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LESSON3:Qualityandtime
Unitcontroller:
Dr.Yinjunming
objectives
Aftercompletingthislesson,youshouldbeableto:
Explainhowqualityisusedasacompetitivenesstool.
Evaluateacostofqualityprogrambycalculatingcategoriesofcostand
analyzingnonfinancialmeasures.
Outlinethethreemethodscompaniesusetoidentifyinternalquality
problems.
Analyzerelevantcostsandbenefitsofqualityimprovements.
Explainhowmanagersuseinformationaboutcostsofdesignquality.
Evaluatequalityperformanceusingfinancialandnonfinancialmeasures.
Explaintheimpactoftimeonqualityandcompetitiveness.
Analyzerelevantrevenuesandcostsoftime.
Contents
1
3
Quality as a competitiveness tool
2
Costs of quality
3
3
Analyzing and improving quality
4
Costs and benefits of quality improvement
5
3
Costs of design quality
6
Evaluating quality performance
7
3
Time and competitiveness
8
Time drivers and costs of time
9
3
Theory of constraints
TOPIC 3.1 Quality as a
competitiveness tool
Quality the total features and characteristics of a
product or a service made or performed according to
specifications to satisfy customers at the time of purchase
and during use
Focusing on quality has long been a strategy that
companies use to gain competitive advantage.
A quality focus reduces costs and increases customer
satisfaction
companies worldwide are turning management attention
to the concept of quality, and international standards (for
example, ISO 9001 or ISO 14001) have recently emerged
to mandate quality levels.
Quality improvements can lead to reduced costs
throughlesswaste,spoilage,andreworkandresultin
higherlevelsofcustomersatisfaction.Globalconcernfor
the environment and effects of climate change are also
creatingagreaterneedforcompaniestofocusonquality
initiatives that reduce waste; the quality of a good or
service is driven by consumer demand, with a
price/quality tradeoff often being made, and todays
consumers are demanding that goods or services be
producedwithoutfurtherdamagetotheenvironment.
Thetermqualityreferstomanyfactors.
threespecificfactors:grade,qualityofdesign,andquality
ofconformance.
Graderelatestodifferencesindegree,worth,orranking
between products or services that have the same
functionaluse;
Quality of design is the degree to which the product
characteristics or services performed meet the needs
andwantsofconsumers.
Qualityofconformance isthedegreetowhichaproduct
or service performs according to design and production
specifications.
Diagram
Two aspects
Of Quality
Design Quality
( )
.
refers to how closely the
characteristics
of
a
product or service meet
the needs and wants of
customers
Conformance Quality
( )
refers to the performance
of a product or service
relative to its design and
product specifications.
Quality and Failure
Actual
Performance
Design
Specifications
Conformance
Quality
Failure
Customer
Satisfaction
Design
Quality
Failure
TOPIC 3.2 Costs of quality
Costsofquality COQ arethecostsincurredtoprevent,or
thecostsarisingasaresultof,theproductionofalowquality
product.
Therearefourcategories:
1. Prevention Costs( ) incurred to preclude the
production of products that do not conform to
specifications
2. Appraisal Costs incurred to detect which of the
individual units of products do not conform to
specifications
3. Internal Failure Costs incurred on defective
products before they are shipped to customers
4. External Failure Costs incurred on defective
products after they are shipped to customers
Elements of Costs of Quality Reports
Determining COQ using
Activity Based Costing
1.
2.
3.
4.
5.
6.
7.
IdentifytheChosenProduct
IdentifytheProductsDirectCostsofQuality
SelecttheCostAllocationBasestoUseforAllocating
IndirectCostsofQualitytotheProduct
IdentifytheIndirectCostsofQualityAssociatedwith
eachCostAllocationBase
ComputetheRateperUnitofEachCostAllocationBase
UsedtoAllocateIndirectCostsofQualitytotheProduct
ComputetheIndirectCostsofQualityAllocatedtothe
Product
ComputetheTotalCostsofQualitybyAddingAllDirect
andIndirectCostsofQualityAssignedtotheProduct
Activity-Based COG Analysis Illustration
TOPIC 3.3 Analyzing and
improving quality
Toidentifyinternalqualityproblems,companiesanalyze
internalbusinessprocessesusingthefollowingthree
methods:
1. Control Charts
2. Pareto Diagrams
3. Cause-and-Effect Diagrams
Control Charts
Statistical Quality Control (SQC) is a formal
means of distinguishing between random
and nonrandom variations in an operating
process
ControlChartsareapartofSQC.
ControlChartsareagraphofaseriesof
successiveobservationsofaparticularstep,
procedure,oroperationtakenatregularintervals
oftime.
Eachobservationisplottedrelativetospecified
rangesthatrepresentthelimitswithinwhich
observationsareexpectedtofall.
Onlythoseobservationsoutsidethecontrollimits
areordinarilyregardedasnonrandomandworth
investigating
Quality Control Charts Illustrated
Pareto Diagrams
Observations outside control limits serve as
inputsforParetoDiagram
Pareto Diagram a chart that indicates how
frequently each type of defect occurs, ordered
fromthemostfrequenttotheleastfrequent
Cause-and-Effect Diagrams
Identifiespotentialcausesofdefects
ProblemsidentifiedbytheParetoDiagramare
analyzedusingcauseandeffectdiagrams
AlsocalledFishboneDiagramsbecausethey
resemblethebonestructureofafish
Fishbone diagram( )
TOPIC 3.4 Costs and benefits of
quality improvement
Relevant costs and benefits are those that
change between alternatives, and can take the
form of increased (or decreased) costs or
additional (or reduced) revenues. Each choice
between alternatives is analyzed by
management in conjunction with the overall
strategygoingforwardfortheorganization
Managersmustconsiderthefollowingeffectsof
nonfinancialinformationandunderlyingeconomic
conditions,whichmaychangelevelsofsalesand
productioncosts.
Opportunitycosts
TheCOQreport
Trendsofqualitycostsovertime
Ethicalissues
TOPIC 3.5 Costs of design quality
Companiesmustalsofocusoncostsofdesign
quality.Poorlydesignedprocessesresultinlost
opportunitycosts.
Becauseofthedifficultyinassigningcoststo
theseareas,mostcompaniesdontmeasurethe
financialcostsofdesignquality.However,these
costsarereflectedtosomeextentinnonfinancial
measures
Nonfinancial Measures of
Internal Business Process Quality
Percentageofdefectiveproducts
Averagerepairtimeatcustomersite
Percentageofreworkedproducts
Numberofdifferenttypesofdefectsfound
Learning Numberofdesignandprocesschangesmade
The & Growth Perspective for Quality
Employeeturnoverratio
Employeeempowermentnumberofprocesses
inwhichemployeeshavetherighttomake
decisionswithoutconsultingsupervisors
EmployeeSatisfaction
EmployeeTraining
Advantages of COQ (Financial) Measures
COQfocusesmanagersattentiononthecostsofpoor
quality
COQmeasuresassistinproblemsolvingbycomparing
costsandbenefitsofdifferentqualityimprovement
programsandsettingprioritiesforcostreduction
COQprovidesasingle,summarymeasureofquality
performanceforevaluatingtradeoffsamongthecostsof
prevention,appraisal,internalfailureandexternalfailure
Advantages of Nonfinancial Measures of Quality
Nonfinancialmeasuresofqualityareofteneasy
toquantifyandunderstand
Nonfinancialmeasuresdirectattentionto
physicalprocessesandtoareasthatneed
improvement
Nonfinancialmeasuresprovideimmediateshort
runfeedbackonwhetherqualityimprovement
effortshavesucceeded
Nonfinancialmeasuresareusefulindicatorsof
futurelongrunperformance
TOPIC 3.6
Evaluating quality performance
Qualityiscriticaltothesuccessofacompany,whetherit
isaserviceorganizationoramanufacturingbusiness.
Managersassessthecompanysinput,processes,and
outputtodetermineitscompetitiveposition.
TounderstandCOQreports,bothfinancialand
nonfinancialaspectsofqualityshouldbeanalyzed
together
EXAMPLE3.1
Cost-of-quality report at
Mastiff Appliances
PreparingaCOQreport
Step1:Determinedirectandindirectquality
cost
Step2:Categorizequalitycosts
Step 3: Analyze nonfinancial
information
20X5
20X6
20X7
Wire
4%
3%
1%
Componentparts
15%
10%
8%
Batteries
10%
5%
5%
PercentageofsuppliersISOcompliant
12%
15%
25%
Defectrate
5%
4%
3.5%
Linedowntime
1%
0.9%
0.75%
45%
47%
54%
87%
89%
93%
Rawmaterials
Percentageofreturnsoverdeliveries
Productionprocesses
Marketing
Percentagehighcustomersatisfaction
rating
Percentageontimedeliveries
In summary, having a strong focus on quality is an
important competitive factor in todays global market.
TheCOQreportshowsmanagementthetypeofquality
costsbeingincurredandtheamountandtrendsofthese
costs. It helps management understand the financial
impact of quality on company profitability. It can show
whether quality costs are predominantly external or
internal, and can aid in budgeting a more appropriate
distribution. The production and dissemination of this
report communicates to all individuals in the company
that quality is a competitivefactorthatwillbedealtwith
directly.
Computerillustration31:
Costofqualityreport
TOPIC 3.7
Time and competitiveness
Companiesviewtimeasadriverofstrategy.
Conductingbusinesscorrectlyandquicklyhelps
increaserevenuesanddecreasecosts.
:
: . ,
( ) .
(Operationalmeasuresoftime):howquickly
firmsrespondtocustomersdemandfortheirproducts
andservices,andtheirreliabilityinmeetingscheduled
deliverydates
:
3 4
Two Operational Measures of Time
1. CustomerResponseTime( )howlong
ittakesfromthetimeacustomerplacesan
orderforaproductorserviceisdeliveredto
thecustomer
2. OnTimePerformance( )deliveringa
productorservicebythetimeitwasscheduled
tobedelivered
Customer-Response Time
Illustrated
TOPIC 3.8
Time drivers and costs of time
TimeDrivers
TimeDriverisanyfactorinwhichachangeinthe
factorcausesachangeinthespeedofanactivity.
TwoTimeDrivers:
1. Uncertainty about when customers will order
products and services
2. Bottlenecks due to limited capacity. A
bottleneck occurs in an operation when the work
to be performed approaches or exceeds the
capacity available to do it
theaveragewaittime
Insituationswheretherearemultipleproductsusingthesame
assemblyline,theaboveformulawouldbeadjustedtoincludeeach
productasfollows:
1.Thenumeratorwouldbeexpandedforeachproductthatusesthe
assemblyline.Forexample,withtwoproducts,AandB,the
numeratorwouldbe:[AveragenumberofordersofA(Manufacturing
timeforA)2][AveragenumberofordersofB(Manufacturingtime
forB)2]
2.Thedenominatorwouldbeexpandedforallproducts.Again,using
thetwoproductexampleabove,thedenominatorwouldbe:2
[Annualmachinecapacity(AveragenumberofordersofproductA
ManufacturingtimeforproductA)(Averagenumberofordersfor
productBManufacturingtimeforproductB)]
Relevantrevenuesandcostsoftime
Companiesmustconsiderthattimeaffectsbothrevenue
andcosts.Customerswilloftenpayahigherpricefor
fasterdeliveryorservice,whilecarryingcosts(suchas
inventory,rent,andwaste)areincreasedforslower
productiontimes.Forthisreason,companiesswitching
tojustintimeoftenfindcostsavings.Whencapacityis
limited,opportunitycostsbecomemoreimportant
EXAMPLE3.2
Time Drivers and Costs of Time
TOPIC 3.9
Theory of constraints
The Theory of Constraints (TOC) describes methods to maximize
operating income when faced with some bottleneck and some
nonbottleneckoperations
TOC focuses on a shortrun time horizon and assumes that operating
costsarefixedcosts
Thefollowingthreemeasurementsareimportanttothetheory:
ThroughputContribution( )equalsrevenuesminusthedirect
materialcostofthegoodssold.
Investments(inventory)( )Sumofdirectmaterial,workin
processandfinishedgoods
inventory,R&Dcosts,andthecostofequipmentandbuildings.
Operatingcosts( )Sumofalloperatingcosts,otherthandirect
materials,incurredtoearnthroughputcontribution
Steps in managing bottlenecks
1. Recognizethatthebottleneckoperationdetermines
throughputcontributionoftheentiresystem
2. Identifythebottleneckoperationbyidentifyingoperations
withlargequantitiesofinventorywaitingtobeworkedon
3. Keepthebottleneckoperationbusyandsubordinateall
nonbottleneckoperationstothebottleneckoperation
4. Takeactionstoincreasetheefficiencyandcapacityof
thebottleneckoperation.Theobjectiveistoincrease
thedifferencebetweenthroughputcontributionandthe
incrementalcostsofincreasingefficiencyandcapacity
Methods to Relieve Bottlenecks
Eliminateidletimeatthebottleneckoperation
Processonlythosepartsorproductsthatincrease
throughputcontribution,notpartsorproductsthatwill
remaininfinishedgoodsorsparepartsinventories
Shiftproductsthatdonothavetobemadeonthe
bottleneckoperationtononbottleneckprocesses,orto
outsideprocessingfacilities
Reducesetuptimeandprocessingtimeat
bottleneckoperations
Improvethequalityofpartsorproducts
manufacturedatthebottleneckoperation
TOPIC 3.10
Case: Quality and time initiatives
Case
3.1:
CostofqualityatWelsh
ManufacturingLtd.
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