How to Measure Quality

Total Quality Management

When all areas of a business

cooperate to achieve quality
• Quality means satisfying the customer the
first time.
• when quality is achieved (conformance
costs)
• Quality Costs also occur when it is not
achieved (non-conformance costs.)

Costs of Quality

Conformance Costs include

prevention costs and appraisal
costs.

Nonconformance costs include

internal and external failure
costs.

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 Financial Measures of Quality
Costs of Conformance to Customer Standards
Prevention costs
Technical support for vendors Quality-certified suppliers
Integrated system development Quality circles
Quality improvement projects Preventive maintenance
Quality training of employees Statistical process control
Design review of products and Process Engineering
processes

Appraisal costs
Inspection of materials, processes, Maintenance of test equipment
and machines Quality audits of products and
End of process sampling and processes
testing Field testing
Vendor audits and sample testing

Financial Measures of Quality

Costs of Nonconformance to Customer Standards

Internal failure costs

Scrap and rework Failure analysis
Reinspection and retesting of rework Inventory control and scheduling
Quality-related downtime Downgrading because of defects
Scrap disposal losses

External failure costs

Lost sales Returned goods
and replacements
Restoration of reputation Investigation of defects
Warranty claims and adjustments Product recalls
Customer complaint processing Product-liability settlements

Measures of Quality
Suggested Performance Measures

Total costs of quality as a percentage of net sales

Ratio of costs of conformance to total costs of quality
Ratio of costs of nonconformance to total costs of quality
Costs of nonconformance as a percentage of new sales

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 Nonfinancial Measures of
Quality
• A business should establish a system to
detect poor quality early.
• Nonfinancial measures help determine the
degree of quality achieved.
• A commitment to ongoing improvement
enhances quality and ultimately maximizes
the financial return from operations.

Nonfinancial Measures

• Nonfinancial measures of quality

include:
• Product design quality.
• Vendor performance.
• Production performance.
• Delivery cycle time.
• Customer satisfaction.

Measures of Product Design

Quality

• Computer-aided design
(CAD) helps detect product
design flaws.

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 Nonfinancial Measures of
Quality
Measures of Product Design Quality
Product design flaws Number and types of design
defects detected
Average time between defect
detection and correction
Number of unresolved design
defects at time of product
introduction

Measures of Vendor
Performance
• Companies analyze vendors to
determine which are most reliable,
furnish high-quality goods, deliver
on time, and charge competitive
prices.

Nonfinancial Measures of
Quality
Measures of Vendor Performance
Vendor quality Defect-free materials as a percentage of
total materials received; prepared for each
vendor

Vendor delivery Timely deliveries of materials as a

percentage of total deliveries; prepared for
each vendor

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 Measures of Production
Performance
• Companies adopt computer-
integrated manufacturing (CIM)
systems to evaluate performance
of production equipment and to
evaluate performance of
maintenance personnel.

Nonfinancial Measures of
Quality
Measures of Production Performance
Production quality Number of defective products per million
produced

Parts scrapped Number and type of materials spoiled

during production
Equipment utilization Productive machine time as a percentage of
rate total time available for production

Machine downtime Amount of time each machine is idle

Machine maintenance Amount of time each machine is idle for
time maintenance and upgrades
Machine uptime Mean Time Between Failures (MTBF)

Measures of Delivery Cycle Time

• Delivery cycle time (time between

accepting an order and final delivery
of the product or service)

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 Nonfinancial Measures of Quality
Measures of Delivery Cycle Time
On-time deliveries Shipments received by promised date as a percentage of
total shipments
Orders filled Orders filled as a percentage of total orders received
Average process time Average time required by production to make a product
available for shipment
Average setup time Average amount of time elapsed between the acceptance
of an order and the beginning of production
Purchase order lead Time it takes for materials to be ordered and received so
time that production can begin
Production cycle time Time it takes to make a product available for shipment
Delivery time Time between the completion of a product and its receipt
by the customer
Delivery cycle time Time between the acceptance of an order and the final
delivery of the product or service (purchase order lead
time + production cycle time + delivery time)
Waste time Production cycle time – average process time – average
setup time
Production backlog Number and type of units waiting to begin processing

Measures of Customer
Satisfaction

• Customer follow-up helps evaluate

customer satisfaction.

Nonfinancial Measures of Quality

Measures of Customer Satisfaction

Customer Number and types of

complaints customer complaints
Warranty claims Number and causes of claims
Returned orders Shipments returned as a
percentage of total shipments

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 Measuring Service Quality
• Many of the quality cost categories
and nonfinancial measures can be
applied to service organizations.
• Flaws in service design lead to
poor-quality services.
• Poor service development leads to
internal and external failure costs.

The Evolving Concept of Quality

• In the past, the benefits of quality were
weighed against the costs of improving
quality.
• A “return on quality” was required.
• In the 1980s, Deming and others promoted
Total Quality Management (TQM).
• Companies came to believe that quality
gave companies a competitive edge.
• Quality control methods were implemented
to eliminate defects in product design and
manufacture.

The Evolving Concept of Quality

• Companies expanded quality management
to include nonmanufacturing processes.
• Benchmarking compares the quality of a
process with a parallel process at the best-
in-class company (from any industry).
• Process mapping diagrams process
inputs, outputs, constraints, and flows to
identify unnecessary efforts and
inefficiencies.
• Service businesses also seek to maximize
customer satisfaction.

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The Evolving Concept of Quality
• The concept of quality evolves to
fulfill customer needs and
expectations as the business
environment changes.
• Quality dimensions include freedom
from defects, dependability, prestige,
good taste, customer expectations,
innovation.
• The goal is customer satisfaction and
customer retention.

Recognition of Quality
Awards to recognize and promote the
importance of quality include:
• The Deming Application Prize—awarded by
the Japanese Union of Scientists and
Engineers.
• The Malcolm Baldrige Quality Award—
awarded to U.S. organizations for
achievements in quality and business
performance excellence.
The International Standards Organization
(ISO) has developed ISO 9000, setting
quality management and quality assurance
standards.

That’s all.

Good luck on the final.