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Implementing Quality ConceptsPrepared By: SHIELA CORTADO AZONBS Accountancy 4 11-0226cLearning ObjectivesWhat is quality, and from whose viewpoint should it be evaluated?What is benchmarking, and why do companies engage in it?What constitutes the total quality management philosophy?How is the Baldrige Award related to quality?What are the types of quality costs, and how are those types related?How is cost of quality measured?How are a cost management system and the balanced scorecard used to provide information on quality in an organization?How is quality instilled as part of an organizations culture?(Appendix) What international quality standards exist?2QualityQualitythe sum of all of the characteristics of a product or service that influence its ability to meet the stated or implied needs of the person acquiring it Totality of internal processes that generate a product or service Customer satisfaction with that product or service3Production View of QualityProductivityThe quantity of good output generated from a specific amount of input during a time periodIncrease productivity by reducing non-value-added activitiesReduce the need to reprocess, rework, replace, repairFit machinery for mistake-proof operations Have employees monitor and be responsible for their own outputDo not store slow-moving inventoryReduce unnecessary material movesReduce unscheduled production interruptionsIncrease supplier quality/reduce inspectionsHave suppliers inspect before shipping

4Quality Control and Statistical Process ControlQuality controlall attempts to reduce variability and product defectsSix SigmaStatistical Process ControlAnalyze where fluctuations occur in processesUse control chartsSPC charts require workers to respond when there are Occurrences outside the control limitsNonrandom patternsWorkers can prevent product defects and process malfunctions5Consumer View of QualityProduct or service meets and satisfies all specified needs at a reasonable costRelates to both performance and value6Characteristics of Product QualityObjectivePerformanceFeaturesReliabilityConformanceDurabilityServiceability and responsiveness

SubjectiveAestheticsPerceived value*Sloan Management Review7Characteristics of Service QualityAll the characteristics of product quality plus: AssuranceTangiblesEmpathy

8Evaluating QualityGradeThe quality level that a product or service has relative to the inclusion or exclusion of characteristics to satisfy customers needs, especially price

ValueMeets the highest number of needs at the lowest possible cost (purchase price plus operating, maintenance, and disposal costs)Its tooexpensive9Reasons to BenchmarkBenchmarkingInvestigate, compare, evaluate own products, processes, services against competitors or best in classReasons to benchmark:Increase awareness of the competitionUnderstand competitors production and performance methods as well as cost structuresIdentify areas of competitors internal strengths and weaknessesIdentify external and internal threats and opportunitiesJustify and accelerate a plan for continuous process improvement and changeCreate a framework for program and process assessment and evaluationEstablish a focus for mission, goals, and objectivesEstablish performance improvement targetsUnderstand customers needs and expectationsEncourage creative thinkingIdentify state-of-the-art business practices and new technologies

10Types of BenchmarkingResults benchmarkingFocus on competitorsReverse engineeringFocus on product/service specifications and performance resultsDetermine best in classProcess BenchmarkingOften noncompetitor benchmarkingBest in (specific characteristic)Flexible manufacturingEquipment maintenanceWorker trainingDistribution and logistics

Strategic benchmarkingNoncompetitor, nonindustry-specific benchmarkingUnderstand how successful companies compete

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1313Total Quality ManagementTotal Quality Management (TQM)Management approach of an organization, centered on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to societyTenetsDictate continuous improvement to the internal managerial system (plan, control, make decisions)Require participation by everyone in the organizationFocus on improving goods and services from the customers point of viewValue long-term partnerships with suppliers14The Quality SystemMoves from after-the-fact inspection to proactive quality assuranceEmphasizes Planning for quality in every process and productPreventionZero defects and continuous improvementResults Ability to set goals and methods for improvementsSystem for measuring quality and providing feedback on quality enhancementsEncouragement of teamworkChange from product inspection and defect correction to proactive quality assurance

15Upper-Level Management InvolvementPersonally involved in quality processDevelop an atmosphere that produces quality improvementsSet an example of commitment to TQMProvide constructive feedback for opportunities for improvementsProvide positive feedback for achieved improvements

16Product/Service ImprovementIdentify value-adding customersIdentify customer wantsQualityValueGood serviceinteraction between customer and organizational employees

17Quality AwardsUSAMalcolm Baldridge AwardJapanDeming Prize

18Malcolm Baldridge National Quality Award (slide 1 of 2)Focuses onManagement systemsProcessesConsumer satisfactionBusiness results

Types of entrantsBusiness and not-for profitEducationHealth care

Represents Excellence19Malcolm Baldridge National Quality Award (slide 2 of 2)Must excel in:LeadershipStrategic planningCustomer focusMeasurement, analysis, and knowledge managementWorkforce focusOperations focusResultsAward winners are effective and systematic in deploying and achieving the multiple requirements within each category and are innovative in continuously seeking improvement20Types of Quality CostsCost of CompliancePreventive costsprevent product defectsAppraisal costsmonitor and compensate when prevention failsCost of NoncomplianceFailure costs Internal lossesscrap, reworkExternal losseswarranty work, customer complaint departments, litigation, product recalls 2121Quality Cost PrinciplesThe cost of compliance and the cost of noncompliance are inversely relatedA decrease in preventive costs will probably increase failure costsA increase in preventive costs will probably decrease failure costsImprovements in quality often result inLower total costImproved productivity22Total Failure CostsProfit lost by selling defective units Cost of reworkCost of processing customer returnsCost of warranty workCost of product recallsCost of litigation related to productsOpportunity cost of lost customers23Measuring the Cost of QualityDetermine where to spend dollars on quality preventionPareto AnalysisTrack the costs of qualityChange chart of accounts or coding systemDevelop a quality reporting systemTraditional general ledger accounts bury quality costs in Work in process inventoryFinished goods inventoryMarketing and advertisingPersonnelEngineering24Cost of QualityPrevention costsQuality trainingQuality market researchQuality technologyQuality product designPreventive maintenance

Appraisal costsQuality inspectionsProcedure verificationsMeasurement equipment

Internal failure costsReworking productsScrap and wasteStoring and disposing of wasteReprocessingRescheduling and setup

External failure costsComplaint handlingWarranty handlingRepairing or replacing returnsCustomer reimbursementsExpediting replacementsProduct recallsImage improvement after failure

Separate cost of quality accounts include:25Computing Cost of QualityComputeQuality costs incurred for production/service activitiesCosts of non-value-added activitiesProduct/service life-cycle costsRework costs

26Calculating Lost Profits Profit Lost by Selling Units as Defects TotalDefectiveUnitsNumberof UnitsReworkedProfitfor GoodUnitProfit forDefective Unit=Z = (D Y) (P1 P2 )X2727Calculating Internal Costs of Failure

ReworkCostNumber of UnitsReworkedCost toRework DefectiveUnit=XR = (Y)(r)2828Calculating External Costs of Failure Cost ofProcessing CustomerReturnsNumber ofDefective UnitsReturnedCostof aReturn=XW = (Dr)(w)2929Calculating Total Failure CostTotal Failure Cost = Profit Lost by Selling Units as Defects + Rework Cost + Cost of Processing Customer Returns + Cost of Warranty Work + Cost of Product Recalls + Cost of Litigation Related to Products + Opportunity Cost of Lost CustomersF = Z + R + W + PR + L + O3030Calculating the Total Quality Cost T = K + A + FTotal QualityCost PreventionCostAppraisalCostFailureCost=++3131Balanced Scorecard and QualityFinancial

Internal BusinessCustomerValueLearning and GrowthTechnology leadership/percentage of production automatedEmployee empowerment/ number of units reworkedSatisfied customers/number of customer complaintsCustomer loyalty/ percentage of revenue from repeat customers32Balanced Scorecard Additional MeasuresAdditional measuresManufacturing cycle efficiencyTime to market for new productsCustomer satisfaction levelsOn-time deliveriesDefect ratesSuccess rates of research and development activities 33Organizational Culture of QualityCommitted and consistent top leadershipEmployees who are eager to meet and exceed customer expectationsWork environment that cares about employees and rewards efforts to achieve high qualityEmpowered employeesJob and quality trainingPursuit of quality awards

34QuestionsWhat is quality?How is benchmarking used to improve quality?What are the different measures of the cost of quality?35Potential Ethical IssuesIgnoring acceptable variation limits and therefore accepting defect levels that are excessiveUsing lower grade raw material and components than specifiedUsing benchmarking to illegally gain information from competitors Discriminating against minority suppliesChoosing to ignore internal information about defects and failures Minimizing estimates of internal and external failure costsNot supporting TQM initiatives in company practicesSelling products at low prices and attempting to recover revenue with exorbitant repair charges after warranty time period

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