11 - 1© 2014 Pearson Education, Inc. Unit-5. 11 - 2© 2014 Pearson Education, Inc. Supply Chain Management

11 - 1© 2014 Pearson Education, Inc.

Unit-5


Supply Chain Management


Outline► Global Company Profile:

Darden Restaurants

► The Supply Chain’s Strategic Importance

► Sourcing Issues: Make-or-Buy vs. Outsourcing

► Six Sourcing Strategies


Outline - Continued

► Supply Chain Risk► Managing the Integrated Supply

Chain► Building the Supply Base► Logistics Management► Distribution Management


Outline - Continued

► Ethics and Sustainable Supply Chain Management

► Measuring Supply Chain Performance


Learning ObjectivesWhen you complete this chapter you should be able to:

1. Explain the strategic importance of the supply chain

2. Identify six sourcing strategies

3. Explain issues and opportunities in the supply chain

4. Describe the steps in supplier selection


When you complete this chapter you should be able to:

Learning Objectives

5. Explain major issues in logistics management

6. Compute percent of assets committed to inventory and inventory turnover


Darden’s Supply Chain

► Largest publicly traded casual dining company in the world

► Serves over 400 million meals annually in more than 1,900 restaurants in the US and Canada

► Annual sales of flagship brands totals $6 billion

► Operations is the strategy© 2014 Pearson Education, Inc.


Darden’s Supply Chain

▶ Sources food from five continents and thousands of suppliers

▶ Four distinct supply chains

▶ Over $2 billion spent annually in supply chains

▶ Competitive advantage achieved through superior supply chain

© 2014 Pearson Education, Inc.


Supply-Chain Management

The objective of supply chain management is to coordinate

activities within the supply chain to maximize the supply chain’s

competitive advantage and benefits to the ultimate consumer


The Supply Chain’s Strategic Importance

▶The coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer

▶Includes suppliers, manufacturers and/or service providers, distributors, wholesalers, retailers, and final customer


The Supply Chain’s Strategic Importance

▶Large portion of sales dollars spent on purchases

▶Supplier relationships increasingly integrated and long term▶Improve innovation, speed design, reduce

costs

▶Managing supplier relationships has added emphasis


Supply Chain Costs

TABLE 11.1

Supply Chain Costs as a Percentage of Sales

INDUSTRY % PURCHASED

Automobiles 67

Beverages 52

Chemical 62

Food 60

Lumber 61

Metals 65

Paper 55

Petroleum 79

Restaurants 35

Transportation 62


Supply Chain vs. Sales Strategy

Hau Lee Furniture

60% of sales $ in supply chainCurrent gross profit = $10,000Increase profits to $15,000 (50%)

CURRENT SITUATION

SUPPLY CHAIN STRATEGY

SALES STRATEGY

Sales $100,000 $100,000 $125,000

Cost of materials $60,000 (60%) $55,000 (55%) $75,000 (60%)

Production costs $20,000 (20%) $20,000 (20%) $25,000 (20%)

Fixed costs $10,000 (10%) $10,000 (10%) $10,000 (8%)

Profit $10,000 (10%) $15,000 (15%) $15,000 (12%)


A Supply Chain for BeerFigure 11.1


Supply Chain ManagementTABLE 11.2 How Corporate Strategy Impacts Supply Chain Decisions

LOW COST STRATEGY

RESPONSE STRATEGY

DIFFERENTIATION STRATEGY

Primary supplier selection criteria

• Cost • Capacity• Speed• Flexibility

• Product development skills• Willing to share information• Jointly and rapidly develop

products

Supply chain inventory

• Minimize inventory to hold down costs

• Use buffer stocks to ensure speedy supply

• Minimize inventory to avoid product obsolescence

Distribution network • Inexpensive transportation

• Sell through discount distributors/retailers

• Fast transportation• Provide premium

customer service

• Gather and communicate market research data

• Knowledgeable sales staff

Product design characteristics

• Maximize performance

• Minimize cost

• Low setup time• Rapid production

ramp-up

• Modular design to aid product differentiation


Sourcing Issues▶Make-or-buy vs. outsourcing

▶Choosing between obtaining products and services externally as opposed to producing them internally

▶Outsourcing▶Transfer traditional internal activities and

resources to outside vendors

▶Efficiency in specialization

▶Focus on core competencies


Six Sourcing Strategies

▶Many suppliers

▶Few suppliers

▶Vertical integration

▶Joint ventures

▶Keiretsu networks

▶Virtual companies


Many Suppliers

▶Commonly used for commodity products

▶Purchasing is typically based on price

▶Suppliers compete with one another

▶Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery


Few Suppliers

▶Buyer forms longer term relationships with fewer suppliers

▶Create value through economies of scale and learning curve improvements

▶Suppliers more willing to participate in JIT programs and contribute design and technological expertise

▶Cost of changing suppliers is huge

▶Trade secrets and other alliances


Vertical Integration

Figure 11.2

Raw material (suppliers) Tree Harvesting

Backward integration Chipmakers Pulpmaking

Current transformation Pepsi Apple International

Paper

Forward integration Bottling Retail stores End-User Paper Conversion

Finished goods (customers)

Vertical Integration Examples of Vertical Integration


Vertical Integration

▶Developing the ability to produce goods or service previously purchased

▶ Integration may be forward, towards the customer, or backward, towards suppliers

▶Can improve cost, quality, and inventory but requires capital, managerial skills, and demand

▶Risky in industries with rapid technological change


Joint Ventures

▶Formal collaboration▶Enhance skills

▶Secure supply

▶Reduce costs

▶Cooperation without diluting brand or conceding competitive advantage


Keiretsu Networks

▶A middle ground between few suppliers and vertical integration

▶Supplier becomes part of the company coalition

▶Often provide financial support for suppliers through ownership or loans

▶Members expect long-term relationships and provide technical expertise and stable deliveries

▶May extend through several levels of the supply chain


Virtual Companies

▶Rely on a variety of supplier relationships to provide services on demand

▶Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands

▶Relationships may be short- or long-term

▶Exceptionally lean performance, low capital investment, flexibility, and speed


Supply Chain Risk

▶More reliance on supply chains means more risk

▶Fewer suppliers increase dependence

▶Compounded by globalization and logistical complexity

▶Vendor reliability and quality risks

▶Political and currency risks


Risk and Mitigation Tactics

▶Research and assess possible risks

▶Innovative planning

▶Reduce potential disruptions

▶Prepare responses for negative events

▶Flexible, secure supply chains

▶Diversified supplier base


Risk and Mitigation TacticsTABLE 11.3 Supply Chain Risks and Tactics

RISK RISK REDUCTION TACTICS EXAMPLE

Supplier failure to deliver

Use multiple suppliers; effective contracts with penalties; subcontractors on retainer; pre-planning

McDonald’s planned its supply chain 6 years before its opening in Russia. Every plant—bakery, meat, chicken, fish, and lettuce—is closely monitored to ensure strong links.

Supplier quality failure

Careful supplier selection, training, certification, and monitoring

Darden Restaurants has placed extensive controls, including third-party audits, on supplier processes and logistics to ensure constant monitoring and reduction of risk.




Logistics delays or damage

Multiple/redundant transportation modesand warehouses; secure packaging; effective contracts with penalties

Walmart, with its own trucking fleet and numerous distribution centers located throughout the U.S., finds alternative origins and delivery routes bypassing problem areas.

Distribution Careful selection, monitoring, and effective contracts with penalties

Toyota trains its dealers around the world, invoking principles of the Toyota Production System to help dealers improve customer service, used-car logistics, and body and paint operations.




Information loss or distortion

Redundant databases; secure IT systems; training of supply chain partners on the proper interpretations and uses of information

Boeing utilizes a state-of-the-art international communication system that transmits engineering, scheduling, and logistics data to Boeing facilities and suppliers worldwide.

Political Political risk insurance; cross-country diversification; franchising and licensing

Hard Rock Cafe reduces political risk by franchising and licensing, rather than owning, when the political and cultural barriers seem significant.




Economic Hedging to combat exchange rate risk; purchasing contracts that address price fluctuations

Honda and Nissan are moving more manufacturing out of Japan as the exchange rate for the yen makes Japanese-made autos more expensive.

Natural catastrophes

Insurance; alternate sourcing; cross-country diversification

Toyota, after its experience with fires, earthquakes, and tsunamis, now attempts to have at least two suppliers, each in a different geographical region, for each component.




Theft, vandalism, and terrorism

Insurance; patent protection; security measures including RFID and GPS; diversification

Domestic Port Radiation Initiative: The U.S. government has set up radiation portal monitors that scan nearly all imported containers for radiation.


Security and JIT

▶Shipments get misrouted, stolen, damaged, or excessively delayed

▶Technological innovations are improving security and inventory management▶Location, motion sensors, broken seals,

temperature

▶Tracking can help expedite shipments


Managing the Integrated Supply Chain

▶Issues▶Local optimization can magnify

fluctuations

▶Incentives push merchandise into the supply chain for sales that have not occurred

▶Large lots reduce shipping costs but increase inventory holding and do not reflect actual sales

Bullwhip effect occurs

when orders are

relayed through the

supply chain increasing

at each step



▶Opportunities▶Accurate “pull” data, shared information

▶Lot size reduction, shipping, discounts, reduced ordering costs

▶Single stage control of replenishment▶Single supply chain member responsible for

ordering

▶Vendor managed inventory (VMI)



▶Opportunities▶Collaborative planning, forecasting, and

replenishment (CPFR) through the supply chain

▶Blanket orders against which actual orders are released

▶Standardization



▶Opportunities▶Postponement withholds modification as

long as possible

▶Electronic ordering and funds transfer speed transactions and reduce paperwork

▶Drop shipping and special packaging bypasses the seller and reduces costs


Building the Supply Base

▶Supplier evaluation▶Finding potential suppliers

▶Determine likelihood of their becoming good suppliers

▶Supplier certification1. Qualification

2. Education

3. Certification



▶Supplier development▶Integrate the supplier into the system

▶Quality requirements

▶Product specifications

▶Schedules and delivery

▶Procurement policies

▶Training

▶Engineering and production help

▶Information transfer procedures


Building the Supply Base▶Negotiation

▶A significant element in purchasing

▶Highly valued skills▶Cost-based price model

▶Supplier opens books

▶Market-based price model

▶Based on published, auction, or indexed prices

▶Competitive bidding

▶Common policy for many purchases

▶Does not generally foster long-term relationships


Building the Supply Base▶Contracting

▶Share risks, benefits, create incentives

▶Centralized purchasing▶Leverage volume▶Develop specialized staff▶Develop supplier relationships▶Maintain professional control▶Devote resources to selection and negotiation▶Reduce duplication of tasks▶Promote standardization



▶E-Procurement▶Speeds purchasing, reduces costs, integrates

supply chain

▶Online catalogs and exchanges▶Standard items or industry-specific web sites

▶Online auctions▶Low barriers to entry

▶Reverse auctions for buyers

▶Price not always the most important factor


Logistics Management

▶Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities

▶Is a frequent candidate for outsourcing

▶Allows competitive advantage to be gained through reduced costs and improved customer service


Shipping Systems

▶Trucking▶Moves the vast majority of manufactured

goods

▶Chief advantage is flexibility

▶Railroads▶Capable of carrying large loads

▶Little flexibility though containers and piggybacking have helped with this


Shipping Systems

▶Airfreight▶Fast and flexible for light loads

▶May be expensive

▶Waterways▶Typically used for bulky, low-value cargo

▶Used when shipping cost is more important than speed


Shipping Systems

▶Pipelines▶Used for transporting oil, gas, and other

chemical products

▶Multimodal▶Combines shipping methods

▶Common, especially in international shipments

▶Aided by standardized containers


Cost and Speed of Shipments

▶Faster shipping is generally more expensive than slower shipping

▶Faster methods tend to involve smaller shipment sizes while slower methods involve very large shipment sizes


Warehousing

▶May be expensive, but alternatives may be more so

▶Fundamental purpose is to store goods

▶May provide other functions▶Consolidation

▶Break-bulk

▶Cross-docking

▶Channel assembly


Third-Party Logistics (3PL)

▶ Outsourcing logistics can reduce inventory, costs, and improve delivery reliability and speed

▶ Coordinate supplier inventory with delivery services

▶ May provide warehousing, assembly, testing, shipping, customs


Distribution Management▶The outbound flow of products

1. Rapid response

2. Product choice

3. Service

▶Increasing the number of facilities generally improves response time and customer satisfaction

▶Total costs are important


Distribution ManagementT

ime

Number of facilities

1 2 3 4 5

Response time

(a) Response Time

$


1 2 3 4 5

Lowest cost

(b) Cost $

Total logistics cost

Facility costs

Inventory costs

Transportation costs

Figure 11.3


Distribution Management

Figure 11.3

$


1 2 3 4 5

Revenue

(c) Cost, Revenue, and Profit

Total logistics costMax profit


Distribution Management

▶Facilities, packaging, and logistics

▶Selection and development of dealers or retailers

▶Downstream management as important as upstream management


Ethics and Sustainable Supply Chain Management

▶Personal ethics▶Critical to long term success of an

organization

▶Supply chains particularly susceptible

▶Ethics within the supply chain

▶Ethical behavior regarding the environment


Institute for Supply Management Principles and Standards

▶Promote and uphold responsibilities to one’s employer; positive supplier and customer relationships; sustainability and social responsibility; protection of confidential and proprietary information; applicable laws, regulations, and trade agreements; and development of professional competence

▶Avoid perceived impropriety; conflicts of interest; behaviors that negatively influence supply chain decisions; and improper reciprocal agreements


ISM Ethical Standards

1. PERCEIVED IMPROPRIETY. Prevent the intent and appearance of unethical or compromising conduct in relationships, actions and communications

2. CONFLICTS OF INTEREST. Ensure that any personal, business or other activity do not conflict with the lawful interests of your employer

3. ISSUES OF INFLUENCE. Avoid behaviors or actions that may negatively influence, or appear to influence, supply management decisions



4. RESPONSIBILITIES TO YOUR EMPLOYER. Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer

5. SUPPLIER AND CUSTOMER RELATIONSHIPS. Promote positive supplier and customer relationships

6. SUSTAINABILITY AND SOCIAL RESPONSIBILITY. Champion social responsibility and sustainability practices in supply management



7. CONFIDENTIAL AND PROPRIETARY INFORMATION. Protect confidential and proprietary information

8. RECIPROCITY. Avoid improper reciprocal agreements

9. APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTS. Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management



10. PROFESSIONAL COMPETENCE. Develop skills, expand knowledge and conduct business that demonstrates competence and promotes the supply management profession


Establishing Sustainability in Supply Chains

▶Return or reverse logistics▶Sending returned products back up the supply

chain for resale, repair, reuse, remanufacture, recycling, or disposal

▶Closed-loop supply chain▶Proactive design of a supply chain that tries to

optimize all forward and reverse flows

▶Prepares for returns prior to product introduction


Establishing Sustainability in Supply Chains

TABLE 11.4 Management Challenges of Reverse Logistics

ISSUE FORWARD LOGISTICS REVERSE LOGISTICS

Forecasting Relatively straightforward More uncertain

Product quality Uniform Not uniform

Product packaging Uniform Often damaged

Pricing Relatively uniform Dependent on many factors

Speed Often very important Often not a priority

Distribution costs Easily visible Less directly visible

Inventory management Consistent Not consistent


Measuring Supply-Chain Performance

▶Assets committed to inventory

Percentage invested in

inventory= x 100

Total inventory investment

Total assets

► Home Depot had $11.4b inventory, total assets of $44.4b

Percentage invested in

inventory= x 100 = 25.7%

11.4

44.4



TABLE 11.5

Inventory as Percentage of Total Assets (with examples of exceptional performance)

Manufacturer (Toyota 5%) 15%

Wholesale (Coca-Cola 2.9%) 34%

Restaurants (McDonald’s .05%) 2.9%

Retail (Home Depot 25.7%) 28%



▶ Inventory turnover

Inventoryturnover =

Cost of goods sold

Inventory investment

► Inventory investment► Average of several periods► (beginning plus ending)/2► Ending inventory



▶ From PepsiCo, Inc. Annual Report

Net revenue $32.5

Cost of goods sold $14.2

Inventory:

Raw material inventory $.74

Work-in-process inventory $.11

Finished goods inventory $.84

Total inventory investment $1.69

Inventoryturnover = = 8.4

14.2

1.69



TABLE 11.6 Examples of Annual Inventory Turnover

FOOD, BEVERAGE, RETAIL

Anheuser Busch 15

Coca-Cola 15

Home Depot 5

McDonald’s 112

MANUFACTURING

Dell Computer 90

Johnson controls 22

Toyota (overall) 13

Nissan (assembly) 150



▶Weeks of supply

► For PepsiCo

Weeks of supply =

Inventory investment

Annual cost of goods sold

52 weeks

Inventory investment = $1.69bAverage weekly cost of goods sold = $14.2b / 52 = $.273b

Weeks of supply = 1.69 / .273 = 6.19 weeks


Benchmarking the Supply Chain

▶Comparison with benchmark firms

TABLE 11.7Supply Chain Metrics in the Consumer Packaged Goods Industry

TYPICAL FIRMS

BENCHMARK FIRMS

Order fill rate 71% 98%

Oder fulfillment lead time (days) 7 3

Cash-to-cash cycle time (days) 100 30

Inventory days of supply 50 20


The SCOR Model▶Processes, metrics and best practices

Plan: Demand/Supply planning and Management

Source: Identify, select, manage, and assess sources

Make: Manage production execution, testing and packaging

Deliver: Invoice, warehouse, transport and install

Return: Raw material Return: Finished goods

Figure 11.4


The SCOR ModelTABLE 11.8

SCOR Model Metrics to Help Firms Benchmark Performance Against the Industry

PERFORMANCE ATTRIBUTE SAMPLE METRIC CALCULATION

Supply chain reliability

Perfect order fulfillment (Total perfect orders) / (Total number of orders)

Supply chain responsiveness

Average order fulfillment cycle time

(Sum of actual cycle times for all orders delivered) / (Total number of orders delivered)

Supply chain agility Upside supply chain flexibility

Time required to achieve an unplanned 20% increase in delivered quantities

Supply chain costs Supply chain management costs

Cost to plan + Cost to source + Cost to deliver + Cost to return

Supply chain asset management

Cash-to-cash cycle time

Inventory days of supply + Days of receivables outstanding – Days of payables outstanding


Benchmarking the Supply Chain

▶Benchmarking useful

▶May not be adequate

▶Audits may be necessary▶Continuing communication, Understanding,

Trust, Performance, Corporate strategy

▶Foster a mutual belief that “we are in this together”


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Managing Quality

PowerPoint presentation to accompany Heizer and Render Operations Management, Eleventh EditionPrinciples of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

66

© 2014 Pearson Education, Inc.


Outline► Global Company Profile:

Arnold Palmer Hospital

► Quality and Strategy► Defining Quality► Total Quality Management► Tools of TQM► The Role of Inspection► TQM in Services


Learning ObjectivesWhen you complete this chapter you should be able to:

1. Define quality and TQM

2. Describe the ISO international quality standards

3. Explain what Six Sigma is

4. Explain how benchmarking is used in TQM

5. Explain quality robust products and Taguchi concepts

6. Use the seven tools of TQM


Managing Quality Provides a Competitive Advantage

Arnold Palmer Hospital► Deliver over 12,000 babies annually

► Virtually every type of quality tool is employed► Continuous improvement

► Employee empowerment

► Benchmarking

► Just-in-time

► Quality tools© 2014 Pearson Education, Inc.


Quality and Strategy

► Managing quality supports differentiation, low cost, and response strategies

► Quality helps firms increase sales and reduce costs

► Building a quality organization is a demanding task


Two Ways Quality Improves Profitability

Improved Quality

Increased Profits

• Increased productivity

• Lower rework and scrap costs

• Lower warranty costs

Reduced Costs via

• Improved response

• Flexible pricing

• Improved reputation

Sales Gains via

Figure 6.1


The Flow of Activities

Organizational PracticesLeadership, Mission statement, Effective operating procedures, Staff support, TrainingYields: What is important and what is to be

accomplished

Quality PrinciplesCustomer focus, Continuous improvement, Benchmarking, Just-in-time, Tools of TQMYields: How to do what is important and to be

accomplished

Employee FulfillmentEmpowerment, Organizational commitmentYields: Employee attitudes that can accomplish

what is importantCustomer SatisfactionWinning orders, Repeat customersYields: An effective organization with

a competitive advantage

Figure 6.2


Defining Quality

An operations manager’s objective is to build a total quality

management system that identifies and satisfies customer needs


Defining Quality

The totality of features and characteristics of a product or service

that bears on its ability to satisfy stated or implied needs

American Society for Quality


Different Views

► User-based: better performance, more features

► Manufacturing-based: conformance to standards, making it right the first time

► Product-based: specific and measurable attributes of the product


Implications of Quality

1. Company reputation► Perception of new products

► Employment practices

► Supplier relations

2. Product liability► Reduce risk

3. Global implications► Improved ability to compete


Malcolm Baldrige National Quality Award

► Established in 1988 by the U.S. government

► Designed to promote TQM practices

► Recent winners include

Lockheed Martin Missiles and Fire Control, MESA Products Inc., North Mississippi Health Services, City of Irving, Concordia Publishing House, Henry Ford Health System, MEDRAD, Nestlé Purina PetCare Co., Montgomery County Public Schools


Baldrige CriteriaApplicants are evaluated on:

CATEGORIES POINTS

Leadership 120

Strategic Planning 85

Customer Focus 85

Measurement, Analysis, and Knowledge Management

90

Workforce Focus 85

Operations Focus 85

Results 450


ISO 9000 International Quality Standards

► International recognition► Encourages quality management

procedures, detailed documentation, work instructions, and recordkeeping

► 2009 revision emphasized sustained success

► Over one million certifications in 178 countries

► Critical for global business


ISO 9000 International Quality Standards

► Management principles► Top management leadership► Customer satisfaction► Continual improvement ► Involvement of people► Process analysis► Use of data-driven decision making► A systems approach to management► Mutually beneficial supplier relationships


Costs of Quality► Prevention costs - reducing the

potential for defects

► Appraisal costs - evaluating products, parts, and services

► Internal failure costs - producing defective parts or service before delivery

► External failure costs - defects discovered after delivery


External Failure

Internal Failure

Costs of Quality

Total Cost

Quality Improvement

Total Cost


Takumi

A Japanese character that symbolizes a broader dimension than quality, a deeper process than education, and a more perfect method than persistence


Leaders in Quality

TABLE 6.1 Leaders in the Field of Quality Management

LEADER PHILOSOPHY/CONTRIBUTION

W. Edwards Deming Deming insisted management accept responsibility for building good systems. The employee cannot produce products that on average exceed the quality of what the process is capable of producing. His 14 points for implementing quality improvement are presented in this chapter.

Joseph M. Juran A pioneer in teaching the Japanese how to improve quality, Juran believed strongly in top-management commitment, support, and involvement in the quality effort. He was also a believer in teams that continually seek to raise quality standards. Juran varies from Deming somewhat in focusing on the customer and defining quality as fitness for use, not necessarily the written specifications.


Leaders in Quality

TABLE 6.1 Leaders in the Field of Quality Management

LEADER PHILOSOPHY/CONTRIBUTION

Amarnd Feigenbaum His 1961 book Total Quality Control laid out 40 steps to quality improvement processes. He viewed quality not as a set of tools but as a total field that integrated the processes of a company. His work in how people learn from each other’s successes led to the field of cross-functional teamwork.

Philip B. Crosby Quality Is Free was Crosby’s attention-getting book published in 1979. Crosby believed that in the traditional trade-off between the cost of improving quality and the cost of poor quality, the cost of poor quality is understated. The cost of poor quality should include all of the things that are involved in not doing the job right the first time. Crosby coined the term zero defects and stated, “There is absolutely no reason for having errors or defects in any product or service.”


Ethics and Quality Management

► Operations managers must deliver healthy, safe, quality products and services

► Poor quality risks injuries, lawsuits, recalls, and regulation

► Ethical conduct must dictate response to problems

► All stakeholders much be considered


Total Quality Management

► Encompasses entire organization from supplier to customer

► Stresses a commitment by management to have a continuing companywide drive toward excellence in all aspects of products and services that are important to the customer


Deming’s Fourteen Points

TABLE 6.2 Deming’s 14 Points for Implementing Quality Improvement

1. Create consistency of purpose

2. Lead to promote change

3. Build quality into the product; stop depending on inspections to catch problems

4. Build long-term relationships based on performance instead of awarding business on price

5. Continuously improve product, quality, and service

6. Start training

7. Emphasize leadership


Deming’s Fourteen Points

TABLE 6.2 Deming’s 14 Points for Implementing Quality Improvement

8. Drive out fear

9. Break down barriers between departments

10. Stop haranguing workers

11. Support, help, and improve

12. Remove barriers to pride in work

13. Institute a vigorous program of education and self-improvement

14. Put everyone in the company to work on the transformation


Seven Concepts of TQM

1. Continuous improvement

2. Six Sigma

3. Employee empowerment

4. Benchmarking

5. Just-in-time (JIT)

6. Taguchi concepts

7. Knowledge of TQM tools


Continuous Improvement

► Never-ending process of continual improvement

► Covers people, equipment, materials, procedures

► Every operation can be improved


4. ActImplement the plan, document

2. DoTest the

plan

3. CheckIs the plan working?

1. PlanIdentify the pattern and make a plan

Shewhart’s PDCA Model

Figure 6.3


Continuous Improvement

► Kaizen describes the ongoing process of unending improvement

► TQM and zero defects also used to describe continuous improvement


Six Sigma► Two meanings

► Statistical definition of a process that is 99.9997% capable, 3.4 defects per million opportunities (DPMO)

► A program designed to reduce defects, lower costs, save time, and improve customer satisfaction

► A comprehensive system for achieving and sustaining business success


Six Sigma► Two meanings

► Statistical definition of a process that is 99.9997% capable, 3.4 defects per million opportunities (DPMO)

► A program designed to reduce defects, lower costs, save time, and improve customer satisfaction

► A comprehensive system for achieving and sustaining business success

Mean

Lower limits Upper limits

3.4 defects/million

±6

2,700 defects/million

±3

Figure 6.4


Six Sigma Program

► Originally developed by Motorola, adopted and enhanced by Honeywell and GE

► Highly structured approach to process improvement► A strategy► A discipline – DMAIC► A set of 7 tools 66


Six Sigma1. Defines the project’s purpose, scope, and outputs,

identifies the required process information keeping in mind the customer’s definition of quality

2. Measures the process and collects data

3. Analyzes the data ensuringrepeatability and reproducibility

4. Improves by modifying or redesigning existing processes and procedures

5. Controls the new process to make sure performance levels are maintained

DMAIC Approach


Implementing Six Sigma► Emphasize defects per million opportunities

as a standard metric

► Provide extensive training

► Focus on corporate sponsor support (Champions)

► Create qualified process improvement experts (Black Belts, Green Belts, etc.)

► Set stretch objectivesThis cannot be accomplished without a major commitment from top level

management


Employee Empowerment► Getting employees involved in product and

process improvements► 85% of quality problems are due

to process and material

► Techniques1) Build communication networks

that include employees

2) Develop open, supportive supervisors

3) Move responsibility to employees

4) Build a high-morale organization

5) Create formal team structures


Quality Circles

► Group of employees who meet regularly to solve problems

► Trained in planning, problem solving, and statistical methods

► Often led by a facilitator

► Very effective when done properly


BenchmarkingSelecting best practices to use as a standard for performance

1. Determine what to benchmark

2. Form a benchmark team

3. Identify benchmarking partners

4. Collect and analyze benchmarking information

5. Take action to match or exceed the benchmark


Best Practices for Resolving Customer Complaints

Table 6.3

BEST PRACTICE JUSTIFICATION

Make it easy for clients to complain It is free market research

Respond quickly to complaints It adds customers and loyalty

Resolve complaints on first contact It reduces cost

Use computers to manage complaints Discover trends, share them, and align your services

Recruit the best for customer service jobs

It should be part of formal training and career advancement


Internal Benchmarking

▶ When the organization is large enough

▶ Data more accessible

▶ Can and should be established in a variety of areas


Just-in-Time (JIT)

Relationship to quality:

► JIT cuts the cost of quality► JIT improves quality► Better quality means less

inventory and better, easier-to-employ JIT system


Just-in-Time (JIT)

► ‘Pull’ system of production scheduling including supply management

► Production only when signaled

► Allows reduced inventory levels► Inventory costs money and hides

process and material problems

► Encourages improved process and product quality


Taguchi Concepts► Engineering and experimental design

methods to improve product and process design

► Identify key component and process variables affecting product variation

► Taguchi Concepts► Quality robustness► Quality loss function► Target-oriented quality


Quality Robustness

► Ability to produce products uniformly in adverse manufacturing and environmental conditions

► Remove the effects of adverse conditions

► Small variations in materials and process do not destroy product quality


Quality Loss Function

► Shows that costs increase as the product moves away from what the customer wants

► Costs include customer dissatisfaction, warranty and service, internal scrap and repair, and costs to society

► Traditional conformance specifications are too simplistic

Target-

oriented

quality


Unacceptable

Poor

GoodBest

Fair

Quality Loss Function

High loss

Loss (to producing organization, customer, and society)

Low loss

Figure 6.5

L = D2C

whereL = loss to societyD2 = square of the distance from target valueC = cost of deviation

Frequency

Lower Target Upper

Specification

Target-oriented quality yields more product in the “best” category

Target-oriented quality brings product toward the target value

Conformance-oriented quality keeps products within 3 standard deviations


TQM Tools

► Tools for Generating Ideas► Check Sheet► Scatter Diagram► Cause-and-Effect Diagram

► Tools to Organize the Data► Pareto Chart► Flowchart (Process Diagram)


TQM Tools

► Tools for Identifying Problems► Histogram► Statistical Process Control Chart


Hour

Defect 1 2 3 4 5 6 7 8

A

B

C

Seven Tools of TQM

(a) Check Sheet: An organized method of recording data

Figure 6.6

/

/ /

/

/ /

/ //

/

/ /

/ / / /

/ /

/ /

/ //

// /

/ // /


Seven Tools of TQM

(b) Scatter Diagram: A graph of the value of one variable vs. another variable

Absenteeism

Pro

duct

ivity

Figure 6.6


Seven Tools of TQM

(c) Cause-and-Effect Diagram: A tool that identifies process elements (causes) that might effect an outcome

Figure 6.6

Cause

Materials Methods

Manpower Machinery

Effect


Seven Tools of TQM

(d) Pareto Chart: A graph to identify and plot problems or defects in descending order of frequency

Figure 6.6

Fre

que

ncy

Pe

rce

nt

A B C D E


Seven Tools of TQM

(e) Flowchart (Process Diagram): A chart that describes the steps in a process

Figure 6.6


Seven Tools of TQM

(f) Histogram: A distribution showing the frequency of occurrences of a variable

Figure 6.6

Distribution

Repair time (minutes)

Fre

que

ncy


Seven Tools of TQM

(g) Statistical Process Control Chart: A chart with time on the horizontal axis to plot values of a statistic

Figure 6.6

Upper control limit

Target value

Lower control limit

Time


Cause-and-Effect DiagramsMaterial

(ball)Method

(shooting process)

Machine(hoop &

backboard)

Manpower(shooter)

Missed free-throws

Figure 6.7

Rim alignment

Rim size

Backboard stability

Rim height

Follow-through

Hand position

Aiming point

Bend knees

Balance

Size of ball

Lopsidedness

Grain/Feel (grip)

Air pressure

Training

Conditioning Motivation

Concentration

Consistency


Pareto Charts

Number of occurrences

Room svc Check-in Pool hours Minibar Misc.72% 16% 5% 4% 3%

12

4 3 2

54

– 100

– 93– 88

– 72

70 –

60 –

50 –

40 –

30 –

20 –

10 –

0 –

Fre

quen

cy (

num

ber)

Causes and percent of the total

Cum

ulat

ive

perc

ent

Data for October


Flow ChartsMRI Flowchart

1. Physician schedules MRI2. Patient taken to MRI3. Patient signs in4. Patient is prepped5. Technician carries out MRI6. Technician inspects film

7. If unsatisfactory, repeat8. Patient taken back to room9. MRI read by radiologist10. MRI report transferred to

physician11. Patient and physician

discuss

11

10

20%

9

880%

1 2 3 4 5 6 7


Statistical Process Control (SPC)

► Uses statistics and control charts to tell when to take corrective action

► Drives process improvement► Four key steps

► Measure the process

► When a change is indicated, find the assignable cause

► Eliminate or incorporate the cause

► Restart the revised process


Control Charts

Upper control limit

Coach’s target value

Lower control limit

Game number

| | | | | | | | |

1 2 3 4 5 6 7 8 9

40%

20%

0%

Plot the percent of free throws missed

Figure 6.8


Inspection► Involves examining items to see if an

item is good or defective► Detect a defective product

► Does not correct deficiencies in process or product

► It is expensive

► Issues► When to inspect► Where in process to inspect


When and Where to Inspect

1. At the supplier’s plant while the supplier is producing

2. At your facility upon receipt of goods from your supplier

3. Before costly or irreversible processes

4. During the step-by-step production process

5. When production or service is complete

6. Before delivery to your customer

7. At the point of customer contact


Inspection► Many problems

► Worker fatigue► Measurement error► Process variability

► Cannot inspect quality into a product► Robust design, empowered

employees, and sound processes are better solutions


Source Inspection

► Also known as source control► The next step in the process is your

customer► Ensure perfect

product to your customer


Source Inspection

► Poka-yoke is the concept of foolproof devices or techniques designed to pass only acceptable product

► Checklists ensureconsistency and completeness


Service Industry InspectionTABLE 6.4 Examples of Inspection in Services

ORGANIZATION WHAT IS INSPECTED STANDARD

Jones Law Office Receptionist performance

Billing

Attorney

Phone answered by the second ring

Accurate, timely, and correct format

Promptness in returning calls

Hard Rock Hotel Reception desk

Doorman

Room

Minibar

Use customer’s name

Greet guest in less than 30 seconds

All lights working, spotless bathroom

Restocked and charges accurately posted to bill




Arnold Palmer Hospital Billing

Pharmacy

Lab

Nurses

Admissions

Accurate, timely, and correct format

Prescription accuracy, inventory accuracy

Audit for lab-test accuracy

Charts immediately updated

Data entered correctly and completely

Olive Garden Restaurant

Busboy

Busboy

Waiter

Serves water and bread within 1 minute

Clears all entrée items and crumbs prior to dessert

Knows and suggest specials, desserts




Nordstrom Department Store

Display areas

Stockrooms

Salesclerks

Attractive, well-organized, stocked, good lighting

Rotation of goods, organized, clean

Neat, courteous, very knowledgeable


Attributes Versus Variables► Attributes

► Items are either good or bad, acceptable or unacceptable

► Does not address degree of failure

► Variables► Measures dimensions such as weight,

speed, height, or strength

► Falls within an acceptable range

► Use different statistical techniques


TQM In Services

► Service quality is more difficult to measure than the quality of goods

► Service quality perceptions depend on 1) Intangible differences between

products

2) Intangible expectations customers have of those products


Service Quality

The Operations Manager must recognize:

► The tangible component of services is important

► The service process is important► The service is judged against the

customer’s expectations► Exceptions will occur


Service Specifications


Determinants of Service Quality

Table 6.5

Reliability involves consistency of performance and dependability

Responsiveness concerns the willingness or readiness of employees to provide service

Competence means possession of the required skills and knowledge to perform the service

Access involves approachability and ease of contact

Courtesy involves politeness, respect, consideration, and friendliness

Communication means keeping customers informed and listening to them

Credibility involves trustworthiness, believability, and honesty

Security is the freedom from danger, risk, or doubt

Understanding/knowing the customer involves making the effort to understand the customer’s needs

Tangibles include the physical evidence of the service


Service Recovery Strategy

► Managers should have a plan for when services fail

► Marriott’s LEARN routine► Listen► Empathize► Apologize► React► Notify


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