financial and nonfinancial measures of quality

89 11–89Copyright © Houghton Mifflin Company. All rights reserved. And Finally… 3.Use measures of quality to evaluate operating performance 4.Discuss the evolving concept of quality 5.Recognize the awards and organizations that promote quality


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