Week 012

Quality, Change and Emerging

Business Models
Quality Costs
Conformance Costs Non-Conformance Costs
Prevention Costs Appraisal Costs Internal Failure Costs External Failure Costs
 Design engineering  Product testing  Repairs, rework, retooling  Product warranty (e.g., recalls
 Suppliers evaluation and  Statistical quality control changes (i.e., costs incurred to and replacements)
management correct errors, etc. before  Product liability (i.e., costs
 Employee training delivery to customers) incurred to correct errors after
 Equipment maintenance delivery is made to customers)
program  Lost CM

Specific examples of activity costs
 Systems development
 Quality engineering
 Quality training
 Quality circles/cells
 Supervision of prevention
activities
 Quality data gathering analysis
and reporting
 Quality improvement projects
 Quality technical support to
suppliers
 Audits of the effectiveness of the
quality system
 System development
Specific examples of activity costs Specific examples of activity costs Specific examples of activity costs
 Inspection and tests of incoming  Rework costs such as labor,  Handling of customer
materials, in-process goods, and overhead, re-inspection, and complaints
finished goods retesting of reworked products  Field services
 Supervision of inspection and  Downtimes  Warranty repairs and
testing activities  Disposal of defective products replacements (within and
 Depreciation of test equipment  Analysis of the costs of defects outside the warranty period)
 Maintenance of test equipment  Re-entering of data in the  Product recalls
 Supplies, utility and other system  Liability arising from defective
incidental costs in the testing Debugging of software errors products
area  Sales returns and allowances
 Testing costs at the customer related to quality problems
sites  Lost contribution margin on
lost sales related to quality
problems
 Change and Managerial Lingo

There are two viewpoints of instituting quality environment in an organization. One is business process re-
engineering (BPR) and the other is kaizen (i.e., continuous improvement).
Business Process Re-Engineering

Business Process Re-Engineering (BPR) is the fundamental rethinking and radical design of business
processes to achieve dramatic improvements in critical contemporary measures such as cost, quality, service,
and speed.
 Kaizen

Kaizen is a Japanese term which refers to the process of continuously improving systems, interrelationships, processes,
set-ups, policies, and other details of activities. Improvements are done not in a wholesale fashion but also in retail,
piece by piece manner. Improvements and betterments could be done in every facet of business operations, in every
department or unit, in every business dynamics and dealings.
The Plan-Do-Check-Act Cycle (PDCA) or the
Deming Wheel

The Plan-Do-Check-Act Cycle (PDCA) or the Deming Wheel is a “management by fact” or a scientific approach to
continuous improvement model based on a process-centered approach.
The Plan-Do-Check-Act Cycle (PDCA) or the
Deming Wheel
STEPS ACTIVITIES TECHNIQUES
Plan Studying the current process Process mapping, process value analysis

Collecting and analyzing data to identify Fish-bone analysis, Pareto analysis, histogram, scattergraph
causes of problems
Regression analysis, statistical control charts, linear and
Planning for improvement dynamic programming, trend analysis, Taguchi quality loss
function, PERT/CPM, Gantt Chart, Learning Curve Theory,
Product Life Cycle, Theory of Constraints, Activity-based
management, scoreboard approach

Benchmarking

Deciding how to measure improvements

Do Small-scale implementation Pilot testing
Check Determine what happened Results evaluation, variance analysis, hypotheses testing
Act Experiment is successful. Plant-wide conversion

Experiment is unsuccessful. Go back to planning

 Just-In-Time (JIT) Management

Materials should arrive just-in-time they are needed in the production process and the conversion process is completed
just-in-time delivery to customers is to be made.
 Activity-Based Management

ABM is “the management process that uses the information provided by the activity-based cost analysis to improve
organizational profitability.
 The ABM Process

1. Identify the activities

2. Determine the cost drivers

3. Set the operational control environment

4. Set the evaluation platforms

5. Set the culture for continuous improvements

 Balanced Scorecard

First, there must be a goal. Second, there must be a strategy. Then, there must be a balanced scorecard.

Goal

A goal is an abstract expression of the enterprise’s desired state of affairs or things to accomplish.

Strategy

Strategy may be developed by zeroing-on in the income statement of an enterprise or on its balance sheet or statement
of cash flows.

Balanced Scorecard (BS)

Once the strategy is developed, the next step is to operationalize it. This is where the importance of balanced
scorecard comes into play.
Balanced Scorecard (BS)

Balanced scorecard is a system used to effectively communicate strategies into concrete terms to all
personnel of the organization, identify key success areas to focus the attention of all members in the
organization, and critically link series of performance measures to monitor the ongoing series of successes
and failures in the implementation of strategies on the road towards the achievement of corporate goals.
 Benchmarking

Benchmarking is basically standard-setting and standard-getting. The idea is to identify the best practices in the
organization and make it as the benchmark (e.g., standards) for others to emulate.