Cost of Quality 4

7/31/2019 Cost of Quality 4

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Hilton Maher Selto


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7Managing Quality and Time to

Create Value

McGraw-Hill/Irwin 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.


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Quality At Any Cost?

Which ismore

important?


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Customers willseek out the

highest quality

product.

Improved quality thatexceeds customerexpectations will

generate more revenuesthat exceed the cost of

quality.

Therefore,quality is

free.

Total Quality Management (TQM)


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Total Quality Management (TQM)

W. Edwards Demingproposed that improvingquality reduces cost and

improves profitability.

Quality can be andshould be improved

continuously.

Quality

TotalRevenues&Costs

Revenues

Cost

Max Profit

Max Quality


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Return on Quality (ROQ)

Profit is maximizedat the optimum

quality level.

The optimum quality level isalways achieved before maximum

attainable profit is reached.

Quality

TotalRevenues&Costs

Revenues

Cost

Max Profit

Optimum Quality


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Lead Indicators of Quality

Variation indicates poor quality. Tomeasure variation, there are several tools

that can be used:

Histograms Run Charts Control Charts

0

10

20

30

40

50

60

70

80

90

Mon. Tues Wed. Thur. Fri.

A graphical display of thefrequency distribution of

attributes.

Histograms


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that can be used:

Histograms Run Charts Control Charts

A graph showing trendsin variation over time. 0

20

40

60

80

100

Mon.

Tues

Wed.

Thur

.Fr

i.


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0

20

40

60

80

100

Mon.

Tues

Wed.

Th

ur.

Fri.



that can be used:

Histograms Run Charts

A run chart with upperand lower control limits.

Control Charts

Notice that this processseems to be out ofcontrol on Fridays.


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Diagnostic Information

While lead indicators tell that there IS aproblem, diagnostic tools help determine

WHAT the problem is.

Cause-and-Effect Diagrams

ScatterDiagrams

Flow Charts Pareto Charts


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Cause-and-Effect Diagrams

Defect =LateDeliveries

Trucks

Breakdown

Flat Tire

Drivers

Dont know

the route

Too slow

PoorlyTrained

Other

Road

Conditions

Rain or

snow

Ice

Road

Work

Wrong

directions

from customer

Sometimes called fishbone

or Ishikawa diagrams


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Scatter Diagrams

A plot of two variables that might be related. APatterns often indicates a causal relationship.

0

10

20

30

4050

0 5 10 15 20

Freq. of Incorrect Info

Avg.

ResponseTime(M

in)

This pattern indicates

a causal relationship.


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Flowcharts

A graphicalillustration of

sequential linkages

among processactivities.

Standardized

symbols are used torepresent decisions,actions, documents,and storage devices.

Taking Phone Orders

SI2

SI1Sales

Invoice

Items on

hand?

Select items and

place on conveyor.

Initial SI1 and

attach to items.

SI1Sales

Invoice

Cancelsales

invoice.

Notify

Customer

in writing.

Update perp.

inventory

records.

SI2Sales

Invoice

N

Yes

No SI2

SI1Sales

Invoice

Inventory

rec

ords.

Prepare Invoice in

duplicate.

Send goods and

invoice to customer

Gather customer

information


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Pareto Charts

A histogram of causes of errors or errors arranged inorder of frequency or size. Helps in prioritizing

actions to address problems.

0

10

20

30

40

50

60

70

80

Late Delivery Defective

Produce

Incorrect Bill Backorders Wrong Item


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Customer Satisfaction

The degree towhich

expectations ofproduct attributes,customer service,

and price have

been met orexceeded.

Common tools for

measuring customer

satisfaction

Phone Surveys

Questionnaires

Focus Groups

# of Customer

Complaints Phantom Shoppers


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Cost of Quality (COQ)

Costs associated withcontrolling quality.

Costs associated withactivities to correct

failure to control

quality.

Out-of-pocket costs associated with qualitygenerally fall into two categories:


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Cost to Control Quality

Prevention

Activities that seek toprevent defects in theproducts or services

being produced.

Certifying Suppliers

Designing forManufacturability

Quality Training

Quality Evaluations

Process Improvements

Appraisal

Activities for inspectinginputs and attributes of

individual units of

product and service.

Inspecting Materials

Inspecting Machines

Inspecting ProcessesStatistical Process

Control

Sampling and Testing


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Costs of Failing to Control

QualityInternal Failure

Costs associated withdefects in processesand products that are

found prior to deliveryto customers.

Disposing of Scrap

Rework

Reinspecting/Retesting

Delaying Processes

External Failure

Costs associated withdefects in processesand products that are

detected after deliveryto customers.

Warranty Repairs

Field Replacements

Product Liability

Restoring reputation

Lost Sales


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Costs of Quality (COQ)

It is easier toMEASURE the

COQ in

organizationsthat use ABC

and ABM.

COQ is notrequired to bereported in the

financialstatements.

When COQ is reported,it is usually expressed

as a % of sales.


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Quality Awards and

Certificates

JapanEuropean

Community


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Managing Time in a

Competitive Environment

Less time means quicker response to changing customerneeds and to changing conditions of the marketplace.

We need to

reduce . . .


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Measuring Results: Process

Efficiency

Process efficiency

The ability to transform inputs into outputs at

lowest cost.

Production processes

Result directly in the production of products or

services provided to external customers.

Business process

Support or enable production processes.


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Measuring Results: Process

Efficiency

High

productivity

High

quality

Low cycle

time

Highthroughput


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Measuring Productivity

Total Factor

Productivity=

Value of Goods

& Services

Total cost of

Providing Goods

& Services

Specific productivity measures compare:

OutcomesValued by

Customers

toThe scarcest or most

valuable resources used to

achieve the outcomes.


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Measuring Cycle Time

The average time necessary to complete anddeliver all good units and dispose of units thathave to be reworked or scrapped because of

defects.

AverageCycle Time

=

Total

Processing

Time

Good UnitsProduced


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Measuring Throughput

Efficiency

A measure of the amount of time spent addingvalue compared to the total cycle time.

Throughput

Ratio=

Value-added

Time

Total

Processing

Time


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Measures of Capacity

It is possiblefor capacity

demand to

exceedpracticalcapacity.

Practical

Capacity

ProcessCapacity

A measure of

a processsability to

transformresources

into valuedproducts andservices.


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Measures of Capacity

Used Capacityis the amount

of thepractical

capacity thatis actually

used.Used

Capacity

In somecases, used

capacity can

actually

exceedpractical

capacity.

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Managing Quality + Time +

Productivity + Capacity = JIT

The objective of JIT is to . . .

purchase materials

produce products

and deliver products

. . . just when they are needed.

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Managing Quality + Time +

Productivity + Capacity = JIT

The goal is to manage costs so that the savingsassociated with JIT exceed the cost of

implementing JIT

Cost savings:

Inventory warehouse rentor cost

Inventory managers andpersonnel

Less warranty cost

Implementation costs:

Employee retraining

Technology improvement

Exposure to workstoppage risks.

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Traditional Push

Manufacturing - Example

Computer Manufacturer

Forecast Sales Order components

Prepare

Production

Schedule

Begin Production in

Anticipation of Sales

Make sales

from finished

goods inventory

Store Inventory

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JIT Pull Manufacturing -

Example

Computer Manufacturer

Customer

places an order

Create Production

Order

Generate component

requirements

Production begins

as parts arrive

Goods delivered

just in time

Components

are ordered

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JIT Success Factors

1.Commitment

to quality.

2. FlexibleCapacity.

3. ReliableSupplier

Relations.4. SmoothProductio

n Flow.

5. Well-trained

workforce.

6. Reducedcycle andresponse

times.

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End of Chapter 7

Uh, Boss?My luggage

was Just-in-

Time, but I

wasnt!

Cost of Quality 4

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