Managing Quality and Time to Create Value

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• Managing Quality and Time to Create Value

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Importance of Quality
Poor quality
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Costs of Improving Quality
Which is more important?
Total Quality Management?
Return on Quality?
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Total Quality Management (TQM)
Customers will seek out the highest quality
product.
Improving quality more than pays its own way by
creating higher profits.
Therefore, quality is free.
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Total Quality Management (TQM)
W. Edwards Deming proposed that improving quality
reduces cost and improves profitability.
Quality can be and should be improved
continuously.
Revenues
Max Profit
Cost
Max Quality
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Return on Quality (ROQ)
There is a trade-off between the costs and
benefits of quality.
Profit is maximized at the optimum quality level.
The optimum quality level is always achieved
before maximum quality level is reached.
Cost
Revenues
Optimum Quality
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Return on Quality (ROQ)
Striving for higher quality levels at ever higher
costsis a case of diminishing returns. The
higher coststo attain higher quality levels may
be more than thecustomer is willing to pay.
Cost
Revenues
Optimum Quality
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TQM vs. ROQ

• Conflict between TQM and ROQ exists only at very
  high levels of quality.
• Most organizations operate below the optimum
  quality level in the ROQ model, so improving
  quality results in higher profits just as in the
  TQM model.

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Dimensions of Quality
? Customer service before and after the sale
? Product or Service Attributes

• 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.

• Tangible
• Performance
• Adherence to specifications
• Functionality
• Intangible
• Reputation
• Appearance
• Appeal

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Measuring Quality

• Customers define quality.
• Some will accept lower quality if price is lower.
• Others demand higher quality and are willing to
  pay for it.
• Identify indicators of customer-defined quality.
• Develop measures of the quality indicators that
  will either confirm high quality or suggest
  problems and possible solutions.

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Lead Indicators of Quality
Variation indicates poor quality. To measure
variation, there are several tools that can be
used
Histograms
Run Charts
Control Charts
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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
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Lead Indicators of Quality
Variation indicates poor quality. To measure
variation, there are several tools that can be
used
Histograms
Run Charts
Control Charts
UCL
A run chart with upper and lower control limits.
Notice that this process seems to be out of
control on Fridays.
LCL
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Diagnostic Information
While lead indicators tell us that thereIS a
problem, diagnostic tools helpdetermine WHAT the
problem is.
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Cause-and-Effect Diagrams
Sometimes called fishbone or Ishikawa diagrams
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Scatter Diagrams
A plot of two variables that might be related.
Patterns often indicate a causal relationship.
This pattern indicates a causal relationship.
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Flowcharts
A graphical illustration of sequential linkages
among process activities. Standardized symbols
are used to represent decisions, actions,
documents, and storage devices.
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Pareto Charts
A histogram of causes of errors or errors
arranged in order of frequency or size. Helps in
prioritizing actions to address problems.
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Customer Satisfaction

• Common tools for measuring customer
  satisfaction
• Phone Surveys
• Questionnaires
• Focus Groups
• of Customer Complaints
• Phantom Shoppers

The degree to which expectations of product
attributes, customer service, and price have been
met or exceeded.
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Cost of Quality (COQ)
Out-of-pocket costs associated with quality
generally fall into two categories
Costs associated with activities to correct
failure to control quality.
Costs associated with controlling quality.
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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

• 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
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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

Companies withthe highest qualitylevels tend
tohave most of their quality expenditures in
this area.
Value Added
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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

• 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
Non-Value Added
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Measuring and Reporting Costs of Quality
It is easier to Measure the COQ in organizations
that use ABC and ABM.
COQ is not required to be reported in the
financial statements.
When COQ is reported, it is usually expressed as
a of sales.
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Quality Awards and Certificates
Malcolm Baldrige National Quality Award
The Deming Prize
ISO 9000
European Community
Japan
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Managing Time in a Competitive Environment
Product development time
We need to reduce . . .
Customer response time
Production cycle time
Less time means quicker response to changing
customer needs and to changing conditions of the
marketplace.
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Management of Process Productivity and Efficiency

• Process efficiency
• The ability to transform inputs into outputs at
  lowest cost.

• Productivity
• Ratio of outcomes of a process divided by inputs
  necessary to complete the process.

Cycle time Elapsed time between starting and
finishing a process.
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Management of Process Productivity and Efficiency
High productivity
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Measuring Productivity
Specific productivity measures compare
Example Sales per employee
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Measuring Cycle Time
Average cycle time is the average time necessary
to complete and deliver all good units and
dispose of units that have to be reworked or
scrapped because of defects.
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Measuring Throughput Efficiency
A measure of the amount of time spent adding
value compared to the total process time.
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Managing Process Capacity

Planned orunavoidabledowntime

Excess 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 savings
associated with JIT exceed the cost of
implementing JIT
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Traditional Push Manufacturing - Example
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JIT Pull Manufacturing - Example
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JIT Success Factors
2. Flexible Capacity.
1. Commitment to quality.
3. Reliable Supplier Relations.
4. Smooth Production Flow.
5. Well-trained workforce.
6. Reduced cycle and response times.
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End of Chapter 7