1. An Integrated Goods and Services Approach
OPERATIONS MANAGEMENT
An Integrated Goods and Services Approach
CHAPTER 15
Managing Quality and Six Sigma
JAMES R. EVANS
AND
DAVID A. COLLIER
Operations Management/Ch. 15 Managing Quality and Six Sigma
©2007 Thomson South-Western

2. Chapter 15 Learning Objectives
To learn how quality management has evolved and changed focus over the years and why organizations need to continue to place a significant amount of emphasis on quality.
To understand what quality means in manufacturing and service operations, how organizations should address customer expectations and perceptions, and how quality is integrated into operations through customer focus, continuous improvement, and employee involvement.

3. Chapter 15 Learning Objectives
To understand the quality philosophies and principles of Deming, Juran, and Crosby and how these individuals influenced the quality management practices of today’s organizations.
To become acquainted with International Organization for Standardization’s ISO 9000:2000 criteria, documentation, requirements, and certification for meeting a family of quality standards used in many international markets.
To understand the principal activities that organizations must incorporate into an effective quality management system to support operations.

4. Chapter 15 Learning Objectives
To understand the basic philosophy and methods of Six Sigma and how it is applied to improve quality and operations performance.
To learn about features of elementary quality analysis and improvement tools and be able to apply them to practical business problems.

5. Chapter 15 Managing Quality and Six Sigma
Quality management refers to systematic policies, methods, and procedures used to ensure that goods and services are produced with appropriate levels of quality to meet the needs of customers.
Organizations today integrate quality principles into their management systems, using tools such as Total Quality Management (TQM), Six Sigma, and Lean Operating Systems (Chapter 17).

6. Chapter 15 Managing Quality and Six Sigma
A Brief History of Quality Management
Historical uses of quality management include the precision involved in building of Egyptian pyramids, interchangeable parts during Industrial Revolution, and statistical tools used for quality control during World War II.
Dr. Joseph Juran and Dr. W. Edwards Deming were pioneers in the field (more later on these two quality gurus.
Japanese integrated quality ideas and methods throughout their organizations and developed a culture of continuous improvement.

7. Chapter 15 Managing Quality and Six Sigma
Understanding Quality
Quality can be a confusing concept, partly because people view quality in relation to differing criteria based on their individual roles in the value chain such as:
perfection,
doing it right the first time, and/or
consistency.
Fitness for use is the ability of a good or service to meet customer needs.

8. The GAP model recognizes that there are several
Chapter 15 The GAP Model
The GAP model recognizes that there are several
ways to mis-specify and mismanage the creation
and delivery of high levels of quality. These "gaps“
are shown in the model in Exhibit 15.1 and
Explained below.
Gap 1 is the discrepancy between customer expectations and management perceptions of those expectations.
Gap 2 is the discrepancy between management perceptions of what features constitute a target level of quality and the task of translating these perceptions into executable specifications.

9. Exhibit 15.1
Gap Model of Quality

10. Chapter 15 The GAP Model
Gap 3 is the discrepancy between quality specifications documented in operating and training manuals and plans, and their implementation.
Gap 4 is the discrepancy between actual manufacturing and service delivery system performance and external communications to the customers.
Gap 5 is the difference between the customer's expectations and perceptions. The fifth gap depends on the other four.

11. Exhibit 15.1
Gap Model of Quality

12. Chapter 15 Managing Quality and Six Sigma
Quality in Operations
Fitness for Use: the ability of a good or service to meet customer needs.
Quality of Conformance: extent to which a process is able to deliver output that confirms to design specifications.
Specifications: targets and tolerances determined by designers of goods and services.

13. Chapter 15 Managing Quality and Six Sigma
Quality in Operations
Quality Control: means of ensuring consistency in processes to achieve conformance.
Service Quality: consistently meeting or exceeding customer expectations and service delivery system performance criteria during all service encounters.

14. Chapter 15 Managing Quality and Six Sigma
Quality in Operations
Principles of Total Quality
A focus on customers and stakeholders.
A process focus supported by continuous improvement and learning.
Participation and teamwork by everyone in the organization.

15. Chapter 15 Managing Quality and Six Sigma
Quality and Business Results
Investment in Quality Yields Business Results
Increased employee participation
Improved product and service quality
Improved customer satisfaction
Improved productivity
Improved employee skills
Improved financial performance

16. Chapter 15 Influential Leaders in Quality Management
W. Edwards Deming
Bringing about improvements in product and service quality by reducing uncertainty and variability in goods and services design and associated processes (the beginning of his ideas in 1920s and 1930s).
Higher quality leads to higher productivity and lower costs.
Deming’s “Chain Reaction” theory (Exhibit 15.3).
“14 Points” management philosophy.
Deming Cycle – Plan, Do, Study, and Act.

17. Exhibit 15.3
The Deming Chain Reaction

18. Chapter 15 Influential Leaders in Quality Management
W. Edwards Deming 14 Points
Point 1: Create a Vision and Demonstrate Commitment
Point 2: Learn the Philosophy
Point 3: Understand Inspection
Point 4: Stop Making Decisions Purely on the Basis of Cost
Point 5: Improve Constantly and Forever
Point 6: Institute Training
Point 7: Institute Leadership

19. Chapter 15 Influential Leaders in Quality Management
W. Edwards Deming 14 Points
Point 8: Drive Out Fear
Point 9: Optimize the Efforts of Teams
Point 10: Eliminate Exhortations
Point 11: Eliminate Numerical Quotas
Point 12: Remove Barriers to Pride in Work
Point 13: Encourage Education and Self-Improvement
Point 14: Take Action

20. Chapter 15 Influential Leaders in Quality Management
Joseph Juran
Wrote Quality Control Handbook in 1951, a comprehensive quality manual.
Defined quality as “fitness for use.”
Advocated use of quality cost measurement.
Quality Trilogy: quality planning, quality control, and quality improvement.

21. Chapter 15 Influential Leaders in Quality Management
Philip B. Crosby
Wrote Quality is Free in 1979, which brought quality to the attention of top corporate managers.
Quality means conformance to requirements, not excellence.
There is no such thing as the economics of quality; doing the job right the first time is always cheaper.
The only performance measurement is the cost of quality which is the expense of nonconformance.
The only performance standard is Zero Defects (ZD).

22. Chapter 15 Managing Quality and Six Sigma
ISO 9000:2000
Quality standards were created in 1987 and revised in 1994 and 2000 to improve product quality, improve the quality of operation’s processes, and provide confidence to organizations and customers that quality system requirements are fulfilled.
Internationally recognized (and sometimes required to do business in certain countries).
Standardizes key terms in quality and provides a set of basic principles for initiating quality management systems.

23. Chapter 15 Managing Quality and Six Sigma
Designing Quality Management and Control Systems
Contract management, design control, and purchasing.
Process control: ensure that a process performs as it should and take corrective action when it does not.
Corrective action and continual improvement
Controlling inspection, measuring, and test equipment.

24. Chapter 15 Managing Quality and Six Sigma
Designing Quality Management and Control Systems
Metrology is the collection of people, equipment, facilities, methods, and procedures used to assure the correctness or adequacy of measurements.

25. σ2 total = σ2 process + σ2 measurement
Chapter 15 Managing Quality and Six Sigma
Designing Quality Management and Control Systems
The total observed variation in production output is the sum of the true process variation (which is what we actually want to measure) plus variation due to measurement:
σ2 total = σ2 process + σ2 measurement
If the measurement variation is high, the observed results will be biased, leading to inaccurate assessment of process capabilities.

26. Chapter 15 Managing Quality and Six Sigma
Designing Quality Management and Control Systems
Repeatability, or equipment variation, is the variation in multiple measurements by an individual using the same instrument. This is a measure of how precise and accurate the equipment is.
Reproducibility, or operator variation, is the variation in the same measuring instrument when it is used by different individuals to measure the same parts. This indicates how robust the measuring process is to the operator and environmental conditions.

27. Chapter 15 Managing Quality and Six Sigma
Designing Quality Management and Control Systems
Records, documentation, and audits
All the elements required for a quality system, such as control processes, measuring and test equipment, and other resources needed to achieve the required quality of conformance, should be documented in a quality manual, which serves as a permanent reference for implementing and maintaining the system.

28. Chapter 15 Managing Quality and Six Sigma
Six Sigma is a business improvement approach that seeks to find and eliminate causes of defects and errors in manufacturing and service processes by focusing on outputs that are critical to customers and results in a clear financial return for the organization.
Used by companies including Motorola, Allied Signal, Texas Instruments, and General Electric.

29. Defects are any mistakes or errors that are passed
Chapter 15 Managing Quality and Six Sigma
Six Sigma
Defects are any mistakes or errors that are passed
on to the customer (many people also use the tern
nonconformance).
Defects per Unit (DPU)=Number of Defects Discovered
Number of Units Processed

30. Chapter 15 Managing Quality and Six Sigma
The Six Sigma concept characterizes quality performance by defects per million opportunities (dpmo), computed as DPMU  1,000,000/opportunities for error, (or, as is often used in services, errors per million opportunities – epmo).

31. Chapter 15 Managing Quality and Six Sigma
A DPMU measure might be lost bags per customer. However, customers may have different numbers of bags; thus the number of opportunities for error is the average number of bags per customer.
Thus, if the average number of bags per customer is 1.6, and the airline recorded 3 lost bags for 8000 passengers in one month (note 12,800 opportunities for error in one month), then
epmo = (3/8000)  1,000,000/1.6 =

32. Chapter 15 Managing Quality and Six Sigma
3-sigma to 66,803 dpmo,
4-sigma to 6,200 dpmo, and
5-sigma level corresponds to 233 dpmo.
What may be quite surprising to realize is that a
change from
3 to 4-sigma represents a 10-fold improvement;
4 to 5 sigma, a 30-fold improvement; and
5 to 6-sigma, a 70-fold improvement.

33. Chapter 15 Managing Quality and Six Sigma
Six Sigma Computations
The sigma level can easily be calculated on an Excel spreadsheet using the formula = NORMSINV(1 – Number of Defects/Number of Opportunities) or equivalently, = NORMSINV(1 – dpmo/1,000,000) + 1.5
Using the airline example discussed earlier, if we had 3 lost bags for 8000(1.6) = 12,800 opportunities, we would find =NORMSINV(1 – 3/12800) = or about a 5-sigma level.

34. Exhibit 15.4
Six-Sigma Quality

35. Chapter 15 Managing Quality and Six Sigma
Six Sigma’s DMAIC Process
Define: identify customer and priorities, identify and define a suitable project, identify CTQs (critical to quality characteristics).
Measure: determine how to measure the process, identify key internal processes that influence CTQs.
Analyze: determine likely causes of defects and understand why defects are generated by identifying key variables that cause process variation.

36. Chapter 15 Managing Quality and Six Sigma
Six Sigma’s DMAIC Process
Improve: identify means to remove defects, confirm key variables, modify the process to stay within acceptable range.
Control: determine how to maintain improvements, put tools in place to ensure that key variables remain within acceptance ranges under the modified process.

37. Chapter 15 Managing Quality and Six Sigma
Implementing Six Sigma
Six Sigma teams are comprised of
Champions - senior-level managers who promote and lead the deployment of Six Sigma in a significant area of the business.
Master Black Belts - full-time Six Sigma experts who are responsible for Six Sigma strategy, training, mentoring, deployment, and results.
Black Belts - fully-trained Six Sigma experts with up to 160 hours of training who perform much of the technical analyses required of Six Sigma projects, usually on a full-time basis.

38. Chapter 15 Managing Quality and Six Sigma
Implementing Six Sigma
Six Sigma teams are comprised of
Green Belts – functional employees who are trained in introductory Six Sigma tools and methodology and work on projects on a part-time basis, assisting Black Belts while developing their own knowledge and expertise.
Team Members are individuals from various functional areas who support specific projects.

39. Chapter 15 Managing Quality and Six Sigma
Cost of Quality Measurements
Cost of quality: costs associated with avoiding poor quality or those incurred as a result of poor quality.
Prevention costs: expended to keep nonconforming goods and services from being made and reaching the customer.
Appraisal costs: expended on ascertaining quality levels through measurement and analysis of data to detect and correct problems.

40. Chapter 15 Managing Quality and Six Sigma
Cost of Quality Measurements
Internal-failure costs: costs incurred as a result of unsatisfactory quality that is found before delivery of good or service to the customer.
External-failure costs: incurred after poor-quality goods or services reach the customer.

41. Total Quality Costs/Direct Labor Costs
Exhibit 15.5
Computing Quality-Cost Indexes
Quality Cost Index:
Total Quality Costs/Direct Labor Costs

42. Chapter 15 Seven Tools of Quality Management
The “Seven QC Tools”
Flowcharts: process mapping to identify the sequence of activities or flow of materials/information in a process.
Run Charts and Control Charts: line graph with data plotted over time; control charts include control limits.
Checksheets: simple tools for data collection, ensure completeness.
Histograms: graphically represents frequency of values within a specified group.

43. Exhibit 15.6
The Structure of a Control Chart

44. Defective Item Checksheet
Exhibit 7.7
Exhibit 15.7
Defective Item Checksheet
Source: K. Ishikawa, Guide to Quality Control (Tokyo: Asian Productivity Organization, 1982), p. 33.

45. Chapter 15 Seven Tools of Quality Management
The “Seven QC Tools”
Pareto Analysis: separates vital few from the trivial many causes; provides direction for selecting project improvement.
Cause-and-Effect Diagrams: represents chain of relationships; often called a fishbone diagram.
Scatter Diagrams: graphical component of regression analysis.

46. Use of Pareto Diagrams for Progressive Analysis
Exhibit 15.8
Use of Pareto Diagrams for Progressive Analysis
Source: Small Business Guidebook to Quality Management, Office of the Secretary of Defense, Quality Management Office, Washington, DC (1988).

47. Exhibit 15.9
Cause-and-Effect (Fishbone) Diagram for Hospital Emergency Admission

48. Exhibit 15.10
Application of the Seven QC Tools in Six Sigma

49. Chapter 15 Seven Tools of Quality Management
Flowcharts: process mapping to identify the sequence of activities or flow of materials/information in a process.
Run Charts and Control Charts: line graph with data plotted over time; control charts include control limits.
Checksheets: simple tools for data collection, ensure completeness.
Histograms: graphically represents frequency of values within a specified group.
Pareto Analysis: separates vital few from the trivial many causes; provides direction for selecting project improvement.
Cause-and-Effect Diagrams: represents chain of relationships; often called a fishbone diagram.
Scatter Diagrams: graphical component of regression analysis.

50. Exhibit 15.11
The Deming Cycle
Plan: study current situation
Do: Implement plan on trial basis
Study: determines if trial is working correctly
Act: standardize improvements

51. Detailed Steps in the Deming Cycle*
Exhibit 15.12
Detailed Steps in the Deming Cycle*
*Adapted from Small Business Guidebook to Quality Management, Office of the Secretary of Defense, Quality Management Office, Washington, DC (1998).

52. Chapter 15 Managing Quality and Six Sigma
Kaizen: focuses on small, gradual, and frequent improvements over the long term with minimum financial investment and with participation by everyone in the organization.
Poka-Yoke (Mistake-Proofing): an approach for mistake-proofing processes using automatic devices or methods to avoid simple human error.

53. Chapter 15 Managing Quality and Six Sigma
Poka-Yoke Examples
Machines have limit switches connected to warning lights that tell the operator when parts are positioned improperly on the machine.
Fast food restaurants used automated French frying machines that can only be operated one way and the French fries are prepackaged and the equipment automated to reduce the chance of human error.

54. Chapter 15 Managing Quality and Six Sigma
Poka-Yoke Examples
A proxy ballot for an investment fund will not fit into the return envelope unless a small strip is detached. The strip asks the respondent to check if the ballot is signed and dated, a major source of error in returning proxy votes.
A 3.5-inch diskette is designed so that it cannot be inserted unless the disk is oriented correctly (try it!). These disks are not perfectly square, and the beveled right corner of the disk allows a stop in the disk drive to be pushed away if it is inserted correctly.

55. Chapter 15 Managing Quality and Six Sigma
Process Simulation: an approach for building a logical model of a real process, and experimenting with the model to obtain insight about the behavior of the process or to evaluate the impact of changes in assumptions or potential improvements to it.

56. Chapter 15 Managing Quality and Six Sigma
Process simulation should be used when the process is very complex and difficult to visualize, involves many decision points, or when the goal is to optimize the use of resources for a process.
Example application is to improve customer satisfaction at a call center (see Exhibit for a Help Desk Call Center).
Building, maintaining and using a simulation model can be expensive.

57. Process Map for Help Desk Simulation Model
Exhibit 15.13
Process Map for Help Desk Simulation Model
*ProcessModel, Inc., 32 West Center, Suite 209, Provo, Utah 84601

58. Chapter 15 Managing Quality and Six Sigma
Solved Problem #1
The following cost of quality data were collected at the installment loan department of the Hamilton Bank. Classify these data into the appropriate cost of quality categories and analyze the results. What suggestions would you make to management?
Loan Processing
1. Run credit check: $26.13
2. Review documents: $3,021.62
3. Make document corrections; gather additional information: $1,013.65
4. Prepare tickler file; review and follow up on titles,
insurance, second meetings: $156.75
5. Review all output: $2,244.14
6. Correct rejects and incorrect output: $425.84
7. Reconcile incomplete collateral report: $78.34
8. Respond to dealer calls; address associate problems;
research and communicate information: $2,418.88
9. Compensate for system downtime: $519.38
10. Conduct training: $1,366.94

59. Chapter 15 Managing Quality and Six Sigma
Solved Problem #1 (continued)
Loan Payoff
1. Receive and process payoff and release documents: $13.92
Research payoff problems: $14.34
Solution:
Quality Cost Categories
Cost Elements Costs Subtotal Proportion
APPRAISAL
Run credit checks
Loan Payment & Loan Payoffs
Receive & process (2 items)
Inspection
Review documents
Prepare tickler file, etc
Review all output
Appraisal Costs $6,

60. Chapter 15 Managing Quality and Six Sigma
Solved Problem #1 (continued)
PREVENTION
Conduct training
Prevention Costs $ 1,
INTERNAL FAILURE COSTS
Scrap and Rework
Make document corrections
Correct rejects
Reconcile incomplete collateral
reports
Compensate for system downtime
Loan Payment or Payoff
Respond to inquiries - no coupon
Research payoff problems
Internal Failure Costs $2,

61. Chapter 15 Managing Quality and Six Sigma
Solved Problem #1 (continued)
EXTERNAL FAILURE COSTS
Respond to dealer calls, etc
External Failure Costs $ 2,
Total Quality Costs $13,114.24
The external failure costs for the bank are not extremely high. However, they do represent 18.5% of the total quality costs. The process of working with dealers should be investigated to determine if it can be simplified, better communications established, and problems avoided, in the future. The highest cost category is in appraisal costs at $6, and 49.6% of total quality costs. If the categories of "document review" and "review all output" can be reduced without compromising the quality of the lending procedure, these costs could be greatly improved.

62. Chapter 15 Managing Quality and Six Sigma
Solved Problem #2
A watch manufacturer has the option of inspecting each crystal. If a bad crystal is assembled, the cost of disassembly and replacement after the final test and inspection is $1.40. Each crystal can be tested for 8 cents. Perform a break-even analysis to determine the percent nonconforming for which 100-percent inspection is better than no inspection at all.
Solution: C1 = $.08
C2 = $1.40
C1/C2 = .057
Therefore, if the actual error rate is greater than .057, 100-percent inspection is best; otherwise, no inspection is warranted.

63. Chapter 15 Managing Quality and Six Sigma
Solved Problem #3
A hotel estimates that each business guest encounters 20 “moments of truth” during service encounters on a typical overnight stay. On average, the hotel has 1000 business customers on Monday through Friday, and has an average of 6 complaints per week. What is the epmo measure, and how close is the hotel operating to a Six Sigma level?
Solution:
The weekly number of opportunities for error is (1000 customers/day)(20 moments of truth per customer)(5 days/week) = 100,000. Six complaints per 100,000 opportunities is equivalent to 60 complaints per million. Using the Excel formula NORMSINV(1-6/100000)+1.5, this is equivalent to a sigma level of 5.35, approaching a “six sigma” level.

64. Chapter 15 Managing Quality and Six Sigma
Solved Problem #4
An analysis of customer complaints at a large mail-order house revealed the following data. Billing errors 867
Shipping errors 1,960
Unclear charges 9,650
Long delay 6,672
Delivery errors 452
Construct a Pareto diagram for these data. What conclusions can you draw? Solution: Total errors are 19,601 (percentages rounded to whole numbers).
Complaint Number Percent Cumulative Percent
Unclear charges 9,
Long delays 6,
Shipping errors 1,
Billing errors
Delivery errors
Almost half the errors are due to unclear charges, and over 80 percent are attributable to the first two categories. These are the ones to which managers should direct their attention.