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CHAPTER 19BALANCED SCORECARD: QUALITY, TIME, AND THE THEORY OF CONSTRAINTS19-1Quality costs (including the opportunity cost of lost sales because of poor quality) can be as much as 10% to 20% of sales revenues of many organizations. Quality-improvement programs can result in substantial cost savings and higher revenues and market share from increased customer satisfaction.19-2Quality of design 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.19-3Exhibit 19-1 of the text lists the following six line items in the prevention costs category: design engineering; process engineering; supplier evaluations; preventive equipment maintenance; quality training; and testing of new materials.19-4An internal failure cost differs from an external failurecost on the basis of when the nonconforming product is detected. An internal failure is detected beforea product is shipped to a customer, whereas an external failure is detected aftera product is shipped to a customer.19-5Three methods that companies use to identify quality problems are: (a) a control chart which is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time; (b) a Pareto diagram, which is a chart that indicates how frequently each type of failure (defect) occurs, ordered from the most frequent to the least frequent; and (c) a cause-and-effect diagram, which helps identify potential causes of failure.19-6No, companies should emphasize financial as well as nonfinancial measures of quality, such as yield and defect rates. Nonfinancial measures are not directly linked to bottom-line performance but they indicate and direct attention to the specific areas that need improvement to improve the bottom line. Tracking nonfinancial measures over time directly reveals whether these areas have, in fact, improved over time. Nonfinancial measures are easy to quantify and easy to understand.19-7Examples of nonfinancial measures of customer satisfaction relating to quality include the following:1.the number of defective units shipped to customers as a percentage of total units of product shipped;2.the number of customer complaints;3.delivery delays (the difference between the scheduled delivery date and date requested by customer);4.on-time delivery rate (percentage of shipments made on or before the promised delivery date);5. customer satisfaction level with product features (to measure design quality);6. market share; and7. percentage of units that fail soon after delivery.19-1
19-8Examples of nonfinancial measures of internal-business-process quality:1.the percentage of defects for each product line;2.process yield (rates of good output to total output at a particular process;3.manufacturing lead time (the amount of time from when an order is received by production to when it becomes a finished good); and4.