Total Quality Management

What is Quality? Quality is providing a product or service that meets or exceeds customer expectations.

Why is Quality Important? Quality products and services Increased business volume Greater customer satisfaction

Product Quality Product quality and profitability are closely related. Businesses that offer premium-quality products and services are more likely to have large market shares. Quality relates positively to a higher return on investment.

Improved Quality, Profitability, and Return on Investment Lower Return Sales Lower Manufacturing Cost Higher Perceived Value Lower Throughput Time

Improved Quality, Profitability, and Return on Investment Lower Return Sales Lower Manufacturing Cost Higher Perceived Value Lower Throughput Time Lower Warranty and Service Costs Higher Prices Higher Market Share Faster Delivery

Improved Quality, Profitability, and Return on Investment Lower Return Sales Lower Manufacturing Cost Higher Perceived Value Lower Throughput Time Lower Warranty and Service Costs Higher Prices Higher Market Share Faster Delivery Increased Revenue

Improved Quality, Profitability, and Return on Investment Lower Return Sales Lower Manufacturing Cost Higher Perceived Value Lower Throughput Time Lower Warranty and Service Costs Higher Prices Higher Market Share Faster Delivery Increased Revenue Higher Profit and Return on Investment

Total Quality Management is the unyielding and continually improving by everyone in an organization to understand, meet, and exceed the expectations of customers.

Focus on the Customer Focus on customer satisfaction. Strive for continuous improvement. Involve the entire work force.

Critical Total Quality Management Factors Continuous Improvement Focus on the Customer Involve all Employees Expectation and Requirements of external customers Specifications for Internal Suppliers/Customers Specifications for External Suppliers

TQM Implementation Guidelines Year One Preparation and Planning Create quality council and staff. Conduct executive quality training programs. Prepare gap analysis. Develop strategic quality improvement plans.

TQM Implementation Guidelines Year Two Training and Documentation Conduct employee communication and training programs. Establish quality teams. Create management system and set goals.

TQM Implementation Guidelines Year Three Assessment, Review, and Revise Revise compensation/appraisal/recognition systems. Launch external initiatives and suppliers. Review and revise.

Absolute Conformance Absolute quality conformance requires that all products or services meet exactly the target value with no variation allowed. Losses 0.50 Target Value

Goalpost Conformance Goalpost or absolute conformance assumes that the firm incurs no quality or failure cost or loss if quality measures fall with the specified limits. Loss No Loss Loss Lower Target Upper Limit Value Limit .45 .50 .55 Thickness

(Tolerance Allowed the Target Value) Quality Loss Function General expression of the loss function, L(x), for a quality characteristic of a product or service is observed x is: 2 L(x) = k(x -T) where: x = an observed value of the quality characteristics T = the target value of the quality characteristic k = the cost coefficient, determined by the firm’s failure costs k = Total Quality Cost (Tolerance Allowed the Target Value)

(Tolerance Allowed the Target Value) Quality Loss Function Your firm has determined that no customer will accept sheet-metal deviating more than .05” from the target value in thickness, that the target thickness is .50”, and that the cost to the firm is $5,000 for each rejection by a customer. Total Quality Cost (Tolerance Allowed the Target Value) k = k = = $2,000,000 $5,000 .05 2

Quality Loss Function L(x) = k(x -T) L(.47) = $2,000,000(.47 - .5)2 If the actual thickness of a unit is .47, then the estimated total loss for the unit is $1,800.

Cost of Quality Prevention – expenditures incurred to keep quality defects from occurring. Appraisal – costs incurred in the measurement and analysis of data to find out if products and services conform to specification. Internal failure – costs incurred as a result of poor quality found through appraisal prior to delivery to customers. External failure – Costs incurred to rectify quality defects after unacceptable products or services reach the customer.

Cost of Quality Prevention costs include: Quality training costs Quality planning costs Equipment maintenance costs Information systems costs Appraisal costs include: Testing and inspection costs Test equipment and instruments Quality audits

Cost of Quality Internal failure costs include: Cost of corrective action. Rework and scrap costs. Process costs. Expediting costs. Reinspect and retest costs. External failure costs include: Costs to handle customer complaints and returns. Product recall and product liability costs. Lost sales from unsatisfactory products and customer ill-will.

Conformance and Nonconformance Costs Cost of Conformity prevention costs appraisal costs Cost of Nonconformity internal failure costs external failure costs

Reporting Quality Costs

Control Charts Size .1255” .125” .1245” Batch #

Control Charts Size Batch # .1255” .125” .1245” Batch # The circled observations are unacceptable. This batch suggests that the workstation needs immediate investigation.

Histogram 1 Quality of chocolate 2 Liqueur 3 Egg size 4 Blending speed 5 Blending duration 6 Improper refrigeration

Pareto Diagram 220 - 200 - 180 - 160 - 140 - 120 - Cumulative 100 - 220 - 200 - 180 - 160 - 140 - 120 - 100 - 80 - 60 - 40 - 20 - Cumulative 1 Egg size 2 Blending speed 3 Liqueur 4 Blending duration 5 Quality of chocolate 6 Improper refrigeration 1 2 3 4 5 6

Brainstorming Don’t criticize anyone’s idea by word or gesture. Once an idea has been put forth, there should be no further discussion of the idea during the session, except for clarification. No idea is ‘dumb’ or ‘silly.’

Brainstorming (continued) Each team member can introduce only one idea at a time. Until most of the members present his or her idea, no member can introduce more than one idea. No single individual should be allowed to dominate the session. Never allow any finger-pointing during the session.

Main Causes of Quality Problems Manufacturing Operations Machines Materials Methods Manpower

Basic Cause-and-Effect Diagram Contribute to the cause Quality Problem Contribute to the cause Cause

Chocolate Mousse Cause-and Effect Diagram Machine Timer Improper calibration

Chocolate Mousse Cause-and Effect Diagram Machine Materials Timer Low quality chocolate Improper calibration Egg size Wrong liqueur

Chocolate Mousse Cause-and Effect Diagram Machine Materials Timer Low quality chocolate Improper calibration Egg size Wrong liqueur Improper calibration Methods

Chocolate Mousse Cause-and Effect Diagram Not following instructions Machine Materials Timer Low quality chocolate Improper calibration Egg size Wrong liqueur 20% Rejection Rate Improper calibration Not following instructions New workers Methods Manpower

Total Quality and Productivity Improvements in quality can lead to increases in productivity. Activity-based accounting is ideally suited to total quality management. JIT necessitates a strong emphasis on quality.

Challenge to Management Accountants Ensure full representation of management accountants on the main quality control committees and quality improvement teams. Make the company fully aware of the competitive benchmarks, competitive gaps, customers’ retention rate, and the cost of quality. Participate actively in identifying areas of greatest quality improvement opportunities and needs.

Challenge to Management Accountants Develop quality measures to monitor and assess ongoing progress toward quality goals. Be involved closely in vendor rating decisions. Review and evaluate quality control effectiveness and the value of training courses for quality control personnel. Gather and review continually scrap and recovery costs.

Tasks of Management Accountants Ensure that the measurement and reporting process meet the following criteria: meets the need of the internal customer include all relevant cost of quality measures including both financial and non-financial measures adjusts measures to reflect quality and business challenges adapts measures as the need changes

Tasks of Management Accountants Ensure that the measurement and reporting process meet the following criteria: is simple and easy to use, execute, and monitor provides fast and timely feedback to users and managers foster improvement rather than just monitoring motivates and challenges team members to strive for the highest quality gains

End of Chapter 6