STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-1 Quality and Strategic Cost Management n Quality and profitability are related n Premium on quality leads to larger market share n Premium on quality leads to higher ROI

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-2 Elements of TQM n Continuous improvement n Customer focus n Employee involvement

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-3 IMA’s TQM Process n Year One n Quality council and staff n Executive quality training n Quality audits n Gap analysis n Strategic quality improvement plans n Year Two n Employee quality training n Quality teams n Establish measurement system and goals n Year Three n Revise compensation system n Launch external initiatives (value chain) n Review and revise

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-4 Other Quality Thoughts n Poor quality is disastrous for service industries n Increased quality = increased productivity n True management accountants must increase their focus on quality

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-5 ISO 9000 n International Organization for Standardization n Internationally accepted guidelines for quality management and standards n Cost of quality = percent of sales

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-6 Ansari: MMQC n Quality costs: costs incurred to ensure products/services meet customers’ expectations n Features n Performance

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-7 MMQC n Types of quality costs n Prevention n Appraisal n Internal failure n External failure

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-8 MMQC n Quality Management System n Understand customer requirements n Establish quality goals n Set work processes (P) n Perform work & monitor output (A & I) n Deliver product & monitor cust. satisf.(E) n Perform root cause analysis

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-9 MMQC n Quality Cost and Customer Satisfaction n Total firm spending n Spending by category n Amount of financial benefits n Focus on customer quality concerns n Elimination of root causes

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-10 MMQC n Value Index n Develop customer perf. rankings n Estimate quality costs for each element n Compute the value index n Cust. Perf. % / Cost % n Root cause analysis and “fish bones”

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-11 MMQC n Attribute Implications of accounting system supporting TQM: n Technical n Improved decision relevance n Process understanding n Behavioral n Focus on Customer Requirements n Improved quality attitudes n Better mgt. visibility…but watch out for “padding” n Cultural n Quality as a way of life n Quality as an ethical value

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-12 MMQC n Strategic Implications of Quality Cost System n Supports quality as a strategic adv. n Assists in avoiding non-productive costs n Assists in avoiding non-productive time

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-13 Environmental Activities n Prevention activities n Assessment activities n Control activities n Failure activities

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-14 Measuring and Reporting Environmental Costs n Traditional systems must be augmented by interviews n Schedule costs into hazardous & non- hazardous categories n Classify the costs by activities n Report and analyze routinely

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-15 Managing Environmental Costs n Product design n Process design n PP&E acquisition n Operational venue n Encourage value chain participation n Routinely integrate MMEC into the decision making process n Checklists n EC Summaries n Post-mortem reviews

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-16 MMEC—TBC Impact n Technical n Improved decision relevance n Insight contrary to common beliefs n Better process identification n Environmental cost insight n Behavioral n EC visibility: what gets measured; gets done

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-17 MMEC—TBC, continued n Cultural n Societal value sharing n Changing environmental mindsets n Compliance and control vs. avoidance n Role of finance as “facilitator” n Can bring focus to this important issue

STRATEGIC COST MANAGEMENT - BA122B – Spring 2011Slide 6-18 MMEC—Strategic Implications n Quality: consumers drawn to environmentally concerned companies…green issues n Cost: environment costs are huge n Time: unexpected “events” are time consuming and defocusing n Think about the movie “Erin Brocovich”