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

2. Learning Objectives
Describe a management information system and explain how it enhances the management cycle.
Define total quality management (TQM) and identify financial and nonfinancial measures of quality.
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3. Learning Objectives (cont’d)
Use measures of quality to evaluate operating performance.
Discuss the evolving concept of quality.
Recognize the awards and organizations that promote quality.
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4. 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
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5. 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
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6. 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)
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7. 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
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8. 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
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9. 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
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10. 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
Support activities
Accounting
Human resources
Major business activities
Purchasing
Manufacturing
Marketing
Sales
Logistics
Order fulfillment
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11. 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
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12. The Management Cycle and a Management Information System

13. 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
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14. 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
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15. 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
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16. Using MIS in the Management Cycle (cont’d)
Reporting
Managers can generate customized reports that
Evaluate performance
Provide useful information for decision making
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17. Discussion What is a management information system (MIS)?
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
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18. Financial and Nonfinancial Measures of Quality
Learning Objective 2
Define total quality management (TQM) and identify financial and nonfinancial measures of quality
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19. 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
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20. Financial and Nonfinancial Measures of Quality (cont’d)
Steps toward creating a TQM environment
Identify and manage the financial measures of quality, or the costs of quality
Analyze operating performance using nonfinancial measures and require that all business processes and products or services be improved continuously
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21. Financial Measures of 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
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22. 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
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23. 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
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24. 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
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25. 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
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26. 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
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27. 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
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28. Financial Measures of Quality

29. 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
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30. 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
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31. 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
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32. Vendor Performance In the past Now
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
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33. 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
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34. 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
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35. 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
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36. 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
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37. 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
Evaluate the performance of each piece of equipment in relation to its capacity
Evaluate the performance of maintenance personnel in following a prescribed maintenance program
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38. Production Performance (cont’d)
Measures that help managers monitor production performance
Production quality
Parts scrapped
Equipment utilization
Machine downtime
Machine maintenance
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39. 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
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40. 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
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41. 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
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42. 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
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43. 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
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44. Customer Satisfaction
Performance measurement continues beyond sale and shipment of a product
Use customer follow-up to evaluate total customer satisfaction
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45. 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
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46. Nonfinancial Measures of Quality

47. 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
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48. Discussion What are the components of the costs of quality?
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
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49. Illustrative Problem: Measuring Quality
Learning Objective 3
Use measures of quality to evaluate operating performance
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50. Evaluating the Costs of Quality
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
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?
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51. Measures of Quality–Data for Analysis
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52. Analysis of the Costs of Quality

53. 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
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54. 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
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55. 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
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56. 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
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57. 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
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58. Evaluating Nonfinancial Measures of Quality
Evaluate each company’s experience in its pursuit of total quality management
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59. Measures of Quality–Data for Analysis
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60. 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
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61. 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
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62. 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
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63. Comparison of Costs of Quality: Conformance Versus Nonconformance
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64. Discussion
When evaluating the costs of quality, how can you determine whether a company is likely to succeed in the competitive marketplace?
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
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65. The Evolving Concept of Quality
Learning Objective 4
Discuss the evolving concept of quality
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66. 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
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67. 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
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68. 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
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69. 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
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70. 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
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71. 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
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72. 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
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73. 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
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74. 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
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75. Discussion What is kaizen?
Kaizen is the continual and gradual improvement of products and processes while reducing costs
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76. Recognition of Quality
Learning Objective 5
Recognize the awards and organizations that promote quality
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77. 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
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78. 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
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79. 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
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80. 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
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81. 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
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82. 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
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83. 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
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84. 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
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85. 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
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86. Recognition of Quality (cont’d)
The ISO series provides a similar framework for environmental management
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87. Discussion
What does the International Organization for Standardization (ISO) promote?
It promotes standardization with a view to facilitating the international exchange of goods and services
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88. Time for Review
Describe a management information system and explain how it enhances the management cycle
Define total quality management (TQM) and identify financial and nonfinancial measures of quality
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89. And Finally… Use measures of quality to evaluate operating performance
Discuss the evolving concept of quality
Recognize the awards and organizations that promote quality
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