Costs of Quality
- Define the four major costs of quality, and their relationship to the role of ethics in determining the overall costs of delivering products and services.
- Explain the basic principles of Total Quality Management (TQM) and Six Sigma.
- Understand how acceptance sampling and process performance approaches interface in a supply chain.
- Describe how to construct process control charts and use them to determine whether a process is out of statistical control.
- Explain how to determine whether a process is capable of producing a service or product to specifications.
- Describe International Quality Documentation Standards and the Baldridge Performance Excellence Program.
3 QUALITY AND PERFORMANCE
The performance of the process should be everybody’s concern.
Costs of Quality
Internal Failure Costs
External Failure Costs
Ethical Failure Costs
Quality is an important dimension of performance. Total Quality Management and Six Sigma are the two important approaches, even referred to as two philosophies that many companies embrace to evaluate and improve quality.
Costs of Quality
The total cost of quality was determined or estimated from the company cost records by the pioneers of quality management movement and they estimated that the costs of quality before the introduction of quality management approached ranged from 20 to 30 percent of gross sales. This total cost of lack of quality management can be reduced and quality can be improved at no further cost to the organization. “Quality is free” is the slogan.
In the quality cost framework, the quality related costs were classified into four major categories: (1) prevention, (2) appraisal, (3) internal failure, and (4) external failure. Krajewski introduces, in the book, fifth category of costs associated with unethical behavior in the area of quality and expresses the opinion that it can be significantly higher than all the other four costs combined.
Prevention costs are associated with improving the process to reduce defects by redesigning the process to remove the causes of poor performance, redesigning the service or product to make it simpler to produce, training employees in the methods of continuous improvement, and working with suppliers to increase the quality of purchased items or contracted services. When a process fails to satisfy a customer, the failure is considered a defect.
To take up defect prevention activities, firms must invest additional time, effort, and money. But they reduce defects considerably and provide good return on investment.
Appraisal costs are incurred in evaluating the output of the process or method of the process. Appraisal identifies defects and prevents delivery of defective products to the customers. If the prevention activities succeed, the effort spent in appraisal can be reduced. The appraisal cost is also reduced by employing statistical tools like acceptance sampling and statistical process control.
Internal Failure Costs
Internal failure costs are the costs incurred in rejecting/scrapping or reworking the items with defects identified during appraisal.
External Failure Costs
External failures are defects identified by the customers after receiving the service or product. It is more costly to go to customer’s premises and correct the problem and to replace it with new item. Also, each failure creates dissatisfaction and dissatisfied customers talk about bad service or products to their friends, and nowadays post in the social . media. External failures erode market
share and profits.
The quality cost framework recommends taking up appropriate defect preventive activities termed as zero defect programs and stresses the idea that it is free to the company. Actually total quality cost will come down.
Ethical Failure Costs
Ethical failure costs are the societal and monetary costs associated with deceptively passing defective services or products to internal or external customers such that it jeopardizes the well-being of stockholders, customers, employees, partners, and creditors.
Developing the cultural environment for ethical behavior is now promoted in management literature as its importance is discovered. Employees must be educated in ethical codes and their relevance in survival of the organization.
Total Quality Management and Six Sigma
Total Quality Management
Managerial Practice 3.1 Improving Quality Through Employee Involvement at Santa Cruz Guitar Company
Total Quality Management:Total quality management (TQM) approach stresses three principles for achieving high levels of quality. These principles are related to (1) customer satisfaction, (2) employee involvement, and (3) continuous improvement in performance.
Customer Satisfaction: Customers, internal or external, are satisfied when their expectations
regarding a service or product have been met or exceeded. Quality has multiple dimensions
in the mind of the customer.
Fitness for Use: The customer buys a product with an idea of use of it in a specific situation. If that use was approved or promised by the sales person, but did not happen, customer is dissatisfied. The product benefits promised need to be realized by the customers.
Conformance to Specifications: The engineering specifications of the product are advertised. The finished product must confirm toe the specifications which can be measured with measuring instruments.
Value: How much value a service or product has in the mind of the customer depends on the customer’s expectations before purchasing it.
Support: The after sale service or product support provided by the company is also part of the quality judgement of the customer.
Psychological Impressions: The quality evaluation also includes psychological impressions: atmosphere, image, or aesthetics associated with the relations the buyers have with the firms during purchase process. Nicely dressed, courteous, friendly, and sympathetic employees can affect the
customer’s perception of service quality.
Good quality pays off in higher revenues and profits. Poor quality erodes the firm’s ability to compete in the marketplace and increases the costs of producing its service or product. Poor quality has an effect on the customers (effectiveness side) and cost of production (efficiency side).
Employee Involvement: Employees have to realize the importance of quality and defect prevention and quality management has to direct and control employee performance in this regard. One of the main challenges in developing the proper culture for TQM. Customer for each employee has to be defined either internal or external. In TQM, everyone in the organization must share the view that quality control is an end in it self. Errors or defects should be caught and corrected at the source, not passed along to an internal or external customer. One way to achieve employee involvement is by the use of teams, small groups of people who have a common purpose, set their own performance goals and approaches, and hold themselves account able for success. Problem-solving teams and self-managed teams moves responsibility for decisions down the organizational chart and increase employees involvement.
Continuous Improvement by front line employees as an organized process improvement activity was implemented in an exemplary manner by Japanese company. In Japanese language, the concept is called kaizen. In USA, it is called change program. Continuous improvement is the philosophy (basic idea) of continually seeking ways to improve processes. Quality improvement and waste elimination are two important focus areas of continuous improvement in Japanese practice and are now made part of world class manufacturing paradigm.
Employees should be given problem-solving tools, such as the statistical tools and a sense of ownership of the process to be improved. A sense of operator ownership emerges when employees feel a responsibility for the processes and methods they use and take pride in the quality of the service or product they produce.
Relative to the specifications for the material the buyer is purchasing, the buyer specifies an
acceptable quality level (AQL), which is a statement of the proportion of defective items (outside of specifications) that the buyer will accept in a shipment. These days, the proportion is getting very small, often measured in parts per ten-thousand. The idea of acceptance sampling is to take a sample, and decide what to do with the entire lot supplied. The steps involved are:
1. Inspection of a random sample taken from the lot supplied.
2. If the sample passes the test (low number of defects), the entire quantity of items is accepted.
3. If the sample fails the test, either (a) the entire quantity of items is subjected to 100 percent inspection and all defective items are segregated, repaired or replaced or (b) the entire quantity is returned to the supplier.
Acceptance sampling reduces inspection at the receiving point of customer companies.
Statistical Process Control
Variation of Outputs
Control Charts for Variables
Control Charts for Attributes
Statistical process control (SPC) is the application of statistical techniques to determine whether
a process is delivering what customers want and for the specification it wa designed. In SPC, control charts are used primarily to plot data on defects in samples to observe the process deterioration point used to initiate corrective or resetting action.
Performance Measurements can be variable or attribute information. Variables are direct measurements made with measuring instruments and attributes are counts, like number of defect points in a cloth.
Defining Process Capability 117
Using Continuous Improvement to Determine
the Capability of a Process 118
Process capability refers to the ability of the process to meet the design specifications for a service or product. Design specifications often are expressed as a nominal value, or target, and a tolerance, or allowance above or below the nominal value.
Two measures commonly are used in practice to assess the capability of a process: the process capability index and the process capability ratio.
Process Capability Index The process capability index, Cpk, measures how well the process is centered as well as whether the variability is acceptable.
The process capability ratio, Cp assesses whether variability is acceptable.
If Cp passed the test, but Cpk did not, we can assume that the problem is that the process is not centered adequately
International Quality Documentation Standards and Awards
The ISO 9001:2008 Documentation Standards
Malcolm Baldrige Performance Excellence Program
Systems Approach To Total Quality Management
Companies can document its quality management practices and display them to customers to assure quality. The International Organization for Standardization devised a family of standards called ISO 9000 for quality system documentation. Subsequently, ISO 14000 was devised for environmental management systems and ISO 26000 for guidance on social responsibility
The ISO 9001:2008 Documentation Standards
ISO 9001:2008 is the latest update of the ISO 9000 standards governing documentation of a quality
program. The standards address quality management by specifying what the firm does to fulfill the customer’s quality requirements and applicable regulatory requirements. Companies become
certified by proving to a qualified external examiner that they comply with all the requirements. As of 2009, more than 1 million organizations world wide have been certified in the ISO 9000 family of documentation standards and are included in registers of quality certifying agencies.
The ISO 140001:2004 Environmental Management Syste
The ISO 140001:2004 standards require documentation of a firm’s environmental program. Firms have to specify what they do to minimize harmful effects on the environment caused by its activities, and to achieve continual improvement of its environmental performance. ISO 140001:2004 covers a number of areas, including the following:
▪ Environmental Management System. Requires a plan to improve performance in resource use and pollutant output.
▪ Environmental Performance Evaluation. Specifies guidelines for the certification of companies.
▪ Environmental Labeling. Defines terms such as recyclable, energy efficient, and safe for the ozone layer.
▪ Life-Cycle Assessment. Evaluates the lifetime environmental impact from the manufacture, use, and disposal of a product.
In August 1987 the U.S. Congress signed into law the Malcolm Baldrige National Quality Improvement Act, creating the Malcolm Baldrige National Quality Award, which is now entitled the Baldrige Performance Excellence Program (www.quality.nist.gov).
The application and review process for the Baldrige award is rigorous. The seven major criteria for the award are the following:
1. Leadership. Describes how senior leaders’ actions guide and sustain the organization and how they
communicate with the workforce and encourage high performance.
2. Strategic Planning. Describes how the organization establishes its strategy to address its strategic challenges, leverage its strategic advantages, and summarizes the organization’s key strategic
objectives and their related goals.
3. Customer Focus. Describes how the organization determines its service or product offerings and the mechanisms to support the customers’ use of them.
4. Measurement, Analysis, and Knowledge Management. Describes how the organization measures,
analyzes, reviews, and improves its performance through the use of data and information at all levels of the organization.
5. Workforce Focus. Describes how the organization engages, compensates, and rewards its workers
and how they are developed to achieve high performance.
6. Operations Focus. Describes how the organization designs its work systems and determines its key
processes to deliver customer value, prepare for potential emergencies, and achieve organizational
success and sustainability.
7. Results. Describe the organization’s performance and improvement in five categories: products
and processes, customer focus, workforce focus, leadership and governance, and financial and
Customer satisfaction underpins these seven criteria. Companies improve substantially when they prepare to implement the award criteria in their companies first to achieve the award. Actually getting the award requires substantial progress in all dimensions.
Learning Goals in Review 121
Video Case Quality at Axon 134
Experiential Learning 3.1 Statistical Process Control with a Coin Catapult 136
Process Improvement – Process Industrial Engineering – Relevant Chapters in Operations Management
Process Strategy and Analysis – Important Points – Operations Management – Krajewski – 12th Edition
Quality and Performance – Important Points – Summary – Krajewski – 12th Edition