2. Total Quality Management
Chapter 16
Total Quality Management

3. Learning Objectives
Define Quality and Total Quality Management, and devise guidelines for implementing total quality management
Distinguish between the two types of conformance and explain their effects on workers’ behavior
Identify four major categories of quality costs

4. Learning Objectives Prepare and interpret cost of quality reports
Describe methods commonly used to identify significant quality problems and their causes
Identify distinct characteristics of total quality management in service organizations

5. Learning Objectives
Explain the relationships between total quality management and productivity
Describe the role of management accountants in total quality management and the challenges they face

6. Learning Objective One
Define Quality and Total Quality Management, and devise guidelines for implementing total quality management

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

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

9. 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.

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

11. 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

12. 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

13. 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

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

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

16. 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

17. 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.

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

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

20. Learning Objective Two
Distinguish between the two types of conformance and explain their effects on workers’ behavior

21. 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

22. 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
Thickness

23. Quality Loss Function L(x) = k(x -T)2
General expression of the loss function, L(x), for a quality characteristic of a product or service is observed x is:
L(x) = k(x -T)2
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
Total Quality Cost
k =
(Tolerance Allowed the Target Value)

24. (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

25. 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.

26. Learning Objective Three
Identify four major categories of quality costs

27. 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.

28. 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

29. Cost of Quality External failure costs include:
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.

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

31. Learning Objective Four
Prepare and interpret cost of quality reports

32. Reporting Quality Costs

33. Learning Objective Five
Describe methods commonly used to identify significant quality problems and their causes

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

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

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

37. 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 Blending speed
3 Liqueur Blending duration
5 Quality of chocolate 6 Improper refrigeration

38. 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.’

39. Brainstorming 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.

40. Main Causes of Quality Problems
Manufacturing Operations
Machines
Materials
Methods
Manpower

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

42. Chocolate Mousse Cause-and Effect Diagram
Machine
Timer
Improper calibration

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

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

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

46. Learning Objective Seven
Explain the relationships between total quality management and productivity

47. 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.

48. Learning Objective Eight
Describe the role of management accountants in total quality management and the challenges they face

49. 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.

50. 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.

51. 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

52. 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

53. End of Chapter Sixteen