Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 7 Managing Quality and Time to Create Value

7-2 Importance of Quality Poor quality Lost customersPoor Reputation Lower Profits

7-3 Learning Objective 1

7-4 Costs of Improving Quality Which is more important?

7-5 Customers will seek out the highest quality product. Improving quality more than pays its own way by creating higher profits. Therefore, quality is “free”. Total Quality Management (TQM)

7-6 W. Edwards Deming proposed that improving quality reduces cost and improves profitability. Quality can be and should be improved continuously. Revenues Cost Max Profit Max Quality Total Quality Management (TQM)

7-7 Return on Quality (ROQ) Profit is maximized at the optimum quality level. The optimum quality level is always achieved before the maximum quality level is reached. Revenues Cost Max Profit Optimum Quality There is a trade-off between the costs and benefits of quality.

7-8 Return on Quality (ROQ) Revenues Cost Max Profit Optimum Quality Striving for higher quality levels at ever higher costs is a case of diminishing returns. The higher costs to attain higher quality levels may be more than the customer is willing to pay.

7-9 Improving Quality vis-à-vis Other Business Dimensions Customers may not be willing to pay for the additional quality received. Many companies that have won awards for their commitment to quality have been unable to sustain profitability in later years. The other value-chain activities cannot be neglected.

7-10 Dimensions of Quality  Product or Service Attributes  Customer service before and after the sale Tangible Performance Adherence to specifications Functionality Intangible Reputation Appearance Appeal Tangible Performance Adherence to specifications Functionality Intangible Reputation Appearance Appeal Prompt and accurate responses to customer inquires Proper treatment of customers by salespeople On-time deliveries Customer follow-up after the sale Timely and accurate resolution of customer concerns Good warranty and repair services Prompt and accurate responses to customer inquires Proper treatment of customers by salespeople On-time deliveries Customer follow-up after the sale Timely and accurate resolution of customer concerns Good warranty and repair services

7-11 Learning Objective 2

7-12 Measuring Quality To ensure that a company meets or exceeds its customers’ expectations. Measures should: indicate customers’ evaluations of product and service quality. estimate customers’ satisfaction with services received. provide warning signals about any deterioration in product or service quality.

7-13 Lead Indicators of Quality Variation indicates poor quality. To measure variation, there are several tools that can be used: Histograms Run Charts Control Charts Defects A graphical display of the frequency distribution of attributes. Histograms

7-14 Lead Indicators of Quality Variation indicates poor quality. To measure variation, there are several tools that can be used: Histograms Run Charts Control Charts A graph showing trends in variation over time. Defects

7-15 Defects Lead Indicators of Quality Variation indicates poor quality. To measure variation, there are several tools that can be used: Histograms Run Charts A run chart with upper and lower control limits. Control Charts Notice that this process seems to be out of control on Fridays. UCL LCL

7-16 Diagnostic Information While lead indicators tell us that there IS a problem, diagnostic tools help determine WHAT the problem is. Cause-and- Effect Diagrams Scatter Diagrams Flow Charts Pareto Charts

7-17 Cause-and-Effect Diagrams Defect = Late Deliveries Trucks Breakdown Flat Tire Drivers Don’t know the route Too slow Poorly Trained Other Road Conditions Rain or snow Ice Road Work Wrong directions from customer Sometimes called “fishbone” or Ishikawa diagrams

7-18 Scatter Diagrams A plot of two variables that might be related. Patterns often indicate a causal relationship. This pattern indicates a causal relationship.

7-19 Flowcharts A graphical illustration of sequential linkages among process activities. Standardized symbols are used to represent decisions, actions, documents, and storage devices. A graphical illustration of sequential linkages among process activities. Standardized symbols are used to represent decisions, actions, documents, and storage devices.

7-20 Pareto Charts A histogram of causes of an error or errors arranged in order of frequency or size. Helps in prioritizing actions to address problems. Frequency of Complaint

7-21 Customer Satisfaction The degree to which expectations of product attributes, customer service, and price have been met or exceeded. Common tools for measuring customer satisfaction Phone Surveys Questionnaires Focus Groups # of Customer Complaints “Phantom” Shoppers Common tools for measuring customer satisfaction Phone Surveys Questionnaires Focus Groups # of Customer Complaints “Phantom” Shoppers

7-22 Cost of Quality (COQ) Costs of activities designed to control quality. Costs of corrective measures taken because of a failure to control quality. Out-of-pocket costs associated with quality generally fall into two categories:

7-23 Cost to Control Quality Prevention Activities that seek to prevent defects in the products or services being produced. Certifying Suppliers Designing for Manufacturability Quality Training Quality Evaluations Process Improvements Prevention Activities that seek to prevent defects in the products or services being produced. Certifying Suppliers Designing for Manufacturability Quality Training Quality Evaluations Process Improvements Appraisal Activities for inspecting inputs and attributes of individual units of product and service. Inspecting Materials Inspecting Machines Inspecting Processes Statistical Process Control Sampling and Testing Appraisal Activities for inspecting inputs and attributes of individual units of product and service. Inspecting Materials Inspecting Machines Inspecting Processes Statistical Process Control Sampling and Testing Value-Added Non-Value-Added

7-24 Cost to Control Quality Prevention Activities that seek to prevent defects in the products or services being produced. Certifying Suppliers Designing for Manufacturability Quality Training Quality Evaluations Process Improvements Prevention Activities that seek to prevent defects in the products or services being produced. Certifying Suppliers Designing for Manufacturability Quality Training Quality Evaluations Process Improvements Value-Added Companies with the highest quality levels tend to have most of their quality expenditures in this area.

7-25 Costs of Failing to Control Quality Internal Failure Costs associated with defects in processes and products that are found prior to delivery to customers. Disposing of Scrap Rework Reinspecting/Retesting Delaying Processes Internal Failure Costs associated with defects in processes and products that are found prior to delivery to customers. Disposing of Scrap Rework Reinspecting/Retesting Delaying Processes External Failure Costs associated with defects in processes and products that are detected after delivery to customers. Warranty Repairs Field Replacements Product Liability Customer Complaints Restoring reputation Lost Sales External Failure Costs associated with defects in processes and products that are detected after delivery to customers. Warranty Repairs Field Replacements Product Liability Customer Complaints Restoring reputation Lost Sales Non-Value-Added

7-26 Measuring and Reporting Costs of Quality It is easier to measure the COQ in organizations that use ABC and ABM. COQ is reported within organizations rather than in external financial statements. When COQ is reported, it is usually expressed as a percentage of sales.

7-27 Quality Awards and Certificates Japan European Community

7-28 Learning Objective 3

7-29 Managing Time in a Competitive Environment Less time means quicker response to changing customer needs and to changing conditions in the marketplace. We need to reduce... Product development time Customer response time Production cycle time

7-30 Time-based ABC and ABM ABC and ABM are costly to implement. A single more economical measure of the cost-driver rate is proposed: “The total cost of supplying capacity to complete certain types of activities divided by the total time available to complete them.” This approach allows: The combining of various activities carried out by individual employees or a single department, to obtain a single time total. The study of groups of activities in an integrated way, Intervention and modification of activities.

7-31 Learning Objective 4

7-32 Management of Process Efficiency Business Processes (supporting activities) Production Processes (goods and services for customers) Productivity Cycle time Throughput time ratio

7-33 High productivity High quality Low cycle time High throughput Management of Process Efficiency Throughput is the amount of goods and services delivered to customers during a period of time.

7-34 Measuring Productivity Specific productivity measures compare: Example: Historical trend of sales per employee

7-35 Measuring Cycle Time This measure is most useful when it includes: the value-added time (spent on good units) the non-value-added time (spent on reworking or disposal of defective units). This measure is most useful when it includes: the value-added time (spent on good units) the non-value-added time (spent on reworking or disposal of defective units).

7-36 Measuring Throughput Efficiency An estimate of the percentage of cycle time that was really spent in adding value to goods and services.

7-37 Managing Process Capacity Theoretical capacity (100%) Practical capacity Demand for output Planned or unavoidable downtime Excess capacity

7-38 Learning Objective 5

7-39 Managing Quality + Time + Productivity + Capacity = JIT The objective of JIT is to... purchase materials produce products deliver products... just when they are needed. The objective of JIT is to... purchase materials produce products deliver products... just when they are needed.

7-40 Managing Quality + Time + Productivity + Capacity = JIT The goal is to manage costs so that the savings associated with JIT exceed the cost of implementing JIT Advantages: Inventory savings of space, insurance, capital and personnel More emphasis on quality Rapid response to customer needs Advantages: Inventory savings of space, insurance, capital and personnel More emphasis on quality Rapid response to customer needs Implementation costs: Employee retraining Technology improvement Exposure to work stoppage risks Implementation costs: Employee retraining Technology improvement Exposure to work stoppage risks

7-41 Traditional “Push” Manufacturing - Example Forecast Sales Order components Prepare Production Schedule Begin Production in Anticipation of Sales Make sales from finished goods inventory Store Inventory

7-42 JIT “Pull” Manufacturing - Example Customer places an order Create Production Order Generate component requirements Production begins as parts arrive Goods delivered just in time Components are ordered

7-43 JIT Success Factors 1. Commitment to quality. 2. Flexible capacity. 3. Reliable supplier relations. 4. Smooth production flow. 5. Well- trained workforce. 6. Reduced cycle and response times.

7-44 Learning Objective 6

7-45 Construction and Use of Control Charts Control charts are used for: Process control Assurance sampling Inspection activities Benefits of control charts: Employees learn to monitor their work Defects can be detected quickly Objective communications Defects

7-46 Types of Control Charts Statistical control Overall mean Standard deviation Confidence range Target control Target mean Target upper limit Target lower limit Patterns of variation Runs, spikes, jumps Cyclical behavior Possible causes

7-47 End of Chapter 7