quality management and measurement multimedia slides by: gail a. mestas, macc, new mexico state...

Quality Management and Measurement

Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University

Chapter 11

Learning Objectives

1. Describe a management information system and explain how it enhances the management cycle.

2. Define total quality management (TQM) and identify financial and nonfinancial measures of quality.

Learning Objectives (cont’d)

3. Use measures of quality to evaluate operating performance.

4. Discuss the evolving concept of quality.

5. Recognize the awards and organizations that promote quality.

The Role of Management Information Systems in Quality Management

• Learning Objective 1– Describe a management information

system and explain how it enhances the management cycle

• To compete successfully, managers need information that enables them to– Determine accurate product, service, and

customer costs

– Improve processes

– Provide timely feedback to stakeholders about their organization

• Can only be provided by a management information system that captures both financial and nonfinancial data

• Management information system (MIS)– A reporting system that

• Identifies, monitors, and maintains continuous, detailed analyses of a company’s activities

• Provides managers with timely measures of operating results

– Is designed to support• Just-in-time (JIT) operations

• Activity-based costing (ABC) and activity-based management (ABM)

• Total quality management (TQM)

• Primary focus of MIS– Management of activities

• Provides managers with improved knowledge of the processes for which they are responsible

• Identifies resource usage and cost for each activity

• Fosters managerial decisions that lead to continuous improvement throughout the organization

• Activity-related information is readily available– Needed to speed responsiveness to customers

and reduce processing time

• Provides more accurate product and service costs– Leads to improved pricing decisions

• Nonvalue-adding activities are highlighted– Can then be reduced or eliminated

• Analyzes profitability of individual customers

Enterprise Resource Planning Systems

• An MIS may be designed as either– A customized, informally linked series of

systems for specific purposes• Such as financial reporting, product costing,

and business process measurement

– An enterprise resource planning (ERP) system

• A fully integrated database system

Enterprise Resource Planning Systems (cont’d)

• ERP system– Combines the management of all major

business activities with support activities to form one, easy-to-access, centralized data warehouse

• Major business activities– Purchasing– Manufacturing– Marketing– Sales– Logistics– Order fulfillment

• Support activities– Accounting

– Human resources

Using MIS in the Management Cycle

• Without the flexibility and power of database management systems like ERP, managers would be at a disadvantage in today’s rapidly changing and highly competitive business environment

11–12

The Management Cycle and a

Management Information

System

Using MIS in the Management Cycle (cont’d)

• Planning– Managers use the MIS database to obtain

relevant and reliable information for• Formulating strategic plans

• Making forecasts

• Preparing budgets

• Executing– Managers use the financial and

nonfinancial information in the MIS database to implement decisions about

• Personnel

• Resources

• Activities

– MIS minimizes waste and improves the quality of the organization’s products or services

• Reviewing– Managers identify and track financial and

nonfinancial performance measures to evaluate all the major business functions

• Allows managers to– Reward performance promptly

– Take speedy corrective action

– Analyze and revise performance measurement plans

• Reporting– Managers can generate customized

reports that• Evaluate performance

• Provide useful information for decision making

Discussion

Q. What is a management information system (MIS)?

A. A management information system is a reporting system that identifies, monitors, and maintains continuous, detailed analyses of a company’s activities and provides managers with timely measures of operating results

Financial and Nonfinancial Measures of Quality

• Learning Objective 2– Define total quality management (TQM)

and identify financial and nonfinancial measures of quality

Financial and Nonfinancial Measures of Quality

• Total quality management (TQM)– An organizational environment in which all

business functions work together to build quality into the firm’s products or services

Financial and Nonfinancial Measures of Quality (cont’d)

• Steps toward creating a TQM environment

1. Identify and manage the financial measures of quality, or the costs of quality

2. Analyze operating performance using nonfinancial measures and require that all business processes and products or services be improved continuously

Financial Measures of Quality

• Quality– The result of an operating environment in

which a product or service meets or conforms to a customer’s specifications the first time it is produced or delivered

Financial Measures of Quality (cont’d)

• Costs of quality– The costs specifically associated with the

achievement or nonachievement of product or service quality

– Includes• Costs of good quality incurred to ensure the

successful development of a product or service

• Costs of poor quality incurred to transform a faulty product or service into one that is acceptable to the customer

The costs of quality may make up a significant portion of a product’s total cost, so, controlling the costs of quality strongly affects profitability

• Components of the costs of quality– Costs of conformance

• The costs incurred to produce a quality product or service

– Costs of nonconformance• The costs incurred to correct defects in a

product or service

• Costs of conformance– Prevention costs

• Costs associated with the prevention of defects and failures in products or services

– Appraisal costs• Costs of activities that measure, evaluate, or

audit products, processes, or services to ensure conformance to quality standards and performance requirements

• Costs of nonconformance– Internal failure costs

• Costs incurred when defects are discovered before a product or service is delivered to a customer

– External failure costs• Costs incurred after a product or service is

delivered to a customer

• An inverse relationship exists between costs of conformance and costs of nonconformance– Spending money on the costs of

conformance reduces the costs of nonconformance

– If little is spent on the costs of conformance, the costs of nonconformance will be high

• Overall goal of an organization– Avoid the costs of nonconformance

• Internal and external failures affect– Customers’ satisfaction

– The organization’s profitability

11–28

Financial Measures of

Quality

Nonfinancial Measures of Quality

• Management needs a measurement and evaluation system that signals poor quality early enough to correct problems before the product or service reaches the customer– Accomplished by implementing a policy of

continuous improvement• Use nonfinancial measures of performance

Product Design

• Quality problems are often the result of poor design– Can automatically identify poorly designed

parts or manufacturing processes by using computer-aided design (CAD)

• A computer-based engineering system

Product Design (cont’d)

• Managers monitor the CAD reports on design flaws– Ensures that products are properly designed and

free of defects

• Measures to consider– Number and types of design defects detected

– Average time between detection and correction

– Number of unresolved design defects at the time of product introduction

Vendor Performance

• In the past– Companies dealt with dozens of suppliers in the

quest for the lowest price

• Now– Companies analyze their vendors to determine

which ones • Are most reliable

• Furnish high-quality goods

• Have a record of timely deliveries

• Charge competitive prices

Vendor Performance (cont’d)

• Once identified, these vendors become an integral part of the production team– Ensures a continuing supply of high-quality

materials

– Vendors may even contribute to product design

• Ensures that the correct materials are being used

Vendor Performance (cont’d)

• Managers monitor each vendor’s performance using– Measures of quality

• Such as defect-free materials as a percentage of total materials received

– Measures of delivery• Such as timely deliveries as a percentage of

total deliveries

Such measures enable managers to identify and monitor reliable vendors so that high-quality, reasonably priced materials are available when they are needed

Production Performance

• Computer-integrated manufacturing (CIM) systems– A fully computerized, plantwide manufacturing

facility in which all parts of the manufacturing process are programmed and performed automatically

– Minimizes concerns about wasted money that can be traced to

• Defective products

• Scrapped parts

• Machine maintenance

• Downtime

Production Performance (cont’d)

• In CIM systems– Most direct labor hours are replaced by

machine hours

– A significant part of variable product cost is replaced by the cost of expensive machinery, a fixed cost

• The largest item on the company’s balance sheet is often automated machinery and equipment

• Each piece of equipment has a specific capacity, above which continuous operation is threatened

• The measures managers use to evaluate these machines have two objectives1. Evaluate the performance of each piece of

equipment in relation to its capacity

2. Evaluate the performance of maintenance personnel in following a prescribed maintenance program

• Measures that help managers monitor production performance– Production quality

– Parts scrapped

– Equipment utilization

– Machine downtime

– Machine maintenance

Delivery Cycle Time

• Companies evaluate their responsiveness to customers by examining delivery cycle time– The time period between acceptance of an

order and the final delivery of the product or service

– Company’s goal• Fill its orders 100 percent of the time

• Deliver its products 100 percent on time

Delivery Cycle Time (cont’d)

• To meet this goal, a company must– Establish and maintain consistency and

reliability within its manufacturing process

– Be highly aware of its delivery cycle time• Important to customers

• Decrease in delivery cycle time can lead to an increase in income from operations

• Delivery cycle time consists of– Purchase order lead time

• The time it takes for materials to be ordered and received so that production can begin

– Production cycle time• The time it takes to make a product

– Delivery time• The time between the completion of the product

and its receipt by the customer

• For each component of delivery cycle time, management should – Emphasize the importance of minimizing

the time

– Track the actual time

– Highlight trends

– Make reports available daily or weekly

• Other measures designed to monitor delivery cycle time– Waste time

– Order backlogs

– On-time delivery performance

– Percentage of orders filled

Customer Satisfaction

• Performance measurement continues beyond sale and shipment of a product– Use customer follow-up to evaluate total

customer satisfaction

Customer Satisfaction (cont’d)

• Measures used to determine the degree of customer satisfaction include– Number and types of customer complaints

– Number and causes of warranty claims

– Percentage of shipments returned by customers

• Or percentage of shipments accepted by customers

These measures help a company continuously produce higher-quality products, improve production processes, and reduce throughput time and costs

11–46

Nonfinancial Measures of

Quality

Measuring Service Quality

• Quality of services can be measured and analyzed– Many of the costs of product conformance also

apply to the development and delivery of a service• Measures include

– Flaws in service design

– Timely service delivery

– Services accepted or rejected

– Number of complaints

– Many of the costs-of-quality categories and several of the nonfinancial measures of quality can also be applied directly to services

Discussion

Q. What are the components of the costs of quality?

A. The components of the costs of quality are the costs of conformance, which are the costs incurred to produce a quality product or service, and the costs of nonconformance, which are the costs incurred to correct defects in a product or service

Costs of conformance include prevention and appraisal costs, and costs of nonconformance include internal and external failure costs

Illustrative Problem: Measuring Quality

• Learning Objective 3– Use measures of quality to evaluate

operating performance

Evaluating the Costs of Quality

• Evaluate each company’s approach to quality enhancement by analyzing the costs of quality and by answering the following questions– Which company is most likely to succeed in the competitive

marketplace?

– Which company has serious problems with its products’ quality?

– What do you think will happen to the total costs of quality for each company over the next five years? Why?

Three companies, Able, Baker, and Cane, have taken different approaches to achieving product quality. All three companies are the same size, each having generated $15 million in sales last year

Measures of Quality–Data for Analysis

11–52

Analysis of the Costs of

Quality

Evaluating the Costs of Quality (cont’d)

• Which company is most likely to succeed in the competitive marketplace?– Able Company

• Spent the most money on costs of quality– Spent 80 percent of that money on costs of

conformance

– Means that only a small amount had to be spent on internal and external failure costs

– Result is high-quality products, which leads to high customer satisfaction

• Which company has serious problems with its products’ quality?– Baker Company

• Spent the least on costs of quality– Over 68 percent of its costs of quality was spent on

internal and external failure costs

– Scrap costs, reinspection costs, the cost of downtime, warranty costs, and customer complaint costs were all high

– Products are very low in quality

• What do you think will happen to the total costs of quality for each company over the next five years? Why?

– Able Company• Total costs of quality should be lower in the

future because the company is establishing a high level of quality

– Spent the most on costs of conformance early in the product’s life cycle

– Quality is integrated into the development and production processes

– Baker Company• Costs of conformance will have to increase

significantly if the company expects to stay in business

– Seven percent of sales revenue being spent on costs of failure

– Company is vulnerable because the marketplace is not accepting its products

– Is in a weak position to face competition

– Cane Company• Company must learn to prevent high internal

and external failure costs to remain competitive– Spending 53 percent of its costs of quality on

conformance, so product quality should be increasing

– However, costs of nonconformance are high

Evaluating Nonfinancial Measures of Quality

• Evaluate each company’s experience in its pursuit of total quality management

Measures of Quality–Data for Analysis

Evaluating Nonfinancial Measures of Quality (cont’d)

• Able Company– Costs of conformance are having a positive effect

• In 20x5, 98.6 percent of materials received form suppliers were of high quality

– Quality over the three years has been increasing

• Product defect rate has been decreasing rapidly

– Customer acceptance and satisfaction have been increasing

• Percentage of on-time deliveries increasing

• Both percentage of returned orders and customer complaints decreasing

• Baker Company– High costs of nonconformance are having

a negative effect• Number of high-quality shipments of materials

from vendors decreasing

• Product defect rate increasing (severe problem)

• On-time deliveries poor and getting worse

• Returned goods and customer complaints increasing

• Cane Company– Making very slow progress toward higher-

quality standards• Most nonfinancial measures show very slight

positive trend

• Needs to spend more money on costs of conformance

Comparison of Costs of Quality: Conformance Versus Nonconformance

Discussion

Q. When evaluating the costs of quality, how can you determine whether a company is likely to succeed in the competitive marketplace?

A. The amount of money a company spends on costs of quality and a comparison of its costs of conformance to its costs of nonconformance are indicators of whether it is likely to succeed

If costs of conformance are much higher than costs of nonconformance, it means that only a small amount had to be spent on internal and external failure costs

The result is high-quality products, which leads to high customer satisfaction

The Evolving Concept of Quality

• Learning Objective 4– Discuss the evolving concept of quality

The Evolving Concept of Quality

• Return on quality (ROQ)– Results when the marginal revenues

possible from a higher-quality good or service exceed marginal costs of providing that higher quality

The Evolving Concept of Quality (cont’d)

• Managers must– Weigh the high costs of consistent quality

against higher revenues

– Base the quality standards for a good or service on the expected return on quality

• Before the advent of TQM, over 20 years ago, managers assumed there was a trade-off between the costs and benefits of improving quality

• In the 1980s, quality gave organizations a competitive edge in the global marketplace– Advocates of TQM stressed improved

quality as a means of enhancing an organization’s efficiency and profits

– Companies emphasized kaizen• Continual and gradual improvement of products

and processes while reducing costs

• Quality control methods eliminated defects in the design and manufacture of products– Statistical analysis

– Computer-aided design (CAD)

– Six Sigma

• Today, more than 90 percent of Fortune 500 companies use a combination of these methods

• Efforts then expanded to include the quality of nonmanufacturing processes– Benchmarking

• Measurement of the gap between the quality of a company’s process and the quality of a parallel process at the best-in-class company

– Process mapping• Method of diagramming in a flow diagram

– Process inputs, outputs, constraints, and flows

• Helps managers identify unnecessary efforts and inefficiencies in a business process

• Service businesses and ecommerce companies also recognize the importance of quality by seeking to– Maximize customers’ satisfaction with their

services

– Continuously improve the customers’ experience

• A manager’s concept of quality must continuously evolve to – Fulfill customers’ needs and expectations

– Meet the demands of the changing business environment

• Dimensions of quality– Products and services must

• Be defect-free and dependable

• Embody intangibles such as prestige and good taste

• Managers must– Meet or exceed a variety of expectations

about customer service

– Create innovative new products and services that anticipate the opportunities to be offered by an ever-changing marketplace

Discussion

Q. What is kaizen?

A. Kaizen is the continual and gradual improvement of products and processes while reducing costs

Recognition of Quality

• Learning Objective 5– Recognize the awards and organizations

that promote quality

Recognition of Quality

• To promote the importance of quality, many awards and organizations have been established– Deming Application Prize

– Malcolm Baldrige Quality Award

– International Organization for Standardization

Recognition of Quality (cont’d)

• Deming Prize– Established by the Japanese Union of

Scientists and Engineers in 1951

– Honors individuals or groups who have contributed to the development and dissemination of total quality management

• Deming Application Prize– Also established by the Japanese Union of

Scientists and Engineers

– Honors companies that achieve distinctive results by carrying out total quality control

– Originally limited to Japanese companies• Interest so great, rules were revised to allow

participation of companies outside of Japan

• Malcolm Baldrige Quality Award– Established by U.S. Congress in 1987

– Recognizes U.S. organizations for their achievements in quality and business performance

– Purpose is to raise awareness of the importance of quality and performance excellence

• Organizations are evaluated on the basis of a set of standards in seven categories– Leadership

– Strategic planning

– Customer and market focus

– Information and analysis

– Human resource focus

– Process management

– Business results

• Thousands of organizations throughout the world accept the Baldrige criteria as the standards for performance excellence– Use them for training and self-assessment,

whether they plan to compete or not

• Award winners are showcased and encouraged to share their best practices with others

• International Organization for Standardization (ISO)– Worldwide federation of national standards

bodies from over 130 countries

– Promotes standardization with a view to facilitating the international exchange of goods and services

• ISO 9000– Set of guidelines for businesses

• Covers the design, development, production, final inspection and testing, installation, and servicing of products, processes, and services

– Standardizes quality management and quality assurance

• ISO 9000 has been adopted worldwide– Many companies do business only with

ISO-certified companies

• To become ISO certified– A company must pass a rigorous third-

party audit of its manufacturing and service processes

• As a result, certified companies have detailed documentation of their operations

• The ISO 14000 series provides a similar framework for environmental management

Discussion

Q. What does the International Organization for Standardization (ISO) promote?

A. It promotes standardization with a view to facilitating the international exchange of goods and services

Time for Review

1. Describe a management information system and explain how it enhances the management cycle

2. Define total quality management (TQM) and identify financial and nonfinancial measures of quality

And Finally…

3. Use measures of quality to evaluate operating performance

4. Discuss the evolving concept of quality

5. Recognize the awards and organizations that promote quality

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